1/ Best Strategies for Inflationary Times (Neville, Draaisma, Funnell, Harvey, Hemert)
"Unexpected inflation is bad for bonds and equities, with local inflation mattering most, while commodities and futures trend following performance is strong."
2/ Inflationary regimes are when:
* YOY CPI ≥ 5% and is above 50% of its highest level over the past 24 months, OR
* YOY CPI ≥ 2%, is below 50% of its highest level over the past 24 months, then re-accelerates to ≥ 5%
* Episode length ≥ 6 months
For companies, costs may tend to rise faster than output prices.
NOTE: Strong trend performance may be partly from the way inflation regimes are defined (length ≥ 6 months).
4/ "One concern is whether each regime is driven by a different component of the CPI and therefore unique. The data suggest this is not the case.
"All of the components experience higher rates of price rises in inflationary regimes (at least twice as high in 59% of instances)."
5/ "For U.S. equities (bonds), the real return averages -7% (-5%) during inflationary times, with negative returns in 75% (75%) of regimes.
"Consequently, the 60-40 equity-bond portfolio performs poorly during inflationary regimes, with a -6% real annualized return."
6/ "Equities benefit from rising inflation if the starting level is below median (deflation risk) but are hurt if it is above median (escalation risk).
"The negative relation between bond returns and inflation changes does not depend much on the starting level of inflation."
7/ "The energy sector lags the commodity it produces. Reasons may include operational issues (wage inflation, geopolitical turbulence) and companies' hedging strategies.
"For financials, default risk dominates rising rates, and there can be a lag between inflation/tightening."
8/ "Neither IG nor HY protected purchasing power.
"IG and HY in excess of government bonds did not historically provide inflation protection.
"The starting TIPS yield in inflation regimes was +2.4%. Now it is -0.7%, so they may not provide the same level of protection today."
9/ "All commodities have positive annualized real returns during inflationary regimes.
"Foodstuffs do least well but still generate strongly positive real annual returns. This may be idiosyncratic due to legislation across the 1960s designed to bring food prices down."
10/ "There is a positive relationship between the 12-month real return to the equally-weighted commodity basket and the contemporaneous change in the inflation rate, irrespective of the starting level of inflation. It may be stronger when inflation is in the top two quintiles."
11/ "U.S. residential real estate has an annualized real return of -2% (+2%) in inflationary (other) regimes."
Residential real estate provided some (but mediocre) inflation protection in the U.K.
In Japan, it historically worked well but may have been influenced by bubbles.
12/ "Generally, collectibles have lived up to their reputation as a store of value in inflationary times.
"However, the asset class is unlikely to be part of an institutional portfolio, given small traded volumes."
13/ "We incorporate estimated costs, based on our live experience trading similar L/S books (combined transaction, slippage, funding, and short-selling). The estimates are at the maximum of the range in Harvey et al.: 2.0% (0.8%) per annum for stock factor (futures) strategies."
14/ "Smaller companies perform poorly in inflationary regimes.
"Value might be surprisingly weak, as growth stocks are often assumed to be adversely sensitive to unexpected inflation.
"Cross-sectional equity momentum performs well.
"Quality holds up well; low beta is weak."
15/ "We construct a time-series momentum strategy with a 10% ex-ante annualized vol target. The weights to historical lags in the trend definition are chosen to best approximate the BTOP50 trend-following index returns.
"Trend following appears to provide inflation protection."
16/ "Equities and bonds perform worst during their own countries’ inflation periods. There may be benefits to international diversification.
"Commodities and trend following perform particularly well when all three countries are in an inflationary regime (4% of sample months)."
17/ "Looking at averages over all regimes may be misleading.
* Gold’s ability to hedge unexpected inflation is driven by a single observation: 1979.
* Today, only 11% of GDP is driven by manufacturing.
* High volatility (gold, bitcoin) may lead to unreliable inflation hedging."
3/ "Value, momentum & defensive/quality applied to US individual stocks has a t-stat of 10.8. Data mining would take nearly a trillion random trials to find this.
"Applying those factors (+carry) across markets and asset classes gets a t-stat of >14."
2/ "The model's four terms describe different life stages for an individual who marries during the sample period. The intercept reflects the average life satisfaction of individuals in the baseline period [all noncohabiting years that are at least one year before marriage]."
3/ " 'How satisfied are you with your life, all things considered?' Responses are ranked on a scale from 0 (completely dissatisfied) to 10 (completely satisfied).
"We center life satisfaction scores around the annual mean of each population subsample in the original population."
1/ Short-sightedness, rates moves and a potential boost for value (Hanauer, Baltussen, Blitz, Schneider)
…
* Value spread remains wide
* Relationship between value and rates is not structural
* Extrapolative growth forecasts drive the value premium
… robeco.com/en-int/insight…
2/ "The valuation gap between cheap and expensive stocks remains extremely wide. This signals the potential for attractive returns going forward."
3/ "We observe a robust negative relationship between value returns and changes in the value spread.
"The intercept of ≈10% can be interpreted as a cleaner estimate of the value premium, given that it is purged of the time-varying effects of multiple expansions & compressions."
2/ Part 1: Basic directional strategies
Part 2: Adjusted trend, trend and carry in different risk regimes, spot trend, seasonally-adjusted carry, normalized trend, asset class trend
Part 3: Breakouts, value, acceleration, skew
Part 4: Fast mean reversion
Part 5: Relative value
3/ Related reading
Time-Series Momentum
Two Centuries of Trend Following
https://t.co/R6JQb6Cg96
Carry
https://t.co/poFk6OWQsO
Value and Momentum Everywhere
https://t.co/l0wVgAOrhL
2/ "The broadly similar pattern of adverse health and well-being reported as new-onset at 6- and 12 months among test-positives and test-negatives highlights the non-specific nature of these symptoms and suggests that multiple aetiologies may be responsible."
3/ Related reading:
Efficacy of Vaccination on Symptoms of Patients With Long COVID
2/ Do you hedge out market beta in order to make the portfolio more risk balanced?
"Yes, hedging out market beta can help.... This can be achieved through various methods such as shorting market index futures or investing in negatively correlated assets."
3/ What are some examples of negatively correlated assets that offer positive CAPM alphas?
"Some examples of negatively correlated assets that have historically offered positive CAPM alphas include gold and equities, government bonds and equities, and REITs and equities."