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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Nothing Doing

Friday, May 19th, 2023

Only high-conviction idea should be actioned

These are confusing times in financial markets, with little direction in any of the main asset classes. This week, we focus only on the high-conviction ideas generated by our models covering asset allocation, commodities, equity sectors, individual countries, credit and different maturities in government bonds. In general, there are more negative, than positive, high-conviction ideas. These include topping signals in many Eurozone countries such as France, Italy, Germany and Spain and for the Eurozone as a whole. We have high-conviction negative signals in Financials across all regions, apart from China, and other pre-recession signals in sectors like US Industrials and UK Materials. The positive signal in asset allocation is for US equities, but the level of conviction is lower than the negative call on the Eurozone, and is heavily dependent on the positive view of US Communications going forward. We like Europe, ex Eurozone, particularly Switzerland and Denmark, and detect signs that India may be bottoming, though the rest of EM Equities are highly unattractive.

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The Case for Europe

Friday, January 20th, 2023

Currency, sector orientation and valuation are all favourable

The basic argument in favour of European Equities is that three of the largest sectors in the index, Financials, Industrials and Consumer are ranked in the top three in our models – unlike the situation in the US, where Technology is in the bottom three. All three have forces driving their outperformance which should last most of this year (respectively rising interest rates, re-opening of global supply chains and rearmament, and post-pandemic recovery). The region, its currencies and its equity markets were priced in October for a catastrophe which simply hasn’t happened, and which is now very unlikely. There may be some short-term profit-taking, but the excessive valuation discount and the currency misalignment will take longer than a few weeks to unwind.

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Bear Market Sector Strategy

Friday, November 4th, 2022

What to focus on and what to ignore

It easy to be overwhelmed by the speed and quantity of information in a bear market. Investors need a clear focus on what matters and what doesn’t. In any bear market, there are about 10 sector pairs (out of 45) which really drive the performance of a regional equity portfolio and the rest don’t matter very much. These pairs vary from one bear market to the next but are relatively easy to identify. There is also another set of pairs, which may be significant in market cap terms, whose relative performance cannot be easily integrated with the rest of the portfolio. US sectors which feature heavily in this list in this bear market include Financials, Healthcare and Industrials. In Europe, they are Materials, Utilities and Financials.

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Switch Off the Autopilot

Friday, October 7th, 2022

Currency impact on equity allocation is now extreme

The strength of the US dollar has hugely overstated the attractiveness of US equities to both US and international investors. The currency effect against developed markets is more powerful than it has been in all but 3% of weekly observations, going back to 1995. This is fine while it lasts, but one day it will go into reverse. Meanwhile, the dollar index is approaching generational highs. After the last tech-bust and peak dollar, US equities underperformed the rest of the world, in dollar terms, for the next five years (2003-08).

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A Difference of Opinion

Friday, July 2nd, 2021

What ESG may mean for the Energy sector

US investors are significantly more positive about the Energy sector than their European counterparts. There could be many explanations, but we are increasingly concerned that there is a buyer’s strike in Europe. This could have unintended consequences – first of all for the implementation of a low-carbon style on a global basis, and second on the outlook for inflation in 2023 and beyond. Changes in our investment style in Europe may have moved too far in advance of changes in our lifestyle.

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The Times, They Are a-Changing

Friday, June 18th, 2021

Reducing industrial cyclicals and adding to consumer cyclicals

Perhaps the most obvious symbol of the changes under way is the fact that Europe, not the US, has been our preferred equity region since late May. This isn’t the result of one single trend or a dramatic headline. It has happened gradually, as marginal buying shifted from the US to Europe. It is the same with the shift from industrial to consumer cyclicals. No-one doubts the coming industrial recovery, but our charts suggest it is already in the price, so investors are starting to look for the next big idea.

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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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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 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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