Podcast QIS #1 English transcription
Podcast QIS #1 English transcription
Ankit
Hello everyone, thank you for joining.
This is our first QIS podcast covering the challenges and opportunities related to the risk premia space. I am your host Ankit Gheedia, I am the Head of QIS Research at BBVA. I have 15 years of experience covering equities, volatility, thematics and cross-asset research.
I am joined today by Sidharth. Sid, why don’t you introduce yourself.
Sid
I am Siddharth Grover, I am the Head of QIS Product Development at BBVA. I have been part of the QIS Business across asset classes for the last 18 years, and prior to joining BBVA in 2021 to head the QIS Product, I was previously with US and Japanese banks.
Question: At the start of the year what is your outlook for the markets in 2025?
Ankit
The title of our house view publication for 2025 is “Navigating Increasing Global Divergence”, which points to increased global dispersion across regions as well as across asset classes.
We see Trump’s election victory as another regime shift in the global economy after moving away from the pessimistic scenario of a hard landing at the beginning of last year, to a no-landing scenario towards the end of last year.
Over the past three months we have seen somewhat of a return to a reflation regime, with a steeper yield curve and financials outperforming.
We expect the new reflation regime to remain intact in 2025 with a more dominant theme of US exceptionalism. And we have already seen markets move in this direction.
We are overweight developed market equities, while we have a neutral view on emerging markets.
Our overweight DM equity view is driven by a relatively positive outlook on US equities vs. their European counterparts.
We are underweight German equities and see the recent outperformance of German equities as rather puzzling. It seems EURUSD is pricing in a much more negative outlook towards the eurozone economy, politics and tariff risks than for the eurozone equity markets, especially given that the biggest US trading partner in the eurozone is Germany.
In the fixed income space we are overweight European government bonds while we are neutral on the US equivalent. This is a reflection of the relative growth differential we expect between the two regions.
In FX we believe in a strong USD and are underweight EM FX.
Question: What is trending in the QIS space?
Sid
Last year was an interesting year. Equities Beta overall had a good year in 2024, particularly in the second half of the year, as risk-on sentiment returned to the forefront. Our Small Cap and Tech Indices, such as AI & VR in the thematic space and Sector-Neutral Factor Indices have done well to capture the Beta and the upswing in the market.
On the risk premia side of things, both Carry and Trend /CTA trackers (NEIXCTA Index) had a good first quarter, and tough second and third quarters, as geopolitical volatility took centre stage together with Sovereign Debt concerns in Europe, which impacted credit spreads.
- Global FX carry suffered as the Japanese yen appreciated and LatAm currencies depreciated.
- Rates Carry had a mixed year, gaining in the first half as rates rallied and before falling as a result of geopolitical volatility.
- Equity Vol Carry strategies such as Put Spread Collar did well, recovering from the geopolitical shocks resulting from the US elections.
- The FX Trend suffered in the second and third quarters, with some frameworks performing better than others.
- A similar playbook was seen for Credit and Rates trend strategies, where some frameworks in the market recovered a portion of the losses while others continued to drop.
Overall, a mixed bag where asset and design diversification made a difference to how strategies were able to mitigate portfolio risk.
Question: How does your market view align with risk premia strategies for 2025?
Ankit
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 the need to diversify and the need for risk premium strategies in portfolios.
We need to remember this is a very rare occurrence. Outside the late 1990s, this has only happened twice in the past 100 years. And in both instances the cumulative return in the subsequent two years was negative.
In our base-case scenario we don’t see a repeat of the late 1990s. I don’t think anyone does.
An optimistic outlook for US equities is at best for high single-digit returns, although I think there is much more pronounced downside risk to equity markets than upside risks.
In such an environment I strongly believe risk premia strategies should make a comeback and be in demand again over the course of this year.
In particular, I prefer trend strategies given the potential for positive returns in both upside and downside markets.
The defensive bias provided by trend-following strategies will be much-needed in the current environment where the market outlook could change rapidly based on new government policy and events.
Question: What should investors be mindful of when thinking about trend strategies?
Sid
Trend strategies in themselves follow a convex payoff where gains are seen when trends are strong in either direction vs. short-term reversals i.e., mean reversion periods.
The design of such a framework plays a very important role, and at BBVA we focus on macro fundamentals in design as well as volatility as a factor, in addition to price movement, to ensure the design is robust and rooted in fundamentals.
Volatility as part of the design framework is extremely interesting:
▪ During periods of high volatility, the medium- or long-term past is not very reflective of the ability of history to predict the future, and in periods of relatively low volatility, the assets are prone to shocks, leading to spikes in volatility usually accompanied by a sell-off in risk assets, as well as extended periods of sideways movement, which is an enemy of trend risk premia.
▪ This is one of the reasons that our frameworks have been able to manage the geopolitical volatility comparatively better than CTA benchmarks.
▪ The impact of expected geopolitical, earnings and inflation-generated volatility in markets on different assets could be different, so multi-asset strategies – either long/short or long only – could be beneficial, depending on risk appetite. A well-designed Multi-Asset Risk Premia or Long-Only Allocator could be an interesting play in 2025.
Question: Ankit, what is your preference in terms of asset classes for trend strategies?”
Ankit
As I said at the start, we expect to be navigating increasing global divergence. This means increased global dispersion across regions as well as across asset classes. As a result, my bias would be to consider multi-asset trends.
Even when we look at bond-equity correlation, it has been volatile since the COVID crisis. As such, having a multi-asset trend approach is likely to be prudent, in my view.
We expect global markets to remain rangebound, although the ranges have clearly become wider due to perceived uncertainty regarding economic and monetary policies.
One clear example of this is the rising term premiums in the fixed-income space, where investors are demanding higher yields to pay for this uncertainty.
Vol is on the rise across asset classes. While in the first year of the last Trump presidency we saw volatility get crushed, I expect 2025 to look more like 2019 and thus be a good year for trend-following strategies.
With that, we 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.