Day Hagan Smart Sector® International Strategy Update March 2025
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Day Hagan Smart Sector® International Strategy Update March 2025 (pdf)
Executive Summary
International equities outperformed the U.S. in February, with Europe leading the way. Spain, the U.K., Germany, Hong Kong, and China gained significant ground while the U.S., Taiwan, Australia, Japan, and India lagged.
In Europe, economic deceleration and corresponding monetary policy adjustments were key influences. The Bank of England (BoE) cut its bank rate by 25 basis points to 4.5% early in the month, responding to a sharply reduced 2025 growth forecast (from 1.5% to 0.75%). Within the region, Germany’s industrial output held firm despite a Q4 2024 GDP contraction of 0.2%, while France saw a milder 0.1% decline. The Eurozone’s GDP remained flat, reflecting stalled momentum amid persistent core inflation aligned with targets.
In the U.S., inflation and shifting Federal Reserve expectations dominated. January’s CPI rose 0.5% month-over-month (3.0% year-over-year), and PPI climbed 0.4%, exceeding forecasts. This data, released mid-month, reduced anticipation of near-term rate cuts, with markets now pricing in a 3.9% fed funds rate by October—up from 2.9% two months prior. Potential tariffs and tight labor supply further fueled inflation concerns, though solid manufacturing and retail sales trends supported economic resilience.
Asia’s markets reflected divergent policy and trade dynamics. The Bank of Japan continued gradual tightening as inflation neared its 2% target, pressuring sentiment. In China, a modest January CPI increase of 0.5% and optimism over softened U.S. tariff risks bolstered the tech and export sectors. Hong Kong benefited from similar trade relief expectations, amplifying regional influences.
Globally, economic activity decelerated, with productivity gains in the U.S. offsetting weaker eurozone and Japanese output. Central banks adopted cautious stances—easing in Europe and the U.S. to counter growth risks while Japan prioritized inflation control. Inflation remained sticky, with U.S. figures above 3% and eurozone core rates stable. These factors—economic stagnation, monetary policy shifts, and trade-related uncertainties—defined the environment shaping equity market behavior through February.
Holdings
Core: Developed Market Positions (approximately 65% of equity holdings)
Country
Australia
Canada
China
France
Germany
Japan
Switzerland
United Kingdom
Outlook
Neutral
Overweight
Overweight
Underweight
Overweight
Modest Overweight
Overweight
Neutral
Explore: Emerging Market Positions (approximately 35% of equity holdings)
India
Taiwan
Thailand
Chile
Israel
Position Details
Core: Developed Market Commentary
Approximately 65% of the strategy is allocated across eight of the largest markets in the ACWI ex-U.S. Index. The fund overweights and underweights the largest non-U.S. equity markets based on macro, fundamental, behavioral, and technical indicators. Weightings are determined using the Black-Litterman framework, which seeks to reduce volatility and enhance returns.
Australia: Australia’s composite model increased to low neutral in March due to the RBA continuing to lower rates while the U.S. is on hold (the interest rate differential is expanding in favor of Australia) and short-term trend indicators shifting positive. Nonetheless, measures calling longer-term trend, volatility, mean reversion, and relative earnings yield are negative. The net result is that we are increasing exposure to low neutral from underweight.
Commentary: In February, the Reserve Bank of Australia (RBA) reduced the cash rate by 25 basis points to 4.1%, marking its first cut since November 2020, in response to slowing inflation. The RBA expressed optimism that inflation is approaching its target range of 2-3%, attributing this to the balancing effects of higher interest rates on demand and supply. However, it also noted an uncertain economic outlook, with weaker-than-expected private demand and concerns over the sustainability of household spending recovery that began in late 2024. Concurrently, geopolitical tensions were exacerbated as tariffs on Mexico and Canada were set to proceed, highlighting risks to Australia’s trade-dependent economy. In the manufacturing sector, the S&P Global Manufacturing PMI increased to 50.6, while the Services PMI Business Activity Index rose to 51.4, indicating cautious growth amidst rising input costs and ongoing economic uncertainties.
Canada: Canada’s composite model improved again with the March update. Measures of trend, relative price momentum, mean reversion, and relative earnings yields are bullish. Indicators of economic activity, however, remain subdued, with Canada’s leading economic indicators and relative currency weakness causing headwinds. We remain overweight.
