October 2018 Model Performance Report

  • US: Within the US Large Cap universe the Value Momentum 2 model had the strongest one month decile return spread performance returning 2.28% during the month while the Historical Growth model lagged. Over the US Small Cap universe our Relative Value model had the strongest one month decile return spread performance, returning 6.04%, while the Price Momentum model lagged.
  • Developed Europe: Within the Developed Europe universe our Relative Value model was the top performer on a one month decile return spread basis, returning 1.20%, while the Price Momentum model trailed.
  • Developed Pacific: Over the Developed Pacific universe, the Deep Value and Relative Value models had the strongest one month decile return spread performance, returning 7.02% and 6.32%, while the Earnings Momentum model lagged. The Price Momentum model's one year cumulative performance is currently 13.68%.
  • Emerging Markets: Within the Emerging Markets universe our Price Momentum
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The best defense is a good risk off-ense

Research Signals - October 2018

The month of October has witnessed some of the worst stock market corrections in history and this year saw it live up to this tendency toward volatility. As such, volatility-based metrics were successful signals in general, as demonstrated by positive performance from low beta in each of our developed market coverage universes (Table 1). Market participants will now wait to see if confidence can be restored from concerns of rising interest rates, trade wars and contracting growth outside the US, as confirmed by the slowdown in the J.P.Morgan Global Manufacturing PMI to a near two-year low.

  • US: 60-Month Beta posted a significant double-digit spread performance among large caps, a level not seen since January 2016
  • Developed Europe: Industry Relative TTM Dividend Yield sat alongside 60-Month Beta as positive indicators for the month
  • Developed Pacific: 24-Month Value at Risk was a significant signal, especially
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Growing pressure on Casino’s dividend

Casino posted good operational performance at half stage and confirmed its 2018 outlook at 3Q18. But the focus is on Casino and its parent company's Rallye leverage

  • Casino forward dividend yield is at a ten-year high, and more than twice peers' level
  • The negative sentiment persists and Casino is the most shorted stock in France
  • But operational performance and ownership structure encourages Casino's dividend prospects, despite payout ratio above 100% of net income estimates

Casino's share price has been under pressure in 2018, reflecting concerns about high levels of debt at Casino and its parent company's Rallye, its complex structure, a fierce competitive retail market in France and exposure to Latam markets. Casino reported stronger profitability than Carrefour at the half-year stage but failed to convince on its debt causing its share price to plummet (-9%) and reached a ten-year low in early September after intense news flow. And despite

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Growing pressure on Casino’s dividend

Casino posted good operational performance at half stage and confirmed its 2018 outlook at 3Q18. But the focus is on Casino and its parent company's Rallye leverage

  • Casino forward dividend yield is at a ten-year high, and more than twice peers' level
  • The negative sentiment persists and Casino is the most shorted stock in France
  • But operational performance and ownership structure encourages Casino's dividend prospects, despite payout ratio above 100% of net income estimates

Casino's share price has been under pressure in 2018, reflecting concerns about high levels of debt at Casino and its parent company's Rallye, its complex structure, a fierce competitive retail market in France and exposure to Latam markets. Casino reported stronger profitability than Carrefour at the half-year stage but failed to convince on its debt causing its share price to plummet (-9%) and reached a ten-year low in early September after intense news flow. And despite

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Oil and Gas Model stability as pressure on oil prices rises

Research Signals - October 2018

Oil prices may be in for a wild ride as geopolitical and economic shocks threaten to spill over into markets. IHS Markit has raised its outlook on Brent and WTI prices in 4Q 2018 while noting that the next 18 months will be plagued by escalating tensions with Saudi Arabia, Iran sanctions, US trade protectionism with China and new administrations in Brazil and Mexico. We highlight steady stock selection success of the Research Signals' Oil and Gas Model for global firms over recent oil price cycles.

