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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Rotation, Inflection & Persistence

Friday, November 13th, 2020

The bottom is not bouncing to the top

There has been a lot of excitement about factor rotation in equities, but it’s mostly based on the back of two days’ trading at the start of this week. We agree that rotation is going to pick up, but from a very low base and our work suggests that it’s going to be from the top to the middle and vice versa. We think that the laggards, like Financials, Energy and Telecom could underperform for some time to come. If the factors in question are meaningful, they will show up in sector performance fairly soon. If not, perhaps they are not as important as reported.

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Dropping Bunds as the Benchmark

Friday, October 2nd, 2020

Europe is on the way to debt-mutuality

It’s time to restructure our euro-denominated fixed income portfolio. The yield on 7-10 year German bunds is too negative for comfort and they no longer offer the best way of creating risk-efficient portfolios. A pan-euro index of government bonds with the same maturity has done this more effectively for the last two years and we believe it offers a safer and more liquid benchmark asset.

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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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