Two Red Flags from China

Friday, August 21st, 2020

Cause for concern in Technology and Financials

China’s stock market is always subject to official intervention, so the signals need to be interpreted carefully. However, there are two new red flags in our equity sector model, relating to Technology and Financials. Technology has suddenly started to deteriorate, which has historically been a good lead indicator for the US Tech sector. Financials are heading for a multi-year low relative to the index, which could have important implications for China’s FX policy regime.

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The Calm Before the Storm

Thursday, March 7th, 2019

Concerns over US earnings, China slowdown, Euro banks

Before the ECB’s announcement today, nothing very important had happened in financial markets for several weeks. We get nervous when it’s this quiet, so we prepared a list of issues to worry about. They range from the benign, like a melt-up in risk assets caused by a sell-off in US Treasuries to the borderline catastrophic, like a Eurozone banking crisis. Our main point is that the current directionless environment is likely to end in the near future. Whether investors believe in any, or all, of the scenarios listed below is up to them.

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Financial Rotation

Wednesday, July 12th, 2017

No evidence of co-ordinated global tightening

The new big idea is that Financials are responding to the prospect of a co-ordinated tightening of monetary policy which will steepen yield curves round the world. At a sector level, there is some superficial evidence to support this, but when we look are individual stocks, particularly in Europe, we see that there are other and better explanations.

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Parlour Games with Volatility

Wednesday, March 8th, 2017

Curious and unsustainable sector effects

The new ultra-low volatility regime throws up some curious implications for equity sectors. Who knew that US Technology and EU Industrials are now attractive to risk-averse investors? What about Healthcare, which could deliver significant returns if investors were just prepared to give it the benefit of the new paradigm.

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Sector Breadth

Wednesday, February 15th, 2017

Measuring support for our overweight calls

Sector recommendations can be stock recommendations in disguise, if performance depends narrowly on one or two large companies. Our overweight recommendations on Financials in the US, the UK and the Eurozone all enjoy broad-based support, as do US and Eurozone Industrials and UK Materials. The overweight calls on US Technology and Eurozone Materials depend heavily on one stock and are therefore lower quality.

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Dodging a Three-Tonne Truck

Wednesday, November 2nd, 2016

Financials rally could be painful

Financials are rallying fast, driven by a significant decline in volatility in the US and the UK, which is exactly what our models expect. We don’t know whether this is justified by fundamentals, but we do know that every investor with an underweight position will have to consider reducing the risk relative to benchmark, sooner or later.

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China Rehabilitated

Wednesday, August 31st, 2016

This week we upgrade China to overweight relative to global equities and Chinese Financials to overweight relative to the local index. There is some interesting evidence to suggest that the PBoC has begun the forced recapitalisation of Tier-2 banks. This has already caused Chinese Financials to decouple from the sector in the rest of the world and it may lead to the rehabilitation of the country as a destination for international investors.

Forced recapitalisation of Tier-2 banks has begun

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Catastrophically Awful

Wednesday, July 13th, 2016

Eurozone banks are in crisis NOW

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.

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