ClearSYSTEMATICS July 2018

Transcription

1 Welcome to ClearSYSTEMATICS, our monthly publication that quantifies the insight in current data and systemizes it into market views and rules-based investment allocations. Our approach is anchored on a systematic and long-term (3-5+ year) Strategic Asset Allocation (SAA) outlook for all major asset classes. This framework - which is factor-based with value, growth, and income prospects as the drivers suggests that optimal SAA should currently have a bias to to equity, EM (especially fixed income), and a significant cash position. We also provide a shorter-term (0-12 months) Tactical Asset Allocation (TAA) recommendation, helping clients to tilt their total portfolio risk levels and to identify high quality relative value allocations. Over the last month, we continued to see the biggest movers in themes related to politics, with big gains in our protectionism, and political risk theme baskets. Although the long-term return potential in EM continues to climb, we remain tactically cautious on EM equity and EMFX performance, with a preference for developed markets and long USD positions. As our chart below shows, we may see some near-term good news coming out of China, leading to an EM bounce, but we would use that as a selling opportunity. Our near-term tactical outlook for risk markets is neutral, but as we extend the horizon, the outlook becomes more challenging, and we recommend investors to sell into market strength. We continue to see the tactical outlook deteriorate in global trade entrepots such as Singapore and Hong Kong, and highlight the continued signal weakness in the UK and core Europe, boding poorly for GBP and EUR. Finally, this month s special article analyses the value of a systematic approach to investment decision-making at market turning points. Sell EM equity (vs DM equity), and EMFX. But remain long DM equity markets for now - watching lead indicators and credit conditions. Our standardized ClearSIGNALS measure the bull/bear investment insight in current data. Non-US activity levels have rolled over, particularly in Europe, and we expect this to be tactically negative for the Euro and relative Euro Stoxx performance. Throughout the document, we have kept detail to a minimum, but the content is backed up by ClearENGINE s rich vein of analysis. We would welcome the opportunity to organise access to the ClearENGINE and any discussion (or debate!) based on your evaluation. As always, we welcome any feedback and ideas. I hope you enjoy. Mike Simcock, CEO. 1

2 Summary What s Moving Tactical Risk Outlook Tactical Opportunities Systematic Tactical Models Systematic Long-Term Portfolios We review the biggest changes in our tool box over the last month. Politics-oriented themes continue to be the biggest movers. Outlook for Turkey improves, but big falls in UK, Singapore, and core Europe. Page 3 Moderate risk-off positions warranted. We expect the global risk environment to deteriorate meaningfully over the next 6-12 months. However, although our shorter-term outlook has deteriorated rapidly over the last 12m, it is not yet negative, and lead indicators remain positive in the US. KEY SIGNALS TO WATCH: MONETARY POLICY IMPULSE AND ACTIVE INVESTOR POSITIONING. Page 6 Over a 12+m time horizon there are few attractive asset classes. We are negative on both fixed income and equities, and bullish on DM relative to EM. Bullish the $ (DXY) and short EMFX. KEY COUNTRIES TO U/W: UK, TRADE-EXPOSED (SINGAPORE/HK), AND WEAK EMs - SOUTH AFRICA, BRAZIL. Page 8 Equity models remain long, but some macro models are rolling over. Short EM on a relative basis in both equities and FX. Still long credit, DXY($), oil, and gold. Page 11 High allocations in the global multi-asset long-term model to equity, EM, and cash. High allocations in global equity model to Russia, Spain, Israel, Singapore, and Turkey. High allocations in global fixed income model to IG credit, linkers, and cash. Special Article: Systematics at Turning Points ClearENGINE provides tools to identify which signals are relevant for predicting turning points in risk premium returns. and a framework to integrate these signals into rules-based models. We highlight the performance of our signal-based models at previous turning points, and highlight a small group of activity, credit, and earnings signals that are key. They do not yet suggest a DM equity turning point but do signal a sustained period of EM equity and EMFX under-performance. Page 12 Page 14 2

