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Stock Markets
Bonds
Currencies
Yield Curve
Commodities
VIX
MOVE
Credit
Global Macro
MacroVar analyzes sectors, industry groups, industries and sub-industries in US, Europe, Emerging Markets and Asia. Each segment is analyzed through its stock market dynamics, credit markets, news flow and industry specific quantitative and macroeconomic factors.
If you are new to Sector & Industry specific investing click here for an introduction to sectors & industries.
More specifically, stock market dynamics are analyzed based on S&P Dow Jones Indices indexes developed based on GICS (? For more), credit markets using individual Credit Default Swaps of specific companies and IBOXX corporate bond indices, news flow based on feeds from reliable finance news sources and industry specific factors based on MacroVar statistical Models and a broad range of sector specific related macroeconomic factors based on PMI & ESI Surveys and other factors like Building Permits. Lastly, MacroVar ranks sectors based on our quantitative models to identify Long / Short Investment themes.
Click here to get an overview of Sectors & Industries across the US, Europe and Asia.
Sector Specific Factor Analysis
Macrovar models analyze in real-time the following relative factors which will be explained briefly in the next sections of this article.
Moreover, MacroVar monitors the following families of factors specific to a sector:
Stock sectors analysis of prices, momentum, trends, charts, and news.
Sectors & Industries investing introduction
Stock Sectors are categorized not cyclical sectors and defensive sectors. Cyclical stock sectors are sectors of stocks whose earnings are more sensitive to the business cycle and the economic growth. Defensive stock sectors are sectors of stocks whose earnings are less sensitive to the business cycle.
Cyclical stock sectors Overview
Defensive stock sectors Overview
cyclical vs defensive sectors
Sectors & Industries versus the Business Cycle
During different economic regimes, different sectors outperform others. For example, during recessions more defensive sectors like consumer staples outperform cyclical sectors like the industrials sector. Hence, an investor would want to scale back on the industrial sector and go long consumer staples.
Hence, after having a global view of the current economic environment, investors can choose their exposure either long, short or long/short across sectors.
The figure below shows which sectors tend to outperform and underperform during different economic cycles.
sectors and the business cycle
Sectors & Industries and the Value Chain
Investment themes are generated primarily from Macroeconomic factors and secondarily Microeconomic factors affecting the value chain in industries. Investors need to look for clues in the world, have views on the value chain and trade to invest with or against the trend.
value chain
Sectors Investing vs Top-Down process and Sector / Industry views
Investors can maximize returns while minimizing risks by investing Long and/or Short across sectors using the following steps:
MacroVar analyzes financial markets and economies using a top down approach. MacroVar’s aim is to monitor markets and economies in order to predict the performance of every sector under investigation in the next 6-12 months.
The most important factors which affect economic conditions and financial markets are:
Global Economic Growth Expectations
Global economic growth is the most important factor affecting individual economies, sectors, industries, and all financial assets (stocks, bonds, currencies, and commodities).
The most important indicator to monitor Global growth is MacroVar Global PMI which is a weighted average of Manufacturing PMI of the 35 largest economies.
PMI is a leading economic indicator published for each country monthly derived from surveys of private sector companies. The PMI summarizes whether market conditions are expanding, staying the same, or contracting as viewed by managers of the companies surveyed. PMI provides information about current and future business conditions.
Special attention is given to the top four largest economies (United States, Eurozone, China, Japan) comprising more than 50% of global GDP.
Interpreting Global PMI: Readings above 50 indicator economic expansion, while readings below 50 indicate economic contraction.
Global Liquidity
Global liquidity is the availability of credit in global financial markets. Global liquidity is controlled by central banks using various instruments to inject or remove money from the system. An expansion of global liquidity leads to debt growth which is favorable for financial assets and economic growth and vice versa.
Global Liquidity Snapshot: Global Liquidity is gauged by monitoring the 1. Level of interest rates, 2. balance sheet and 3. Money Supply M2 of the four major central banks of the world namely Federal Reserve (US), ECB (Eurozone), PBoC (China) and BOJ (China).
Country View
Country Economic, Financial & Risk Snapshot
To get a snapshot of your country’s economic health, the most important macroeconomic and financial indicators are the country’s 1. Manufacturing and Services PMI and 2. The performance of the stock market, bonds and currency.
A country’s full macroeconomic analysis involved the indicators below.
Get a snapshot of a country’s economy using:
To further analyze a country’s macroeconomy, the following parameters must be closely monitored:
Four Macroeconomic Environments versus financial markets
There are four macroeconomic environments based on economic growth and inflationary conditions. MacroVar uses this model to monitor macroeconomic conditions for the largest 35 countries in the world.
