All posts in category: Correction (7)

How Low Do We Go?

Wednesday, October 24th, 2018

This is a correction, not a bear market

Our asset allocation model cannot get much more bearish. In our view the reason for the recent weakness has been the need for US equities to adjust to PE ratios in line with their long run average now that everything else – real interest rates, risk conditions and earnings growth – is also approaching its own average. We are less concerned about the prospect of a US recession, partly because we see no warning signs from the credit markets. Our model is unlikely to get more optimistic in the next six weeks, but this may happen just in time for Christmas.

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Winter Is Coming

Wednesday, August 23rd, 2017

But it will be very mild to start with

We fully expect a correction in US and global equities at some stage during the Autumn, but unless two or more of our risk-scenarios crystallize at the same time, we don’t think it will be more than 10%. There is too much residual momentum, especially outside the USA, and even after a correction, realised volatility will be below its long-run average.

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Lucky Dip

Wednesday, July 5th, 2017

Buy the Eurozone correction, not the US

We agree with consensus that an equity correction could happen at any time. However, we will not be buying the dip in the US. We much prefer the Eurozone, which has a habit of late-cycle outperformance. We also prefer Japan, which has just hit a new 22-year high, to EM, which keeps failing at resistance just above current levels.

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A Warning from History

Wednesday, June 7th, 2017

High exposure to Euro Equities can be dangerous

There is a lot of concern that the ultra-low level of volatility may herald the death of the global equity bull market. But historically this has been a poor indicator (as have Tech bubbles). Two which have worked in the past are very low exposure to US investment grade credit and very high exposure to Eurozone Equities, both of which we have now. But the lead-time from here could be between 10-30 weeks.

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Where To Next?

Wednesday, March 29th, 2017

US investors need to diversify geographically

US Equities look as though they are due a 5-10% correction, so US investors have a chance to look at other opportunities. One option is a Northern Europe group of fiscally responsible countries in and out of the Eurozone. Our preferred option is a diverse group of EMs, including India, Korea, Mexico, South Africa and Turkey, which offer equivalent risk-adjusted returns, but much lower correlation with US Equities.

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Messy and Inconsistent

Wednesday, March 22nd, 2017

High equity exposure vs rotation into defensives

The rotation into US defensives has broadened over the last two weeks. There is a potential contradiction with the high exposure to equities recommended by our asset allocation model. We look at the maths underlying our asset allocation decision, historical precedents for US equities being overbought and international equity comparisons. A 5-10% correction followed by renewed strength, just about fits all the evidence.

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Mind the Gap

Wednesday, September 28th, 2016

Eurozone bullishness not matched by the US

When Eurozone investors are a lot more bullish about global equities than their US counterparts, we start to get nervous. There are structural reasons for this behaviour, but it can be a sign that a correction in equity markets is on the way.

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