Photographer: Qilai Shen/Bloomberg

Quant Model Triggers Buy Signal for China Stocks, Emerging Bonds

  • Societe Generale strategists favor less equity risk overall
  • French bank is top ranked in Extel survey for global strategy

Chinese equities, euro-zone fixed income and emerging-market bonds will deliver the highest returns over the next 12 months, according to top-ranked Societe Generale SA, whose strategists use market timing signals from quantitative models to decide where to invest.

That comes as the team, led by the firm’s Paris-based global head of asset allocation, Alain Bokobza, say now is the time to reduce overall allocations to global equities as dwindling expected returns indicate the end of the current bull market isn’t far off. They’ve tripled the proportion of government bonds in their portfolio to 25 percent over the past year, despite Treasuries remaining at minimum levels, and slashed the American stocks allocation in half to just 10 percent.

The catch for getting bullish on Chinese shares is that you’ll have to stomach some of the highest expected levels of volatility of any asset anywhere in the world over the next 12 months, according to Bokobza’s team. SocGen was ranked No. 1 in global strategy research for a 14th consecutive year in 2017 and also placed first for quantitative research in the Extel survey of votes from institutional investors.

Here are their key recommendations and other market observations:

  • Expected returns and volatility trends are improving for government bonds relative to equities
  • Over the past three months, anticipated returns are down across all asset classes with equities down most
  • Within government bonds, model prefers emerging markets and euro-area government bonds
  • Keeping zero allocation to commodities

Here are the total returns and risk metrics from SocGen’s three strategies associated with its model, which it calls Q-Map, since 1994 (Data prior to September 2005 is based on back-tested results.)

Risk-averseRisk-balanced Dynamic 
Annualized return 6.7%7%7.9%
Volatility 7.2%8.8%11.2%
Sharpe ratio 0.910.770.69
Maximum drawdown 22%27%33%
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