Quant Strategy – Macro moving markets ::Macquarie Research,

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Quant Strategy – Macro moving
markets
With the continued macro volatility in the market this month we again focus on
our Macro Distance model for Asia and Japan. Currently the model is still
suggesting the current time period is similar to June 2008 and August 2010.
The macro issues which arose in late July have not been resolved yet.
In Asia, the overall similarity with history has continued to fall this month to
historically low levels. This suggests we are not in a normal environment and
may be heading towards a period of tail risk. Low historical similarity to today
suggests that a reliance on what typically worked (long term average) is not
advised. Carefully focusing on a few key relevant periods in history should
provide a better guide to future performance. Key style recommendations are:
 The model has started reducing the overweight exposure to momentum
which is riskier at turning points.
 Increasing exposure to valuation metrics and in particular Dividend Yield
which work well in a bear case and also during deep value rallies, as
discussed in last month‟s Asia Pac Dynamics – Playing Defence
 High exposure to defensive strategies of Quality, Low risk and Large cap
exposures
 Japan has shown a strong increase in exposure to mean reverting Technical
Indicators which work better in volatile markets.
Trading in times of uncertainty
Last month we looked at how investment returns were impacted by these two
possible extreme market scenarios, this month we investigate the trading
implications of a GFC scenario or a deep value rally (like March 2009 or August
2010 when QE2 was introduced).
We found that:
 Market and Macro volatility tends to lead to higher levels of trading in the
short term, but has led to lower levels of volume in the longer term.
Overall trading volumes peaked before the GFC of 2008 before beginning a
secular trend downwards. We explore some of the possible reasons behind
this secular fall in trading volumes in the note.
 In 2008 defensive sectors were more heavily traded and in demand
leading to higher liquidity for Telecoms, Consumer Staples and Healthcare
sectors. Tech, materials and industrial sectors had the most stable trading
volumes.
 During the crisis in 2008, daily turnover in Valuation and Momentum
strategies became more volatile, indicating greater risk of trading into or out
of these strategies during periods of market stress.
 While in the “risk on” value rally in March 2009, the short sides of defensive
strategies (Low Risk, Profitability and Quality) experienced a sudden spike in
daily turnover volatility. In a “risk on” rally not only will defensive positions
work against you but there is also greater trading risk to trading the short side
of a defensive exposure.