HomeSolutionsInsightsNewsroomPeopleContactLogin

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

Announcements
Press
Blog

The Qi work on the shifting macro regime for momentum as a smart beta strategy can be found here

The February / March sell-off has, in valuation terms, left it 1.5 sigma (6.1%) cheap to macro-warranted model value. Back-tests suggest this is a rare but statistically significant level. Since 2009, only three times has ChiNext been in regime & with this big a negative FVG. Buying those dips elicited a 67% hit rate & 4.9% average return.

Perhaps most interesting of all is that Qi’s RETINA ™ is now flagging a Divergence buy signal.

RETINA ™ combines Qi’s existing macro valuations with a numerical measure of trend plus accelerating / decelerating momentum. In this instance the signal is exclusively predicated on valuation & one of Qi’s optimisation strategies.

A Divergence rule identifies when macro-warranted model value & spot price have moved in the opposite direction over the last 10 days. In this instance, the most recent sell-off has not been justified by macro fundamentals.

Macro valuation + trend / momentum overlay. Look Up ™

Only Blackrock is below our model confidence threshold & a function of micro, idiosyncratic drivers.

Otherwise, macro matters for US financials. Moreover, they are largely moving in line with macro fundamentals. Most of this week’s reporters are close to model fair value.

At the margin, Goldman Sachs & Morgan Stanley offer a slight valuation edge, trading just below macro model value. At the other end of the range, Bank of NY Mellon & State Street are both around 5% rich to model.

The macro profile is similar across the sector. Tight credit spreads remains the number one driver. Reflation is captured via a positive sensitivity to both inflation expectations & energy prices. Rising US real yields are a tailwind not a headwind.

In every case macro model value is flat-lining; consolidating after a 5month uptrend. The move in these factors will be critical in deciding the next move for financials.

The Qi Vol Indicator captures the ability of macro to explain price action across some key global benchmark instruments in equity, rates & FX markets.

When macro’s explanatory power falls, markets are more vulnerable to other factors like positioning & sentiment; both of which can cause sharp price swings. Hence, low macro model confidence equates to a higher Qi Vol Indicator which can, in turn, signal a period of elevated volatility.

There are some ‘false dawns’ but overall the Qi Vol Indicator has done a good job of leading sharp spikes in VIX over the last 5 years - summer 2016, “Volmageddon” early in 2018, Jan 2019 & most recently the Covid shock of February/March 2020.

Neither the absolute level, nor the rate of change in our Vol Indicator is currently giving any cause for concern. That said, the divergence versus the VIX is notable & worth monitoring.

One potential risk for H2 2021 is if, in sharp contrast to the stimulus in the US, Beijing chooses to actively rein in its growth. In z-score terms, the Chinese recovery (the blue line is Now-Casting’s China tracking GDP) has been the outlier & the clear engine of recovery early in 2021.

For all the talk of reflation, relative to long term trend, US growth has yet to post a similar upswing.

The ability to track the impact of Chinese or US growth on different asset classes over the months ahead will be absolutely critical. One to monitor. Moreover, Qi’s Optimise Trade Selection functionality gives clients the ability to identify which markets are most sensitive to Chinese or US GDP going forward.

Macro model confidence is typically high & most valuations are close to fair value.

Steel company Nucor appears to have discounted some of the good macro news already. Otherwise the models that are modestly rich to model are at the sector level (Materials XLB & Industrials XLI) or specialist infrastructure ETFs – PAVE & IGF.

Single stocks are, relatively speaking, modestly lagging the potential Biden uplift. Commercial vehicles company Cummins which is working on electric buses is the book-end at 3.4% cheap to macro.

Each stock-picker will have their preferred play. Qi clients can run their own picks versus the prevailing macro regime to see where the bottom-up & top-down views align.