www.cvib.com.br 10º Congresso Value Investing Brasil 23 de maio de 2017 Macro global coerente insights variantes Jonathan Tepper Variant Perception
Our Company Who We Are: Variant Perception is an independent global investment strategy firm that was founded by former traders and economists to provide investment ideas to hedge funds, family offices and asset managers. What We Do: Our job is to help clients improve their returns. Our research focuses on - Leading economic and liquidity indicators - Debt and currency crisis prediction tools - Buy and sell signals based on sentiment, valuation and positioning Our Clients: Our clients are some of the world s most forward-looking institutions. They include asset managers, family offices, hedge funds, foundations, and corporations. 2
Real-time Recession Signals Protect Capital Variant Perception started with the question: how can we forecast the next recession and find profitable trades? Variant Perception did just that in the US in December 2007 and June 2009. Identifying the start and end of recessions in real time helps investors avoid large losses as the biggest drawdown in equity markets happen during recessions. 3
Problem #1 Turning Points Are Hard To Predict The most valuable trades for investors are almost always at economic turning points. Most analysts and economists merely extrapolate recent trends. This is why economic forecasts are generally useless precisely when you need them most. 4
Problem #2 Not All Data Is Created Equal The dirty secret in economics is that most data is revised, but an investor cannot revise their trades based on more accurate data 6-12 months later. At Variant Perception we use unrevised data in all our models. 5
Problem #3 Pitfalls of the Guru Approach Most macro analysis is done by the guru approach, where a wise man has unique insights or a crystal ball into the future. Most gurus have one good call and then fail at future predictions. The guru model is not robust, repeatable or scalable. 6
The Solution Our Leading Indicator Framework Our solution is to create a robust set of tools based on proprietary leading economic and liquidity indicators. We build all our own leading indices based on unrevised data, giving a solid advantage to real-time decision makers. 7
Developing a Variant Perception Variant Perception has built a framework to identify extremes in the key drivers of asset prices. 8
It Begins With Economic Leading Indicators The best way to track the business cycle is to: 1) follow leading indicators, and 2) follow the sequential interaction between leading, coincident and lagging indicators. 9
.and Liquidity Leading Indicators The business cycle is primarily controlled by central banks policies that: a) Tighten monetary policy when growth and inflation are rising b) Ease when growth is falling Asset prices are most correlated with changes in global liquidity. 10
Liquidity leads commodity prices and emerging Our global liquidity indicators lead commodity prices and emerging markets that are tied to commodity prices. 11
Timing Valuation, Sentiment, Positioning Signals Short term signals can help investors extremes in sentiment, positioning and valuation. We have built reliable signals that trigger before downturns and corrections. 12
Case study: Brazil 2015-2016 From our February 2016 Monthly. Brazil is one of the countries we are watching closely that could be a star outperformer within EM. It has been a country that has battered and disappointed investors, but most of our indicators show we are close to a cyclical bottom. Our Brazil short leading indicator has bottomed and is beginning to turn up, in agreement with the long-leading indicator, signalling we are nearing the cyclical trough of the Brazilian business cycle. Charts from February 2016 13
Current views on Brazil From our latest Leading Indicator Watch: The growth rate in Brazil should roll over, as our short and long-leading indicators have turned down. Nothing goes up in a straight line and the dramatic improvement in Brazil will slow down. We anticipate a bottom in inflation, as well as a lower growth rate ahead. Vehicle sales have turned positive, and retail sales will soon follow. 14
Putting tools into practice Now, on to some of our latest views! 15
China tightening monetary policy China is tightening monetary policy, and money growth has rolled over. Our economic leading indicator is still high, but all our liquidity indicators have turned down. Our China liquidity indicator leads Chinese house prices, commodities, the Australian dollar and other China-related plays. 16
US credit cycle very old and tired The US credit cycle is now very old, and companies are highly indebted, despite low interest rates. No matter how you look at it, US corporate leverage is as high as in previous recessions, and corporate health is terrible based on interest coverage ratios. 17
Credit Cycle and Volatility All economic leading indicators point to much wider credit spreads and higher equity volatility. Equity volatility and credit spreads are perfectly correlated. Both will widen / rise. 18
Credit spreads to widen Traditional accounting relationships give a good lead on credit spreads. - Declining cash flow relative to debt generally leads credit spreads by one year. - Likewise, rising capital expenditures relative to operating profit leads credit spreads by one year. 19
Ruler on the fingertip Fundamentally unstable conditions don t persist. Difficult to predict exact catalyst, but we have signals that help us know when markets will correct. 20
US equity valuation stretched The US market is as expensive as in late 1999 and early 2000. Back then a few stocks were extremely mispriced (tech and telecom). Average valuations were high, but median valuations were not. Today, most sectors and stocks are overpriced. 21
Pockets of Value The combination of low valuations and cheap currencies usually help an equity market to outperformance, with high equity market valuations and expensive currencies are a recipe for under-performance. 22
Wages to rise, profit margins to fall We are very late in the business cycle, with an extremely tight labor market. All leading indicators for wages points to wage growth. The flipside of high wage growth is falling corporate profit margins. 23
Yield curve to flatten We anticipate a flatter yield curve. Our leading indicators all point to a flatter curve. The Federal Reserve is far behind where they should be based on the Taylor Rule. They are purposefully too loose. As they tighten, the curve will flatten. 24
More stress for US consumer Rising rent, medical and gasoline costs are harming the US consumer. While stock prices, house prices and consumer confidence are supporting the consumer, we see headwinds. It is not surprising that retail sales in discretionary stocks have been badly hurt. 25
Japan outlook positive Almost all the inputs to our leading indicators are positive in Japan 26
The Minsky Framework: Debt & Currency Crisis Variant Perception tracks current account imbalances and debt growth. Our tools consistently flag countries that run the highest risk of currency and debt problems. 27
Contact Us If you would like a colleague to receive Variant Perception research, please email us at sales@variantperception.com Sean Link, Head of Sales sean@variantperception.com +1 (704) 926 1116 Denise Hearn, Head of Sales EMEA denise@variantperception.com +44 (0) 207 648 4606 Copyright by Variant Perception LLC VARIANT PERCEPTION is a federally registered trademark of Variant Perception LLC www.variantperception.com - All rights reserved It is a violation of US federal and international copyright laws to reproduce all or part of this publication by email, xerography, facsimile or any other means. The Copyright Act imposes liability of $100,000 per issue for such infringement. The publications of Variant Perception are provided to subscribers on a paid subscription basis. If you are not a paid subscriber of the reports sent out by Variant Perception and receive emailed, faxed or copied versions of the reports from a source other than Variant Perception you are violating the Copyright Act. This document is not for attribution in any publication, and should not be disseminated, distributed or copied without the explicit written consent of Variant Perception. Disclaimer: Variant Perception s publications are prepared for and are the property of Variant Perception and are circulated for informational and educational purposes only. The content of this report is intended for institutions and professional advisers only. This report is not intended for use by private clients. Recipients should consult their own financial and tax advisors before making any investment decisions. This report is not an offer to sell or a solicitation to buy any investment security. Variant Perception s reports are based on proprietary analysis and public information that is believed to be accurate, but no representations are made concerning the accuracy of the data. The views herein are solely those of Variant Perception and are subject to change without notice. Variant Perception s principals may have a position in any security mentioned in this report. All data is sourced from Bloomberg unless otherwise stated. 28