Recent trends suggest signs of normality returning, with some rotation:
speculative value stocks could recover along with leading economic
indicators later in 2009 – growth and price momentum the likely losers;
financials rise to the top of our model, energy still highly ranked,
materials and IT the least attractive
The combination of our fundamental model with our recently
introduced financial health, quality and flexibility model should maintain
performance but reduce risks
Sector-neutral versus top-decile factor strategies: differences,
regional statistics and how to choose the right strategy

Alpha strategy
As markets have continued to sell off, ‘alpha patterns’ appear to be normalising. In the past three months
growth has been the best-performing style, followed by low price risk, profitability, financial health and
efficiency, as well as analyst revisions and analyst sentiment. We term this pattern a ‘quality and
momentum mix’.
Based on the global average of our regional models, nearly all of the models we provide generated alpha
in the past three months, which was true of both our unconstrained and sector-neutral strategies. The
exceptions were StatisticBull, StatisticBear and FunTecBull (a single strategy). The top three models for
unconstrained strategy were value, growth and dividend, while value, growth and technical delivered the
best results among the sector-neutral strategies.
We recommend positioning in anticipation of a stabilisation and rebound of leading economic indicators. Data
series such as the German IFO, OECD leading indicators and the US-ISM have contracted severely over the
past 18 months or so, reaching historical recession trough levels. Historical precedent and HSBC economists’
expectation of an economic recovery in 2010 at the latest suggest that they could start to recover in the course
of this year. We have analysed the early stages of previous economic recoveries, signalled by leading
indicators, and found that this phase has previously tended to be accompanied by a significant recovery of
oversold and risky value stocks. Indeed, although value stocks are still suffering severe downward earnings
revisions, we now expect their performance to recover on the back of the current low absolute valuation levels
and our view that market participants may have already factored in some of these forthcoming negative
developments. According to our model, value, as an unconstrained strategy, implies overweight positions in
financials, materials and oil; however, financials and oil in particular are also very attractive according to our
top-down strategy models. We expect the dividend yield recovery to be less consistent than historically. Some

defensive dividend stocks could lag behind during a recovery (eg utilities and telcos) while others could
continue to suffer as a result of negative developments in consensus earnings forecasts. We therefore
recommend examining our dividend model to look for opportunities, as it takes into account the earnings
aspect and several risk criteria. We continue to focus on analyst revisions as one of our key alpha strategies, but
our strategy mix also incorporates our recently introduced factor category ‘financial health and efficiency’. For
now we opt not to play price momentum as long there is the possibility that the many ‘fallen angels’ might start
to recover.

Style rotation strategy –
Q2 2009 6
Global and regional sector
strategy 17
FHQF model: Combining with
fundamental model 22
Sector-neutral versus topdecile
factor strategies 26
Regional strategy: Details 34
Model portfolios 73
Screening model statistics 79
Alpha factor watch 97
Sector-related statistics 136
Appendix 157
Disclosure appendix 158
Disclaimer 168