Systematic Approach

Watch the latest update by our Head of Quantitative Investments Andrea Gentilini for the latest trends affecting our systematic investment approach.

Watch the latest update by our Head of Quantitative Investments Andrea Gentilini for the latest trends affecting our systematic investment approach.

Watch and learn about the latest trends in Quantitative Investment’s systematic approach, in volatility, equities, fixed income and Fx

Quantitative Investments is beginning a series of monthly videos, each with an update on both systematic and hybrid aspects of investment approaches. Watch the latest updates.

Markets surged in early November as the Fed appeared more dovish and the US economy showed signs of cooling. This could turn out to be a false dawn but currently the odds seem favorable for the bulls to maintain control – at least for now. In response, our allocation models are making notable shifts: ceasing equity overweight reduction and establishing a small bond overweight – the first since May.

For now the much-feared recession has been staved off thanks to a resilient consumer. However, the risk is not off the table yet which has prompted our models to take a small step back from maximum equity allocations. While they stay optimistic, they have now started to treat the asset class with a grain of salt while bonds don’t seem to be able to find their way out of the dog’s house.

Nothing seems to be able to derail equities on their way up, despite risk factors such as the US debt ceiling or the surprisingly hawkish Fed communiqué in June. A major reason for the calm is the continuously surprising resilience of the consumer, which still argues for an equity overweight.

Markets keep ignoring the economic deterioration in the US, as first cracks in the US banking system increase the likelihood of a Fed pivot over the upcoming months. At the same time Chinese recovery boosts the growth outlook for the APAC region. While growth perspectives and sentiment seem to diverge, our models stick to their equity overweight.

This month we asked ChatGPT for its investment outlook. Aside from fancy language we didn’t get much out of it. Conversely, our models reveal a continued equity overweight and a slightly more constructive view on bonds as investors hope for Fed pivot.

The tightening cycle has started to bite by taking down three US lenders and sending jitters through the banking sector as a whole. While swift Fed action convinced our models to quickly reject 2007/08 comparisons, a true Fed pivot might be needed to support market sentiment further down the line.

The strong US labor market report has shifted recession risks towards the end of the year. This may have opened the door for a grace period, in which uncertainty around the economic impact of recent policy tightening makes it impossible to refute the arguments of either camp: bulls and bears. This article shows how our models are dealing with this kind of uncertainty.

The euphoria in the financial markets has been driven by falling expectations of a severe recession. Although our models continue to indicate a US recession, this is likely to begin later in the year. This means there is no contradiction in the equity overweighting that is currently suggested by our model.