During these macroeconomic conditions economic growth is strong, capacity utilization is high and hence rising inflation is experienced. Policy makers use monetary policy and fiscal policy tools to slowdown the economy and bring inflation down.
High global growth with rising inflation expectations lifts commodities. Many emerging economies growth is linked to commodities. When commodities rise emerging market stocks, currencies and real estate rise as well.
During this environment, global growth is strong and global risk is low. Capital flows out of safe developed low growth countries like the US into emerging markets.
The best performing financial assets are emerging market stocks, international real estate, emerging countries’ currencies, commodities, and IL bonds (inflation linked bonds).
The worst performing financial assets are US treasury bonds and cash since they are adversely affected by rising inflation.
Click to check the Best & Worst Assets during Stagflation
The best asset performers protecting investors from inflation are Gold, Cash, Treasury Inflation Protected Securities, and the US Dollar.
The worst performers are long-duration treasury bonds adversely affected by rising inflation.
The best performers are developed markets stocks, developed Real estate and US Treasury bonds.
Low inflation with moderate growth is a good environment for bonds and stocks and bad for the worst performs which are commodities and commodity related sectors.
During this environment the best asset performers are Long-Duration Treasuries and Cash. Everything else experiences big volatility and often large losses.
MacroVar risk management model overview
Successful investing requires managing a portfolio of assets to protect the capital of investors and generate steady returns in both rising and falling markets. This requires investing in growth assets (stocks, commodities, currencies) when global financial risk is low while shifting the portfolio to safe investments (bonds, cash) or neutralizing a portfolio’s market risk when financial risk exceeds certain levels.
Risk management analysis
Financial markets and the real economy have historically experienced a series of severe crises. During these financial crisis, catastrophic investment and economic losses where experienced. It is critical for any investment or business strategy to understand financial risk conditions and adapt strategies based on these conditions.
Analyzing the Global Economy and Financial risk
The global economy and financial markets experience long-term growth. When financial risk is low, financial markets operate smoothly providing ample liquidity to financial markets and the economy. During these periods high growth assets like stocks experience high returns and are priced efficiently based on their fundamental drivers. On the contrary, when financial risk is rising, market liquidity deteriorates because of a loss of confidence in banks, funding institutions or governments which causes a feedback loop of surging funding costs, increased price volatility and asset fire sales.
MacroVar risk management model overview
MacroVar risk management is a quantitative model which monitors critical financial markets and warns investors when financial risk is rising quickly. The risk management model monitors stocks, bonds, credit markets, currencies and global liquidity daily. MacroVar risk management model is comprised of the following segments:
Learn more in the respective section of MacroVar Risk Management model section.
MacroVar Investing & Trading Guide
This guide was created by MacroVar’s team of professional fund managers and economists to enable you understand the principles of trading and investing.
Macrovar uses a top down framework to analyse markets and economies and multi-factor models to identify trading opportunities across 1,400 financial assets.
Top-Down Analysis of Markets & Economies
Fund managers use a top down framework to analyze the major components driving the global economy which in turn drive all financial markets.
The major factors monitored and analysed are:
Global Economic Growth Expectations
The most important factor to predict from a fundamental point is view is global economic growth trend for the next one to three months. This is accomplished by monitoring leading macroeconomic indicators for each country like manufacturing, services PMI and other business and consumer confidence indicators. Global economic growth is monitored by calculating MacroVar Global PMI based on each country’s manufacturing PMI and it’s relative weight to Global GDP of the 35 largest economies. Special attention is given to the top four largest economies (United States, Eurozone, China, Japan) comprising more than 50% of global GDP. Global macroeconomic growth breadth is monitored. The trend and momentum for each macroeconomic indicator is calculated using the following metrics.
Check the major macroeconomic indicators of the largest 35 economies in the world in MacroVar’s Global Economy section.
Global Liquidity conditions
Global liquidity is a major factor affecting all financial markets. The most important liquidity factors are related to the four largest central banks in the world namely the Federal Reserve (US), ECB (Eurozone), PBoC (China) and BOJ (China). MacroVar monitors each central bank’s interest rates, Money Supply (M2) and Balance Sheet dynamics on a year to year basis.
Global Financial Risk levels
Global financial risk conditions are especially important since they affect all financial assets. MacroVar risk index is composed of various financial risk factors to provide an overview of global market risk conditions. The risk index is used for adjusting portfolio risk. MacroVar risk management provides free current risk analysis.
