Top Down Signals - Markets
Top down view of global equity markets
The above chart provides a historical perspective of global growth expectations priced in by financial markets (iGDP, see section on global macro score), and in turn the global equity return that is implied purely from a top-down perspective (iEMR), after accounting for the other 2 macro indicators (iEMC and iLCI). Both are detailed in the section on global macro score. The right-hand side of the picture above represents the current level and trend for iGDP along with the top 3 drivers of the trend (in the above case, for instance the rise in Merrill Lynch’s Global Financial Stress Index is the 2nd top contributor to a negative trend in iGDP), while for equity returns, the global iEMR is complemented with expectations of relative out/under-performance by region.
Regional Technical Indicator and Performance by Macro Profile
Like the one calculated for each stock, the regional technical indicator detects whenever a regional index is experiencing a break up or down trend, and if so, informs on its strength and significance (ie. the extent that historically such trend has been persistent enough to be able to benefit from trading it). The other graph tracks the performance of all stocks belonging to each of the 7 macro profiles described in section 2b, so that investors can spot and interpret when specific profiles tend to meaningfully outperform or underperform others.
Top-down view of country equity indices
This consists of country-level return forecasts established "top-down" by combining two sources of expected returns:
Expected return from Structural factors:
- Country Equity Index fundamentals (valuation relative to history and relative to other country indices)
- Country growth (real GDP), inflation (CPI), and risk (EIU ranking)
- Growth sustainability (GDP growth relative Government debt growth)
- Debt service manageability (% Government debt)
- Policy cushion (nominal GDP growth minus repo rate)
- Public finances health (% current account and % budget surpluses)
- Competitive currency (real effective exchange rate level and trend)
Expected return from Cyclical factors:
- Contribution from current level and trend of market expectations with regards to global growth (iGDP), EM vs. DM-led growth (iEMC), and inflation (iLCI).
Passive money flows
The large money flows into passive products over the past few years have been an important driver of (lack of) market liquidity and in turn of price swings affecting whole regions or sectors. This chart tracks the money flows into and prices of major regional and sector-specific ETFs to keep investors aware of any significant region/sector rotations.