Commentary: In late January, Canada experienced political upheaval following Prime Minister Justin Trudeau’s unexpected resignation amid a looming no-confidence motion sparked by Finance Minister Chrystia Freeland’s departure over fiscal disagreements related to U.S. tariff threats. This political instability prompted an early election slated for March 24, unsettling investors and negatively impacting the TSX. The index, sensitive to policy changes, suffered as doubts about future economic direction grew. Economically, the Bank of Canada’s dovish approach brought limited relief, cutting interest rates by 50 basis points to 3.25%—the fourth consecutive decrease—in December 2024. Despite signaling potential further easing to address declining growth forecasts of 1.5% for 2025, the central bank’s efforts were hampered by declining commodity prices, with West Texas Intermediate crude oil averaging $68 per barrel. Trade tensions heightened with U.S. President Trump’s proposed 25% tariff on Canadian goods, exacerbating fears of economic disruptions, particularly since 75% of Canadian exports head to the U.S. While tariffs on Canada were paused in February, uncertainty continued to undermine investor confidence. Additionally, Statistics Canada reported a 2.2% inflation rate in January, alongside slowing retail sales growth, reflecting restrained consumer sentiment. The cumulative impacts of political and trade risks positioned Canada as one of February’s economic laggards.
China: China’s composite model increased significantly, with measures of mean reversion, trend, volatility, relative currency strength, and credit spreads now bullish. We note that China’s Manufacturing PMI (Purchasing Manager Index, an indicator of economic activity) trends are still negative, and Emerging Market price momentum relative to other regions is generally weak. Given the technical improvements, we are increasing exposure.
Commentary: In recent developments, China has signaled a potential escalation in trade tensions, with former U.S. President Trump hinting at 25% reciprocal tariffs on European automobiles and delaying tariffs on Mexico and Canada until April 2. Simultaneously, plans to tighten chip export controls to China have emerged, compounding concerns among investors closely monitoring Chinese policy announcements following the National People’s Congress. Market sentiment in China is cautious due to economic uncertainties and geopolitical strains with the U.S.
France: The Composite model for France increased to low neutral. Measures of trend, breadth, mean reversion, and ETF inflows improved. Conversely, France’s leading economic indicators, relative dividend yield, and other valuation measures are still negative. We are modestly increasing exposure in anticipation of the economic backdrop showing marginal improvement but remaining underweight relative to the ACWX benchmark overall.
Commentary: U.S. President Trump proposed a tariff-free trade agreement between the U.S. and the U.K., concurrently hinting at upcoming tariffs on the European Union. As investors analyzed newly released corporate earnings and key economic indicators from France, preliminary data revealed that the annual inflation rate plummeted to a four-year low of 0.8% in February 2025, a significant decrease from 1.7% in January and below the anticipated 1%. The HCOB Flash France Manufacturing PMI experienced a slight improvement, rising to 45.5 in February from 45 in January, indicating the mildest contraction in manufacturing since last May; however, the sector still faced weak demand and declining new orders. In contrast, the HCOB France Services PMI fell sharply to 44.5, down from 48.2, reflecting the steepest contraction since September 2023. This downturn was marked by a significant drop in new business, the largest decline in five years, and notable staffing reductions, the most extensive since August 2020, highlighting ongoing challenges in the sector.
Germany: Like other Euro-centric regions, Germany’s composite model increased in March. All technical indicators, including breadth, trend, and volatility measures, are now positive. We also note significant ETF inflows, better PMI readings, and some potential relative strength by the euro. We remain overweight.
Commentary: In February, Germany’s Ifo Business Climate indicator remained steady at 85.2, slightly below the market expectation of 85.8. While companies exhibited increased optimism about future prospects, with a rise to 85.4 from 84.3 in January, their assessment of current conditions fell to 85.0, reflecting a decrease from 86.0. Meanwhile, the HCOB Germany Manufacturing PMI improved, rising to 46.1 from 45 in January, exceeding the anticipated 45.5. This marks the highest level in two years, indicating a slowing decline in manufacturing, which saw its mildest contraction in nine months. Conversely, the HCOB Services PMI slightly decreased to 52.2 from 52.5, just below forecasts. Despite this, the service sector has experienced three months of moderate expansion, coupled with a slowdown in the decrease of new orders and exports. At the same time, workforce numbers increased for a second consecutive month amid rising input prices driven by higher labor costs.
