Your Exposure to the New Economic Order - Part IIl

Since the Russian invasion of Ukraine on February 24th, we have leveraged our access to over 150 style and 400 sector factors to measure the market’s reaction. In our last two editions of Factor Spotlight, we introduced our Surprise Metric and our Surprise Characteristics Indices to quantify the significance of factor movements in the market and the sensitivity of assets to this new economic order. This week's edition will dissect an unusual week in the markets and provide context around what has changed and what has persisted.

A Rebound for Global Large-Cap Growth and Beta

On a cumulative basis, since the onset of the conflict, the key style surprises have persisted. However, this week we saw a partial correction in many areas. The unwinding illustrated in the crowding factors last week reversed course this week as HF Crowding rallied and Short Interest sold off. As investors pushed back into higher beta stocks, market beta factors recouped some of the losses from prior weeks. Investors have also come around on growth in the US and developed markets but not yet in emerging markets. This week, large-cap stocks rebounded after a small-cap rally had pulled size factors down through the first two weeks of the conflict.

The notable area of persistence has been Inflation. The Fed approved a 25 basis point rate hike this week with more likely to follow but the still escalating circumstances in Ukraine make it challenging to rein in record inflation numbers.

Top Style Factor Surprises

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A Course Reversal in Sector Flows

Sector factors are where we find this past week’s shift most evident. The most popular industries throughout the conflict underperformed this week, while those industries that had been declining at rapid rates saw some much-needed tailwinds. The most dramatic turns came in Energy and Financials. The Energy Equipment & Services factor in the Wolfe QES DM model, for example, was down -10.58% since last Thursday after rising by over 22% from February 24th through March 10th. Conversely, banks had the most extensive recovery in Financials, though this occurred much more abroad as US Banks factors were relatively flat.

Surprise Characteristics Indices

As we discussed last week, we have used the cumulative factor surprises summarized above to create weekly-rebalanced indices for investors to understand what factors the market is moving in and out of and quantify sensitivities to the market reaction.

As expected, the indices underperformed due to the reversal in the factors above this past week. The 95th percentile index, shown below, finished up 1.30% on a cumulative basis Thursday, far from its peak at 6.91% on March 7th. Given the newest factor information through the 17th, we have rebalanced the index and calculated predicted betas across more than 7,000 stocks and ETFs.

Uncovering Downside Potential

Leveraging Omega Point’s Security Search functionality, we can screen a broad universe of investible securities to find stocks that are particularly sensitive to the new market climate. Below, we screened for US stocks with market caps greater than $2 billion and average daily trading volumes above $20 million. We then utilized the HF Crowding and Short Interest factors in the Wolfe QES US Broad v2 model to screen for long crowded names with a negative beta to the surprise indices and short crowded names with a positive beta to the surprise indices. These lists represent popular hedge fund stocks likely to face systematic negative pressures due to the war.

Long Crowded Stocks with Negative Beta

Short Crowded Stocks with Positive Beta

Whether managers are interested in screening for trades, measuring portfolio sensitivity to the conflict in Ukraine, or looking to hedge unwanted risks, Omega Point's platform and proprietary content provide the tools to navigate a turbulent global market better. If you are interested in analyzing your portfolio through the lens of the Surprise Characteristics Indices or would like to explore our methodology further, please don’t hesitate to reach out.

US & Global Market Summary

US Market: 03/14/22 - 03/18/22

• All three major indices saw their most significant weekly percentage gains since November 2020, with the S&P jumping 6.2% while the Dow and Nasdaq rose 5.5% and 8.2%, respectively.
• U.S. equities rallied as investors found positive signs, including a drop in oil prices and assurances from Beijing, despite tighter U.S. monetary policy and continued uncertainties over Russia’s war in Ukraine.
• The Fed announced it was raising interest rates by a quarter percentage point and indicated six remaining hikes throughout the rest of the year to combat an inflation rate that has surged to a 40-year high. Stocks rose after Chair Jerome H. Powell indicated that the economy is “very strong” and the probability of a recession occurring in the next 12-months is “not particularly elevated.”
• The London Metal Exchange reopened nickel trading following a halt on March 8 after a short squeeze that sent prices soaring to more than $100k a ton.
• Moderna rose 6.3% after the drugmaker submitted a request to the FDA to allow for a second booster of its COVID-19 vaccine.

Normalized Factor Returns: Axioma US Equity Risk Model (AXUS4-MH)

• Size slingshotted from last week’s bottom spot to the top of the charts, but still sits in extremely oversold territory.
• Growth continues its torrid climb and finishes the week tied for first place.
• Medium-Term Momentum lost a bit of steam from its recent upward tear, but still moves deeper into overbought terrain.
• Value continues its recent downward trend and moves deeper into oversold territory.
• U.S. Total Risk shot up 1.24% this week.

Normalized Factor Returns: Axioma Worldwide Equity Risk Model (AXWW4-MH)

• Global Size, mirroring its US counterpart, went from worst to first in this week’s charts.
• Growth continues its upward tear and finishes the week firmly in the #2 spot.
• Earnings Yield moved upward for the second straight week following a ten-week slide.
• Medium-Term Momentum lost some steam but keeps climbing.
• Value continues to plummet and moves deeper into oversold terrain.
• Exchange Rate Sensitivity recent fall accelerated and took the week’s bottom spot.
• Global Total Risk shot up 1.28% this week.

Regards,
Kevin