Global Financial Markets Overview
MacroVar uses a top down framework to analyse financial markets as well. The major financial markets which affect the rest of the other financial assets are:
Stocks
Bonds
Currencies
Commodities
Equity Risk
Credit Risk
Global Macroeconomic Overview
How Financial Markets Work
The basic logic on how financial assets behaves during different economic conditions is provided below. There are periods where correlations between financial assets breakdown and where economic data are disconnected from financial markets but the core market logic is described below.
There are two market environments: Risk On periods during which funds flow from safe assets to risky assets and Risk Off periods where funds flow from risky assets to low-risk assets.
Risk Assets (Risk-On): Stocks, Cyclical Commodities, Cyclical Sectors / Industries, High Yield Bonds, Cyclical Currencies, Emerging Markets (Capital flows to emerging markets in search for higher yields, higher growth rates and hence profits)
Safe Assets (Risk-Off): US Treasuries, German Bunds, Defensive Sectors / Industries, US Dollar DXY, Swiss Franc, Japanese Yen, Gold
The most important asset correlation is between the US stocks and US Bonds. During risk on periods US stocks rise while US bonds are sold and vice-versa. Since equities are closely linked with credit, MacroVar monitors closely the performance of corporate bonds for each sector in US and EU markets.
During Risk on Periods the markets behave as follows:
Global Risk
Stocks
Stock Sectors
Bonds (MacroVar monitors 2-year, 5-year and 10-year bonds)
Yield Curve dynamics
Currencies
Commodities
Macroeconomic Conditions
Factors of a specific financial asset
Financial assets like stocks, bonds, currencies and commodities are linked with other
related financial markets. MacroVar monitors a broad list of macroeconomic and financial factors affecting every financial market. Check a representative list of factors monitored below:
Country Macroeconomic Overview
MacroVar analyses the economic and financial conditions of the largest 35 economies in the world by monitoring 40 economic and financial indicators for each country.
Economic Aim
A nation’s economy is healthy when it experiences stable economic growth with low inflation and low unemployment. Economic growth is measured by Real GDP and inflation by CPI, PPI. An economy is affected by its individual performance and its economic performance relative to the rest of the World (RoW).
Policymakers (government & central bank) use fiscal and monetary policy to inject liquidity (print & spend money) during slowdowns (to solve weak economic growth) and withdraw liquidity (buy back money & stop spending money) from an overheating economy (to solve high inflation).
Excessive intervention in the economy may lead to loss of confidence in the country and a financial crisis. The degree of intervention depends on the country’s fundamentals. Read how to analyze a country’s economic in depth.
The four economic environments
Financial markets are affected by economic growth and inflation expectations. The performance of each financial asset for each economic environment is explained below.
The four economic environments:
MacroVar uses leading economic indicators for each country to predict economic and inflation expectations. More specifically for each country the Price Expectations and New Orders expectations components of the PMI, ISM and ESI indicators are used for structuring the models.
Country Macroeconomic Analysis
This analysis is based on the work of Ray Dalio and more specifically how the economic machine works.
Introduction: An economy is the sum of the transactions that make it up. A country’s economy is comprised of the public and private sector. The private sector is comprised of businesses and consumers.
Economic activity is driven by 1. Productivity growth (GDP growth 2% per year due knowledge increase), 2. the Long-term debt cycle (50-75 years), 3. the business cycle (5-8 years). Credit (promise to pay) is driven by the debt cycle. If credit is used to purchase productive resources, it helps economic growth and income. If credit is used for consumption it has no added value
Money and Credit: Economic transactions are filled with either money or credit (promise to pay). The availability of credit is determined by the country’s central bank. Credit used to purchase productive resources generating sufficient income to service the debt, helps economic growth and income.
Country versus Rest of the World: A country’s finances consist of a simple income statement (revenue–expenses) and a balance sheet (assets–liabilities). Exports are imports are the main revenue and expense for countries. Uncompetitive economies have negative net income (imports higher than exports), which is financed by either savings (FX & Gold reserves) or rising debt (owed to exporters).
Debt: A nation’s debt is categorized as local currency debt and FX debt. Local debt is manageable since a country’s central bank can print money and repay it. FX debt is controlled by foreign central banks hence it is difficult to be repaid. For example. Turkey has US dollar denominated debt. Only the US central bank (the Federal Reserve), can print US dollars hence FX debt is out of Turkey’s control.
A country can control its debt by either: 1. Inflate it away, 2. Restructure, 3. Default. The US aims to keep nominal GDP growth above interest rates (kept low) to gradually reduce its debt.
