China vs US Exceptionalism

Friday, August 27th, 2021

Exposure to some sectors may be justified but timing is critical

Our recommended exposure to Chinese equities is effectively zero, but EM Equities (of which China is by far the largest part) are critical to the success of any global balanced portfolio. So, we have looked at individual Chinese sectors to see which ones have been the most successful diversifiers compared to their US counterpart. The good news is that it is easy to identify those which fail the test badly: Financials, Industrials, Telecom and Small Caps. The bad news is that only Technology has offered successful diversification over the whole of our test period, but now is not a good entry point. There may also be opportunities in Consumer Staples and Healthcare, but, again, we prefer to wait for a better entry point.

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Europe Has Second Thoughts

Friday, March 12th, 2021

Earnings estimates need to be revised down

We have started to apply our probability approach to consensus earnings estimates. For Europe ex UK, we cover 45 industry groups as well as the index. There is still a 100% probability that consensus estimates for the index will be higher in 12 months’ time than they are now. But the average score for individual industry groups peaked in February and has started falling. There are eight industries where the probability of an increase is now less than 50%. More importantly, a downturn in the average industry score is normally a indicator that the index score is also about to decline.

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Tickets to the Moon

Friday, February 12th, 2021

After Small Caps, Energy could be next

The recent outperformance of Small Caps is starting to generate headlines, but we think there is more to come, especially in Europe. We don’t see any need to take profits, nor do we think that Small Cap outperformance is a reliable indicator of an upcoming peak in the equity index. We do accept that it may be too late to start a big overweight position, So, if you are looking for the next big thing, you may want to consider Energy.

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Fizzing or Bubbling?

Friday, January 29th, 2021

The immediate danger lies in Asia, not the US

Everyone is suddenly on bubble alert, but our numbers suggest that the main danger lies in Asian equities, not the US. China, Hong Kong, Taiwan, Korea, India, Japan, Australia and Indonesia all have weekly RSIs above 70%, which is our warning signal. US equities are still below this threshold, apart from Small Caps, which broke above it three weeks ago.

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Three Ideas from the US Senate

Friday, January 15th, 2021

Energy, Healthcare and Communications in the spotlight

Elections don’t change things, except when they do. The combination of the Saudi oil cut and Democrat control of the Senate could usher in a period of materially higher oil prices. The Senate victory also means that social media companies may be threatened with more regulation and even a possible break-up. But does the new administration have the political capital to take on Big Pharma at the same time? The outlook for the Healthcare sector may be more hopeful than the Blue Wave doomsters suggested.

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How the World Turns

Friday, November 27th, 2020

The value trade won’t work everywhere

This report is a real-time survey of how the great rotation is progressing in different regions of the world. Our conclusions are (1) Many of the important sector infection points happened back in September; so talking about them now in terms of factors suggests that people missed them the first time round. (2) The UK has much the most aggressive sector rotation and China the least. (3) There are different winners and losers in each region and any attempt to apply one paradigm to all of them is likely to fail. (4) Many value-rich sectors in each region have hardly moved, suggesting that the value trade has already been differentiated into those sectors which have catalysts and those which don’t.

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Party Like It’s 1999

Friday, August 7th, 2020

Time to take profits in US Tech

The US Tech sector has just flashed an important warning signal. Our recommended weighting has just dropped below its 52-week moving average. This has happened seven times in the last 25 years and the result is always a significant reduction in exposure. Six times out of seven, the sector has not bottomed until it was deep in underweight territory.

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Signs of Life in the Eurozone

Friday, July 24th, 2020

Rally in Financials is thematically important for the region

Our charts for Eurozone equities relative to the rest of the world have suddenly gone vertical. The change started in late June and the charts have improved in each of the last four weeks. It is now supported by improving lead indicators in cyclical sectors, like Materials and Industrials, and deep value sectors like Financials. The latter are key to the rehabilitation theme. Without them, a Eurozone rally will be anaemic; with them it could be surprisingly powerful.

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Re-Configuring the S&P Sectors

Friday, May 29th, 2020

Time to Start Thinking About It

Well-designed sectors make portfolio management easier, but that means that the definitions need to be reviewed and refreshed on a regular basis. We believe we have arrived at that moment in the US. We propose splitting the Tech sector into two, combining Materials with Industrials and Energy with Utilities. We find that it is easier to generate systematic outperformance using the new definitions.

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One Disease; Three Themes

Friday, April 3rd, 2020

Consensus is looking for mean reversion in the wrong place

Three interesting ideas emerge from our regular reports. First, the volatility shock will almost certainly be as bad as 2008. Second, we believe that a long Technology /short Energy trade will have a positive pay-off no matter whether equity markets rise or fall. Third, our models are increasing exposure to EM Equities. We recognise this is a contrarian trade, but it is well-supported by our process and doesn’t depend on one or two countries.

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