Probability-based investment modelling for professional and institutional investors
Nothing has happened to move the dial on any of our major themes; so this a time for housekeeping and some small ideas. The three we have chosen are: reducing exposure to the Energy sector, using Spanish government bonds as the safe-haven against election shocks in Europe, and increasing exposure to UK and Eurozone Small Caps.
We all wonder what happens if the Italian government loses the constitutional referendum on December 4th. Most investors understand the negative implications for France, but our analysis suggests that Belgium would also suffer badly. Germany is our preferred safe-haven, but our second choice is Spain.
One of the main reasons for the new high in US equities is the sharp decline in the volatility of their returns compared with those of other asset classes. Any institutional investor with a formal risk-budgeting approach will be forced to allocate more money to them, having not owned them when they were riskier, but cheaper. This looks dangerously like a “buy high, sell low” strategy.
The scores for the Financials sector in our Eurozone and Pan-European equity models are catastrophically awful – as bad as those for US Financials at the onset of the Lehmans crisis. The only possible conclusion is that the Eurozone financial crisis has already begun. The three large banks with the worst individual scores are Unicredit, Intesa and Deutsche Bank.