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That was the message from “Black Friday starts now” where RETINA flagged that US Retail was cheap to the broader market back in mid-October ahead of an early & more protracted shopping season. Retailers subsequently outperformed the S&P500 by 7.5% & Qi’s XRT vs. SPY model now sits 0.7 sigma (2.5%) rich to macro.

During earnings season several retailers have referred to the threat from inflation. Bottom-up analysis looks at companies pricing power; Qi looks at a stock price’s relationship with inflation expectations.

The chart shows those retail Consumer Discretionary stocks that benefit (suffer) from rising inflation to the right (left) of the vertical bound. We also add a valuation overlay. Red (green) stocks above (below) the horizontal bound are rich (cheap) to macro model value.

The majority of retailers still want reflation but a sizeable minority now have a negative relationship where rising inflation is a headwind; presumably a function of margin compression.

Bed, Bath & Beyond is an example which also screens as 29% rich to model. Note though inflation is not a significant driver versus other macro factors. Garmin however has just started a new macro regime with inflation the top driver & the relationship is negative. The macro perspective suggests it is a stock that, on current patterns, has little pricing power.

Here we look at any US equity sector ETF with model confidence of at least 50% & then shock two China factors - Chinese GDP growth & sovereign CDS spreads - by two standard deviations. The blue bars show the subsequent percentage gain or loss in macro model value.

In short, US equity investors hawkish on China can find refuge in biotech but need to be wary of any energy exposure & the housing market.

The sector most vulnerable to a China shock is US energy. Every other macro factor held constant, XLE, XOP & OIH model value falls between 0.5 & 1.0% in the China stress scenario. They are, however, all already cheap to macro fair value.

Transport ETF IYT is the next most sensitive & is slightly rich (+0.3 sigma, +1.4%) to model. The standout though are Home Builders XHB & Home Construction ITB. Both screen as vulnerable & both are around one sigma rich to model.

Only two sectors see model value rise in this China shock scenario. Biotech ETFs IBB & BBH represent the best defensive play.

The Qi framework allows investors to run empirical scenario analysis. Not educated guesswork, but the quantified impact on any asset from an isolated move in certain macro factors.

In outright terms, Travel & Leisure is 1.1 sigma (4.0%) below model fair value. Relative to the Euro Stoxx 600 it is 1.2 sigma (7.4%) cheap to macro. Both are 1y lows for the Qi Fair Value Gap.

Covid clearly represents a fairly unprecedented shock so back-tests come with a strong health warning. Still, as a guide, using these FVGs as dip buying levels since 2009 reveals hit rates of 67% & 78% respectively. The average returns were +4.0% & +1.0% respectively.

Of the ten biggest FVGs amongst Qi’s models for European sector relative value, seven involve Travel & Leisure; & all show it as cheap versus its peers.

A fair amount of bad news would now appear to be priced making the sector a potentially interesting vehicle for anyone with a contrarian stance with regards to the pandemic & the European economy.

Qi Watchlists allow clients to customise any list of securities by asset class, geography or theme. Here we curate a list of assets typically seen as sensitive to the global economic cycle.

US break-evens are elevated (but out of regime) while the yield curve is too flat relative to model. The message from the bond market is Central Bank’s reaction function has changed. No longer content to watch-&-wait for inflation to self-correct, sticky inflation requires a policy response & that threatens future growth.

Cyclically-sensitive AUDJPY is also mildly concerned – it is modestly cheap to model. It’s a similar picture in commodities – oil & copper both modestly cheap. Gold is marginally rich to copper in RV terms, IAU vs JJC.

The equity picture is mixed. It’s marginal but, in the US, both small caps & tech are modestly rich versus large caps; Growth a tad rich versus Value. A classic cyclical vs defensive play like XLF / XLU is at fair value.

European internals are more cautious - Staples are rich vs Discretionary (STS vs. STR) – but overall equities, for now, don’t appear threatened by the message from Fixed Income.

1.) Sensitivity to economic growth
2.) Sensitivity to inflation
3.) Valuation edge
4.) Importance of macro

For more details on our product upgrades or if interested in testing this Qi dataset, delivery method or reports please contact a Quant Insight representative:
info@quant-insight.com