Japan: With the March update, Japan’s composite model declined to low neutral as sentiment normalized (it was no longer overly pessimistic) and the yen weakened relative to the U.S. dollar. This, along with other negative indicators calling valuations and China’s neutral PMI levels (around 50), are headwinds. In response, we are reducing exposure back to neutral.
Commentary: The Japanese yen recorded a nearly 4% gain for February, bolstered by strong expectations that the Bank of Japan (BOJ) will persist in raising interest rates this year. Despite some mixed economic signals, Japan’s economic landscape, along with trends in inflation and wages, supports the central bank’s shift towards policy normalization. Recent data indicated that Tokyo’s core inflation eased to 2.2% in February from 2.5% in January, marking the fourth consecutive month above the BOJ’s 2% target. Additionally, the looming tariffs imposed by U.S. President Trump present potential risks to Japan’s economic outlook, instilling caution regarding future rate hikes. On another front, the au Jibun Bank Japan Manufacturing PMI rose slightly to 48.9 in February, up from January’s ten-month low of 48.7; however, it still reflects an ongoing contraction in factory activity for eight months. Conversely, the Services PMI showed resilience, increasing to 53.1 in January, indicating the strongest growth since September 2024, driven by rising employment and new order trends, despite a slight easing in input cost inflation overall
Switzerland: The Swiss Market Index (SMI) gained over 3% in February. The composite model improved due to short-term trend indicators responding positively to the move. Additionally, measures of breadth, interest rate trends, ETF asset inflows, and earnings revision trends are positive. We remain overweight.
Commentary: The Swiss Franc retreated from a two-month high as the dollar gained strength following U.S. President Donald Trump’s proposal for a 25% tariff on European imports, including automobiles. This tariff threat poses significant risks to vital Swiss industries such as pharmaceuticals, machinery, and watches, despite recent increases in exports to the US amid declining demand from China and Europe. Switzerland’s GDP growth also slowed to 0.2% in Q4 2024, down from 0.4% in Q3, marking the slowest expansion since Q2 2023, primarily affected by the services and chemical sectors. As inflation continues to decrease, pressure mounts on the Swiss National Bank to further reduce interest rates, with a potential cut expected in March, albeit with rates remaining positive. The KOF Economic Barometer declined in February, indicating growing concerns in manufacturing and services, although demand from abroad provides some resilience.
United Kingdom: The March update left the UK composite model unchanged. One indicator calling the Pound versus the U.S. dollar turned positive, while another calling 3-month earnings revision trends turned negative. Other technical and fundamental indicators are mixed. We note that sentiment has reversed from overly optimistic levels and may be a headwind until that condition is resolved. We are neutral.
Commentary: In February, the Bank of England (BoE) reduced its benchmark Bank Rate by 25 basis points to 4.5%, marking the third cut in its easing cycle that began in August of the previous year. All nine Monetary Policy Committee members voted in favor of the reduction, despite expectations of an 8-to-1 split, with two members advocating for a more significant 50-basis-point cut. The BoE underscored a gradual approach to monetary easing due to increasing growth concerns juxtaposed with persistent services inflation. Consequently, growth forecasts for 2025 were revised downwards, reflecting an economic performance that fell short of previously set expectations. Meanwhile, the British pound traded at $1.26, just below a two-month peak above $1.27, as investors reacted to looming U.S. tariffs and the BoE’s policy direction. President Trump announced 25% tariffs on imports from Mexico and Canada and a 10% duty on Chinese goods, while hinting at a potential tariff-free trade agreement with the UK. Additionally, the S&P Global UK Manufacturing PMI fell to 46.4, indicating the sharpest contraction since December 2023, while the Services PMI rose to 51.1, suggesting modest growth but weaker demand overall.
Emerging Market Positions
Approximately 35% of the strategy is allocated across five markets from a pool of more than 20 smaller markets. Selection is based on a multifactor technical ranking system using trend and mean reversion indicators. The process seeks to identify oversold opportunities within the global equity markets that are likely to mean-revert from lower levels, which are evidencing mild pullbacks from long-term uptrends.
Emerging Market Positions
Approximately 35% of the strategy is allocated across five markets from a pool of more than 20 smaller markets. Selection is based on a multifactor technical ranking system using trend and mean reversion indicators. The process seeks to identify oversold opportunities within the global equity markets that are likely to mean-revert from lower levels, which are evidencing mild pullbacks from long-term uptrends.