3 1) What s Moving? Figure 1: Long-term EM equity return potential continues We review the biggest changes in our systematic tool box over the last month. to rise. Bottom Line: The energy complex, linkers, and credit were the biggest asset class performers last month. Long-term return potential continues to rise in EM, but it will become more attractive as EM underperforms. However, TRY (Turkish Lira) long-term return potential now merits a look. Politics-oriented long-term themes continue to be the biggest movers. No change in US short-term equity outlook, which remains neutral. Short-term monetary signals improved over last month, led by more dovish central bank communications. But equity investors have been heavy net sellers. Beware global trade entrepots such as Singapore where our signals have deteriorated notably. UK and core Europe outlooks also continue to deteriorate, reinforcing our negative views on GBP and EUR.» Signal Primer Figure 2: The long-term FX potential of TRY is now worth a look. Figure 3: The market has been rewarding investment themes that are biased to a deteriorating political environment.» Signal List 3

4 Figure 4: The short-term global risk outlook is oscillating Figure 7: Investors have been aggressively selling equities between neutral and risk-off, after a long-period of over the last month. neutral/risk-on. Figure 5: Driven by changes in monetary signals. Central Figure 8: The outlook in global-trade markets such as bankers are playing cat and mouse with markets. Our Singapore has deteriorated significantly. Prattle signal is becoming less negative. Figure 6: The medium-term risk outlook is also oscillating Figure 9: Driven by changes in sentiment about the between neutral/risk off, suggesting investors should be economic outlook there. selling into market strength. 4

5 Figure 10: In the UK, tactical return prospects are Figure 13: Turkey economic sentiment is rising. deteriorating. Figure 11: Money growth is falling signalling the BoE Figure 14: Our inflation signals continue to rise in the US, should be super cautious. supporting linkers. Figure 12: In contrast, in Turkey, we are seeing Figure 15: And trends in core Europe continue to look improvements in both short-term fundamentals and poor - expect core Eurozone equities to underperform technicals. tactically. 5

6 2) Tactical Risk Outlook Figure 16: 0-6m Risk Appetite Outlook Clear MODELS Our Risk Appetite Matrices help you to set your total portfolio risk position by evaluating the outlook for investor risk appetite over the next 6 months, and also looking further out to the months horizon. Bottom Line: The short-term outlook has deteriorated rapidly over the last 12m but is not yet negative - the outlook for economic activity is poor, but short-term technicals are positive. Meaning only very moderate tactical risk-off positions are warranted for now. But we expect the global risk environment to deteriorate over the medium-term driven by the tightening money environment, expensive valuations, and poor longer-term technicals. It s all about monetary policy at this point in the cycle - but for now, our signals suggest they are still easy and supportive of risk assets. Although equity positions are stretched among long-term investors, and equity buy-flows have recently deteriorated, active mutual funds still have plenty of firepower, suggesting this may not yet be the top of the cycle. Figure 17: 6-12+m Risk Appetite Outlook Figure 18: Evolution of 0-6m Risk Appetite Outlook»Read more about our short term Risk Appetite Matrix 6

7 Figure 19: Although we are cautious on short-term Figure 22: Policy makers are keeping monetary economic prospects, our key lead signal, with a large conditions very easy relative to neutral, and the cycle is China weighting, has recently ticked up. unlikely to end until this signal falls below neutral. Figure 20: Policy makers are being very reactive to Figure 23: Long-term investors are fully invested in financial equities relative to their long-term averages and positive asset price moves in terms of their communication. Watch our Prattle signal very closely equity flows are falling. for extreme levels to fade tactical positions. Figure 21: Even though equity flows are falling, price Figure 24: But active mutual funds have plenty of breadth remains very firm. firepower. A significant correction is likely when both The short-term technical conditions do not yet suggest a sustained sell-off. long and medium-term investors are overweight. 7

8 3) Tactical Opportunities Figure 25: Tactical Asset Class Ratings Our tactical Investment Ratings evaluate opportunities by measuring the consistency of signal insight about returns over the next 12 months. Bottom Line: Over a 12+m tactical time horizon, there are very few attractive asset classes only IG credit and soft commodities. We are negative on both fixed income and equities, though bullish on DM relative to EM. UK and trade driven markets (HK, Singapore, Germany) are likely to underperform in DM. Brazil, and S. Africa are our top shorts in EM. Short EU HY vs longs in US IG. Bullish the $ (DXY) and short EMFX, but in DM, we like long JPY vs shorts in EUR and GBP. Figure 26: Note the contrast in the 0-6m outlooks for US equities (bullish) vs China (bearish).»investment Rating Primer 8

