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Asia Pac Dynamics
Quant Strategy– Schrödinger’s Market
For the past few months our macro model has been suggesting that we have
been living in a “Schrödinger’s market” with the macro environment similar to
both a QE2-style rally (of August 2010) and another GFC-type crisis (June
2008). This month the macro model seems to have finally collapsed the
uncertainty and settled on a state of the world; unfortunately, the model thinks
we are now more likely in a 2008-GFC type macro environment.
With this shift in the model, we expanded on the analysis we did in our August
Asia Pac Dynamics – Playing defence and looked at various historical crises and
rallies over the last 15 years in Asia to see what we could learn from them:
Similarity to history remains very low. This highlights we are in a period of
heightened tail risk where the standard investment strategies may not work
as expected.
In this non-normal tail risk environment it is not surprising that the macro
model has underweighted the standard three key investment strategies
of Valuation, Momentum and Analyst calls which work in normal
environments. The model has been overweight momentum since the start of
this year, and has shifted to an underweight momentum position, rotating
back into Value.
The model remains overweight the secondary defensive strategies of
profitability, growth, quality, low risk and capital changes which tend to
work better in bear market regimes.
Even though we might be in a bear market environment, things could change
quickly and surprise investors with a post-crisis rally. We looked at what
strategies did and did not work in a post-crisis rally to prepare for this eventuality.
The only strategies that have mattered in previous post-crisis rallies
have been Valuation metrics. Most of the other signals underperform or are
only weakly predictive. Therefore, we recommend maintaining some exposure
to valuation metrics just in case the market turns. Book Yield & Dividend
Yield signals that are robust in a bear market and in a market rally.
Avoid shorting or underweighting poor-quality, high-risk stocks. These
stocks can rally strongly if the market bounces and investors with a defensive
bias on the short side may be caught out. Investors can get defensive
exposures on the long side by focusing on the high-quality, low-risk stocks
which don’t suffer as badly in a market rally.
Avoid momentum – Historically, momentum hasn’t worked in a market crisis
or a sudden market rally.
From market peak to trough, the last few major crises have lasted 6–18
months. So far we are three months in from the recent market highs in July.
With strategy risk from a sudden regime shift from market crisis to rally and back
again we examine some macro signals which may help investors manage
turning point risk. Other than the distance model, some of the key macro
signals we track to detect a change in trend include Earnings Yield
spreads, Earnings Revision Aggregates, PMI, Market correlations, Time
series and Cross-Sectional Volatility. Unfortunately, none of these signals
currently indicate that we have turned the corner yet.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Asia Pac Dynamics
Quant Strategy– Schrödinger’s Market
For the past few months our macro model has been suggesting that we have
been living in a “Schrödinger’s market” with the macro environment similar to
both a QE2-style rally (of August 2010) and another GFC-type crisis (June
2008). This month the macro model seems to have finally collapsed the
uncertainty and settled on a state of the world; unfortunately, the model thinks
we are now more likely in a 2008-GFC type macro environment.
With this shift in the model, we expanded on the analysis we did in our August
Asia Pac Dynamics – Playing defence and looked at various historical crises and
rallies over the last 15 years in Asia to see what we could learn from them:
Similarity to history remains very low. This highlights we are in a period of
heightened tail risk where the standard investment strategies may not work
as expected.
In this non-normal tail risk environment it is not surprising that the macro
model has underweighted the standard three key investment strategies
of Valuation, Momentum and Analyst calls which work in normal
environments. The model has been overweight momentum since the start of
this year, and has shifted to an underweight momentum position, rotating
back into Value.
The model remains overweight the secondary defensive strategies of
profitability, growth, quality, low risk and capital changes which tend to
work better in bear market regimes.
Even though we might be in a bear market environment, things could change
quickly and surprise investors with a post-crisis rally. We looked at what
strategies did and did not work in a post-crisis rally to prepare for this eventuality.
The only strategies that have mattered in previous post-crisis rallies
have been Valuation metrics. Most of the other signals underperform or are
only weakly predictive. Therefore, we recommend maintaining some exposure
to valuation metrics just in case the market turns. Book Yield & Dividend
Yield signals that are robust in a bear market and in a market rally.
Avoid shorting or underweighting poor-quality, high-risk stocks. These
stocks can rally strongly if the market bounces and investors with a defensive
bias on the short side may be caught out. Investors can get defensive
exposures on the long side by focusing on the high-quality, low-risk stocks
which don’t suffer as badly in a market rally.
Avoid momentum – Historically, momentum hasn’t worked in a market crisis
or a sudden market rally.
From market peak to trough, the last few major crises have lasted 6–18
months. So far we are three months in from the recent market highs in July.
With strategy risk from a sudden regime shift from market crisis to rally and back
again we examine some macro signals which may help investors manage
turning point risk. Other than the distance model, some of the key macro
signals we track to detect a change in trend include Earnings Yield
spreads, Earnings Revision Aggregates, PMI, Market correlations, Time
series and Cross-Sectional Volatility. Unfortunately, none of these signals
currently indicate that we have turned the corner yet.
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