Current Holdings:
India
Taiwan
Thailand
Chile
Israel
Explore: Emerging Market Commentary
India: The BSE Sensex fell nearly 2% on the last day of February, its steepest decline since early October 2024, reflecting broader global market trends. Concerns over a potential global trade war and ongoing foreign investor sell-offs fueled the downturn. U.S. President Donald Trump announced that the 25% tariffs on imports from Canada and Mexico would be implemented on March 4, pushing duty rates on Chinese goods up by an additional 10%. All sectors experienced losses, particularly in technology and fast-moving consumer goods (FMCG). Additionally, India’s economy grew by 6.2% in the December quarter, a rise from a revised 5.6% in the previous quarter, but falling short of the 6.3% expectations. The index recorded a weekly decline of 2.8% and a monthly drop of 5.6%, marking its third consecutive monthly downturn, driven by weak earnings and concerns about a global trade conflict. In response to slowing economic growth and rising uncertainties, the Reserve Bank of India decreased its key repo rate by 25 basis points to 6.25%, the first cut since May 2020, aligning with market expectations..
Taiwan: In February, the Taiwan stock market, represented by the Taiwan Weighted Index (TWII), faced significant volatility, concluding the month with over a 1% decline. The downturn was primarily influenced by Taiwan Semiconductor Manufacturing Company (TSMC), which, despite reporting record quarterly profits and a robust revenue forecast of $25–$25.8 billion for Q1 2025 on January 16, saw its stock drop by 6.6% on February 3 due to competition concerns from China’s DeepSeek and ongoing U.S.-China trade tensions. Taiwan’s GDP growth also slowed to 4.0% year-on-year in Q3 2024 from 5.1% in Q2 amidst high U.S. interest rates and geopolitical risks, suggesting fragility in the investor sentiment despite the TWII’s annual gain of 26.99%.
Israel: The Real Estate sector in Israel experienced a 4.1% pullback due to waning demand. Economic indicators painted a challenging picture, with the Bank of Israel reporting a 20.7% GDP contraction in Q4 2023, followed by a 3.35% recovery in Q1 2024. Despite forecasts of 2.0% growth in 2024 and 5.0% in 2025, consumer confidence remained low, impacting the industrial sector. Meanwhile, ongoing geopolitical tensions, including the Hamas conflict and skirmishes with Hezbollah, continued to dampen investor sentiment.
Chile: The Chilean stock market has been experiencing positive momentum, driven by several key factors. First, robust copper prices play a pivotal role. As the world’s top copper producer, Chile benefits immensely from global demand, particularly from renewable energy and infrastructure projects, boosting export revenues and investor confidence. Second, political stability has improved market sentiment. Recent government efforts to balance economic reforms with business-friendly policies have reassured investors, reducing uncertainty. Third, strong domestic consumption supports growth. With rising wages and a resilient middle class, consumer spending has fueled sectors like retail and banking, reflected in stock gains. Finally, foreign investment is surging. Chile’s open economy and trade agreements attract capital inflows, especially in technology and energy. These factors—copper strength, political calm, consumer demand, and foreign interest—create a favorable environment for appreciation.
Thailand: During February, the Stock Exchange of Thailand (SET) Index experienced significant volatility, closing the month lower. A late-month surge of 24.75 points (2.05%) followed an unexpected interest rate cut by the Bank of Thailand from 2.25% to 2.00%. This reduction aimed to counter a dismal economic landscape, marked by a 3.1% drop in industrial output in December 2024, as reported by MarketScreener. Earnings reports reflected mixed performance; while GULF saw a 22% profit increase, IRPC posted a THB 5.2 billion net loss due to weak sales margins. The World Bank’s February 2025 Economic Monitor estimated GDP growth for Thailand at 2.9%, driven by anticipated tourism inflow of 40 million visitors, despite looming U.S. tariff risks affecting exports. The central bank subsequently revised its 2025 GDP forecast to slightly above 2.5%, citing manufacturing challenges and increasing import competition. Overall, trade tensions and high household debt contributed to ongoing market volatility, prompting a cautious stance among investors amid hopes for a technical rebound spurred by monetary policy adjustments.
