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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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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Monthly model performance report – May 2018

US: Within the US Large Cap universe, our models struggled. Over the US Small Cap universe our Price Momentum model had the strongest one month decile return spread performance, returning 2.26%, while the Value Momentum 2 model lagged.

Developed Europe: Our Price Momentum model was the top performer on a one month decile return spread basis, returning 3.91%, while the Deep Value model trailed.

Developed Pacific: The Price Momentum model had the strongest one month decile return spread performance, returning 1.89%. The Price Momentum model's one year cumulative performance is currently 10.75%.

Emerging Markets: Our Relative Value model had the strongest one month decile return spread performance, returning 1.11%. The Earnings Momentum model's one year cumulative performance has improved to 13.29%.

Sector Rotation: The US Large Cap Sector Rotation model returned 2.70%.The Tech sector had a favorable ranking and the Telecom sector

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The value-momentum trade war

Research Signals - May 2018

In the same way that global markets have witnessed the back and forth on trade discussions, developed market traders have sold off either value or momentum stocks one month, only to see them bounce back the next month. Momentum was the more widely preferred strategy in May (Table 1) as global markets shrugged off fears of a trade war as just a war of words. Hopes remain that growth in major economies will not be undermined, supported by global economic growth remaining solid in May according to the J.P. Morgan Global Manufacturing PMI™. Investors now wait for further developments with upcoming European Central Bank, US Federal Reserve and G-7 meetings.

  • US: Natural Logarithm of Market Capitalization performance indicates stronger returns to small caps and 60-Month Beta points to outperformance to higher risk names
  • Developed Europe: Deep Value measures underperformed, with Book-to-Market one of the
    Table 1
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The value-momentum trade war

Research Signals - May 2018

In the same way that global markets have witnessed the back and forth on trade discussions, developed market traders have sold off either value or momentum stocks one month, only to see them bounce back the next month. Momentum was the more widely preferred strategy in May (Table 1) as global markets shrugged off fears of a trade war as just a war of words. Hopes remain that growth in major economies will not be undermined, supported by global economic growth remaining solid in May according to the J.P. Morgan Global Manufacturing PMI™. Investors now wait for further developments with upcoming European Central Bank, US Federal Reserve and G-7 meetings.

  • US: Natural Logarithm of Market Capitalization performance indicates stronger returns to small caps and 60-Month Beta points to outperformance to higher risk names
  • Developed Europe: Deep Value measures underperformed, with Book-to-Market one of the
    Table 1
    Continue reading "The value-momentum trade war"

Brief overview on dividends from Temasek-linked companies

  • Seven out of the eight Temasek-linked companies (TLCs) show no notable change in dividend policies after 2015.
  • Dividends paid in recent years are underpinned by underlying performance or are consistent with existing payout patterns or policies.
  • Aggregate dividends from eight TLCs remained relatively flat over the period between 2015 and 2017.

Temasek Holdings (Temasek) is one of the three institutions that contribute to the Singapore government's budget via the Net Investment Return Contribution (NIRC) framework. This framework was introduced in 2008 and returns from the state-owned investment firm were recently included in 2015.

While we understand that the NIRC framework does not require Temasek to increase its dividend contribution, we evaluate the payouts from companies that Temasek has a stake in, and are part of the FTSE Straits Times Index (STI) to determine if the dividends paid after 2015 reflect any inconsistency to its historical trend, and if they can

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Healthy dividend growth projected for Chinese Automakers

  • Future dividend growth is expected to be sustained by projected higher sales volume and booming sales of new-energy vehicles.
  • Declared dividends from Chinese automotive companies grew by 25% year-on-year (YOY) to HKD 9.2bn for 2017.
  • Majority of the companies adopt performance-linked payout policies, and we noted that some have lifted their payout ratio in 2017.
  • Market competition however, could create some risks on forecasted dividends.

IHS Markit expects Chinese automakers to continue growing their payouts, with a well-sustained healthy growth rate in the forthcoming years. Aggregate dividends from the industry are forecasted to increase to HKD 16.2bn by 2020, representing an increase of 76% from the amount declared for 2017. We expect this growth to be underpinned by higher vehicle sales and flourishing new-energy vehicles (NEV) market.

Aggregate dividends from Chinese automotive sector (HKD bn)


Source: IHS Markit, FactSet. Dividends from H shares only. Excludes one-off payment

Positive

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Monthly model performance report – April 2018

US: Within the US Large Cap universe, our models struggled. Over the US Small Cap universe our Deep Value model had the strongest one month decile return spread performance, returning 0.50%, while the Value Momentum model lagged.

Developed Europe: The models over the Developed Europe universe struggled during the month.

Developed Pacific: The Value Momentum model had the strongest one month decile return spread performance, returning 6.45%. The Price Momentum model's one year cumulative performance is currently 9.38%.

Emerging Markets: Our Price Momentum model had the strongest one month decile return spread performance, returning 4.44%. The 52-Week High factor within the Price Momentum model, had a one month decile return spread of 2.75% and was the largest contributor to the model's performance in April.

Sector Rotation: The US Large Cap Sector Rotation model returned -2.60%.The Tech sector had a favorable ranking and the

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Short selling in earnings season: Anything but boring

  • Tesla shares end week flat despite earnings volatility
  • Diebold Nixdorf shares and bonds dip after reporting
  • Frontier Communications rips on exceeded expectations
  • Short demand for all three expressed in equities and bonds

Earnings season can be a minefield for short sellers, with the known catalysts providing immediate feedback to a short thesis. Witness Frontier Communications, whose shares have appreciated more than 40% since their earnings report on May 1st. Coming into the numbers, there were 27m shares short, representing a 6m share decline from the 2018 high on April 3rd ─ and it’s worth noting that some portion of the short demand is used to hedge long positions elsewhere in the capital structure, including the convertible preferred shares. Following the report short sellers added 6.3m shares to the position, putting the total short back over 33m shares.

Short sellers of the FTR 11% 2025 bonds also felt some pain,

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Value trade protectionism

After tumbling from the January high in the first quarter, global stocks were relatively more range bound to start off the second quarter. Global economic growth did see a mild improvement in April according to the J.P. Morgan Global Manufacturing PMI™, yet developed market investors shied away from momentum toward value, as inflation fears and concerns of escalating trade tensions and higher interest rates remained (Table 1).

  • US: Rational Decay Alpha was a particularly weak performing factor among large and small caps
  • Developed Europe: Valuation was a positively rewarded theme, as demonstrated by Forward 12-M EPS-to-Enterprise Value and Industry Relative Leading 4-QTRs EPS to Price
  • Developed Pacific: Markets followed suit with other developed regions, favoring value over momentum, while also taking direction from the securities lending market, as gauged by Implied Loan Rate
  • Emerging markets: Industry-adjusted 12-month Relative Price Strength captured positive investor outlook, though optimism was kept in
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