Quantitative Equity Research_ Quant Matters – Factors Amidst Tariffs and Derivatives

Summary of Key Points from the Conference Call Industry Overview - The report discusses the impact of tariffs on various markets, specifically focusing on the US, Europe, and Japan, highlighting the uncertainty created by tariff announcements and their implications for economic growth and profitability [2][13][14]. Core Insights and Arguments - Tariff Impact: Tariffs have introduced significant uncertainty affecting disinflation paths, growth prospects, the yield curve, and the dollar. The focus for investors has shifted towards profitability from quality factors [2][13]. - Market Resilience: Stocks with higher domestic revenue exposure are more resilient to market shocks caused by tariffs, outperforming the broader market during periods of tariff announcements [13][40]. - Economic Cycle Update: The economic cycle in the US has shifted from 'recovery' to 'expansion', while the inflation regime in Japan has changed from 'stable' to 'rising' [5][6][24]. - Interest Rate Expectations: The Federal Reserve is expected to implement only one rate cut in June 2025, down from previous expectations of two cuts, due to ongoing tariff uncertainties [13][24]. Regional Insights United States - Recommended Factors: The recommended investment factors include Low PEG, R&D-to-market cap, and Profitability. These factors have shown reduced sensitivity to changes in the 10-year Treasury yield, indicating potential resilience in a volatile market [45][46]. - Market Beta: The market beta for top quintile stocks in these factors has decreased, suggesting they may be more resilient during market corrections [46]. Europe - Recommended Factors: Key factors include Up vs. Down earnings revision (3ma), Free Cash Flow Yield, and Net Buyback Yield. These factors have shown defensive characteristics, particularly in weak market conditions [57][58]. - Market Performance: The MSCI Europe index is close to the strategist's price target, with tariffs posing downside risks [58]. Japan - Recommended Factors: The focus is on Net Buyback Yield, Disfavoring Small Size, and Low PEG. The emphasis is on domestic factors that are less affected by tariffs, with a positive outlook on corporate governance improvements [67][68]. - Market Dynamics: The report notes that long-term yields in Japan have risen sharply, which is generally unfavorable for smaller firms [68]. Additional Important Insights - Volatility Analysis: The report highlights increased volatility in equity markets following tariff announcements, with significant fluctuations observed in the VIX, VSTOXX, and VNKY indices [15][19]. - Performance Metrics: The analysis of factor performance on the first trading day after the tariff announcement showed that Low Volatility and Large Cap stocks outperformed, while the performance of Growth vs. Value was less clear [31][41]. - Tariff Resilience Screening: A stock screening process was developed to identify stocks likely to be resilient amidst tariff-related market shocks, with results indicating outperformance compared to respective markets [78][80]. This summary encapsulates the critical insights and recommendations from the conference call, providing a comprehensive overview of the current market dynamics influenced by tariffs and economic conditions across different regions.