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View All Insights ↗The current geopolitical risk in the Middle East puts even more into focus commodity price trends and their effect on equity markets. When commodity prices are trending higher, do commodity exporting markets do better and commodity importing do worse? And vice versa. When commodity prices are trending lower, do commodity exporting markets do worse and commodity importing markets do better. In other words, can the trend of export prices relative to import prices be useful in allocating the equity markets?
The Heckman Global Allocation Model² uses a smart beta (factor based) approach to allocating the global markets using a set of 13 valuation and macro-economic investment factors. The model can evaluate the efficiency of each factor for allocating markets on a standalone basis as well as a combination of factors. To test whether the trend of export vs import prices be useful in allocating the equity markets, we created a terms-of-trade index based on the imported or export composition for each market and the price of four different exported and imported items – fuel, metal/minerals, agriculture, and manufacturing. For each market, we compare today’s index vs where the index was 18 months ago. For example, if oil prices have gone up compared to where they were 18 months ago, large oil exporters such as Norway or Brazil would have positive terms-of-trade. Conversely, under these circumstances over the same time period, if a market is a large oil importer, such as Japan, its terms-of-trade would be negative. Conversely, when the price of oil has gone down compared to where it was 18 months ago, Norway’s terms-of-trade would become negative and Japan’s positive (as an oil importer). We tested whether overweighting markets with positive terms-of-trade and underweighting markets with negative terms-of-trade was a strategy that produced alpha over a benchmark.
Starting with benchmark country capitalization weights, we re-balanced the country allocation monthly by assigning overweights to markets with higher-than-average terms-of-trade and underweights to markets with lower-than-average terms-of-trade. Each country gets an overweight or underweight allocation relative to the benchmark that is roughly in proportion to the difference between its score and the cross-market average score (with restrictions on the maximum allocation possible to small markets to avoid unrealistically large exposures). The allocation coming the Heckman model is updated each month and performance returns (gross and net of estimated transactions costs) are calculated monthly. Returns are then measured relative to the relevant universe benchmark returns.
Results of Standalone Backtests
The annualized alphas for overweighting markets based on its terms-of-trade trend on a standalone basis using the Heckman Global Allocation model are shown in the following figures. The tests were done across the markets in the MSCI All-Country World Index (ACWI) which include both the developed and emerging markets, across the markets in the MSCI All-Country World Index (ACWI ex US) which include both the developed and emerging markets but excluding the U.S., across the markets in the MSCI World Index (all the developed markets), and across the markets in the MSCI Emerging Market Index (all the emerging markets). Figure 1 shows the hypothetical annualized alphas (gross and net of estimated transaction costs) from January 1990 through November 2023. Figure 2 shows the hypothetical annualized alphas (gross and net of estimated transaction costs) more recently from January 2014 through November 2023³.
What the charts show is the trend in export and import prices can be useful for allocating equity markets. Over the whole period starting in January 1990, it has been most useful for allocating the ACWI markets, the ACWI (excluding the U.S.) markets, and the Emerging Markets. In contrast, allocating markets based on export prices relative to import prices appears to have offered less alpha in allocating the developed markets. In particular, over the last 10 years, performance of the developed markets has been dominated by outperformance of the U.S. market and by tech - rather than by export vs import prices movements.
Figure 1
Figure 2
¹ For Institutional Investors Only
² The Heckman Global Allocation Model is a hypothetical model. Performance results were not actually achieved by any portfolio of the adviser.
³ January 1990 is when the Heckman Global Model started. The Model data goes back to January 1990, and 2014 was trying to represent as close to the recent 10 years
DISCLOSURE:
For Institutional Investors Only. This publication is provided by Heckman Global Advisors (“HGA”), which is not an independent entity but is a Division of DCM Advisors, LLC, a registered investment adviser. The views herein are solely those of HGA and may differ from those of other business units of DCM Advisors, LLC and are subject to change without notice. Nothing contained herein constitutes an offer to sell or a solicitation of an offer to buy any security or any interest in DCM Advisors, LLC vehicle(s).
All investments are subject to the risk of loss, including the potential for significant loss, and it should not be assumed that any models or opinions incorporated herein will be profitable or will equal past performance. Past performance is no guarantee of future results. All returns are illustrative based on the assumptions as outlined. There can be no assurance that the returns could have been achieved or avoid substantial losses. The information contained herein has been obtained from sources believed to be reliable but is not necessarily complete and its accuracy cannot be guaranteed.
