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BNP Paribas MarFA™ Summary

Overview

BNP Paribas MarFA™ is a cross-asset correlation framework used to identify driving factors and trading opportunities across various asset classes. It evaluates the fair-value of 75 assets, including equities, rates, credit, FX, and commodities, based on macroeconomic and market factors. The framework provides trading signals for overbought/oversold assets, suggesting potential corrections within 1–2 months.

Key Points

• MarFA™ Macro focuses on long-term correlations (12-month) and identifies macro factors influencing asset performance.
• MarFA™ Trading is a short-term variant that highlights market factors affecting assets.
• The framework recommends monitoring macro and market factors closely to identify mispricings and potential trading opportunities.
• A buy cheap, sell expensive strategy based on MarFA™ signals has historically delivered a Sharpe ratio of 0.5 since its launch in September 2016.
• Since the last update on 16 January 2018, the Sharpe ratio of the portfolio has improved to 0.7.

Core Content

Equity Markets

• The Nikkei 225, FTSE 100, Germany's DAX, Swiss SMI, and Canada's TSX are identified as oversold following a recent sell-off.
• The S&P 500 has recoupled with its fair-value.
• MSCI EM has corrected to fair-value after being overvalued in January.
• MSCI South Africa, MSCI Mexico, MSCI South Korea, and MSCI India are oversold, but the deviation is less than two standard deviations, so it does not trigger a significant signal.

Interest Rates

• US 10y nominal yield and US 10y real yield are still overvalued by approximately 18.8bp and 20bp, respectively.
• Italian and Australian 10y yields are too low.
• Major credit indices appear fairly valued due to recent declines in fair-values.

Commodities

• Oil, gold, and platinum have all seen corrections but remain overvalued:
  • WTI oil: Fair-value is USD 59, currently 8.3% overvalued.
  • Gold: Fair-value is USD 1,302, currently 2.3% overvalued.
  • Platinum: Fair-value is USD 969, currently 2.5% overvalued.

FX Markets

• GBPUSD and EURSEK are overvalued by 2.6% and 2.2%, respectively.
• USDJPY, AUDUSD, and EURPLN are undervalued by 2.6%, 2.1%, and 1.9%, respectively.

Trading Signals

The following assets are expected to correct within the next 1–2 months:

• Equities: Nikkei 225, FTSE 100, DAX, SMI, TSX (oversold).
• Rates: US 10y nominal and real yields (overvalued), Italian and Australian 10y yields (undervalued).
• Commodities: Oil, gold, and platinum (overvalued).
• FX: GBPUSD, EURSEK (overvalued), USDJPY, AUDUSD, EURPLN (undervalued).

Fair-Value Deviations

Main Macro and Market Factors

Macro Factors

1. Economic activity: Measured via PMIs, this is the most important factor for equities and credit.
2. Inflation expectations: Based on 5y5y inflation and surveys, important for 10y rates and curves.
3. Economic data surprises in developed markets (especially the US): Important for USD FX pairs and fixed income.

Market Factors

1. US 5y real yields: Influence across rates, equities, FX, credit, and commodities.
2. Implied volatility: Especially important for equities and credit.
3. Risk appetite: Measured by the BNPP Risk Premium Index (BNPSGRP Index), most important for equity markets.

Key Observations

• Global equities have converged back to fair-value.
• Commodity prices are still overvalued despite recent corrections.
• Credit markets are fairly valued as fundamentals have declined.
• FX pairs show a mix of overvaluation and undervaluation, with some pairs like USDJPY and AUDUSD showing significant undervaluation.

Disclaimer

This document is a marketing communication and is not investment research under MiFID II. It may contain Research as defined under MiFID II unbundling rules and is intended for Relevant Persons only. It is not an offer to sell or a solicitation to buy any financial instrument. The information and opinions are based on public sources and internal models and are subject to change. There is no guarantee of accuracy or completeness, and no liability is accepted for any losses arising from reliance on this document.