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Both Brazil & South Africa are rich to macro. The iShares ETF for MSCI Brazil EWZ is now 1.3 sigma (18.4%) rich; the equivalent ETF for South Africa EZA is 1.7 sigma (7.4%) above model.

The macro regimes are similar - a desire for global reflation, higher commodities & a weaker US Dollar. One distinction is that, on current patterns, Brazil is relatively indifferent to risk aversion metrics like VIX; whereas South Africa is reliant on the fear gauge behaving itself.

These are significant valuation levels. Back-testing today’s FVG as sell signals since 2009 reveals a 63% hit rate & +3.1% average return for EWZ; a 67% hit rate & +10.5% average return for EZA.

The other standout is Russia. While geopolitical risks clearly dominate it is worth noting the sharp rise in macro’s explanatory power recently. ERUS model confidence has risen 70% in 2mths; RSX confidence is up 66%. Both are now in strong macro regimes.

Both are close to fair value. Having been very cheap to model, the recent rally has taken Russian equities back in line with macro fundamentals. Armed conflict & sanctions pose a clear risk but the macro environment is also playing an increasingly assertive role.

If you fear tightening monetary policy into an economic slowdown means the Fed risk stalling growth & causing an even bigger shock for risky assets, then an inverted yield curve & widening in credit spreads are two of the key flash points for markets.

Qi has two models for US High Yield credit – CDX spreads & the tracking ETF HYG. Both screen as cheap to macro but the critical observation is that model value is deteriorating.

Both show US HY as 0.8 sigma below model. That’s a modest valuation gap in actual terms – HYG is 0.7% cheap, CDX spreads 13bp too wide.

More important is the red line in the chart below. Given where all the macro factors are, fair value for HYG (CDX spreads) continues to trend lower (wider). This will be a critical chart to track in 2022.

Moreover, Qi’s unique factor sensitivity analysis means you can also track where moves in US High Yield spreads will spill over into other asset classes.

For example, amongst global equities Brazil EWZ is the most reliant on tight credit spreads, while Indonesia EIDO offers a relative safe haven given current patterns show it’s okay with wider credit.

Note EWZ is 12.7% rich to macro; EIDO 4.2% cheap. For those nervous about US credit markets, re-allocating from Brazil to Indonesia warrants further investigation.

GVIP is an ETF that tracks the top stock picks of blue chip Hedge Funds. At the end of 2021 the fund factsheet suggested the “very important positions” had a tech heavy skew. Today, the long positions seem split across asset managers, banks, energy as well as tech.

It is, first-&-foremost, a bottom up stock picking strategy. But while holdings are selected according to company fundamentals, macro has become increasingly important. Qi’s GVIP model confidence is now 65% - it is back in a macro regime.

The valuation gap is at an extreme. GVIP is 2.7 sigma, 8.6% cheap to the macro environment. Critically though model fair value is trending lower. The prevailing macro conditions are deteriorating, it is just that spot has moved lower at a quicker pace.

The new regime has a distinct Goldilocks feel – reflation, easy monetary policy, healthy risk appetite. Given the Fed’s hawkish pivot in 2022, that explains the move lower in both spot & model value. The good news for the optimists is a lot of bad news is now priced.

But, as always, Qi would prefer to wait for macro-warranted model value to bottom out & inflect higher before taking advantage of the FVG signal.

* Source: Morgan Stanley Prime Brokerage

All of this information can now be downloaded into an excel file, thereby enabling clients to take the data & add into their own analysis.

On each model page, simply click on “Manage Model” in the top right hand corner to access 1 year’s history of Qi’s macro datasets.

Qi’s data starts in January 2009 – a full history is available via the Qi API.