Indices are presented herein for illustration purposes only as the Heckman Global Allocation model does not intend to track any index or benchmark. The MSCI All-Country World Index (ACWI) , which includes both the developed and emerging markets, is designed to represent performance of the full opportunity set of large- and mid-cap stocks across 23 developed and 24 emerging markets.
The MSCI All-Country World Index (ACWI ex US) which includes both the developed and emerging markets but excluding the U.S., captures large, mid and small cap representation across 22 of 23 Developed Markets (DM) countries (excluding the United States) and 24 Emerging Markets (EM) countries
The MSCI World Index (all the developed markets), is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. The MSCI Emerging Market Index (all the emerging markets) is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.
These materials are the exclusive property of DCM Advisors, LLC. Unless otherwise expressly permitted by DCM Advisors, LLC in writing, please do not distribute, reproduce or use these materials for any purpose other than internal business purposes solely in connection with the management of investment funds or investment products that are sponsored or advised by you. This publication is not considered a Research report under FINRA Rule 2241(a)(11) and related rules.
DCM-24-07
It is commonlypresented in the media that the higher the GDP growth means the market will have higher performance. In this article, we test this commonly held view using the Heckman Global Allocation Model.
The Heckman Global Allocation Model uses a smart beta(factorased) approach to allocating the global markets using a set of 13valuation and macro-economic investment factors. The model can evaluate theefficiency of each factor for allocating markets on a standalone basis as well combination of factors. We tested on a standalone basis for allocating markets both forecasted GDP for thecurrent year (since one does not know actual GDP until way into the followingyear) and forecasted GDP for the next year using monthly data from January 1990through September 2. (Source: Heckman Global and Consensus Economics)
For each factor we calculated a score for every market each month based on how high the market’s forecasted GDP growth (for current year or next year) is relative to the average market. Starting with benchmark country capitalization weights, we re-balance the portfolio by assigning overweights to markets with higher-than-average forecasted GDP growth and underweights to markets with lower than average forecasted GDP growth. Each country gets an overweight or underweight allocation relative to the benchmark that is roughly in proportion to the difference between its score and the cross-market average score (with restrictions on the maximum allocation possible to small markets to avoid unrealistically large exposures). The portfolio is updated each month and performance returns (gross of transactions costs) are calculated monthly. Returns are then measured relative to the relevant universe benchmark returns.
Results of Standalone Backtests
The annualized alpha for overweighting markets on a standalone basis testing both measures of GDP forecasts (current year and next year) is shown in Figures 1 and 2. The tests were done across the MSCI All-Country World (ACWI) markets which include both the developed and emerging markets, across the MSCI World markets (the developed markets), and across the MSCI Emerging markets. The alpha was negative whether we tested forecasts for the current year or for next year. In other words, the media hype that higher GDP forecasts for a market translate into higher returns relative to other markets does not necessarily hold up.
Disclosure: This publication is provided by Heckman Global Advisors (“HGA”), which is not an independent entity but is a Division of DCM Advisors, LLC, a registered investment adviser. Nothing contained herein constitutes an offer to sell or a solicitation of an offer to buy any security or any interest in DCM Advisors, LLC vehicle(s). The information contained herein has been obtained from sources believed to be reliable but is not necessarily complete and its accuracy cannot be guaranteed. The comments contained herein are opinions and may not represent the opinions of DCM Advisors, LLC and are subject to change without notice. All investments are subject to the risk of loss, including the potential for significant loss, and it should not be assumed that any models or opinions incorporated herein will be profitable or will equal past performance. Copyright © 2023 DCM Advisors, LLC. All Rights Reserved. These materials are the exclusive property of DCM Advisors, LLC. Unless otherwise expressly permitted by DCM Advisors, LLC in writing, please do not distribute, reproduce or use these materials for any purpose other than internal business purposes solely in connection with the management of investment funds or investment products that are sponsored or advised by you. This publication is not considered a Research report under FINRA Rule 2241(a)(11) and related rules.
