HomeSolutionsInsightsNewsroomPeopleContactLogin

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

Announcements
Press
Blog

While meme stocks often steal the headlines one of the biggest shifts in the investment industry is the growth in thematic ETFs.

From Qi’s watchlist of thematic ETFs it is notable how RETINA™ is flagging some of the valuation outliers.

Of the five cheapest ETFs, RETINA™ has posted bullish signals on three, all of which are around 1.5 sigma below macro fair value. US Internet ETF FDN, Global FinTech ETF FINX & the Global X ETF MILN designed to provide exposure to the millennial generation.

To varying degrees all three speak to disruptive innovation, the area that has borne the brunt of the recent sell-off. In all cases a desire for Fed rate cuts is a dominant driver. The Fed’s policy pivot has been instrumental in their recent underperformance; but at these levels, a fair degree of Fed hawkishness is priced.

At the other end of the spectrum, global airlines ETF JETS speaks to a post Omicron re-opening trade; while the richness of the Global Infrastructure ETF IGF presumably hinges on hopes Biden can pass some kind of Build Back Better spending bill.

Only on BIZD has RETINA™ flagged a bearish signal. Investing in Business Development Centres is an income play but, given its SME exposure, a small company, value strategy too. Cyclical re-opening investments may have further to run in 2022 but these don’t look the levels to chase, at least from a macro perspective.

Our partners at Omega Point provide next generation portfolio analytics. Their focus is predominantly on smart beta factors which means aligning their signals with Qi’s macro factors makes a powerful combination.

Their latest Factor Spotlight takes 3 Qi factors – Fed rate expectations, Fed QT expectations & 10y US real yields – to provide stock pickers with an empirical look at the securities most vulnerable to the early 2022 shift in financial conditions.

Here we take the 9 NASDAQ stocks in their analysis & add Qi’s macro valuation overlay.

Three names – Atlassian, DexCom & Lululemon – have already moved to discount a fair degree of bad news. Interestingly, after a 6week downtrend, all 3 show model value potentially bottoming out. In the Lululemon chart above, macro-warranted fair value (red line) is showing tentative signs of stabilising at recent lows.

TEAM & DXCM are around 0.75 sigma cheap to macro; LULU is 1.1 sigma or 13% below macro-warranted fair value. All three back-test well at current FVGs.

Lululemon is the pick of the bunch – it is only been this cheap to model & in macro regime 14 times since 2009. Buying those dip produced a 93% hit rate & +7.8% average return.

Fed hawks may argue it’s too soon to buy dips. In which case note Splunk SPLK is 0.4 sigma (5.5%) above model. That’s a modest FVG but it is the one stock that has lagged in the down trade & is still rich to macro.

It has taken just 3 trading days in 2022 to take real yields back above their long term trend.

The current move is still small relative to other big macro shocks. 2013’s taper tantrum was a 4 standard deviation event on Qi; March 2020 posted an even bigger swing from initial lockdown to Fed policy response.

That notwithstanding this is a sharp move & one which, should it continue, would threaten risk appetite across global capital markets. Qi users can track shifts in the same z-score terms via “Top 10 Driver Macro Shifts” in the top corner of the Qi portal’s home page.

Yesterday, the ST Fair Value Gap on the S&P500 model was negligible: -0.2 sigma or 0.6%. Spot was effectively at macro-warranted fair value. That FVG now stands at -0.75 sigma or -2.2%.

The ST model is inherently more noisy & a tactical rather than strategic tool. But how significant is that discrepancy between where the market is now & model value? Below we show the efficacy of using different FVGs as a buy-the-dip signal.

A key premise of Qi is to use quantitative techniques to help guide your investment process. Use the factor moves & valuation gaps to provide signals about what is driving asset prices, & what the balance of risks are.

The back-test results above suggest the balance of probabilities favour a bounce. Individual investors may emphasis poor sentiment, or a ‘this time is different’ mentality.

History may not repeat itself but as it often rhymes, it is worth embracing a framework to help try & skew risk-reward in your favour. The above provides a roadmap which can provide an additional input into the discretionary process.

Qi’s Long Term model for the S&P500 remains below the key 65% confidence threshold, but the Short Term model has been in a strong macro regime since October. Model confidence is currently 78%.

We always default to the Long Term model with its rolling 12mth look-back period. Relationships are more stable, valuation signals typically back-test better. But, in a more tactical market, there will be times when the shorter 4mth rolling window, can offer value.

The ST regime is show above (click chart to expand). It is a Goldilocks scenario – reflation plus tight credit spreads & healthy risk appetite. But the biggest standout is the relationship with the Fed’s monetary policy stance.

Both Fed rate expectations & QT expectations are positive drivers. On current patterns, rate hikes & QT are consistent with higher S&P500 – they reflect a healthy underlying economy that is comfortable with policy normalisation.

These relationships could change again. At the factor level there will be a tipping point where a higher terminal rate &/or faster pace of hikes become equity negative. Qi would capture that via S&P500 sensitivity to Fed rate expectations (the shape of the Euro$ curve) flipping from positive to negative.

Real time, quantitative tracking of critical shifts in macro relationships. Lazy narrative versus robust process.