Catastrophic Stop Model
The Catastrophic Stop model combines time-tested, objective indicators designed to identify high-risk periods for the equity market. The model (Figure 1) improved in February and entered March with a fully invested equity allocation recommendation. We will raise cash if our models shift to bearish levels (below 40% for two consecutive days).
Figure 1: Catastrophic Stop Model vs. S&P 500 Total Return Index
This strategy utilizes measures of price, valuation, economic trends, monetary liquidity, and market sentiment to make objective, unemotional, rational decisions about how much capital to place at risk and where to place that capital.
For more information, please contact us at:
Day Hagan Asset Management
1000 S. Tamiami Trl
Sarasota, FL 34236
Toll Free: (800) 594-7930
Office Phone: (941) 330-1702
Website: https://dayhagan.com or https://dhfunds.com
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Day Hagan/Ned Davis Research
Smart Sector® International ETF
Symbol: SSXU
Strategy Description
The Smart Sector® International strategy combines three quantitative investment strategies: Core International, Explore International, and Catastrophic Stop.
The Process Is Based On The Weight Of The Evidence
Core Allocation
The fund begins by overweighting and underweighting the largest non-U.S. equity markets based on proprietary models.
Each of the models utilizes market-specific, weight-of-the-evidence composites of fundamental, economic, technical, and behavioral indicators to determine each area’s probability of outperforming the ACWI, for example. U.S. Markets are weighted accordingly relative to benchmark weightings.
Explore Allocation
To select smaller markets, the fund uses a multi-factor technical ranking system to choose the top markets. The markets with the highest rankings split the non-core model allocation equally.
When Market Risks Become Extraordinarily High — Reduce Your Portfolio Risk
The model remains fully invested unless the Catastrophic model is triggered, whereupon the equity-invested position may be trimmed by up to 50%.
The Catastrophic Stop model combines time-tested, objective indicators designed to identify periods of high risk for the broad U.S. equity market. The model uses price-based, breadth, deviation from trend, fundamental, economic, interest rate, behavioral, and volatility-based indicator composites.
When Market Risks Return To Normal — Put Your Money Back To Work
When the Catastrophic Stop model moves back to bullish levels, indicating lower risk, the strategy will reverse toward being fully invested.
Disclosures
The data and analysis contained within are provided "as is" and without warranty of any kind, either express or implied. The information is based on data believed to be reliable, but it is not guaranteed. Day Hagan DISCLAIMS ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY, OR FITNESS FOR A PARTICULAR PURPOSE OR USE. All performance measures do not reflect tax consequences, execution, commissions, and other trading costs, and as such, investors should consult their tax advisors before making investment decisions, as well as realize that the past performance and results of the model are not a guarantee of future results. The Smart Sector® Strategy is not intended to be the primary basis for investment decisions and the usage of the model does not address the suitability of any particular in Fixed Income vestment for any particular investor.
Using any graph, chart, formula, model, or other device to assist in deciding which securities to trade or when to trade them presents many difficulties and their effectiveness has significant limitations, including that prior patterns may not repeat themselves continuously or on any particular occasion. In addition, market participants using such devices can impact the market in a way that changes the effectiveness of such devices. Day Hagan believes no individual graph, chart, formula, model, or other device should be used as the sole basis for any investment decision and suggests that all market participants consider differing viewpoints and use a weight-of-the-evidence approach that fits their investment needs.
Past performance does not guarantee future results. No current or prospective client should assume future performance of any specific investment or strategy will be profitable or equal to past performance levels. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals and economic conditions may materially alter the performance of your portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client’s portfolio. Historical performance results for investment indexes and/or categories generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment management fee, the incurrence of which would have the effect of decreasing historical performance results. There can be no assurances that a portfolio will match or outperform any particular benchmark.
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There may be a potential tax implication with a rebalancing strategy. Re-balancing involves selling some positions and buying others, and this activity results in realized gains and losses for the positions that are sold. The performance calculations do not reflect the impact that paying taxes would have, and for taxable accounts, any taxable gains would reduce the performance on an after-tax basis. This reduction could be material to the overall performance of an actual trading account. Day Hagan does not provide legal, tax or accounting advice. Please consult your tax advisor in connection with this material, before implementing such a strategy, and prior to any withdrawals that you make from your portfolio.
There is no guarantee that any investment strategy will achieve its objectives, generate dividends or avoid losses.
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