Gavekal Capital: Dollar Dictated Returns In April - Except This Time The Lowest Correlated Outperformed

Friday, May 1, 2015

Dollar Dictated Returns In April - Except This Time The Lowest Correlated Outperformed

With April in the rearview mirror, it's a good time to look back on which factors had the strongest relationship to market over the past month. USD correlation had the tightest relationship to the market. This isn't all that surprising given that USD correlation has had the third highest r-square value (0.94) over the past year. What is surprising (sort of) is that the stocks with the lowest correlation to the USD were the best performers in April. This is the exact opposite that has been the case over the past year.

MSCI World Index Factor Scoring Model

One way that we measure factor relationships is by putting all the stocks into 10 groups (deciles) from highest correlation (1) to lowest correlation (10). Stocks that were in the 9th and 10th (least correlated) deciles returned on average 6.1% in April. Stocks in the 1st decile (most correlated) returned just 1.5%. This is the exact opposite trend that has taken place over the past year. Stocks that are the most correlated to the USD are up 32$ while stocks with the lowest correlation are down -5% over the past year.

About Gavekal Capital

Gavekal Capital is a US registered investment advisory firm that manages the Gavekal Knowledge Leaders Strategy. Knowledge Leaders are a group of the world’s leading innovators with deep reservoirs of intangible capital. These companies often possess competitive advantages such as strong brand, proprietary knowledge or a unique distribution mechanism. Knowledge Leaders are largely service-based and advanced manufacturing businesses, often operating globally. Gavekal Capital seeks to identify the world’s leading knowledge companies through a proprietary process that analyzes corporate knowledge investments.
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