There has been a lot ofdiscussion on the strength of the U.S. dollar over the past several years andits relationship with rising interest rates. The common belief is that when interest rates in the U.S. rise, the dollar will strengthen. SinceDecember 31, 1988 through August 31, 2023, we have looked at thereal exchange rate [1]ofthe U.S. dollar, which compares the valuation trend of the U.S. dollar relativeto its trading partners and its relationship with changes in the Fed fundsrate. The change in Fed funds rate which we measured is the difference between the Fed fundsrate and its 24-month average. Below is a chart of the two – U.S. dollar realexchange rate valuation and changes in Fed Funds rate.
Below is a table of the correlation between real exchange rate valuation and the change in Fed funds rate. For the whole time, the correlation is low . However, if the period is broken up into periods when the Fed policy has been tight, then the correlation is overall positive.
** Our data only starts late in that tightening cycle
Heckman Global's Conclusion: When the Fed policy has been tight, the valuation of the real exchange rate of the U.S. dollar tends to be positively correlated with changes in Fed Funds rate.
[1] The real effective exchange rate index as a weighted average ofthe CPI-adjusted exchange rates of the U.S. with respect to its six largesttrading partners. Our real exchange rate valuation factor is measured as thedeviation, in percent, of the most recent level of the U.S. dollar realexchange rate from its six-year moving average.
Disclosure: This publication is provided by Heckman Global Advisors (“HGA”), which is not an independent entity but is a Division of DCM Advisors, LLC, a registered investment adviser. Nothing contained herein constitutes an offer to sell or a solicitation of an offer to buy any security or any interest in DCM Advisors, LLC vehicle(s). The information contained herein has been obtained from sources believed to be reliable but is not necessarily complete and its accuracy cannot be guaranteed. The comments contained herein are opinions and may not represent the opinions of DCM Advisors, LLC and are subject to change without notice. All investments are subject to the risk of loss, including the potential for significant loss, and it should not be assumed that any models or opinions incorporated herein will be profitable or will equal past performance. Copyright © 2023 DCM Advisors, LLC. All Rights Reserved. These materials are the exclusive property of DCM Advisors, LLC. Unless otherwise expressly permitted by DCM Advisors, LLC in writing, please do not distribute, reproduce or use these materials for any purpose other than internal business purposes solely in connection with the management of investment funds or investment products that are sponsored or advised by you. This publication is not considered a Research report under FINRA Rule 2241(a)(11) and related rules. DCM-23-92
The current geopolitical risk in the Middle East puts even more into focus commodity price trends and their effect on equity markets. When commodity prices are trending higher, do commodity exporting markets do better and commodity importing do worse? And vice versa. When commodity prices are trending lower, do commodity exporting markets do worse and commodity importing markets do better. In other words, can the trend of export prices relative to import prices be useful in allocating the equity markets?
The Heckman Global Allocation Model² uses a smart beta (factor based) approach to allocating the global markets using a set of 13 valuation and macro-economic investment factors. The model can evaluate the efficiency of each factor for allocating markets on a standalone basis as well as a combination of factors. To test whether the trend of export vs import prices be useful in allocating the equity markets, we created a terms-of-trade index based on the imported or export composition for each market and the price of four different exported and imported items – fuel, metal/minerals, agriculture, and manufacturing. For each market, we compare today’s index vs where the index was 18 months ago. For example, if oil prices have gone up compared to where they were 18 months ago, large oil exporters such as Norway or Brazil would have positive terms-of-trade. Conversely, under these circumstances over the same time period, if a market is a large oil importer, such as Japan, its terms-of-trade would be negative. Conversely, when the price of oil has gone down compared to where it was 18 months ago, Norway’s terms-of-trade would become negative and Japan’s positive (as an oil importer). We tested whether overweighting markets with positive terms-of-trade and underweighting markets with negative terms-of-trade was a strategy that produced alpha over a benchmark.
Starting with benchmark country capitalization weights, we re-balanced the country allocation monthly by assigning overweights to markets with higher-than-average terms-of-trade and underweights to markets with lower-than-average terms-of-trade. Each country gets an overweight or underweight allocation relative to the benchmark that is roughly in proportion to the difference between its score and the cross-market average score (with restrictions on the maximum allocation possible to small markets to avoid unrealistically large exposures). The allocation coming the Heckman model is updated each month and performance returns (gross and net of estimated transactions costs) are calculated monthly. Returns are then measured relative to the relevant universe benchmark returns.
