What Why - MSCI Economic Regime Allocator Indexes

What are the MSCI Economic Regime Allocator Indexes?

These are indexes that allocate into different exposures based on pre-determined set of rules. They are allocating to different asset classes and sectors, and are driven by macro variables.

Why should you consider MSCI Economic Regime Allocator Indexes?

Financial markets go through different cycles or phases, and during those different types of assets or different stocks may perform differently. Stocks with different fundamentals or with different revenue types may also have quite diverging performances over time. To match this behavior, investors may choose a rule-based approach, where allocation to different exposures in the market is driven by pre-determined factors and represented by an index.

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MSCI Economic Regime Allocator Index offerings:

How are the MSCI Economic Regime Allocator Indexes constructed?

The indexes are based on four economic regimes, defined by whether the rate of change of GDP and CPI are positive or negative. The four regimes are:

How are the four regimes defined?

The four regimes are defined rate of change of GDP and CPI, which are based on high frequency nowcast data from our data partner QuantCube, who estimate those measures for various economies on daily basis, ahead of official release.

For GDP, we use GDP Nowcast, which uses real time and alternative data and official inputs to estimate the level of GDP ahead of official release. For example, USA GDP nowcast is a 3 months leading indicator and has 95% correlation with official USA GDP.

For CPI, we use CPI Nowcast, which is estimating the level of CPI ahead of official release - 10 days in advance of Consensus Publication & 14 days in advance of Official Numbers, For example, USA CPI nowcast has 97% correlation with official USA CPI.

Based on short (one week) and long (one month) term change of the QuantCube GDP Growth Indicator and QuantCube Inflation indicator, the relevant regime is defined. Macro signals are based on USA economy for USA and USA and China for World.

What is the allocation in different regimes?

Economic Regime Sector Allocator Indexes allocate to sectors based on the historical performance of such sectors in different Economic Regimes1. Additionally, it invests in full sector portfolios in GDP-rising scenarios and 50% in sector portfolios and 50% in cash in GDP-falling scenarios.

  Stagflation Heating Up Slow Growth Goldilocks
Energy 12.5%     25%
Materials   25%   25%
Industrials       25%
Consumer Disc   25%    
Consumer Stap 12.5%   10%  
Healthcare 12.5% 25% 10%  
Financials     10%  
IT   25%   25%
Comm Services     10%  
Utilities 12.5%   10%  
Cash equivalent 50%   50%  

Economic Regime Asset Allocator Indexes allocate different proportion to equities, cash and US treasuries in different Economic Regimes. Within equities, the performance is further broken down by sector similar to the Economic Regime Sector Allocator Indexes.

  Stagflation Heating Up Slow Growth Goldilocks
Energy 5%     15%
Materials   20%   15%
Industrials       15%
Consumer Disc   20%    
Consumer Stap 5%   4%  
Healthcare 5% 20% 4%  
Financials     4%  
IT   20%   15%
Comm Services     4%  
Utilities 5%   4%  
US treasuries     80% 40%
Cash equivalent 80% 20%    

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Footnotes - MSCI Economic Regime Allocator Indexes

1 Monthly active returns over MSCI World Index (December 1975 to August 2012)