Time to Separate China from EM

Friday, August 13th, 2021

EM ex China has begun an interesting rally

We think it is time to take China out of the main EM equity indices. Some of the arguments made for its inclusion are no longer valid. It doesn’t make sense to have separate benchmarks for companies listed in China and Hong Kong. Separate indices for China plus Hong Kong and the rest of Emerging Markets would increase flexibility for all investors, not just those who no longer wish to have passive exposure to the current regime in China. Once we make the split, we can see that EM ex China has already begun an interesting rally.

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Adding REITs and TIPS to the mix

Friday, June 4th, 2021

Multi-asset diversification works, but hasn’t done so recently

Successful diversification using publicly-traded alternative asset classes, like commodities, REITs and TIPS is possible. We can select from a family of systematically-managed portfolios, which allow us to capture the upside of diversification and avoid most of the downside. However, the big takeaway from this process is that multi-asset diversification itself has been largely redundant since the end of the financial crisis, thanks to the actions of the Federal Reserve. Since that time there have been two false dawns, when it looked as though the concept was about to make a comeback and we may be on the verge of another one now. If it turns out to a real dawn, we have the regime management skills to exploit it. If not, we should be able to get out without too much harm.

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Is it Time for Commodities?

Thursday, May 20th, 2021

We have a process. All we need is the upswing.

We know how to incorporate commodities into our asset allocation process. Over the last 25 years as a whole, our process would have generated significant outperformance on an absolute and risk-adjusted basis. This is achieved by systematically managing exposure to a limited number of commodities: oil, gold and copper only, and by actively managing a small number of other assets, spread across equities and fixed income. Passive exposures don’t work as well and too many assets create unnecessary and counter-productive complexity. The problem with including commodities is that US exceptionalism in equities, currencies and fixed income has made this strategy unattractive since 2010. If you think that this regime may be ending, it may be time to take another look at commodities.

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To See Ourselves as Others Do

Friday, March 26th, 2021

US investors have few diversification opportunities in Europe

Eurozone equities may be cheap when compared to the US, but that’s not really important. Over the last10 years, US investors have never been able to generate a superior risk-adjusted return by diversifying into the Eurozone index, no matter what tactical allocation strategy they follow. The picture is marginally better if we look individual sectors over a shorter time-frame, but Japan and Asia ex Japan, do much better on this test.

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How to Hedge an Equity Sell-Off

Friday, September 18th, 2020

Not with government bonds

Bonds don’t always go up when equities go down. In 2003, holding long-dated government bonds offset 50% of average local currency losses in developed equity markets. That ratio has fallen steadily in each of the following major sell-offs, 2009, 2016 and 2020. This year, it was effectively zero on average for the seven largest developed markets. For some countries, it was negative – i.e. bonds went down just when you needed them most.

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Where Have All the Leaders Gone?

Thursday, November 21st, 2019

And why does nobody like Japan?

Two weeks ago, we had the lowest number of net buying opportunities for individual countries since May 2000. It’s hard to be bullish about global equities as an asset class when there are so few leaders. Japan is one of just three countries which look attractive on our system, but nobody seems to care.

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Capitulation and the rule of 35

Thursday, April 18th, 2019

Managing risk on the downside

Equity bears are capitulating. The priority is to protect their portfolios from further underperformance by getting closer to their benchmark equity weight. Our models have always shown that the worst sample periods for our process are between 29-35 weeks. The behavioural explanation would be that fund managers are allowed to be wrong for two quarters in a row, but not for three. Cutting a losing position during the third quarter of the mistake tends to be more damaging than doing it early in the second.

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Don’t Forget the Skew

Thursday, November 29th, 2018

Plan for falling equities with violent changes of direction

Although our models are consistently bearish about the outlook for equities, we agree that there are several large problems which have depressed performance, which would allow the market to bounce if they were “solved” – even temporarily. Rather than prepare for an outright bear market, we think investors should focus on the bull/bear skew and sell countries which tend not to perform in rising markets, even though they are heavily exposed when they fall. This list includes several large Anglo-Saxon markets such as the UK, Canada and Australia.

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Few places to hide

Thursday, May 3rd, 2018

UK portfolios could be vulnerable to rising oil

We are concerned that oil may be entering a new trading range which could damage a conventional balanced portfolio. We look at two correlations: between equities and bonds and between oil futures and a balanced portfolio. In the Eurozone, investors don’t really need a hedge. In the US, it may be “nice to have”, but not essential. In the UK, equities and bonds are positively correlated at the highest level since 2001, which means that investors need some sort of hedge, even though we can’t yet be sure that oil is the right one.

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