  • Over the past five years, the model's buy portfolio outperformed the sell portfolio by 1.23% on average monthly
  • The Oil and Gas Model has been particularly effective at identifying high quality names and has the desirable characteristic of being agnostic to oil price movement, with a correlation of just 0.07
  • W&T Offshore and Evolution Petroleum are currently
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Monthly model performance report – September 2018

  • US: Within the US Large Cap universe, the GARP model had the strongest one month decile return spread performance, returning 0.47% during the month, while the Value Momentum 2 model lagged. The performance of the GARP model was driven by the performance of the short portfolio. Over the US Small Cap universe, our Deep Value model had the strongest one month decile return spread performance, returning 0.20%, while the Value Momentum model lagged. The performance of the Deep Value model was driven by the performance of the long portfolio.
  • Developed Europe: Within the Developed Europe universe, our Deep Value model was the top performer on a one month decile return spread basis, returning 5.50%, while the Price Momentum model trailed.
  • Developed Pacific: Over the Developed Pacific universe, the Price Momentum and Value Momentum models had the strongest one month decile return spread performance, returning 3.15% and
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Post-season play

Research Signals - September 2018

Markets enter the final stretch of the year on the back of lower business optimism globally, according to the J.P.Morgan Global Composite Output Index, which fell to a two-year low in September on especially weak international trade. Factor performance for the month saw an unwinding of the momentum trade in favor of value across many major regional markets (Table 1). Heading into the final quarter of the year, investors hope that trade tariffs and Italian and US politics can follow the lead of the Major League Baseball season as it winds down heading into the home stretch.

  • US: The momentum strategy relinquished its winning role and large caps trailed small caps, as confirmed by Rational Decay Alpha and Natural Logarithm of Market Capitalization, respectively
  • Developed Europe: Valuation swung from being a strong negative to a positive signal, as demonstrated by Book-to-Market's 7.1
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Bank & Thrift Model II – 10 years after Lehman bankruptcy

Research Signals - September 2018

On 15 September 2008, Lehman Brothers filed for Chapter 11 bankruptcy protection, the largest corporate filing in US history, which most associate with sparking the financial crisis. While trust in Wall Street, government institutions and, especially, banks may have yet to fully recover, the Research Signals' Bank & Thrift Model II has been a trustworthy stock selection signal for US banks over the 10 years since that fateful day.

  • Over the 10-year period since the Lehman bankruptcy, the model's buy portfolio outperformed the sell portfolio by 1.91% on average monthly
  • Bank & Thrift Model II has been particularly effective at identifying high risk names to avoid
  • Wells Fargo, SunTrust Banks and M&T Bank are currently ranked in the bottom decile of Nonperforming Assets + 90 Day Delinquent Accounts to Assets and Loans 30 to 89 Days Past Due to Total Assets

First, to review

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Digging down under quant performance

Research Signals - September 2018

As an export economy, Australia is vulnerable to global economic developments which have caused many global markets to decline in recent months. However, the Australian share market ended August trading near ten-year highs off early-April lows, despite trade tensions between major trading partners - the US and China - before correcting in the early days of September. Given the heightened trade rhetoric over the course of this year, we review the Australian economic landscape and recent quantitative model and factor performance within the Research Signals Global Factor Library.

  • Services and manufacturing firms maintain a positive view on the outlook for the year, despite recent moderation in the private sector economy and outflows in equity ETFs
  • All five of our thematic models recorded positive performance thus far this year for buy-rated stocks and negative returns for sell-rated stocks relative to the market, led by the Earnings
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Monthly model performance report – August 2018

US: Within the US Large Cap universe the Price Momentum model had the strongest one month decile return spread performance returning 4.41% during the month while the Deep Value model lagged. Over the US Small Cap universe our Price Momentum model also outperformed, returning 3.24%, while the Deep Value model lagged. For both universes, the performance of the Price Momentum model was driven by the long portfolio.

Developed Europe: Within the Developed Europe universe our Price Momentum model was the top performer on a one month decile return spread basis, returning 3.42%, while the Deep Value model trailed.

Developed Pacific: Our models struggled over the Developed Pacific universe during the month. The Price Momentum model's one year cumulative performance is currently 9.82%.

