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Adam Birkett 77Hmm5Tg N4 Unsplash
25.07.2022
Blending micro & macro
during earnings season
This week, 175 S&P500 companies release earnings. But Q2 GDP may herald a technical recession, the Fed will hike rates & further inflation data are also due.

There are so many moving parts, how is an equity manager supposed to keep up?

Qi’s RETINA™ is a pipeline of potential trade ideas. Amongst a list of tailored assets, it highlights when securities become divorced from macro fundamentals.

One current example is RSP, the Invesco ETF that tracks an equally weighted S&P500 index rather than a market-cap one.

RETINA is flagging that RSP is now 0.9 sigma (5.5%) rich to macro model value. Spot RSP has accelerated ahead of macro conditions & Qi’s Fair Value Gap is at the richest levels recorded in 2022.
See more
Juskteez Vu Tirxot28Znc Unsplash
20.07.2022
How to measure
Italian political risk
Marrying bottom up & top down analysis is hard enough. How are portfolio managers supposed to handicap political risk?

Instead of relying on the opinion of geopolitical strategists, the Qi framework uses financial securities to capture the markets’ current perceptions of the risk around certain political scenarios.

Asset swap spreads for peripheral EuroZone sovereigns like Italy, Spain & Greece can be used to measure the degree of stress markets are pricing in for highly indebted southern European economies.

Qi’s algorithm de-trends & vol adjusts each spread, & then runs Principal Component Regression to capture the independent sensitivity of any security to this factor.

In the chart below we look at European equity sectors & overlay sensitivity to peripheral spreads with aggregate macro valuations.

Sectors to the right of the vertical zero bound want Italian spreads to remain well behaved. The further to the right, the greater the sensitivity; i.e. the more vulnerable they are if BTP spreads blow wider.

Red dots above the horizontal zero bound are currently rich relative to overall macro fair value.
See more
Pexels Sam Willis 3934512
19.07.2022
Company fundamentals & a strong
Dollar - how to blend macro & micro
Last week we illustrated how Qi can help equity long/short managers identify when company fundamentals are more important than macro factors.

If nothing else, that makes Qi a valuable productivity tool. As we move through earnings season, stock pickers can concentrate their time & energy on the stocks currently being driven by idiosyncratic risks.

But in reality the bottom up & top down worlds often meet in a the middle. An example of where macro & company fundamentals collide is the US Dollar. With the Dollar at multi-year highs, where is currency strength an issue; & how to know whether it represents a tailwind or a headwind.
See more
Blue Planet
12.07.2022
How an equity PM achieved 4% outperformance using Qi macro sensitivities
An equity PM running a large cap, long only US equity portfolio started 2022 with some concerns. The PM was concerned about higher inflation pushing the Fed to hike rates aggressively and what this might do to financial conditions.
See more
Hs 2009 25 Hubble
11.07.2022
How to pair fundamental &
quantitative equity investing
It’s a frustrating time for stock-pickers. Their bottom-up analysis of company fundamentals keeps being ‘polluted’ by macro events.

Qi empowers equity managers with the ability to differentiate between the stocks that are dominated by idiosyncratic risks, versus those that are a function of the macro environment.

Qi’s model confidence measure acts as a filter. A quick & easy way to spot where a stock is macro-driven, & potentially scale down risk. Thereby freeing up time & capital to allocate to stocks where your alpha edge will make the biggest difference.
See more
Jake Weirick 09Bqxnvo7Eu Unsplash
07.07.2022
Proof! What Value
needs to outperform Growth
Not another piece of commentary opining on markets. Empirical proof of what’s driving Value versus Growth.

Attribution analysis defines what moves Qi macro-warranted fair value. In the case of US Value vs. Growth (using Vanguard ETFs VTV vs. VUG), Qi model value rose 34.9% from the start of the year to the May 24th high watermark for Value outperformance.

Spot VTV / VUG rallied 35.3% in that time. The market moved exactly as macro conditions dictated it should!