9 Figure 27: Tactical Equity Country Ratings 9

10 Figure 28: Tactical FX Ratings 10

11 4) Systematic Tactical Risk Premia Models Bottom Line: ClearMODELS apply simple rules to combinations of macro and technical signals to generate allocation decisions designed to outperform passive buy-and-hold allocations. Figure 29: EM/DM equity allocation model remains U/W EM. Clear Equity models remainmodels long, but some macro models are rolling over. Short EM on a relative basis in both equities and FX. Still long credit. Long DXY ($), oil, and gold.»systematic Model Primer and FX Case Studies Figure 30: Systematic risk premia models 11

12 5) Systematic Optimised SAA Long-Term Portfolios: Bottom Line: ClearHORIZON portfolios are systematically constructed from ClearMacro s 3-5+ year factor-based return projections. Long-term return estimates are built-up across the investable universe from income, growth, and value factors. The objective is to maximise risk-adjusted returns over the long-term. Figure 31: EM equity long-term annualized return prospects. Clear MODELS Long-term portfolios should be barbelled to equity exposure, EM, and cash. Significant draw-downs are impossible to avoid in the event of a cyclical downturn, but large cash positions provide some optionality. In the absence of attractive developed market asset class return prospects, active relative positioning is essential - our long-term portfolios are positioned overweight in Spain, Israel, Hong Kong and Singapore.» Learn More Figure 32: ClearMacro systematic long-term portfolios 12

13 Figure 33: ClearMacro s multi-asset SAA portfolio. Figure 34: Asset class breakdown. Figure 35: Long-term risk-adjusted asset class return prospects.» Learn More 13

14 6) Special Article: Systematics at Turning Points Bottom Line: Systematic signals and models provide reliable warnings of turning points for risk premia returns. Long-term relative performance is captured by avoiding large portfolio drawdowns associated with these turning points and achieved via systematically driven risk reductions. ClearENGINE provides tools to identify which relevant signals for predicting turning points, and a framework to integrate them to rules-based models. Sell EM equity (vs DM equity), and EMFX. But remain long DM equity markets for now - watching lead indicators and credit conditions. Our core Gathering Storm narrative lays out our expectations for a significant downturn for asset prices over the next 1-2 years. We examine in this article the track record of our systematic library of signals and models at predicting turning points in both the absolute level of stock markets (where we review the US and China), and relative performance (EMFX and EM MSCI against MSCI Developed Markets). Turning points in relative performance are more common than outright risk premium sell-offs - since 1996, there have been only 2 cyclical turning points in US equities, in contrast to 5 for both the EM/DM risk premia spread and EMFX. Some signals matter more than others at these turning points. Our signal search engine identifies which ClearSIGNALS provide the best early warnings (figure 36 summarises the critical signals for DM equities). Current readings are benign for DM equities, but troubling for the relative outlook of EM. A systematic approach to integrating these signals into systematic models has been successful at predicting turning points. Our S&P model outperformed its benchmark in 2/2 cyclical and 6/7 tactical turning points. China model outperformed in 4/4 cyclical and 9/9 tactical turning points. EM/DM model outperformed in 5/5 cyclical and 5/6 tactical turning points. EMFX model outperformed in 3/3 cyclical and 2/2 tactical turning points. Figure 36: The signals that matter at turning points, and what they re telling us now. Caution should prevail when a majority of signals are sells. For this article, we define a cyclical turning point as a risk premium sell-off lasting at least 18 months, and tactical as a sell off lasting at least 6 months. 14

15 We review below our key stand-alone tactical signals for flagging turning points in US equities. Although fiscal and earnings trends are deteriorating, the overall outlook is still benign. Figure 37: Our tactical lead indicator signal for the US Figure 40: Credit conditions are being pushed around by remains bullish. central bank balance sheet tightening, but remain neutral for now. Figure 38: And is reinforced by our strategic lead Figure 41: The Financial Conditions signal is in the indicator signal, which evaluates predictive insight over bullish zone. longer lag times. Figure 39: The fiscal impulse is waning. Figure 42: But our earnings signal has deteriorated. 15