Emerging Markets: Within the Emerging Markets universe our Price Momentum model had the strongest one month decile return spread performance, returning 2.23%. The

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Factor performance remains linked while stocks decouple

Research Signals - August 2018

US stocks continue to decouple from other regional markets this year, particularly versus emerging markets. At the same time, investors look for the Federal Reserve to continue on its rate increase trajectory, contrary to other major central banks. However, buoyant US stocks saw positive performance from price momentum factors, at the expense of valuation, a theme that carried over to several other developed markets (Table 1), as investors wait to see if trade and currency concerns plaguing emerging markets will spill over to developed economies.

  • US: High momentum large and small cap names saw a spike in performance, with 11.1 and 6.6 percentage point swings, respectively, in Industry-adjusted 12-month Relative Price Strength spread performance since June
  • Developed Europe: Valuation factors were an underperforming group, including such measures as TTM Free Cash Flow-to-Enterprise Value and Industry Relative Leading 4-QTRs EPS to Price
  • Developed Pacific:
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A look at quant performance in China

Investors' interest in China's capital markets has gained momentum following the launch of the Shanghai-Hong Kong stock-connect program in November 2014 and the Shenzhen-Hong Kong stock-connect program in December 2016. Improved accessibility to the markets has ultimately resulted in the inclusion of over 220 China A-shares in the MSCI Emerging Markets Index, in two phases beginning 31 May 2018. Given this additional conduit for foreign investors to participate directly in the A-shares market, we review the economic landscape of China and recent quantitative factor and model performance within the China A-shares universe of the Research Signals Global Factor Library.

  • Despite an economic environment of mild growth deceleration and bear market pricing, especially in May and June, positive equity ETF flows support a positive investor outlook
  • From a long-only perspective, factors which outperformed on average year-to-date include North America Sales Exposure along with gauges of low risk and medium-term price momentum
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Monthly model performance report – July 2018

US: Within the US Large Cap universe, the Relative Value model had the strongest one month decile return spread performance, returning 3.72% during the month, while the Price Momentum model lagged. Over the US Small Cap universe, our GARP model had the strongest one month decile return spread performance, returning 3.87%, while the Price Momentum model lagged.

Developed Europe: Within the Developed Europe universe, our Price Momentum model was the top performer on a one month decile return spread basis, returning 1.86%, while the Relative Value model trailed.

Developed Pacific: The Deep Value and Value Momentum models had the strongest one month decile return spread performance, returning 7.40% and 6.40%, respectively, while the Earnings Momentum model lagged. The Price Momentum model's one year cumulative performance is currently 11.36%.

Emerging Markets: Within the Emerging Markets universe, our Value Momentum model had the strongest one month

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Negotiating the value trade

Research Signals - July 2018

Trade tensions between the world's two largest economies have weighed on sentiment across global equity markets for several months and continue to drive markets, as valuation and securities lending indicators were strong performing signals across most of our coverage universes, while price momentum lagged (Table 1). In the meantime, investors hope for positive trade negotiations and carefully watch for the impact on relatively strong earnings and PMI data across US and European markets, as global manufacturing slowed again in July, with the J.P. Morgan Global Manufacturing PMI™ posting its lowest reading for one year.

  • US: Investors shied away from high risk names measured by 24-Month Value at Risk, while small caps underperformed, particularly the microcaps, as confirmed by Natural Logarithm of Market Capitalization
  • Developed Europe: Small caps also underperformed in European markets, along with overvalued names captured by Industry Relative Leading 4-QTRs EPS to
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Most shorted global equities ahead of earnings

  • IRBT most shorted equity reporting this week
  • Shorts get stung in Hasbro, await Mattel on Weds
  • Crypto-shorts hanging around in Monex

US:

The most shorted US equity reporting earnings this week is iRobot, which has a massive 44% of shares outstanding short. The short demand has declined on the margin, with just over 500k borrowed shares being returned in the last month. With that said, the current 12.2m shares is up 50% from the robotics firm's Q1 earnings report on April 24th.

