HomeSolutionsInsightsNewsroomPeopleContactLogin

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

Announcements
Press
Blog

More recently, a huge rally in US renewable energy company Enphase has added additional momentum. It rose 25% last week after strong earnings & new product innovation. ENPH is now almost 30% rich to macro fundamentals but model confidence has fallen sharply – the idiosyncratic news about their new solar microinverter trumps the influence of macro right now.

Enphase is a major holding for several thematic ETFs. It constitutes 12.4% of the Invesco Solar technologies ETF TAN & 8.7% of iShares Global Clean Energy ETF ICLN.

Both ETFs are approaching 2 sigma (~20%) rich to macro model value in outright terms. They are also outperforming their peers & the broader market. Both TAN vs. SPY and ICLN vs. XLE are almost 1.5 sigma rich to model. All four models are in regime & show fair value moving sideways. The latest rally has moved clean energy ahead of macro fundamentals.

Moreover, it is not just a US phenomenon. The outperformance of the FTSE Environment Opportunity Asia Pacific index versus the standard FTSE Asia index can be seen in the white line above. But macro-warranted model value (the red line) is deteriorating; hence a +1.8 sigma (+3.6%) Fair Value Gap on Qi.

COP26 could deliver a significant policy shift that fundamentally moves the goalposts for clean energy. Absent that, & from a tactical macro perspective at least, it seems late to be chasing the move here.

Qi includes a range of factors in our models that speak to the ease of obtaining credit, the availability of liquidity & overall financing levels. They include:

All are in z-score terms, showing how far each factor is from its long term trend. They are simply aggregated together & then the mean displayed here with a lower (higher) number pointing to tighter (easier) credit conditions.

In absolute terms, several of these indicators will have been significantly tighter in the past. However, in terms of the rate of change relative to trend, markets are experiencing a sharp squeeze in credit. Historically, such moves are not friendly for risky assets.

Do markets not believe the ECB’s dovish forward guidance? Or, do they believe it, but simply think it will be overwhelmed by supply bottlenecks & rising inflation?

If you believe Lagarde stresses the ECB’s dovish policy stance & bond markets react by continuing to push break-evens higher & real yields lower, then short EURUSD is the better trade. Real yield differentials remain the key driver of the cross according to Qi where model confidence is 82% & spot is modestly (0.3 sigma, 0.4%) rich to macro.

Meanwhile EURJPY is driven by a more nuanced combination of nominal rate differentials & risk appetite. A hawkish pivot by Lagarde that, relatively speaking, raises nominal European yields would, all else equal, drive EURJPY higher.

If that prompted a ‘risk off’ move, with VDAX a negative driver, rising risk aversion would negate that & depress model value. But, if equities interpret that as the ECB being pre-emptive & ahead of the curve, & Euro Stoxx rally / VDAX falls, then that’s a powerful combination for a long EURJPY position. Currently EURJPY is bang in line with model fair value.

By identifying the regime & specific drivers of different Euro crosses, Qi can provide a roadmap for the different scenarios investors are considering for today’s ECB meeting.

That’s a good starting point. However, given this is a macro argument, where possible it makes sense to complement analysis of company fundamentals with a macro perspective. This Qi Watchlist contains 25 global stocks whose earnings rely on macro conditions in China. Here we focus on the five with the richest valuations, i.e. those most vulnerable if the consensus about slower Chinese growth is correct.

Adidas & Infineon Technologies are both out of regime. Low model confidence means idiosyncratic risks are more important than macro factors currently. For these, bottom up analysis is sufficient.

Asian financials HSBC & Standard Chartered are both around 6.0% rich to macro. Both want healthy economic growth (China tracking GDP, higher commodity prices) & rising interest rates (both real rates outright & steeper yield curves). All intuitive but, at these Fair Value Gaps, both have discounted a fair amount of good news. For those bearish on Chinese economic growth, they look vulnerable.

Richemont is the world’s second largest luxury goods firm & an obvious victim of President Xi’s “common prosperity” push. Yet spot price has been rallying of late & has now moved back towards the highs seen prior to Beijing’s focus on greater social equality. That has left it 6.7% rich to macro on Qi. Another efficient vehicle for those worried about downside risks in China.

The chart shows Qi’s model for large cap US Value versus Growth via the Vanguard ETFs VTV & VUG. The white line shows the spot VTV / VUG ratio heading lower once again. Growth is outperforming. In contrast, the red line shows Qi’s fair model value rising - macro fundamentals point to Growth underperforming. The divergence means Value is now one sigma (4.9%) cheap.

Unsurprisingly, such Fair Value Gaps don’t back-test well. Buying VTV vs. VUG at -1 sigma since 2009 produces a 47% hit rate. Don’t fight big tech basically! At least at these FVGs.

So why mention now? Both models are in strong & stable macro regimes; and both show the same highly intuitive set of drivers. Reflation (stronger growth, higher commodities, rising real rates & steeper yield curves) favour Value over Growth. So far, no surprise.

Note though that Fed & CB QT Expectations are the dominant driver. In the VTV vs. VUG model it alone accounts for 27% of model explanatory power. For those who follow the volatility markets (which is the proxy Qi uses to measure QT expectations) a big divergence has opened up between bond & equity vol. MOVE has been flirting with YTD highs; VIX is back well below 20.

Don’t fight big tech is tough to argue with. But, for anyone worried about equity market complacency relative to the message from the bond market, Growth as a style factor could be vulnerable & an interesting trade expression.