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Global Equity Strategy Summary

Core Content Overview

This document outlines the current quantitative framework and analysis for global equity strategy, focusing on regional and sector performance across several metrics. The framework includes:

1. Scorecards: Evaluating sectors based on valuations, macro sensitivity, earnings momentum, price momentum, positioning, and fundamentals.
2. Earnings vs Trend: Assessing earnings performance relative to historical trends.
3. Machine Learning (ML) Model: Identifying macro variables that influence sector returns and offering insights on potential upside and downside.

Key Components of the Quantitative Framework

• Scorecards:

  • Regional Scorecards: Regions are ranked based on z-scores that reflect performance across MCI, economic momentum, valuation, earnings, risk appetite, and macro.
  • Global Sector Scorecards: Sectors are evaluated on valuation, macro sensitivity, earnings momentum, price momentum, positioning, and fundamentals.
  • European Sector Scorecards: Similar to the global scorecards but tailored to European regions.

• Z-Score Weights:

  • Each component is weighted differently depending on the scorecard (e.g., 35% for valuation in global sectors, 20% for economic momentum in regions).

• Market Direction:

  • The strategy does not cover market direction directly.
  • The target for Global MSCI AC World is 910, implying a c7% upside.
  • A 25% chance of a bubble is noted, though it is not yet in place.

Regional Analysis

• Japan:

  • Ranks first in the composite scorecard due to very loose monetary conditions.
  • MCI score is 1.61, showing strong monetary conditions.
  • Economic momentum score is 0.02, indicating minimal change.
  • Valuation score is 0.23, suggesting moderate valuation.
  • Risk appetite score is 0.89, indicating positive risk appetite.
  • Macro score is 0.66, showing moderate sensitivity to macroeconomic variables.

• US:

  • Ranks second in the composite scorecard, driven by strong economic and earnings momentum.
  • MCI score is -0.35, indicating tighter monetary conditions.
  • Economic momentum score is 1.32, showing strong momentum.
  • Valuation score is -1.70, suggesting overvaluation.
  • Risk appetite score is -1.09, indicating lower risk appetite.
  • Macro score is -0.12, indicating moderate sensitivity.

• UK:

  • Ranks third in the composite scorecard, with strong valuation and moderate risk appetite.
  • MCI score is -0.90, showing tighter monetary conditions.
  • Economic momentum score is -1.45, indicating weak momentum.
  • Valuation score is 0.06, suggesting fair valuation.
  • Risk appetite score is 0.10, indicating slightly positive risk appetite.
  • Macro score is -0.16, indicating moderate sensitivity.

• Europe ex UK:

  • Ranks fourth in the composite scorecard, with strong valuation and moderate macro sensitivity.
  • MCI score is -0.63, indicating tighter monetary conditions.
  • Economic momentum score is -0.21, showing weak momentum.
  • Valuation score is 0.90, suggesting overvaluation.
  • Risk appetite score is 1.05, indicating strong risk appetite.
  • Macro score is -1.00, indicating moderate sensitivity.

• GEM (Global Emerging Markets):

  • Ranks last in the composite scorecard due to weak earnings momentum, risk appetite, and macro sensitivity.
  • MCI score is 0.28, indicating loose monetary conditions.
  • Economic momentum score is 0.32, showing moderate momentum.
  • Valuation score is -0.82, suggesting overvaluation.
  • Risk appetite score is -0.95, indicating lower risk appetite.
  • Macro score is -0.85, indicating moderate sensitivity.

Sector Analysis

• Overall Scorecard:

  • Healthcare Equipment is the top sector, one of the key overweights.
  • Commercial Services rose the most, moving up 11 ranks.
  • Autos was the biggest loser, falling 13 ranks to 27th.
  • Pharmaceuticals, Food Producers, and Beverages are also top performers.

• Valuation Scorecard:

  • Beverages and Food Producers are the cheapest sectors (3.2 std).
  • Semiconductors and Food Retail are at the bottom.
  • Healthcare Equipment is highly valued with a 3.2 std cheap valuation.

• Macro Scorecard:

  • Retailing is the biggest beneficiary of the macro scenario.
  • Software follows closely, showing strong macro sensitivity.
  • Insurance & Capital Goods are at the bottom.

• Earnings Momentum:

  • Diversified Financials and Software are top performers.
  • Pharma has improved significantly, rising 8 ranks.
  • Autos is the biggest loser, declining 9 ranks.

• Price Momentum:

  • Chemicals is the most oversold (2.8 std).
  • Autos is the most overbought (2.5 std).

• Analyst Recommendations:

  • Semis and Pharma are the most bearish sectors.
  • Utilities and Banks are the most bullish.

• Quality Fundamentals:

  • Semiconductors and Healthcare Equipment rank best.
  • Pulp & Paper ranks lowest.

Machine Learning Insights

• Pharma, Household Products, and Food & Beverages offer the most upside.
• Consumer Services, Retailing, and Diversified Financials are among the sectors with the most downside.
• The ML model uses daily macro proxies such as 2-10 Yield Curve, Hard data, AI Narrative, China Proxy, Soft data, US 10y breakeven, and US 10y real yield.

Earnings vs Trend

• Software earnings are in line with the trend (10% CAGR, R-squared of 0.99).
• Semiconductors earnings are 41% above trend, indicating a peak deviation.

Summary of Key Findings

• Top Regions: Japan (top), US (2nd), UK (3rd), Europe (4th), GEM (bottom).
• Top Sectors: Healthcare Equipment, Food Producers, Pharmaceuticals, Beverages, and Commercial Services.
• Bottom Sectors: Autos, Pulp & Paper, and Semiconductors.
• Key Overweights: Healthcare Equipment, Software, and Insurance.
• Key Underweights: GEM, Semiconductors, and Consumer Durables.
• Risk Appetite: Europe ex UK and Japan show strong risk appetite, while GEM and US show lower risk appetite.
• Valuation: Beverages and Food Producers are undervalued, while Semiconductors and Food Retail are overvalued.
• Macro Sensitivity: Retailing and Software are most sensitive to the macro scenario, while Insurance and Capital Goods are least sensitive.

Strategic Implications

• The strategy emphasizes growth defensives and low financial leverage.
• Healthcare Equipment and Pharmaceuticals are highlighted as key longs due to strong fundamentals and valuation.
• The US and UK are preferred for their economic momentum and valuation.
• Japan is favored due to its loose monetary conditions, but this may change.
• GEM is underweight due to weak earnings and macro sensitivity.
• The strategy remains cautious about a potential market bubble but continues to target a 910 level for the Global MSCI AC World index.