The IRBT Q1 earnings came in better than expected on top line and earnings, and while the shares initially sold off 3.4%, they've rallied more than 25% since. Consensus EPS for Q2 stands at $0.18 per Factset, and with the shares well off the YTD low and short interest only slightly below 52-wk high, there is clearly a divergence of opinions in the market. The

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Monthly model performance report – June 2018

US: Within the US Large Cap universe, our models struggled. Over the US Small Cap universe our Value Momentum 2 model had the strongest one month decile return spread performance, returning 2.38%, while the Price Momentum model lagged.

Developed Europe: The models over the Developed Europe universe struggled during the month. Valuation especially struggled, with the Relative Value and Deep Value models returning worse than -2.0%, with 3-month and 12-month cumulative returns also in negative territory.

Developed Pacific: Over the Developed Pacific universe, the Price Momentum model had the strongest one month decile return spread performance, returning 3.95%. The Price Momentum model's one year cumulative performance is currently 11.41%.

Emerging Markets: Within the Emerging Markets universe our Price Momentum model had the strongest one month decile return spread performance, returning 2.04%. The performance of the model was driven by the long portfolio. The Earnings

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Tariff threats weigh on sentiment

Research Signals - June 2018

Relative to most global equity markets, US investors maintained a more positive outlook as earnings have held up amid trade tensions. However, US stocks have not been able to support sentiment globally, confirmed by the key role of low risk strategies across markets (Table 1). Volatile markets in the second quarter reflected investors' concerns of whether trade wars will weigh on growth, at the same time as global manufacturing slipped to an 11-month low in June according to the J.P. Morgan Global Manufacturing PMI™.

  • US: Price Momentum measures such as Industry-adjusted 12-month Relative Price Strength suffered, along with Demand Supply Ratio particularly among large caps, as the most shorted names outperformed for a third consecutive month
  • Developed Europe: While investors punished high risk names for a second month, they did not turn to the safe haven of undervalued names as the most attractively valued
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EM equity short position hit post-crisis peak in early June

  • China leads via ADRs and Hong Kong listed shares
  • Four emerging markets hit post-crisis high short balances in June
  • EM ETFs on pace for first quarterly outflow since Q3 2015
  • Declining share prices, and short covering, have pulled balances down from June 8th peak

Short demand for emerging market (EM) equities is trending up- by $7.8bn YTD as of June 27th - and currently sits at a total of $101bn. The YTD increase in short positioning follows an increase of more than $29bn in 2017. EM equities now represent more than 11.5% of all equity short balances, up from 8.8% at the start of 2017. The short position in nominal terms peaked on June 8th, at $110.8bn, an increase of over $18bn from the start of the year. Since then declining share prices, along with increasing short covering, have reduced the balances to $101bn.

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Social media indicator review

Research Signals - June 2018

In March 2014, we introduced a set of social media indicators, in partnership with Social Market Analytics, Inc., that classify the text content in daily Twitter posts to construct a family of social media signals. With four years of live data since the initial roll out and over 6 years of out of sample history since SMA's inception, we revisit this developing discipline for gauging investor sentiment at a time when President Trump's predilection for tweeting consumes the news media, with some suggesting the social media service was the the big winner of the 2016 US election, and has now joined the S&P 500.

  • For names at the extreme tails (3 standard deviations) of the factor distribution, we report notable S-Score™ average daily return spreads of 0.163% since the factor went live, with robustness to longer 10-day holding periods and to long-only strategies

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Dividends from oil majors back to growth

The recovery in the oil price, stronger free cash flow generation and improved balance sheet are expected to boost oil payouts by 7%” below the analysts names and above bullet points.

  • After reaching $80/bbl we expect the oil price to stabilize to $75 by end of 2019
  • American oil majors to raise their dividends by 5% in the next 3 years
  • Shell and BP to lag the sector (flat DPS) in the short term due to higher leverage
  • Short-term boost projected for continental European oil majors (+4%) while we see a bright outlook for Russian oil companies with double digit growth

Dividend growth returned to positive territory in FY17 (+6%) after two years of decline in FY15 and FY16, and we expect that trend to continue. We are forecasting an increase of 7% in FY18, followed by growth of 4% in FY19 and FY20. Among the companies we analysed there

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