16 In the following pages, we review the performance of 4 of our risk premia models at each tactical and cyclical turning point since model inception, highlighting the importance of systematic decision-making frameworks for generating relative out-performance at market turning points. First, our long/short S&P model. The blue line is the strategy NAV and the pink line the risk premium benchmark. Figure 43: Apr Oct Figure 44: Mar Sep Figure 45: Oct Apr Figure 46: Apr Oct

17 Blue line is strategy NAV and pink line the risk premium benchmark.. Figure 47: Apr Oct Figure 48: May Nov Figure 49: Jan

18 Next, we review our long/short China equity model. Blue line is strategy NAV and pink line the risk premium benchmark. Figure 50: Jan July Figure 51: May Nov Figure 52: Jan July Figure 53: Oct April

19 Figure 54: Nov May Figure 55: Nov May Figure 56: Nov May Figure 57: May Nov Figure 58: Jan

20 Next, we review our EM/DM risk premia spread model. Blue line is strategy NAV and pink line the risk premium benchmark. Figure 59: Feb Aug Figure 60: July Jan Figure 61: Apr Oct Figure 62: May Nov

21 Blue line is strategy NAV and pink line the risk premium benchmark. Figure 63: Nov May Figure 64: Oct Apr Figure 65: Mar

22 Next, we review our long/short EMFX model. Blue line is strategy NAV and pink line the risk premium benchmark. Figure 66: Feb Aug Figure 67: Aug Feb Figure 68: May Nov Figure 69: May Nov Figure 70: Jan

23 INVESTMENT DECISION-MAKING 2.0 ClearMacro is an independent WealthTECH solution empowering smarter investment decisions. Imagine A centralised, modular platform generating forward-looking, global, multi-asset investment insight to power investment decisions across short, medium and long term investment horizons. Integrating systematic and thematic investment frameworks using a global macro screening capability. Your portfolio running LIVE - with profitable opportunities and risks highlighted. This is ClearENGINE... Next Generation Investment Framework. SAA Return Factor Projections Systematic Strategy Suites Investment Theme Framework Investment Committee Support TAA Signal Library Global Macro Screening Powering Smarter Investment Decisions Risk Appetite Gauges Portfolio Diagnostic Bespoke Builds Investment Rating Dashboards I wished to be able to answer two simple questions - what am I missing and what does it mean to me? I am delighted to say that we can now not only answer these questions with our portfolio running within the ClearENGINE Global Investment Framework but apply this intelligence LIVE to optimise our performance- CIO/Head of Multi-Asset : Inst. Asset Manager - London UK. Our senior team harnesses decades of experience gained across the asset management and investment strategy industries with the very best expertise in data science. To discuss how ClearMacro can add value to your investment decisions, please call +44 (0) or simply Head of Client Relations, chris.sandfield@clearmacro.com and we will be delighted to get back in touch. >> TAA Signal Primer >> Signal Glossary >>Systematic Strategies >> Thematics Framework >> Portfolio Diagnostic DISCLAIMER Copyright 2018, ClearMacro Ltd. All rights reserved. ClearMacro Ltd. is not a registered investment advisor and the general information, recommendations and other materials contained in its research and reports are for information purposes only and should not be considered as an offer or solicitation to sell or buy securities or other financial instruments or products, nor to constitute any advice or recommendation with respect to such securities or financial instruments or products. ClearMacro s research and reports have been prepared without regard to the circumstances and objectives of those who receive it, and do not provide individually tailored investment advice. ClearMacro Ltd. does not accept any liability for what is written in its research and reports, or for any actions that occur because of the information contained in its research and reports. ClearMacro Ltd. research and reports are provided to its clients through its website [ and are also distributed electronically. ClearMacro Ltd. relies on a variety of data providers for economic and financial market information. The data used in this report are judged to be reliable, but ClearMacro. cannot be held accountable for the accuracy of data used herein. ClearMacro Ltd., its directors, officers, employees or contractors may have some financial interest in any or related securities mentioned in its research and reports. This document is the property of ClearMacro Ltd. and should not be circulated without the express authorisation of ClearMacro Ltd. Any use of graphs, text or other material from this report by the recipient must acknowledge ClearMacro Ltd. as the source and requires express written permission. To read our Privacy Policy please click here +44 (0) info@clearmacro.com CLEAR THE NOISE CONNECT THE DOTS.