That simple statistic demonstrates the importance of the macro environment for equity managers, even when they think they are allocating on a style basis.

The chart below shows the breakdown of the VTV / VUG model move over that period.
See more
Nasa Rtzw4F02Zy8 Unsplash
04.07.2022
Macro confuses me
- is bad news now good news?
Macro relationships are in a constant state of flux. That makes it hard for bottom-up equity managers to dissect what the macro environment is doing to their portfolio.

Perhaps the best example is the market cliché about bad news being good news. Some are making that argument now – that poor economic data will stop the Fed from tightening monetary policy, & hence is equity positive.

Reality is rarely so clear-cut. Indeed the current picture is more nuanced. How can an equity PM identify the true underlying picture?

Qi demonstrates that macro factors currently explain 84% of the variance of the S&P500. The chart shows the top macro drivers.
See more
Casey Horner Rmowqdcqn2E Unsplash
29.06.2022
Staying on top of the changing
macro environment
Equity PMs already have their hands full analysing the fundamentals of hundreds of companies, plus monitoring whether their picks have a growth or value tilt.

Macro adds another layer again. And a complex one at that given the number of macro indicators, & the need to sift through them, screening for importance & impact.

It is this perceived noise & complexity that makes the macro space such a turn off.

Is there a clean, easy to understand way to monitor the constant shifts in the macro environment?

Yes, Qi. And RETINA™ in particular which will push alerts into your workflow.

The chart below popped into RETINA™ users Symphony / Slack / email channels this morning, alerting them to the fact that tracking Japanese GDP growth has edged into negative territory. Why? Because weak vehicle sales overnight detracted 0.23% from Q2 economic growth.
See more
Ferenc Horvath Skcfibu91Aa Unsplash
27.06.2022
Stagflation vs. Recession
- how to get macro transparency
How can an asset manager stay on top of the shifting macro narrative? Discerning between stagflation & recession is a tricky call, but a vital one that will dictate performance over H2’22.

Take last week’s bounce in risky assets for instance. The chart below, which can be found on Qi’s portal homepage, shows the 10 macro factors that shifted the most last week.

The good news? Several key measures of financial conditions which had deteriorated significantly in recent months, enjoyed a respite.

The Dollar liquidity squeeze eased up, real rates fell, the stress in European government bond markets reversed course & money markets started to relax expectations for Central Bank rate hikes.
See more
Nasa Hi5Dx2Obas Unsplash
23.06.2022
Recession fears escalate
- how Ai helps asset allocation
Powell’s testimony & the fall in crude oil has driven recession fears to the forefront of investors’ minds.

Traditionally, equity allocators needed to process hundreds of variables (bottom up & top down) to decide the relative winners & losers should the economic cycle turn deflationary.

Or, they can use Ai to screen global equity markets for their independent relationship with inflation expectations.

The chart below shows global equity indices. Markets to the right of the vertical line want rising inflation expectations & therefore suffer in a deflation scenario.

The y-axis is the Qi Fair Value Gap: macro-warranted fair value. Indices in red above the zero bound are rich to model, the green below are cheap.
See more
Close
Adam Birkett 77Hmm5Tg N4 Unsplash
25.07.2022
Blending micro & macro
during earnings season
This week, 175 S&P500 companies release earnings. But Q2 GDP may herald a technical recession, the Fed will hike rates & further inflation data are also due.

There are so many moving parts, how is an equity manager supposed to keep up?

Qi’s RETINA™ is a pipeline of potential trade ideas. Amongst a list of tailored assets, it highlights when securities become divorced from macro fundamentals.

One current example is RSP, the Invesco ETF that tracks an equally weighted S&P500 index rather than a market-cap one.

RETINA is flagging that RSP is now 0.9 sigma (5.5%) rich to macro model value. Spot RSP has accelerated ahead of macro conditions & Qi’s Fair Value Gap is at the richest levels recorded in 2022.
See more
Rsp
Aside from crunching the numbers on single stocks, bottom-up analysis will be thinking about concentration risks.

