BBVA QIS Podcast Transcription
Ankit: Hello Everyone Thank you for joining our monthly podcast covering the challenges and opportunities in the risk premia space. Today’s focus is our risk premia outlook that we released earlier this month I am your host, Ankit Gheedia, Head of QIS Research at BBVA Global Markets. I am joined today by Luigi. Luigi, why don’t you introduce yourself?
Luigi: Thank you Ankit. I am Luigi Alfarano, and I’m responsible for QIS and Index solutions origination at BBVA in Europe. “So Ankit, you published a risk premia outlook recently. Tell us a bit more about your thinking”
Ankit: Yes Luigi, we recently published our risk premia outlook covering trend carry and value strategies across bonds, FX and credit markets. It is currently a very challenging environment to write market outlooks. We have been living in unprecedented times since the start of the year, with a once-in-a-career shift in • German fiscal policy, • US trade policy and • transatlantic relationships We believe the current environment supports the use of quantitative tools and frameworks based on evidence to drive potential investment outcomes.
Luigi: “What is your one word summary” Ankit: Dispersion • For the past two years US equities have delivered an annual return of more than 20% • In such years it’s very hard to argue in favour of diversification • Also this is a very rare occurrence, outside late 1990s and this has only happened twice in the past 100 years And in both instances the cumulative return in the subsequent two years were negative:
• Diversification is clearly making a come back this year
• US exceptionalism is fading, driving a rotation among global equity markets
• Geopolitics and fiscal policy divergence is driving dispersion in the fixed income and currency markets. Average pairwise dispersion within our family of risk premia indices is near record low levels, which also supports dispersion and diversification being the new normal.
Luigi:“So what’s the trade”
Ankit: The credit trend is currently screening high on our risk-premia allocation metrics. Our credit-trend score indicator is near its all-time highs, which has historically led to a strong performance for credit trend strategies. Our macro volatility indicator also suggests positive returns for trend strategies in general during 2025. In addition, FX carry was the worst performer since the global JPY carry unwind and is starting to make a comeback. We see the stars aligning for carry strategy again once we have more clarity on US trade policy.
Luigi:“What about defensive strategies”
Ankit: Since the middle of last year we have seen equity and FX vol rise on average. The risk appetite in equities has faded more acutely since December. The equity skew has been climbing and the put call ratio has also been rising steadily, which seems like a largely anticipated correction. Overall volatility and fixed income have not delivered their traditional hedging characteristics in the post-COVID world. Although gold has recently proved to be a good diversifier with its crisis alpha We believe adding risk-premia strategies to portfolios, particularly trend could reap benefits. We like Credit trend, with the FX trend next in our line of preferences followed by the bond trend, particularly given the US policy under the new administration looks set to drive long-end bond yields lower. So Luigi what are our clients telling us?
Luigi: These days clients are prioritising mitigating risks and capitalising on volatility, as the markets are still uncertain and valuations stretched. They are adopting dynamic, quantitative approaches, such as tail risk and conventional hedging strategies, including puts and variance swaps. QIS innovations are providing crucial flexibility, enabling more tactical shifts in portfolios. We know that one strategy doesn’t fit all, therefore, diversification is key, even when building a defensive portfolio. On the other hand, in this mean-reverting market regime, trend-following strategies have been selectively reconsidered.
Ankit: That’s interesting Luigi. Trend strategy is indeed starting to look interesting on our macro framework. What are investors feeling about trend-following strategies right now?
Luigi: Trend-following strategies are under scrutiny in today’s markets, where sustained trends are less frequent. While they worked well in directional environments like 2022, their effectiveness now depends on selective integration. In fact, these strategies can still enhance portfolio convexity and provide downside protection in specific scenarios. Investors are, therefore, evaluating their role carefully to avoid introducing unnecessary volatility while ensuring alignment with broader defensive frameworks. Flexibility and tactical adjustments are key, as they allow trend-following strategies to play a valuable role in strengthening portfolios without compromising resilience in volatile markets. Ankit, any final words?
Ankit: Yes, please get in touch with your BBVA sales representative to get a copy of our risk premia outlook We have launched a new framework to analyse various risk-premia strategies We have looked through a number of macro indicators to identify the best ones for each of our risk-premia strategies I don’t want to spill all the beans here so please get in touch to discuss our process. With that, we will end our podcast. Thank you for listening, and please get in touch if you have any questions or would like to discuss these ideas any further.