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Summary of BNP Paribas MarFA™: Risk Premia Too Low for Some Assets?

Core Content

BNP Paribas MarFA™ is a cross-asset correlation framework that identifies market factors and potential trading opportunities. It monitors the correlations, driving factors, and valuations of 75 assets across rates, equities, credit, FX, and commodities. The framework uses historical data over the past twelve months to signal mispricings in assets that are likely to correct within the next 1-2 months.

Main Macro Factors

The following are the key macro factors identified by MarFA™:

1. US 10y real yields

   • This is the most significant factor, explaining approximately 55% of the total variance in the asset universe.
   • Influences rates, equities, FX, credit, and commodities.

2. Economic activity data

   • Captured through timely economic surveys such as the US ISM and PMI surveys.
   • Particularly important for high beta assets like EM equities and FX.

3. Commodity prices

   • Explains only about 5% of the variation across the asset universe.
   • Still relevant for real rates and certain FX pairs (EURNOK, NZDUSD).

Key Findings

• Overvalued assets:

  • MSCI World, MSCI Korea, and the Nikkei are overvalued by 2-5%.
  • French 2y government bond yields are too low by 15 basis points.
  • US investment grade credit is overbought by around 1%.
  • EURUSD is overvalued by almost 2%.

• Underperforming assets:

  • MSCI Brazil and MSCI South Africa are undervalued by -1.8 and -1.6 respectively.
  • USDZAR is undervalued by -1.3.
  • UK 10yr and US 2yr bonds are undervalued by -1.2 and -1.2 respectively.
  • Japan 2yr bond yields are undervalued by -1.1.
  • MSCI Mexico is undervalued by -1.1.

Political Risk and Risk Premia

• Italy:

  • The widening of the German-Italy 10y yield spread has moved back towards its MarFA™ fair value.
  • The decline in Italian equities has been in line with the broader market.
  • There is little idiosyncratic risk premium priced into Italian assets.
  • The outcome of the upcoming elections remains uncertain and could impact markets.

• UK:

  • The decline in gilt yields and the GBP has aligned with MarFA™ fair value.
  • No significant risk premium is priced into UK assets.
  • There is potential for the market to add GBP shorts, indicating room for adjustment.

EURUSD Overvaluation

• EURUSD is overvalued by both MarFA™ and STEER™ models.
• The pair has moved from being undervalued to overvalued, corresponding with positioning shifting from moderate short to extreme long.
• This suggests a potential correction if risk premia increase.

Legal Notice

• This document is a marketing communication and not investment research.
• It may be subject to conflicts of interest due to interactions with sales and trading.
• It is intended for professional clients and eligible counterparties.
• BNP Paribas may engage in transactions inconsistent with the views expressed.
• The information is for informational purposes only and does not constitute a prospectus or public offering.
• Past performance is not indicative of future results.
• No liability is accepted for any use of the information provided.

US Disclosures

• Options and ETFs discussed may involve significant risks.
• Certain securities may be restricted and only available to Qualified Institutional Buyers or non-US persons.
• BNP Paribas may have multiple interests in the companies involved and may act as an Authorized Participant, market maker, or advisor.

Regulatory Information

• The document is produced by BNP Paribas London Branch, authorized by ECB, ACPR, and FCA.
• In France, it is distributed by BNP Paribas SA and BNP Paribas Arbitrage.
• In Germany, it is distributed by BNP Paribas Niederlassung Deutschland.
• In Belgium, it is distributed by BNP Paribas Fortis SA/NV.

Conclusion

MarFA™ highlights that only a few assets are currently mispriced. These assets, including global, Korean, and Japanese equities, French 2y bonds, US IG credit, and EURUSD, are likely to correct in the next 1-2 months. The framework suggests that political risks in Italy and the UK have not yet been fully priced into their assets, indicating potential for further market movements.