Anthony Todd, Chief Executive Officer
"Make no mistake: global growth is under threat in 2019. Macroeconomic indicators could be a useful way to quantify the extent of this threat in order to position accordingly."
4 October 2019
Anthony Todd, Chief Executive Officer
"Make no mistake: global growth is under threat in 2019. Macroeconomic indicators could be a useful way to quantify the extent of this threat in order to position accordingly."
Macroeconomic indicators condense a wide range of economic data into a single value to capture periodic fluctuations (cycles) in economic activity with respect to their longer-term historical trends. They are often created and used by central bank economists to proxy economic growth and in order to heavily inform their monetary policy decision-making. As a result, market participants also keep a close eye on these indicators as they can have a significant effect on prices.
Macroeconomic indicators can be used to classify the state of current economic conditions into regimes such as the following:
Worse Economic Conditions:
Better Economic Conditions
We have used three macroeconomic indicators as they are used by central banks and followed by market participants. Moreover, these indicators are also produced at least monthly.
We acknowledge that the choice of indicators are US centric and may not compare perfectly with global economics. Despite this, we do have the advantage of extensive history and therefore consistency. Besides, history has repeatedly shown worldwide economic interdependence to the extent that when the US sneezes, the whole world can catch a cold. This could be epitomised over the past 20 full years whereby the correlation between the year-on-year changes in the IMF World GDP and the US GDP has been approximately 83%.
In order to compare values across the three selected macroeconomic indicators, normalised z-scores are shown and used below.
Chicago Fed National Activity Index 3-Month Moving Average (CFNAI3MMA) is a monthly indicator favoured by Fed economists to quantitatively describe changes in volume of economic activity:
Note: The data with respect to various indices is shown for illustrative purposes only. Detailed descriptions of the indices used are available on request.
Chicago Fed National Activity Diffusion Index (CFNAI-DIFFUSION) is a monthly indicator favoured by Fed economists to quantitatively describe breadth within the changes in economic activity:
Note: The data with respect to various indices is shown for illustrative purposes only. Detailed descriptions of the indices used are available on request.
Aruoba-Diebold-Scotti Business Conditions Index (ADS) is a weekly index produced by the Fed and favoured by many Fed economists to quantitatively describe and track real-time conditions for US businesses at a high-frequency:
Note: The data with respect to various indices is shown for illustrative purposes only. Detailed descriptions of the indices used are available on request.
We compare the macroeconomic z-score of each month to the previous value to classify that month into the four regimes (indicator states): recovery, contraction, expansion, slowdown. We also classify each monthly z-score based on whether it is positive to indicate ‘above average economic conditions’ or negative to indicate ‘below average economic conditions’. We then compare and average the monthly returns of ADP across the various regimes and conditions. We also lag the monthly z-score by one month with respect to the ADP returns to understand how ADP performed the month following the macroeconomic indicator reading.
Note: Aspect Diversified started trading on 15th December 1998. The performance data used above for Aspect Diversified from January 2019 onwards has not been audited. The returns shown are net of the fees (and relevant crystallisation periods) applicable to the A share class of the flagship fund trading the programme over time, currently a 2.00% management fee (accrued weekly and paid monthly in arrears) and 20.00% performance fee (determined and debited (if applicable) annually). The returns used include the reinvestment of all sources of earnings. The performance of customised or modified implementations of the Programme may differ to the performance shown above. Past performance is not necessarily indicative of future result.
The current economic cycle has proceeded at a tepid pace despite massive fiscal stimulus and exceptionally low rates and we keep being told that we are in the very late stages. Looking forwards, the central banks of most countries have signalled worries over a slowing or contracting global economy, not only through their rhetoric but also by implementing dovish monetary policies in the first half of 2019. Furthermore, trade tensions and rising geopolitical unrest have darkened the investment outlook for many market participants. As at the end of H1 2019, all three macroeconomic indicators are pointing to economic conditions which are below average.
The Aspect Diversified Programme has shown positive performance irrespective of macroeconomic regime as well as much needed outperformance in the in the gloomiest scenarios. Additionally, given the rise in our discussions with investors around this topic, it might be suitable to consider a CTA such as the Aspect Diversified Programme, especially at a time of mounting economic pessimism.
Note: Any opinions expressed are subject to change and should not be interpreted as investment advice or a recommendation. Any person making an investment in an Aspect Product must be able to bear the risks involved and should pay particular attention to the risk factors and conflicts of interests sections of each Aspect Product’s offering documents. No assurance can be given that any Aspect Product’s investment objective will be achieved.
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