RESEARCH: MACRO & ECONOMICS

DON’T GET CARRIED AWAY BY CARRY

• Carry across asset classes has not performed strongly over the most recent decade
• Currency carry and Value & Size equity factors exhibited the same trends in performance since 1999
• All three factors are likely driven by risk sentiment, essentially offering the same risk exposure

DOES FINANCIAL LEVERAGE MAKE STOCKS RISKIER?

• The leverage of US stocks has been increasing over the last four decades
• The most leveraged stocks did not generate higher returns than the least leverages ones
• However, they were also not riskier

AGING & EQUITIES: SELLING STOCKS FOR THE LONG-TERM

• There is a negative relationship between aging populations and stock valuations
• Given that most developed markets are aging, this creates structural headwinds for equities
• The massive future population declines require investors to rethink traditional asset allocation

CREATING ANTI-FRAGILE PORTFOLIOS

• Most asset classes are bets on economic growth
• Diversified endowment-style portfolios are essentially short volatility 
• Long volatility strategies can be used to create anti-fragile portfolios

EM EQUITIES VS DEBT: SAME, SAME, BUT DIFFERENT?

• Some EM asset classes are highly correlated, to the point they can almost be considered interchangeable
• EM equities and hard-currency government debt are highly correlated to US equities and bonds
• In crisis times, all EM exposure is sold off and fails to provide meaningful diversification benefits

NO LONGER SUPERHEROES? TWILIGHT OF THE BONDS

• Bonds had superhero qualities over the last few decades
• The case for bonds in asset allocation is not clear when yields are low or negative
• Japan can be used as a roadmap for the outlook of a 60/40 portfolio in the US or Europe

BONDS & THE INVISIBLE THIEF

• US bonds generated positive total returns in most inflation regimes
• Returns were mixed when inflation was above 4%
• Real returns were strongly negative when inflation was high

EM DEBT: TO HOLD, OR NOT TO HOLD?

• Hard currency emerging market debt outperformed local currency EM debt since 2013
• EM government and corporate debt traded comparably
• Adding EM debt to a traditional US equity-bond portfolio would have generated only marginal benefits

GLOBAL PENSION FUNDS: THE COMING STORM

• The outlook for US equity and bond returns is low based on historical data
• The return assumptions of US public pension funds are difficult to achieve
• Only an extreme allocation to alternatives would meet the expected rate of return

PMI & EQUITY FACTOR PERFORMANCE

• Value and Size have a positive relationship with the PMI, similar to the S&P 500
• Indicates that risk sentiment is a core driver of factor performance
• Investors can consider incorporating variables like the PMI in a risk management framework

EQUITY FACTORS & THE MIGHTY US DOLLAR

• The US dollar had a slightly negative relationship with the stock market since 1996
• Some equity factors are more sensitive to changes in the US dollar than others
• On average the sensitivity is zero, but as often averages are misleading

CORPORATE DEBT IN THE CHINESE STOCK MARKET

• China exhibits the world’s highest corporate debt as % of GDP
• However, Chinese stocks are not significantly more levered than U.S. stocks
• Asset and debt growth has stalled in 2018, likely indicating an economic slowdown

EQUITY FACTORS & INFLATION

• Factor performance is impacted by inflation and deflation
• An inflationary environment is more attractive for most factors
• The change in inflation has been most meaningful for the Size factor

EQUITY FACTORS & GDP GROWTH

• Economic cycles have a clear impact on factor performance
• Some factors show pro-cyclical while others highlight anti-cyclical characteristics
• Given that real GDP is not published in real-time, it is unlikely effective for factor selection

FACTORS & INTEREST RATES

• There are no consistent relationships between Value, Size, Momentum and interest rates
• Applies to high and low and increasing and decreasing rate environments
• Investors shouldn’t be too concerned about factor exposure and rising rates, more about very low rates