All posts in category: Geo-Political Risk (15)

Country Trumps Sector

Thursday, January 18th, 2024

Switching between equity regions will be a theme in 2024

Our models do not currently identify much opportunity for generating outperformance by switching between asset classes and most of our equity sector models are reducing their recommended active weight. We still think that above average exposure to cash and short-dated bonds is a good idea. However, they may be some opportunities for switching between equity regions, which will be affected by changing perceptions of political risk as we move through the year. The important thing is to stay nimble and remember that other people have opinions too. One example of this is in EM Equities, where India vs China is now priced for perfection, which doesn’t reflect the fact that India has a general election in April or May.

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Upside Protection

Monday, November 21st, 2022

The need to hedge against unexpected good news

Our models are slightly conflicted at the moment. The multi-asset models, which mimic sophisticated institutional portfolios, are significantly more bearish than our simple equity vs government bond models, which are more retail-orientated. Before we dismiss the latter is just being wrong, we should at least try to explain the difference. Retail investors may be trying to hedge against the possibility of unexpected good news: a shallow US recession; a peace deal in Ukraine; or an end to zero-Covid in China. Any one of these could result in significant upside for global equities and the joint probability that none of them will happen is lower than you think.

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Discontinuity Rules

Friday, March 18th, 2022

A lot has changed but not everything that should have

If the fall of the Berlin Wall was supposed to be the end of history, the invasion of Ukraine may well mark the rebirth of geography in investment markets. Equity returns in Europe are being impacted by country specific factors beyond the usual mix of sector effects. We see the potential for new definitions of core and periphery in Eurozone bond markets and there are many emerging equity markets in Latin America and SE Asia which are not affected by the war, even the asset class as a whole is (China, Russia, Eastern Europe). The thing which hasn’t changed is the momentum of US earnings growth.

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The China Question

Friday, July 30th, 2021

China’s problem may be Europe’s opportunity.

Our recommended weight for Chinese equities has just hit its all-time low since the beginning of this century. They have been in extreme underweight territory for their longest period ever. We think this is more than a temporary misunderstanding. It could represent the breakdown of the pro-China consensus that has dominated US investment thinking for over a decade. There may be parallels with what happened when the US became disillusioned with Russia 10 years ago. US investors who want international equity diversification will be forced to have another look at Europe.

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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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EM Bonds: the new safe haven

Friday, March 6th, 2020

Higher yields and lower volatility

Many investors, brought up on the Tequila crisis of 1994, or the Thai baht crisis of 1997, or others too numerous to mention, may be surprised to see EM Sovereign Bonds at the top of our euro asset allocation model and at #2 in the US$ version. Times have changed. The volatility of the EM bond portfolio (but not necessarily individual countries) is less than 7-10 year Treasuries and the yield is a lot higher. They deserve their ranking.

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Opportunity in the Detail

Thursday, June 13th, 2019

Listen to the market. It has lots of ideas.

Even if the macro outlook is uncertain, there are still several important messages that can be gleaned from the detail of our equity sector models. The three we highlight concern US Energy, Global Utilities and European Consumer Goods. Our models can never prove any investment thesis, but they can suggest interesting lines of enquiry.

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Eurosceptics may win EU elections

Thursday, October 11th, 2018

A black swan for 2019

We take recent opinion polls for each political party in each country in the EU and compare them with the share of vote and the number of seats they won in the EU Parliamentary elections in 2014. We conclude there is a good chance that Eurosceptic parties may form the largest single grouping after the elections in May 2019. We believe that this scenario has not even been considered by most investors and that it has significant shock value. Some may even regard it as a black swan.

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A Selection of Emerging Markets

Wednesday, January 31st, 2018

These may help to mitigate dollar volatility

Despite our worries in late November, EM Equities have done well, but we still need to be selective. In Asia, we like China, Thailand and Singapore and have put Malaysia and Indonesia on the positive watch-list. We don’t like Latin America at all, and prefer Austria as the play on Eastern Europe. This leaves South Africa and India, two BRICS, which have interesting upside, if the politics turn out right.

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Winter Is Coming

Wednesday, August 23rd, 2017

But it will be very mild to start with

We fully expect a correction in US and global equities at some stage during the Autumn, but unless two or more of our risk-scenarios crystallize at the same time, we don’t think it will be more than 10%. There is too much residual momentum, especially outside the USA, and even after a correction, realised volatility will be below its long-run average.

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