All posts in category: Defensives (14)

Should We Worry about Health

Friday, December 1st, 2023

The sector is in need of therapy

Healthcare has been underperforming all year. We are underweight in the US and Japan and may soon be forced to downgrade in Europe as well. There are a number of possible explanations, ranging from the industry specific to macro-economic, and from portfolio construction to US politics. None of them, on their own, is particularly convincing, but in combination they form a powerful cocktail. Our models are telling us there is a problem, but we are not sure what it is.

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Three Things That Didn’t Happen

Friday, March 24th, 2023

No dollar surge, no switch to defensives or into EM Equities

We have written before about the importance of dogs which don’t bark in the night. Three things did not happen last week. The dollar did not surge in response to stress in financial markets. Equity investors did not dump cyclical or high-beta sectors in favour of defensive sectors. There was no shift towards EM Equities in response to a banking crisis in developed markets. Simple explanations are often wrong, but maybe investors think that the dollar is structurally over-valued, that there isn’t going to be a recession in the US or Europe and that the great globalisation trade of the last 30 years is over. They could be wrong, but their opinions are important.

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Groundhog Day for Value

Friday, January 7th, 2022

Everything depends on the slope of the yield curve

We see lots of commentary suggesting that the value style is going to outperform the growth style in Europe and the US. We also see this being used as a reason for rebalancing global equity portfolios away from the US and towards Europe. We disagree with both ideas and also with the big idea behind them, which is that government yield curves are going to shift higher and/or steepen at the same time. Indeed, the recent behaviour of US Financials suggests that investors are becoming concerned about the yield curve inverting over the medium term. We also think that the new emphasis on ESG guidelines makes the value/growth trade much more complex than it used to be.

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There Will Be A Correction

Friday, April 23rd, 2021

But we don’t know when, why or how much

With very few exceptions, our main risk-appetite indicators are at or close to maximum risk-on. We see evidence of peaking behaviour in global equities vs global fixed income, in US Credit, and cyclicals vs defensives in the US, Japan and the UK. There is one indicator – Italian vs German government bonds – which is already past its peak. Most investors understand this and intend to use any correction as a buying opportunity. However, it still makes sense to take some risk off the table now, if only to put it back on at a lower price. We are also concerned that investors may be ignoring an uptick in geo-political risk.

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Barbell

Thursday, April 4th, 2019

Overweight defensives and high growth. Ignore the rest.

Equity investors have decided to revisit a strategy first utilised during the secular stagnation debate of 2015 and early 2016. In the US and Europe, they are buying low beta defensives in case there is a recession and paying a premium for stocks with strong secular growth, in case there isn’t. There is very little active weight in the rest of their portfolios. It’s a Barbell strategy, which works while we wait for clarity from the US results season.

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Markets at a Crossroads

Wednesday, February 20th, 2019

US Industrials may give us a sign

We detect signs that the rally in global equities is losing momentum, but we could be wrong, so we are going to do nothing for the next week or two. There are signs of recovering risk appetite in EM Equities and in credit, but not in equity sector selection. Our global equity vs fixed income model is at a critical chart-point and we will look to US Industrials to provide confirmation of that message, whatever it is, whenever it comes.

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Midsummer Moderation

Wednesday, August 22nd, 2018

Time to reduce the beta of your equity portfolio

All four defensive sectors in the US have generated relative buy signals in the last three months and as a group they are starting to outperform the index. This may or may not be an indicator for the equity market as a whole; that is for the future to decide. Right now, investors should be reducing the beta of their equity portfolio, no matter what their macro-outlook. And the same applies to European portfolios as well

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Defensive Mindset

Wednesday, July 11th, 2018

The least bad alternative

The shift towards defensive equity sectors has clearly accelerated in the last three weeks. It has happened in every region and is led by the Utilities sector. The detail is less important than the big picture. Investors are worried about rising rates, rising oil prices and rising tariffs. They are buying defensives because of what they are not, rather than what they are.

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One of Us Is Wrong

Wednesday, March 14th, 2018

Defensive underweight contradicts top-down view

Our models show a clear contradiction between the neutral recommendation for European equities vs fixed income and the all-time record underweight in defensives, which we discussed two weeks ago. There is normally a good correlation between a bearish view on equities and defensives, but over the last year this has turned negative in Europe. The US and Japan do not share this problem. It’s one that Europe needs to resolve.

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Records Are There to Be Broken

Wednesday, February 28th, 2018

Defensive underweight lasts a long time already

Underweight Defensives is such a consensus call that nobody really bothers to argue the reasons for it any longer. In Europe, our underweight position on Telecom, Utilities, Staples and Healthcare is the biggest it has ever been. The persistence of this underweight is well on the way to challenging the record for any combination of sectors. Consensus is right for now, but everything changes in the end.

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