Interactive Investor

eyeQ: what to do about gilts?

interactive investor has teamed up with the experts at eyeQ who use artificial intelligence and their own smart machine to generate actionable trading signals. Here’s what it says about gilts.

3rd April 2024 10:59

Huw Roberts from eyeQ

"Our signals are crafted through macro-valuation, trend analysis, and meticulous back-testing. This combination ensures a comprehensive evaluation of an asset's value, market conditions, and historical performance." eyeQ

Trading signal: strategic long-term model
Macro relevance: 70%
Model value: £10.12
Fair Value Gap: +1.73% premium to model value

Data correct on 3 April 2024. Please click glossary for explanation of terms.

The interactive investor platform offers investors the opportunity to invest in bonds as well as equities. iShares Core UK Gilts ETF GBP Dist (LSE:IGLT) is the iShares ETF that provides exposure to the UK government bond market. It’s an efficient way for novices to get exposure because it covers the entire UK government bond universe and removes the need to pick individual gilts.

Mainstream financial media will talk about investing in bonds as a diversification play. The traditional 60:40 fund mix argues that a 40% allocation to bonds performs well during times of recession thereby protecting investors when equities suffer.  

The trouble occurs when the opposite scenario is true, i.e. growth is strong and inflation is the main problem. And that’s potentially the biggest risk scenario facing the market today.

Inflation is down but the final mile - getting Consumer Prices Index (CPI) back to the Bank of England’s target - is proving hard work. A situation where inflation remains stubbornly high, preventing the Bank from cutting base rates is negative for global bond markets, including IGLT.

And the issue is eyeQ’s smart machine shows IGLT has rallied further than macro fundamentals justify. The ETF was 3.2% rich to macro conditions just before Easter. The correction has already started but it remains 1.73% rich to big picture stuff such as economic growth and inflation.

Most investors won’t short sell a bond ETF for understandable reasons. But, for those who do like to diversify, eyeQ is saying now is not the right time to be adding bond exposure to your holdings. Wait for better levels.

Source: eyeQ. Past performance is not a guide to future performance.

Useful terminology:

Model value

Where our smart machine calculates that any stock market index, singe stock or exchange-traded fund (ETF) should be priced (the fair value) given the overall macroeconomic environment.

Model (macro) relevance

How confident we are in the model value. The higher the number the better! Above 65% means the macro environment is critical, so any valuation signals carry strong weight. Below 65%, we deem that something other than macro is driving the price.

Fair Value Gap (FVG)

The difference between our model value (fair value) and where the price currently is. A positive Fair Value Gap means the security is above the model value, which we refer to as “rich”. A negative FVG means that it's cheap. The bigger the FVG, the bigger the dislocation and therefore a better entry level for trades.

Long Term model

This model looks at share prices over the last 12 months, captures the company’s relationship with growth, inflation, currency shifts, central bank policy etc and calculates our key results - model value, model relevance, Fair Value Gap.

These third-party research articles are provided by eyeQ (Quant Insight). interactive investor does not make any representation as to the completeness, accuracy or timeliness of the information provided, nor do we accept any liability for any losses, costs, liabilities or expenses that may arise directly or indirectly from your use of, or reliance on, the information (except where we have acted negligently, fraudulently or in wilful default in relation to the production or distribution of the information).

The value of your investments may go down as well as up. You may not get back all the money that you invest.

Equity research is provided for information purposes only. Neither eyeQ (Quant Insight) nor interactive investor have considered your personal circumstances, and the information provided should not be considered a personal recommendation. If you are in any doubt as to the action you should take, please consult an authorised financial adviser. 

Disclosure

We use a combination of fundamental and technical analysis in forming our view as to the valuation and prospects of an investment. Where relevant we have set out those particular matters we think are important in the above article, but further detail can be found here.

Please note that our article on this investment should not be considered to be a regular publication.

Details of all recommendations issued by ii during the previous 12-month period can be found here.

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In addition, individuals involved in the production of investment articles are subject to a personal account dealing restriction, which prevents them from placing a transaction in the specified instrument(s) for a period before and for five working days after such publication. This is to avoid personal interests conflicting with the interests of the recipients of those investment articles.