Cycle Factors for Chinese Equity Sector Rotation

Summary

The document describes a qualitative and quantitative approach to sector rotation based on economic cycles. It treats commodity prices, represented by the CRB spot index, as a timely gauge of the real economy, and links long, medium, and short cycles with investment style, valuation, and market direction. For Chinese industry indices, it identifies 21-, 42-, and 100-month components as shared drivers, while noting that these differ from cycles emphasized in a broader global analysis.

Its allocation model extracts those three signals from an equal-weighted index of six sectors using Gaussian filtering, fits each sector’s year-over-year log series with a multiple linear regression, and ranks sectors by predicted next-period returns. A historical backtest from March 2005 to January 2018 reports positive excess returns after a stated transaction cost. The document also specifies a 50-month training window and discusses sensitivity to window length, Fourier padding, and filter decay. Its evidence is historical and model-based; the authors caution that cycle relationships may fail.

Key ideas

• The model uses commodity prices as a proxy for the state of the real economy.
• It associates long, medium, and short cycles with investment style, valuation, and near-term market direction.
• The proposed Chinese sector signals have periods of 21, 42, and 100 months.
• Gaussian-filtered cycle factors feed sector regressions and next-period return rankings.
• The reported backtest is historical evidence, and the authors warn that the relationships may stop working.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.