Show Me the Damage

Thursday, May 16th, 2019

EM equity weakness may cause FX volatility to surge

So far, most of the damage inflicted by US/China trade tensions has been on EM Equities. Our models suggest they peaked over a month ago and there is no support until we get well into underweight territory. The danger is that equity weakness turns into FX volatility, affecting EMs and DMs. We know this is always dangerous for risk assets in general.

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Time to Get Fussy

Thursday, March 21st, 2019

Be selective in EM Equities

Indiscriminate buying of any and all emerging market equities worked well from Q4 2018 to Q1 2019. We now see signals that it is time to be more selective. We have just put four EM countries on our negative watch list, and we will have to rely much more on index heavyweights like India, China and Taiwan if the region is to continue to outperform. The region also faces renewed competition from certain “cheap” European countries.

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The Calm Before the Storm

Thursday, March 7th, 2019

Concerns over US earnings, China slowdown, Euro banks

Before the ECB’s announcement today, nothing very important had happened in financial markets for several weeks. We get nervous when it’s this quiet, so we prepared a list of issues to worry about. They range from the benign, like a melt-up in risk assets caused by a sell-off in US Treasuries to the borderline catastrophic, like a Eurozone banking crisis. Our main point is that the current directionless environment is likely to end in the near future. Whether investors believe in any, or all, of the scenarios listed below is up to them.

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Lost in Translation

Wednesday, September 26th, 2018

China and the US disagree about more than trade

There is a fundamental conflict between the bearish sector stance of our Chinese equity sector model and the bullish positioning of the US model. We don’t think it is possible for these two sets of sector recommendations to remain unchanged without having an impact on each other or the rest of the global equity universe. On balance we think it is more likely that the US will come to resemble China, rather than the other way around.

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Red Flags

Wednesday, July 4th, 2018

Emerging Markets, the Renminbi & Eurozone Banks

Our recommended underweights for Eurozone Financials and EM Equities are at the sort of levels we saw just before major crises such as 2008 and 2010-12. We think that both can be traced back to tightening financial conditions and restricted dollar liquidity. What concerns us is that neither the Fed and the ECB are prepared to admit there may be a problem or that these two themes could feed off each other. We also worry that further devaluation of the Chinese renminbi could put additional pressure on EM Equities and bring a potential flashpoint closer.

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A Selection of Emerging Markets

Wednesday, January 31st, 2018

These may help to mitigate dollar volatility

Despite our worries in late November, EM Equities have done well, but we still need to be selective. In Asia, we like China, Thailand and Singapore and have put Malaysia and Indonesia on the positive watch-list. We don’t like Latin America at all, and prefer Austria as the play on Eastern Europe. This leaves South Africa and India, two BRICS, which have interesting upside, if the politics turn out right.

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China Out of Sync

Wednesday, January 17th, 2018

What do they know that we don’t?

Our equity sector models suggest that Chinese investors are much more defensive and less pro-cyclical than investors in every other region. This is odd considering that China is forecast to be the largest single contributor to global growth. The obvious, but not the only possible, explanation is that Chinese investors don’t share this optimism.

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Final Thoughts & First Decisions

Wednesday, December 13th, 2017

The agenda for January starts to take shape

It’s too late to make any significant adjustments to the portfolio this year, but there are several themes which may have matured sufficiently to be immediately actionable when markets restart in January. On the downside, we may have to cut exposure to China and to the Technology sector in the US, and globally. On the upside, there may be an opportunity in UK equities and certain defensive sectors like Staples and Telecom.

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Do They Know It’s Christmas

Wednesday, December 6th, 2017

Chinese and US equity seasonality are different

We remain concerned about the bubble in the Chinese Technology sector leading to a global equity correction. This week we examine the seasonality of Chinese equity returns to see if we can get any clues on timing. We find that the recent sell-off is in line with normal seasonal patterns and that the moment of greatest risk appears to be mid-February to early April or early June to mid-July, assuming a sell-off starts in China, not elsewhere.

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