Results of Standalone Backtests
The annualized alphas for overweighting markets based on its terms-of-trade trend on a standalone basis using the Heckman Global Allocation model are shown in the following figures. The tests were done across the markets in the MSCI All-Country World Index (ACWI) which include both the developed and emerging markets, across the markets in the MSCI All-Country World Index (ACWI ex US) which include both the developed and emerging markets but excluding the U.S., across the markets in the MSCI World Index (all the developed markets), and across the markets in the MSCI Emerging Market Index (all the emerging markets). Figure 1 shows the hypothetical annualized alphas (gross and net of estimated transaction costs) from January 1990 through November 2023. Figure 2 shows the hypothetical annualized alphas (gross and net of estimated transaction costs) more recently from January 2014 through November 2023³.
What the charts show is the trend in export and import prices can be useful for allocating equity markets. Over the whole period starting in January 1990, it has been most useful for allocating the ACWI markets, the ACWI (excluding the U.S.) markets, and the Emerging Markets. In contrast, allocating markets based on export prices relative to import prices appears to have offered less alpha in allocating the developed markets. In particular, over the last 10 years, performance of the developed markets has been dominated by outperformance of the U.S. market and by tech - rather than by export vs import prices movements.
Figure 1
Figure 2
¹ For Institutional Investors Only
² The Heckman Global Allocation Model is a hypothetical model. Performance results were not actually achieved by any portfolio of the adviser.
³ January 1990 is when the Heckman Global Model started. The Model data goes back to January 1990, and 2014 was trying to represent as close to the recent 10 years
DISCLOSURE:
For Institutional Investors Only. This publication is provided by Heckman Global Advisors (“HGA”), which is not an independent entity but is a Division of DCM Advisors, LLC, a registered investment adviser. The views herein are solely those of HGA and may differ from those of other business units of DCM Advisors, LLC and are subject to change without notice. Nothing contained herein constitutes an offer to sell or a solicitation of an offer to buy any security or any interest in DCM Advisors, LLC vehicle(s).
All investments are subject to the risk of loss, including the potential for significant loss, and it should not be assumed that any models or opinions incorporated herein will be profitable or will equal past performance. Past performance is no guarantee of future results. All returns are illustrative based on the assumptions as outlined. There can be no assurance that the returns could have been achieved or avoid substantial losses. The information contained herein has been obtained from sources believed to be reliable but is not necessarily complete and its accuracy cannot be guaranteed.
Indices are presented herein for illustration purposes only as the Heckman Global Allocation model does not intend to track any index or benchmark. The MSCI All-Country World Index (ACWI) , which includes both the developed and emerging markets, is designed to represent performance of the full opportunity set of large- and mid-cap stocks across 23 developed and 24 emerging markets.
The MSCI All-Country World Index (ACWI ex US) which includes both the developed and emerging markets but excluding the U.S., captures large, mid and small cap representation across 22 of 23 Developed Markets (DM) countries (excluding the United States) and 24 Emerging Markets (EM) countries
The MSCI World Index (all the developed markets), is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. The MSCI Emerging Market Index (all the emerging markets) is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.
These materials are the exclusive property of DCM Advisors, LLC. Unless otherwise expressly permitted by DCM Advisors, LLC in writing, please do not distribute, reproduce or use these materials for any purpose other than internal business purposes solely in connection with the management of investment funds or investment products that are sponsored or advised by you. This publication is not considered a Research report under FINRA Rule 2241(a)(11) and related rules.
DCM-24-07
What is the relationship of market consensus earnings growth forecasts for a market (aggregated bottom-up from company data)¹ and future country returns?
To answer this question, for each of the MSCI Developed and Emerging markets, each month, we looked both at the consensus forecasted earnings growth for the current year (after all one does not know the actual earnings growth for the current year until early the following year) as well as the consensus forecasted earnings growth for the following year. We correlated both the earnings growth forecast for the current year and the earnings growth forecast for the following year with each market’s MSCI returns over 3 periods:
- Over the next 3 months
- Over the next 6 months
- Over the next 12 months
We cover 23 developed and 24 emerging markets as defined by MSCI. The study utilizes a database and returns covering a 30-plus year period from January 1990 through March 2023 for most developed markets and from August 1992 through March 2023 for many emerging markets. The charts below show the average correlation for developed, emerging, and all markets of forecasted earnings growth with market returns over 3 different periods of time.
