The Melbourne Cup, say insiders, is anyone’s game. Not even the horses know who will win.
But each year the quants, those pointy head analysts who model the financial markets, attempt to use their arcane skills to predict winners in the big horse race.
At Macquarie Bank this has become something of a tradition. In a note to clients, they write: “Each year we look to the market for some new ideas to guide our model and 2021 threw out plenty of obstacles for investors.
“Delta and lockdowns were key talking points; however, investors are now fixated on inflation and interest rates as the worst of the virus appears to be in the rear vision mirror.”
What’s that gort to do with a horse race in Melbourne? The economy, influenced by the pandemic, has had a serious impact on the Melbourne Cup field.
The model they developed has a number of factors: Value (cheapness, what you get for the price); Momentum (what is working, what is getting better?); Sentiment (what everyone is looking for right now, what people like); Quality (what is the best, the most reliable?); Innovative Data (what other data sources gives us an information edge?).
The analysts: “Typically, in inflationary environments, value and quality stocks are in favour as they are seen as shorter duration assets. We therefore upweight our Value and Quality factors in this year’s model.
“International travel restrictions continued to impact the make-up of runners with Australian visas still as scarce as shipping pallets.
“In 2019, 20 of the 24 horses came from outside ANZ. This year that number only sits at 13 from 24.
“The weaker offshore competition will have been a contributing factor to the emergence of potentially the shortest priced favourite since Phar Lap (at time of writing), Incentivise. Racenet published an article on the challenge for such heavily-priced favourites at converting this heavy favouritism to success in the Melbourne Cup.”
And here’s what the Macquarie Bank analysts’ model came up with:
Last year’s winner Twilight Payment comes out on top.
Incentivise, Floating Artist, Verry Elleegant, Delphi and Great House make up the top quartile of the field.
The analysts: “Our preferred strategy backs the top horses in our model. We also aim for the trifecta using the top quartile of horses. This best mirrors the way quantitative strategies are applied to equity investing.”
NOTE: The Macquarie quants emphasise: “... this model is not intended to be taken seriously. The Quant team has limited knowledge of horse racing and the purpose of this article is primarily fun. And ... past performance is no indication of future returns. Happy punting!”
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