HomeSolutionsInsightsNewsroomPeopleContactLogin

Acclaimed macro analytics
Portfolio Construction & Risk Management
Trading Solutions
Macro Models
Thematic equity baskets

Announcements
Press
Blog

The chart shows some of this week’s reporting companies. Firstly, it shows whether a stock is in a macro regime (those to the right of the 65% model confidence threshold) or being driven by company news. Then we’ve added sensitivity to the US Dollar on the y-axis.

Netflix is interesting. Just below our threshold for a regime but the most vulnerable to a strong Dollar. Note also, running the same chart but for sensitivity to interest rates, Netflix is also the most reliant on real yields not marching higher.

Most of this week’s reporters who are in macro regimes favour a weaker Dollar. The outlier is AT&T which also screens as 2.1% cheap to model fair value.

API users can run this on customised lists of assets – here the companies reporting earnings this week, but it could be equally applied to different portfolios or trading strategies.

This will be a critical earnings season. Recession talk is everywhere, but arguably earnings forecasts are the one area yet to reflect the vibe shift.

The quadrant above looks at this week’s reporters & provides two perspectives. The vertical line is our 65% threshold for a macro regime.

Stocks to the right are macro-driven. Those to the left are where stock pickers should concentrate their energies.

Managers need to know that a bet on Blackrock is primarily a bet on credit spreads, VIX & real yields. A Fair Value Gap of 8.7% suggests BLK has discounted a fair degree of good news on these fronts.

But the majority of this week’s reporters are not macro plays. Earnings & forward guidance trump economics & financial conditions. Identify what regime a stock is in, then apply the relevant analysis, be it macro or micro.

Part of it was the notion of a cyclical bounce. Stronger economic growth & forward growth expectations plus higher commodities between them account for part of the rise in model value.

But financial conditions & measures of market stress were vastly more significant. Higher real rates & wider credit spreads were responsible for nearly twice as much in terms of Growth’s underperformance.

Probably less well known is the role played by European government bond markets. The widening in peripheral spreads as markets fretted about the ECB’s hawkish pivot was the biggest single driver of Value’s outperformance.

Qi model confidence is currently 73% - macro retains strong explanatory power. Equity managers choosing their tilt for H2 2022 need to be aware of the macro environment & how that determines the Value vs Growth asset allocation decision.

Yes, the S&P500 wants lower real rates currently. Real yields have moved higher for all of 2022 until recently, when hard landing fears escalated. Some may construe that as evidence of the bad news = good news thesis.

But the biggest single positive driver is Fed rate hike expectations where sensitivity has increased significantly. Equities want an upward sloping money market curve, i.e. the economy is healthy & interest rates will be higher tomorrow than they are today.

But recession fears have inverted the money market strip; the market is now discounting rate cuts next year.

Over June, macro model value for the S&P500 fell 11.1%. Of that move, 3.2% was due to the market's shift to recession & rate cuts. In comparison, the fall in real rates hardly impacted.

In this instance, bad news is bad news. Only robust empirical analysis can quantify these relationships.

Looking at individual macro drivers in isolation is misleading. Only by pulling together the entire macro picture but then breaking it down to identify the dominant driver(s), can PMs understand the aggregate picture.

When will a stock picker ever have time to track second tier high frequency economic data like Japanese auto sales?

Qi’s Ai driven process makes macro easy to digest, thereby solving a universal problem – how to make macro simple to understand & an integral part of your investment process.

The bad news? The catalyst for that shift in financial conditions was increased recession risk. Tracking GDP growth fell significantly in the US & Europe. “Doctor” copper, often used as a leading indicator for the global business cycle, fell sharply.

A macro backdrop that supports peak inflation, less monetary tightening & a potential soft landing is risky asset positive. But one that heralds recession is anything but.

Somehow money managers need to find a way to calibrate between these two scenarios. How? Qi model value shows fair value for any security given its sensitivity to the macro factor shifts seen above.

For example, currently the mix between recession risks & easier financial conditions are producing a stalemate for the S&P500. Macro warranted model value is flat-lining at the lows.

But macro conditions have improved noticeably for US High Yield credit HYG.

Both show current market levels close to macro model value, but only credit is enjoying an improvement in underlying macro fundamentals.

For a US equity allocator, for example, the chart immediately identifies the Russell 2000 as the most vulnerable to recession – highly reliant on rising inflation expectations & slightly rich to macro.

For anyone with an Asian focus, Singapore EWS is slightly cheap to model but it is the most reliant on reflation.

How is an equity manager supposed to keep track of these shifts? Users can manipulate macro factor z-scores like this using the API.

How can an equity manager know which of their holdings are most sensitive to tighter FCIs? Via the Optimise Trade Selection function. Let’s look at EU sectors’ sensitivity to real yields as an example.

European Technology is the most reliant on low real yields currently. It has also lagged the recent sell-off & sits close to model fair value.

The other standout is EU Retail – it is highly sensitive to real yields & 0.5 standard deviations or 9.9% rich to macro fair value.

For equity managers whose main risk scenario is still higher real yields, Qi reveals the two sectors most vulnerable with the best entry levels.

Run Optimise Trade Selection on the single stocks / sectors / ETFs you trade.