August – Research & performance reporting

1. Macro and Market Perspectives – Thinking qualitatively

The risk aversion of investors towards US stocks has been rising of late, with positive earnings surprises triggering negative reactions on average, something that happened for the last time in 2011.

SP500_EPS_BG

In a counterbalancing manner, the USD has significantly depreciated (-9%) against its trade basket. This is a situation that seems to be likely to last for some time. The winners in this scenario are the global US large cap firms, which report earnings in USD, though their markets are global. The big losers are the smaller domestic firms and in particular the retailers, which see the cost of their imports libelled in USD increase sharply, while their margins are being eroded by the newly emerged digital distribution champions. By the way, this latter point helps to contain inflation.

Despite a situation of low noise but ongoing political instability in the US, growth related to consumption is strong and the expected reflation promised by president Trump is not necessarily required, as it might lead to overheating.

Overall, while the increased political uncertainty in the US has led to a risk based repricing of stocks (hence the poor market reaction to the Q2 earnings annoucements) , the macroeconomic situation looks sound with a current GDP growth level of 3%.

US_GDP_BG

However, leaving aside share-buybacks and related financial engineering, in the US, the trend towards rising profits seems to have clearly stopped for some time now. This means that not everybody is benefitting equally from such growth. Looking ahead, the possibility of interest rates rising further also makes long-only investing more risky than low beta & long-short strategies.

US_PROFITS_BG

Overall our view is that the US economy is benefiting from a growth level above escape velocity. US large caps are taking advantage from a weak USD, while the new digital retail distribution model limits considerably the risk of overheating and inflation. In this context, stock selectivity and active management should be kings.

Bramham_Gardens_Event

2. Artificial Intelligence US Investment Strategies – Results from the Research Lab

During this month of August, we globally got the trend right. The only issue is that we have been surprised by the fact that Q2 earnings results clearly above analyst expectations have led to substantial, sometimes even close to double digit, drops in price (NVIDIA, ULTA,…).
Despite these surprises that indicate some changes in mood in the US market, we have succeeded in capturing a positive performance above 1% on the Long-Short strategy, thanks to the noted contribution of the Short leg.

The Long leg is in positive territory, performing better than the SP500 this month. As a result, the Long-only strategy is 7.80% ahead of the SP500 year-to-date.

Obviously, these theoretical strategies are presented for research purposes in order to outline the power of Artificial Intelligence. They are measured gross of any cost & fees and assuming stock loan availability as well as no slippage. Returns are log-returns.

The Long-Short A. I. strategy

Long-Short Price based
Year to end of August 6.21%
August 1.21%

The Long-only A. I. strategy

Price based – ex dividends SP500 Long
Year to end of August 9.89% 17.70%
August 0.05% 1.11%

We are available to discuss with you our work : contact@bramham-gardens.com



RELATED POSTS