Overview
quant outlook
Systematic Strategies in a Brave New World
The global economy has just experienced one of the deepest recessions in history. After a horrendous first half of the year, positive news has started to emerge on the economic front. But the recovery remains extremely fragile and hostage to when permanent solutions for the virus are found and what form they take. COVID-19 has caused many dislocations in markets. Identifying these dislocations is more interesting and rewarding at this juncture than predicting market direction. For example, corporate credit spreads and equity implied volatility appear too high given stock market ebullience. Within equities, megacaps have largely outperformed the rest of the market and are potentially overvalued. Rates are ultra-low, and rate curves flat making it riskier to earn carry from bond markets, and putting question marks against the traditional 60/40 allocation.
We focus on how investors can use systematic strategies to their benefit in this low-yield, high-volatility, high-risk environment.
Maintain hedges
Stay in low leverage Quality stocks in the US
Intra-day trend following to benefit from a liquidity scarcity
Equity repo as a systematic carry trade
Synthetic down variance as cheap protection against gap risk, equity puts funded by credit to hedge against a drawn out sell-off.
eight KEY ALLOCATION IDEAS FOR THE SYSTEMATIC INVESTOR
A PORTFOLIO APPROACH TO SYSTEMATIC
Alain BOKOBZA, Head of Global Asset Allocation Strategy
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Rates trend following as a cheap tail option on rates
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Monetise the equity volatility risk premium
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FX Value adds value
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FIND OUT MORE
Higher default rates and the possibility of a credit cycle downturn support buying strong balance sheet stocks versus shorting those of weaker companies.
Material sell-offs in markets are typically accompanied by low liquidity; our intra-day trend following strategy benefits by supplying liquidity when it is most constrained.
Rates will likely break out violently from their central bank controlled ranges in a risk sell-off or an unexpected inflation rise. Rates trend following should be able to position for both eventualities.
Equity volatility risk premium is elevated but hard to capture in a world with high volatility-of-volatility. We highlight a risk mitigated approach for doing so.
FX responds to shifts in monetary and fiscal stances, changes in risk appetite and long-term structural changes in economies – all likely in the wake of COVID-19. Our FX fair value strategy brings together three different strands to monetise these phenomena.
Equity repo offers much higher carry than fixed income benchmarks while having several downside risk mitigants.
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OVERVIEW
Commodity carry as a negative beta play on commodities
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Download the full publication
Monetising the convenience yield in commodities usually has a negative beta to commodities, and is likely to work as long as the recovery in commodity prices continues at a sedate pace.
quant outlook
Systematic Strategies in a Brave New World
The global economy has just experienced one of the deepest recessions in history. After a horrendous first half of the year, positive news has started to emerge on the economic front. But the recovery remains extremely fragile and hostage to when permanent solutions for the virus are found and what form they take. COVID-19 has caused many dislocations in markets. Identifying these dislocations is more interesting and rewarding at this juncture than predicting market direction. For example, corporate credit spreads and equity implied volatility appear too high given stock market ebullience. Within equities, megacaps have largely outperformed the rest of the market and are potentially overvalued. Rates are ultra-low, and rate curves flat making it riskier to earn carry from bond markets, and putting question marks against the traditional 60/40 allocation.
We focus on how investors can use systematic strategies to their benefit in this low-yield, high-volatility, high-risk environment.
OVERVIEW
eight KEY ALLOCATION IDEAS FOR THE SYSTEMATIC INVESTOR
Overview
Maintain hedges
1
Stay in low leverage Quality stocks in the US
2
Intra-day trend following to benefit from a liquidity scarcity
3
FX Value adds value
6
Monetise the equity volatility risk premium
Rates trend following as a cheap tail option on rates
5
Equity repo as a systematic carry trade
7
Commodity carry as a negative beta play on commodities
8
Synthetic down variance as cheap protection against gap risk, equity puts funded by credit to hedge against a drawn out sell-off.
Higher default rates and the possibility of a credit cycle downturn support buying strong balance sheet stocks versus shorting those of weaker companies.
Material sell-offs in markets are typically accompanied by low liquidity; our intra-day trend following strategy benefits by supplying liquidity when it is most constrained.
Equity repo offers much higher carry than fixed income benchmarks while having several downside risk mitigants.
Rates will likely break out violently from their central bank controlled ranges in a risk sell-off or an unexpected inflation rise. Rates trend following should be able to position for both eventualities.
Monetising the convenience yield in commodities usually has a negative beta to commodities, and is likely to work as long as the recovery in commodity prices continues at a sedate pace.
Equity volatility risk premium is elevated but hard to capture in a world with high volatility-of-volatility. We highlight a risk mitigated approach for doing so.
FX responds to shifts in monetary and fiscal stances, changes in risk appetite and long-term structural changes in economies – all likely in the wake of COVID-19. Our FX fair value strategy brings together three different strands to monetise these phenomena.
FIND OUT MORE
Download the full publication
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This page contains financial analysis which reflects the opinion of the Cross-Asset Research department of Societe Generale, at the date of its publication. It does not necessarily reflect the views of the other departments of Societe Generale nor the official opinion of the Societe Generale group. This content has been prepared for use by institutional and professional investors and is not intended for retail investors. Investors should consider this report as only a single factor in making their investment decision.
© Societe Generale 2020
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#contentwithimpact
This page contains financial analysis which reflects the opinion of the Cross-Asset Research department of Societe Generale, at the date of its publication. It does not necessarily reflect the views of the other departments of Societe Generale nor the official opinion of the Societe Generale group. This content has been prepared for use by institutional and professional investors and is not intended for retail investors. Investors should consider this report as only a single factor in making their investment decision.
© Societe Generale 2020
Cookies Policy
Legal Information
Contact
