Macroeconomic

Global Economy Indicator

A good macroeconomic indicator should allow investors to get a bird's eye view of the real global economy, so they can spot impending recessions in advance or identify market exaggerations before they burst in order to position their portfolios accordingly. However, because macroeconomic data is reported with a lag, many macro indicators detect recessions and bubbles only after they have already occurred or burst, rendering them essentially useless. However, after extensive research, we have developed an indicator that addresses this problem thanks to two important aspects.

Leading Economic Data

Gathering Atypical Data

The first idea is to use economic data with a short time lag to accurately "nowcast" (or even forecast, if possible) global GDP or, more generally, economic activity. An accurate "nowcast" provides an advantage over investors waiting for official data, but at the price of a much longer lag. Therefore, our macroeconomic indicator uses monthly global data and, to further shorten the lag, even weekly and daily U.S. data, which is extremely timely considering that major economic data are typically updated quarterly.

Identifying Inflection Points

Time Series Analysis

It should not be surprising that the current state of the global economy is usually priced in and thus contains almost no predictive power about future equity market returns. Even the trend (or rate of change) of the global economy is closely watched by investors so that it is of little use in predicting future equity market returns. To construct a macroeconomic indicator with predictive power, we believe it is crucial to focus on the change in the rate of change (i.e., observe the sign of the second derivative) to see whether the trend will continue or not.

Deliver a Clear Signal

A Simplified Indicator

Alquant offers the result of its analysis in the form of an indicator ranging from 0% to 100% on a daily basis. The value of the Macroeconomic indicator is inversely proportional to the exposure to global equity markets that an investor should take in order to maximise his risk-adjusted return. For example, a value of 20% indicates that an 80% exposure to the underlying index is optimal in terms of risk and return.

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