WHAT’S DRIVING OUTPERFORMANCE ACROSS ASIA & LATIN AMERICA?

Takeaway: Our factor analysis of performance across Asian & Latin American equity and FX markets reveals both intuitive and less-obvious trends.

SUMMARY CONCLUSIONS:

 

  • Over the short-to-intermediate term, factors associated with currency weakness is a common theme among outperforming factors across Asian and Latin American equity markets. The reverse holds true over the long term.
  • Over the short-to-intermediate term, factors associated with the global search for yield is a common theme among outperforming factors across Asian and Latin American currency markets. More traditional fundamentals such as rates of economic growth and fiscal sobriety are more commonly associated with currency outperformance over the long term.

 

METHODOLOGY:

 

  • In the brief prose below, we walk through the key takeaways from our 17-factor performance model across the 40 country-level equity and currency markets (20 apiece) we track across Asia and Latin America.  
  • To calculate outperformance, we compare the average % change of the respective equity and currency markets where the factor scores below the first quartile to those where the factor scores above the third quartile.  
  • It should be reiterated that the factor scores are all relative to the sample, such that any “high” or “low” reading is associated with the respective quartile and not an arbitrary absolute figure(s).
  • Lastly, the analysis below is not being presented in any way as causal – i.e. the factors aren’t the drivers per se, but rather as common characteristics of leaders and laggards within the samples of market performance.
  • We focus on the top three outperformance deltas across each of the three performance durations, as we believe the factors associated with the most meaningful outperformance may, in fact, be driving the associated market deltas to some degree – likely well beyond what we’d be able ascertain from performing a simple full-sample regression analysis.

 

EQUITY MARKETS:

 

  • On a 1M basis, the top three factors associated with outperformance are: a low sovereign debt/GDP ratio, high growth (YoY real GDP) and expectations of currency weakness over the near term.
  • On a 3M basis, the top three factors associated with outperformance are: expectations of currency weakness over the near term, cheap equity market valuation and a low dividend yield.
  • On a 1Y basis, the top three factors associated with outperformance are: a low sovereign budget balance/GDP ratio, expectations of currency strength over the long term and recent currency strength.
  • Easy mean reversion opportunities (LONG screen = 1M outperformance w/ 3M and 1Y underperformance; SHORT screen = 1M underperformance w/ 3M and 1Y outperformance): N/A

 

WHAT’S DRIVING OUTPERFORMANCE ACROSS ASIA & LATIN AMERICA? - 1

 

WHAT’S DRIVING OUTPERFORMANCE ACROSS ASIA & LATIN AMERICA? - 2

 

WHAT’S DRIVING OUTPERFORMANCE ACROSS ASIA & LATIN AMERICA? - 3

 

WHAT’S DRIVING OUTPERFORMANCE ACROSS ASIA & LATIN AMERICA? - 4

 

FX MARKETS:

 

  • On a 1M basis, the top three factors associated with outperformance are: high inflation (YoY CPI), high 10Y sovereign yields and high 2Y sovereign yields.
  • On a 3M basis, the top three factors associated with outperformance are: high 10Y sovereign yields, high 2Y sovereign yields and relative equity market weakness.
  • On a 1Y basis, the top three factors associated with outperformance are: high growth (YoY real GDP), expensive equity market valuation and a low sovereign debt/GDP ratio.
  • Easy mean reversion opportunities (LONG screen = 1M outperformance w/ 3M and 1Y underperformance; SHORT screen = 1M underperformance w/ 3M and 1Y outperformance): N/A

 

WHAT’S DRIVING OUTPERFORMANCE ACROSS ASIA & LATIN AMERICA? - 5

 

WHAT’S DRIVING OUTPERFORMANCE ACROSS ASIA & LATIN AMERICA? - 6

 

WHAT’S DRIVING OUTPERFORMANCE ACROSS ASIA & LATIN AMERICA? - 7

 

WHAT’S DRIVING OUTPERFORMANCE ACROSS ASIA & LATIN AMERICA? - 8

 

KEY TAKEAWAYS

Over the short-to-intermediate term, factors associated with currency weakness is a common theme among outperforming factors across Asian and Latin American equity markets. The reverse holds true over the long term.

 

Over the short-to-intermediate term, factors associated with the global search for yield is a common theme among outperforming factors across Asian and Latin American currency markets. More traditional fundamentals such as rates of economic growth and fiscal sobriety are more commonly associated with currency outperformance over the long term.

 

INVESTMENT THEMES

We currently hold the following biases across Asian and Latin American asset classes:

 

  • BULLISH bias on Singapore’s equity market (since 12/21/12; TREND duration)
  • BULLISH bias on Chinese consumer-oriented equities (since 12/10/12; TREND duration)
  • BULLISH bias on Hong Kong’s equity  market (since 11/16/12; TREND duration)
  • BEARISH bias on the Japanese yen (since 9/27/12; TREND and TAIL durations)
  • BEARISH bias on Australia’s equity market and the Aussie dollar (since 6/5/12; TAIL duration)
  • BEARISH bias on the Argentine peso (since 11/4/10; TAIL duration)

 

If a particular country or asset class isn’t on this list, it’s because we either wash out neutral on it from a fundamental perspective or we simply don’t hold enough fundamental conviction in either a long or short thesis at the current juncture.

 

Additionally, we could also be waiting on time decay (i.e. specific catalysts closer to materializing) and/or specific price signals (such as our eventual positive view on Indian equities post a [continued] near-term correction).

 

Please email us if you’d like to dive deeper into any of these ideas and/or if you’d like to further discuss the takeaways and implications of the aforementioned factor study.

 

Darius Dale

Senior Analyst


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