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The 10 richest models have a strong EM bias. South Africa EZA & Brazil could represent their status as commodity plays. Note macro model value is moving sideways rather than trending lower.

The three rich DM markets include Singapore EWS & South Korea EWY where presumably geographical distance helps.

Greece is not in regime but, to date, macro model value had not been declining. Mainly because it’s less reliant on low VIX versus other EU indices, & the fact it’s comfortable with rising real rates.

This is not to advocate new longs or shorts during incredibly uncertain times. But it does provide a framework to consider where, in macro terms, markets have moved to discount events in Ukraine. Strikingly, certain EM plays, & in the US small rather than large caps, are seemingly regarded as the safer place to hide.

Qi’s Optimise Trade Selection function suggests the European sector most vulnerable to spikes in risk aversion is Travel & Leisure. On current patterns, it is the only sector which falls by over 1% for a one standard deviation increase in European equity vol.

With a valuation gap of +0.5 sigma (+3.5%) EU Travel & Leisure is also slightly rich to macro. While it is true that the FVG was 1.6 sigma, +11.3% just a week ago, it is also striking that it is the only sector with a rich valuation on Qi metrics.

The critical point is that macro-warranted fair value appears to be heading lower. With risk aversion alone accounting for 30% of model value, further geopolitical stress means the sector is the one most susceptible to macro fair value deteriorating still further.

Low Vol plays are often seen as an integral part of a smart beta approach. The constituents of ETFs such as iShares’ USMV are typically cash flow positive, have healthy balance sheets & together they are seen as a defensive strategy that outperforms during drawdowns.

USMV’s profile is similar to several of Qi’s equity models. Recently back into regime (model confidence up 42% over the last month to 70% now) with a driver mix that shows a desire for reflation, low risk aversion, tight credit spreads & low real yields.

What is noticeable with US Min Vol though is the recent move lower has diverged from macro fair value – the red line above which is tracking sideways. That divergence has opened up a -0.75 sigma (-2.2%) Fair Value Gap.

That FVG, whilst not extreme, is getting towards the wide end of recent ranges. In fact, USMV has only been in regime & this cheap to model 13 times since January 2009. The hit rate on that as a buy signal is 84.6% for an average return of +2.4%.

History never repeats. But, aligned with Qi’s framework, it does generate interesting hedging ideas for the age old dilemma of how to find cheap downside protection for your asset allocation mix.

Relative to the broad macro environment, which commodity play is lagging the recent bull move? Which has already priced in a lot of the good news?

AUDUSD is 0.5 sigma (1.4%) below macro fair value. Not a huge valuation gap but unsurprisingly iron ore & copper rank amongst the top positive drivers. VIX & risk aversion is the other big driver so, for those who believe in commodity upside & “risk on”, Aussie offers a slightly cheap entry level.

Chilean miner Antofagasta has had its fair share of negative headlines of late - issues around water rights & pressure from environmental groups. Those idiosyncratic risks have resulted in the stock price lagging versus the macro environment. The stock is now one sigma (7.7%) cheap to model fair value.

Conversely, Copper & global copper miners COPX lie at the rich end of valuations. While they have moved ahead of fair value, model value is trending higher, it is simply that they have moved quicker than macro fundamentals. That suggests it is not yet a trade to fade; rather, from a macro view point, it is the least attractive to be chasing here, even for commodity bulls.