There are fears that the big stocks by earnings contribution distort the overall earnings picture for the broader index. Put another way, that the earnings picture is worse outside of the biggest mega cap names.

Analysing company fundamentals during earnings season is a big drain on time. Fundamentally, Qi’s provides a low touch way to identify when stocks become divorced from macro.

RETINA™ is an efficient productivity tool to help blend micro & macro into one investment process.
Juskteez Vu Tirxot28Znc Unsplash
20.07.2022
How to measure
Italian political risk
Marrying bottom up & top down analysis is hard enough. How are portfolio managers supposed to handicap political risk?

Instead of relying on the opinion of geopolitical strategists, the Qi framework uses financial securities to capture the markets’ current perceptions of the risk around certain political scenarios.

Asset swap spreads for peripheral EuroZone sovereigns like Italy, Spain & Greece can be used to measure the degree of stress markets are pricing in for highly indebted southern European economies.

Qi’s algorithm de-trends & vol adjusts each spread, & then runs Principal Component Regression to capture the independent sensitivity of any security to this factor.

In the chart below we look at European equity sectors & overlay sensitivity to peripheral spreads with aggregate macro valuations.

Sectors to the right of the vertical zero bound want Italian spreads to remain well behaved. The further to the right, the greater the sensitivity; i.e. the more vulnerable they are if BTP spreads blow wider.

Red dots above the horizontal zero bound are currently rich relative to overall macro fair value.
See more
Europe Equity Sectors Btps
Today, Mario Draghi addresses the Senate; tomorrow the ECB meet. A new Draghi coalition government plus details of a credible anti—fragmentation tool would help assuage market fears about a blow-out in BTP spreads.

If you hold that view, European Chemicals look an interesting prospect. If your fear further political instability ahead, choose between EU Technology (highly sensitive) or Media (rich valuation).

Qi's Optimise Trade Selection function enables you to run this search across a range of assets. Instead of sectors, screen Euro Stoxx 600 single stocks for their sensitivity to BTP spreads. API users can go a step further & screen their own portfolio for shifts in the Italian political landscape.

#nextgenerationstresstests
Pexels Sam Willis 3934512
19.07.2022
Company fundamentals & a strong
Dollar - how to blend macro & micro
Last week we illustrated how Qi can help equity long/short managers identify when company fundamentals are more important than macro factors.

If nothing else, that makes Qi a valuable productivity tool. As we move through earnings season, stock pickers can concentrate their time & energy on the stocks currently being driven by idiosyncratic risks.

But in reality the bottom up & top down worlds often meet in a the middle. An example of where macro & company fundamentals collide is the US Dollar. With the Dollar at multi-year highs, where is currency strength an issue; & how to know whether it represents a tailwind or a headwind.
See more
Earnings Spotflight Quadrants Usd Twi 18072022 1
The chart shows some of this week’s reporting companies. Firstly, it shows whether a stock is in a macro regime (those to the right of the 65% model confidence threshold) or being driven by company news. Then we’ve added sensitivity to the US Dollar on the y-axis.

Netflix is interesting. Just below our threshold for a regime but the most vulnerable to a strong Dollar. Note also, running the same chart but for sensitivity to interest rates, Netflix is also the most reliant on real yields not marching higher.

Most of this week’s reporters who are in macro regimes favour a weaker Dollar. The outlier is AT&T which also screens as 2.1% cheap to model fair value.

API users can run this on customised lists of assets – here the companies reporting earnings this week, but it could be equally applied to different portfolios or trading strategies.
Blue Planet
12.07.2022
How an equity PM achieved 4% outperformance using Qi macro sensitivities
An equity PM running a large cap, long only US equity portfolio started 2022 with some concerns. The PM was concerned about higher inflation pushing the Fed to hike rates aggressively and what this might do to financial conditions.
See more
Hs 2009 25 Hubble
11.07.2022
How to pair fundamental &
quantitative equity investing
It’s a frustrating time for stock-pickers. Their bottom-up analysis of company fundamentals keeps being ‘polluted’ by macro events.

