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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

The jury is still out on whether this represents contagion amongst real estate companies alone; or whether the sheer size of the property sector means stress here has broader ramifications for the Chinese economy.

For now, most financial ‘tourists’ following the story use ETFs like AHYG – the iShares USD Asia High Yield Bond ETF. On Qi, AHYG is in a strong macro regime (87% model confidence) & there is no Fair Value Gap – the market is moving in line with macro fundamentals.

The standout feature though is macro-warranted model value. The red line is still trending lower. If anything, the downtrend appears to be accelerating.

AHYG may not currently offer any tactical valuation edge (Qi Fair Value Gaps highlight dislocations & therefore trading opportunities) but, for now, the combination of key factors like Chinese GDP growth, commodity prices, real rates, inflation expectations, the Dollar & risk aversion all continue to point to a deteriorating macro environment.

What could prompt a change in trend? The obvious candidate is a policy response - official credit stimulus would impact several of the key drivers above. Absent that, the current patterns suggests the macro outlook remains bleak.

What is evident looking at the GBP fx watchlist below, is that GBP is generally cheap versus its peers relative to the macro environment. Looking at the key drivers on the right it is also evident that interest rates are a key driver of Sterling once again.

Several GBP fx crosses have experienced sharp falls in model confidence of late. EURGBP for example has fallen 18% in the last 2 weeks & now sits at 53%. The equivalent numbers for GBPAUD are -17% to 58% now.

Of those in regime, interest rate differentials are the key driver of GBPSEK & GBPJPY. All else equal, higher nominal UK yields versus Swedish & Japanese yields will be GBP positive. The latter though is close to fair value; it is GBPSEK which presents a valuation edge being 1.9 sigma (2.2%) cheap to model.

Moreover, BoE QT expectations is the biggest single driver of GBPSEK & the relationship is positive. Ending QE early (currently slated for December) could provide the cross with a significant boost. Combining a rate hike with early QT is a powerful combination for GBPSEK in particular.

The regime is different for cable – real yields matter more than nominal rates, but it also emphasises domestic GDP growth & commodity prices.

It is cheap (-0.7 sigma, -0.8%) but whereas Sterling bulls buy GBPSEK for a hawkish BoE policy response, they should buy cable if bullish on the UK economy. Put another way, a BoE policy error has the potential to hurt cable more.