These results suggest that at the market level there is little correlation in the near term (3,6, and 12 months out) with earnings growth forecasts and stock prices at the market level.
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¹ I/B/E/S, Heckman Global Advisors, Bloomberg
Disclosure: This publication is provided by Heckman Global Advisors (“HGA”), which is not an independent entity but is a Division of DCM Advisors, LLC, a registered investment adviser. The region and sector allocations recommended herein are solely those of HGA and may differ from those of other business units of DCM Advisors, LLC. Nothing contained herein constitutes an offer to sell or a solicitation of an offer to buy any security or any interest in DCM Advisors, LLC vehicle(s). The information contained herein has been obtained from sources believed to be reliable but is not necessarily complete and its accuracy cannot be guaranteed. The comments contained herein are opinions and may not represent the opinions of DCM Advisors, LLC and are subject to change without notice. All investments are subject to the risk of loss, including the potential for significant loss, and it should not be assumed that any models or opinions incorporated herein will be profitable or will equal past performance. Copyright © 2023 DCM Advisors, LLC. All Rights Reserved. These materials are the exclusive property of DCM Advisors, LLC. Unless otherwise expressly permitted by DCM Advisors, LLC in writing, please do not distribute, reproduce or use these materials for any purpose other than internal business purposes solely in connection with the management of investment funds or investment products that are sponsored or advised by you. This publication is not considered a Research report under FINRA Rule 2241(a)(11) and related rules. DCM-23-47
It is commonlypresented in the media that the higher the GDP growth means the market will have higher performance. In this article, we test this commonly held view using the Heckman Global Allocation Model.
The Heckman Global Allocation Model uses a smart beta(factorased) approach to allocating the global markets using a set of 13valuation and macro-economic investment factors. The model can evaluate theefficiency of each factor for allocating markets on a standalone basis as well combination of factors. We tested on a standalone basis for allocating markets both forecasted GDP for thecurrent year (since one does not know actual GDP until way into the followingyear) and forecasted GDP for the next year using monthly data from January 1990through September 2. (Source: Heckman Global and Consensus Economics)
For each factor we calculated a score for every market each month based on how high the market’s forecasted GDP growth (for current year or next year) is relative to the average market. Starting with benchmark country capitalization weights, we re-balance the portfolio by assigning overweights to markets with higher-than-average forecasted GDP growth and underweights to markets with lower than average forecasted GDP growth. Each country gets an overweight or underweight allocation relative to the benchmark that is roughly in proportion to the difference between its score and the cross-market average score (with restrictions on the maximum allocation possible to small markets to avoid unrealistically large exposures). The portfolio is updated each month and performance returns (gross of transactions costs) are calculated monthly. Returns are then measured relative to the relevant universe benchmark returns.
Results of Standalone Backtests
The annualized alpha for overweighting markets on a standalone basis testing both measures of GDP forecasts (current year and next year) is shown in Figures 1 and 2. The tests were done across the MSCI All-Country World (ACWI) markets which include both the developed and emerging markets, across the MSCI World markets (the developed markets), and across the MSCI Emerging markets. The alpha was negative whether we tested forecasts for the current year or for next year. In other words, the media hype that higher GDP forecasts for a market translate into higher returns relative to other markets does not necessarily hold up.
Disclosure: This publication is provided by Heckman Global Advisors (“HGA”), which is not an independent entity but is a Division of DCM Advisors, LLC, a registered investment adviser. Nothing contained herein constitutes an offer to sell or a solicitation of an offer to buy any security or any interest in DCM Advisors, LLC vehicle(s). The information contained herein has been obtained from sources believed to be reliable but is not necessarily complete and its accuracy cannot be guaranteed. The comments contained herein are opinions and may not represent the opinions of DCM Advisors, LLC and are subject to change without notice. All investments are subject to the risk of loss, including the potential for significant loss, and it should not be assumed that any models or opinions incorporated herein will be profitable or will equal past performance. Copyright © 2023 DCM Advisors, LLC. All Rights Reserved. These materials are the exclusive property of DCM Advisors, LLC. Unless otherwise expressly permitted by DCM Advisors, LLC in writing, please do not distribute, reproduce or use these materials for any purpose other than internal business purposes solely in connection with the management of investment funds or investment products that are sponsored or advised by you. This publication is not considered a Research report under FINRA Rule 2241(a)(11) and related rules.