Long Ideas/Overweight Recommendations
- iShares National AMT-Free Muni Bond ETF (MUB)
- iShares 20+ Year Treasury Bond ETF (TLT)
- Vanguard Extended Duration Treasury ETF (EDV)
- Consumer Staples Select Sector SPDR Fund (XLP)
- Health Care Select Sector SPDR Fund (XLV)
Short Ideas/Underweight Recommendations
- SPDR S&P Regional Banking ETF (KRE)
- iShares Russell 2000 ETF (IWM)
- iShares MSCI European Monetary Union ETF (EZU)
- iShares MSCI France ETF (EWQ)
- SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
QUANT SIGNALS & RESEARCH CONTEXT
#EmergingOutflows Continues: Emerging markets continue to suck wind in Q4, in line with our #Quad4 theme. After making the switch from being broadly positive on EM asset class beta to adopting a broadly negative bias in late September, we continue to stress the merits of global capital allocators being underweight EM capital and currency market risk.
Since our 9/23 note titled, “EMERGING MARKETS: THE EM RELIEF RALLY IS LIKELY OVER”, the iShares MSCI Emerging Markets ETF (EEM) is down -3.9%, the WisdomTree Emerging Currency Fund (CEW) is down -5.2%, the iShares JPM EM USD Bond ETF (EMB) is down -1.1% and the Market Vectors EM Local Currency Bond ETF (EMLC) is down -5.8%. To put this performance in perspective, the EEM ETF was up +6.7% over the course of our bullish bias, which began in late March and the VWO (EEM less South Korea) was up +9%.
At the regional level, emerging Europe equities (GUR) are down -10.7% and emerging LatAm equities (GML) are down -12.5%, while emerging Asian equities (GMF) are up a paltry +1% since 9/23. The former returns are perpetuated by Russia (RSX) and Brazil (EWZ) crashing, down -14.9% and -20.7%, respectively, while the latter return is buoyed by gains in China (FXI up +7.4%; CHIX up +18.6%) and India (EPI up +4.2%).
Looking to our Tactical Asset Class Rotation Model (TACRM), we continue to see signals that suggest investors remain under pressure to rotate out of emerging markets, at the margins. A the primary asset class level, TACRM is still generating a “DECREASE EXPOSURE” signal for both EM Equities and Foreign Exchange; those signals have been intact since the weeks ended 10/3 and 9/5, respectively. Their Passive Trend Follower Asset Allocations of 13% and 2% are off -39% and -20% from their respective trailing 3M averages.
At the secondary asset class level, 9 of the bottom 16 Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI) readings are explicit emerging market exposures: EM corporate debt (EMCB), Malaysia (EWM), Mexico (EWW), Asian local currency debt (ALD), EM local currency debt (EMLC), EM FX (CEW), Colombia (ICOL), EM USD debt (EMB) and Russia (RSX). Recall that TACRM’s VAMDMI metric adjusts for both volume and volatility, which strengthens the predictive value of the momentum signal (vs. a single-factor model like a SMA or EMA).
All told, lacking a clear catalyst to get positive, we continue to see further downside for EM asset class beta. Stay tuned for a more detailed presentation on emerging markets heading into 2015 after a year of demonstrable underperformance in 2014; the MSCI EM Index is down -1.7% YTD, underperforming the S&P 500 by 1400bps!
***CLICK HERE to download the full TACRM presentation.***
TRACKING OUR ACTIVE MACRO THEMES
#Quad4 (introduced 10/2/14): Our models are forecasting a continued slowing in the pace of domestic economic growth, as well as a further deceleration in inflation here in Q4. The confluence of these two events is likely to perpetuate a rise in volatility across asset classes as broad-based expectations for a robust economic recovery and tighter monetary policy are met with bearish data that is counter to the consensus narrative.
Early Look: Party Hard? (12/8)
#EuropeSlowing (introduced 10/2/14): Is ECB President Mario Draghi Europe's savior? Despite his ability to wield a QE fire hose, our view is that inflation via currency debasement does not produce sustainable economic growth. We believe select member states will struggle to implement appropriate structural reforms and fiscal management to induce real growth.
#Bubbles (introduced 10/2/14): The current economic cycle is cresting and the confluence of policy-induced yield-chasing and late-cycle speculation is inflating spread risk across asset classes. The clock is ticking on the value proposition of the latest policy to inflate as the prices many investors are paying for financial assets is significantly higher than the value they are receiving in return.
Best of luck out there,
Associate: Macro Team
About the Hedgeye Macro Playbook
The Hedgeye Macro Playbook aspires to present investors with the robust quantitative signals, well-researched investment themes and actionable ETF recommendations required to dynamically allocate assets and front-run regime changes across global financial markets. The securities highlighted above represent our top ten investment recommendations based on our active macro themes, which themselves stem from our proprietary four-quadrant Growth/Inflation/Policy (GIP) framework. The securities are ranked according to our calculus of the immediate-term risk/reward of going long or short at the prior closing price, which itself is based on our proprietary analysis of price, volume and volatility trends. Effectively, it is a dynamic ranking of the order in which we’d buy or sell the securities today.