Injections & Withdrawals
The government and central bank use fiscal and monetary policies to inject liquidity during slowdowns to boost growth and withdraw liquidity from an overheating economy to control rising inflation. The available policies and tools used during recessions are the following:
Monetary Policies (MP)
Fiscal Policies (FP)
Expansionary FP is when government spends more than tax received to boost economic growth. This is financed by issuing new debt financed by 1. domestic or foreign investors or 2. CB money printing
Currency vs Injections & Withdrawals and inflation
The degree of economic intervention depends on the country’s economic fundamentals, its currency status and credibility. Countries with reserve currencies or strong fundamentals are allowed by markets to intervene. However, when nations with weak economic fundamentals intervene heavily, confidence is lost, causing a capital flight out of the country, spiking inflation and interest rates which lead to a severe recession, political and social crisis.
Reserve vs Non-reserve currencies: Reserve currencies are used by countries and corporations to borrow funds, store wealth and for international transactions (buy commodities). They are considered low risk. The US dollar is the world’s largest reserve currency. The main advantage of reserve currency nations is their ability to borrow (issue debt) on their own currency. These countries have increased power to conduct monetary and fiscal policies to boost their economies. However, prolonged expansionary fiscal and monetary policies eventually lead to loss of confidence in these currencies as a store of value and potential inflationary crisis.
Non-reserve currency countries: Conversely, developing nations are not considered low risk hence their ability to borrow in their own currencies is limited. Their economic growth is dependent on foreign capital inflows denominated in foreign currencies like the US dollar. During periods of global economic growth, capital flows from developed markets into developing nations looking for higher returns. These economies and their corporations’ issue foreign debt to grow. However, during periods of weak global economic growth or financial stress, foreign capital flows (also called capital flight) back to developed countries causing an inability of countries and companies to repay their debt. Central banks gather foreign exchange reserves during growth periods to create a cushion against capital outflows.
A nation’s economy is vulnerable to economic weakness or financial stress when it experiences:
Trend & Momentum indicators
Momentum trading is used to capture moves in shorter timeframes than trends. Momentum is the relative change occurring in markets. Relative change is different to a trend. A long-term trend can be up but the short-term momentum of a specific market can be 0.
If a market moves down and then moves up and then moves back down the net relative change in price is 0. That means momentum is 0.
A short-term positive momentum, with a long-term downtrend results in markets with no momentum.
MacroVar Momentum model for Financial Markets
MacroVar Trend signal ranges from -100 to +100. The market trend signal is derived as the mean value from 4 calculations for each asset. The timeframes monitored are the following: 1 Day (1 trading day), 1 Week (5 trading days), 1 Month (20 trading days), 3 Months (60 trading days)
For each timeframe, the following calculations are performed: 1. Calculations of the return for the specific timeframe, 2. If return calculated is higher than 0, signal value 1 else signal value -1. Finally, the 4 values are aggregated daily.
MacroVar Trend model for Financial Markets
The most important trend indicator
The 52-week simple moving average and its slope are the most important indicators defining a market’s trend. An uptrend is characterized by price above the 52-week moving average followed by an upward slope. If fundamentals of the market have not changed and the moving average slope is still in uptrend, a price drop signifies a market correction and not a change of trend. Traders should watch oscillators like MacroVar oscillator and RSI to buy the dip and still follow the trend. The moving average slope turn signifies a change of trend.
MacroVar Trend model for financial markets
MacroVar Trend signal ranges from -100 to +100. The market trend signal is derived as the mean value from 8 calculations for each asset. The timeframes monitored are the following: 1-month (20 trading days), 3-months (60 trading days), 6-months (125 trading days), 1-year (250 trading days)
For each timeframe, the following calculations are performed: 1. Closing price vs moving average (MA): if price greater than MA value is +1, else -1, 2. Moving average slope: if current MA is higher than previous MA, upward slope +1, else -1
MacroVar trend model can be used as a trend strength indicator. MacroVar trend strength values ranging between +75 and +100 or -75 and -100 show strong trend strength.
A technical rollover is identified when MacroVar trend strength indicator moves from positive to negative value or vice-versa.
MacroVar Trend model for Macroeconomic Indicators
A macroeconomic indicator is in an uptrend when last value is higher than its twelve month moving average and its twelve month moving average slope is positive (last twelve month moving average is higher than the previous month’s twelve month moving average)
Lastly, MacroVar calculates the number of months the current value has recorded highs or lows. Trend change is assumed when a specific indicator has recorded a 3-month high / low or more.
MacroVar Momentum model for Macroeconomic Indicators
A macroeconomic indicator’s momentum is monitored by calculating its long-term year over year (Y/Y) return and its short-term month on month (M/M) return.