Qi empowers equity managers with the ability to differentiate between the stocks that are dominated by idiosyncratic risks, versus those that are a function of the macro environment.

Qi’s model confidence measure acts as a filter. A quick & easy way to spot where a stock is macro-driven, & potentially scale down risk. Thereby freeing up time & capital to allocate to stocks where your alpha edge will make the biggest difference.
See more
Us List Quadrants 07072022
This will be a critical earnings season. Recession talk is everywhere, but arguably earnings forecasts are the one area yet to reflect the vibe shift.

The quadrant above looks at this week’s reporters & provides two perspectives. The vertical line is our 65% threshold for a macro regime.

Stocks to the right are macro-driven. Those to the left are where stock pickers should concentrate their energies.

Managers need to know that a bet on Blackrock is primarily a bet on credit spreads, VIX & real yields. A Fair Value Gap of 8.7% suggests BLK has discounted a fair degree of good news on these fronts.

But the majority of this week’s reporters are not macro plays. Earnings & forward guidance trump economics & financial conditions. Identify what regime a stock is in, then apply the relevant analysis, be it macro or micro.
Jake Weirick 09Bqxnvo7Eu Unsplash
07.07.2022
Proof! What Value
needs to outperform Growth
Not another piece of commentary opining on markets. Empirical proof of what’s driving Value versus Growth.

Attribution analysis defines what moves Qi macro-warranted fair value. In the case of US Value vs. Growth (using Vanguard ETFs VTV vs. VUG), Qi model value rose 34.9% from the start of the year to the May 24th high watermark for Value outperformance.

Spot VTV / VUG rallied 35.3% in that time. The market moved exactly as macro conditions dictated it should!

That simple statistic demonstrates the importance of the macro environment for equity managers, even when they think they are allocating on a style basis.

The chart below shows the breakdown of the VTV / VUG model move over that period.
See more
Proofvtvvsvug
Part of it was the notion of a cyclical bounce. Stronger economic growth & forward growth expectations plus higher commodities between them account for part of the rise in model value.

But financial conditions & measures of market stress were vastly more significant. Higher real rates & wider credit spreads were responsible for nearly twice as much in terms of Growth’s underperformance.

Probably less well known is the role played by European government bond markets. The widening in peripheral spreads as markets fretted about the ECB’s hawkish pivot was the biggest single driver of Value’s outperformance.

Qi model confidence is currently 73% - macro retains strong explanatory power. Equity managers choosing their tilt for H2 2022 need to be aware of the macro environment & how that determines the Value vs Growth asset allocation decision.
Nasa Rtzw4F02Zy8 Unsplash
04.07.2022
Macro confuses me
- is bad news now good news?
Macro relationships are in a constant state of flux. That makes it hard for bottom-up equity managers to dissect what the macro environment is doing to their portfolio.

Perhaps the best example is the market cliché about bad news being good news. Some are making that argument now – that poor economic data will stop the Fed from tightening monetary policy, & hence is equity positive.

Reality is rarely so clear-cut. Indeed the current picture is more nuanced. How can an equity PM identify the true underlying picture?

Qi demonstrates that macro factors currently explain 84% of the variance of the S&P500. The chart shows the top macro drivers.
See more
Spxdrivers
Yes, the S&P500 wants lower real rates currently. Real yields have moved higher for all of 2022 until recently, when hard landing fears escalated. Some may construe that as evidence of the bad news = good news thesis.

But the biggest single positive driver is Fed rate hike expectations where sensitivity has increased significantly. Equities want an upward sloping money market curve, i.e. the economy is healthy & interest rates will be higher tomorrow than they are today.
Spxfedrateexpectations
But recession fears have inverted the money market strip; the market is now discounting rate cuts next year.

Over June, macro model value for the S&P500 fell 11.1%. Of that move, 3.2% was due to the market's shift to recession & rate cuts. In comparison, the fall in real rates hardly impacted.

In this instance, bad news is bad news. Only robust empirical analysis can quantify these relationships.

Looking at individual macro drivers in isolation is misleading. Only by pulling together the entire macro picture but then breaking it down to identify the dominant driver(s), can PMs understand the aggregate picture.
Casey Horner Rmowqdcqn2E Unsplash
29.06.2022
Staying on top of the changing
macro environment
Equity PMs already have their hands full analysing the fundamentals of hundreds of companies, plus monitoring whether their picks have a growth or value tilt.

Macro adds another layer again. And a complex one at that given the number of macro indicators, & the need to sift through them, screening for importance & impact.

It is this perceived noise & complexity that makes the macro space such a turn off.

Is there a clean, easy to understand way to monitor the constant shifts in the macro environment?

Yes, Qi. And RETINA™ in particular which will push alerts into your workflow.

The chart below popped into RETINA™ users Symphony / Slack / email channels this morning, alerting them to the fact that tracking Japanese GDP growth has edged into negative territory. Why? Because weak vehicle sales overnight detracted 0.23% from Q2 economic growth.
See more
Japangdpnowcasting
When will a stock picker ever have time to track second tier high frequency economic data like Japanese auto sales?

Qi’s Ai driven process makes macro easy to digest, thereby solving a universal problem – how to make macro simple to understand & an integral part of your investment process.
Ferenc Horvath Skcfibu91Aa Unsplash
27.06.2022
Stagflation vs. Recession
- how to get macro transparency
How can an asset manager stay on top of the shifting macro narrative? Discerning between stagflation & recession is a tricky call, but a vital one that will dictate performance over H2’22.

Take last week’s bounce in risky assets for instance. The chart below, which can be found on Qi’s portal homepage, shows the 10 macro factors that shifted the most last week.

The good news? Several key measures of financial conditions which had deteriorated significantly in recent months, enjoyed a respite.

The Dollar liquidity squeeze eased up, real rates fell, the stress in European government bond markets reversed course & money markets started to relax expectations for Central Bank rate hikes.
See more
Macrotop10
The bad news? The catalyst for that shift in financial conditions was increased recession risk. Tracking GDP growth fell significantly in the US & Europe. “Doctor” copper, often used as a leading indicator for the global business cycle, fell sharply.

A macro backdrop that supports peak inflation, less monetary tightening & a potential soft landing is risky asset positive. But one that heralds recession is anything but.

Somehow money managers need to find a way to calibrate between these two scenarios. How? Qi model value shows fair value for any security given its sensitivity to the macro factor shifts seen above.

For example, currently the mix between recession risks & easier financial conditions are producing a stalemate for the S&P500. Macro warranted model value is flat-lining at the lows.

But macro conditions have improved noticeably for US High Yield credit HYG.

Both show current market levels close to macro model value, but only credit is enjoying an improvement in underlying macro fundamentals.
Nasa Hi5Dx2Obas Unsplash
23.06.2022
Recession fears escalate
- how Ai helps asset allocation
Powell’s testimony & the fall in crude oil has driven recession fears to the forefront of investors’ minds.

Traditionally, equity allocators needed to process hundreds of variables (bottom up & top down) to decide the relative winners & losers should the economic cycle turn deflationary.

Or, they can use Ai to screen global equity markets for their independent relationship with inflation expectations.

The chart below shows global equity indices. Markets to the right of the vertical line want rising inflation expectations & therefore suffer in a deflation scenario.

The y-axis is the Qi Fair Value Gap: macro-warranted fair value. Indices in red above the zero bound are rich to model, the green below are cheap.
See more
Globalequitiesinfl
For a US equity allocator, for example, the chart immediately identifies the Russell 2000 as the most vulnerable to recession – highly reliant on rising inflation expectations & slightly rich to macro.

For anyone with an Asian focus, Singapore EWS is slightly cheap to model but it is the most reliant on reflation.
  • Qi portal users – use Optimise Trade Selection to screen your asset class for sensitivity to inflation expectations.
  • Qi API users – replicate the chart above on your portfolio’s holdings.
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