All posts in category: Global Equities (52)

For the Unbelievers

Friday, June 2nd, 2023

Low risk, not high return, makes Japanese equities attractive

Our proprietary volatility index dropped out of the danger zone three weeks ago, having warned us back in May 2022 that something was going to break. This helps to explain why investors feel so comfortable with equity risk at the moment. All equity regions have levels of realised volatility below their 25-year median and only US Treasuries are still in the danger zone. The volatility of Japanese equity returns is in the 13th percentile of its 25-year history. Investors don’t have to believe the new (or is it the old) shareholder activism story. The risk-cost of entry into Japanese equities is low by historical standards and that is enough to make the risk-reward calculations work.

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What To Do About China

Saturday, May 6th, 2023

It’s an ill wind which blows nobody any good.

EM Equities are in deep trouble and we see no early turning-point, mainly because China is also suffering. The strong outperformance promised after the end of lockdown has not materialised, but more importantly, our models suggest that the local equity market itself is not functioning as it should. Two relatively obscure indicators: active weight and persistence of winning and losing sectors are either at, or very close to, 20-year lows. This suggests that investors are struggling to construct portfolios, which deliver an appropriate balance between risk and return. This is not a problem China has suffered from until recently and if it continues, international investors may have to regard this as a secular trend, not a cyclical aberration. If EM and China are not attractive destinations for international capital, other regions must benefit on a relative basis – and the most obvious is Europe.

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If It Walks Like a Bull

Friday, February 3rd, 2023

It can still fall over in the near future

Our mainstream sector and asset allocation models are producing signals which we would normally expect to see that the start of a new bull market, and not all what we expected in Q4. Much of this is because we have had two bullish surprises (end of zero-Covid in China and the postponement of the US recession), but we should also acknowledge that equities in the UK, and probably the Eurozone, are going to reach new all-time highs in the near future. What is this, if not a bull market? Alas, the same is not true of the US. There is already a recession in US earnings estimates, driven by tight labour markets, margin compression and over expansion in the Tech sector. Estimate drawdowns can last for over two years and the current one has only been going for 31 weeks. New bull market, or bear market rally, call it what you will, it isn’t going to last much longer.

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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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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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Messy Reality

Friday, August 19th, 2022

Using sector betas to evaluate investor attitudes to risk

We wanted to get a handle on which equity regions had the most risk-averse investors, so we measured the beta of our recommended overweight and underweight sectors. We found that reality is much messier than we thought and that pre-conceived, US-centric attitudes to risk do not translate well to other regions. Our numbers suggest that Eurozone investors are the most risk averse, but the sectors they use to express this view are not the ones that US investors would choose.

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The Great Undiscounted Risk

Friday, August 5th, 2022

Our models expect a bear-steepening in the US yield curve

There is a widespread and unspoken assumption that the Fed will curtail QT if the US economy starts to suffer and that there are no circumstances in which it would accelerate it. We think this assumption needs to be tested. Our models suggest a bear-steepening in the US yield curve is more likely than continued inversion or a bull-steepening. If we are right, this can only be bad news for US and global equities, because our models suggest that the equity rally is completely explained by the recent collapse in 10-year yields. Indeed, equities have underperformed bonds on a risk-adjusted basis since the end of June. If the bond market becomes less supportive later this year, we think there is another significant down-leg in store for equities.

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What’s Working Now

Thursday, April 14th, 2022

Our equity sector models do well when markets are under stress

Asset allocation is difficult at the moment, with bonds and equities falling in tandem in Q1. We are in favour of broader diversification strategies including other asset classes, but they should not be the result of hasty decisions after a bad quarter. All of our equity sector models have produced excess returns in the year to date and have a history of doing well when markets are under stress. Their best year for excess returns was 2020, during the first wave of the pandemic, and so far, 2022 is shaping up to be another good year.

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So Much Choice

Friday, February 4th, 2022

The opposite to US growth is not US value

If investors decide to get out of the growth style in the US, there are several other strategies they can follow apart from US value: (1) low volatility in US equities; (2) growth in non-US equities; (3) low volatility in other US asset classes; (4) non-US value. The problem with the value style is that cheap stocks tend to stay cheap, unless there is a clear and obvious catalyst for them to outperform, like a massive earnings surprise (as in Energy) or a surge in corporate activity (which may happen in the UK). We think the most popular destination for flows out of US growth will be low volatility in US equities, into sectors such as Consumer Staples and, possibly, Utilities.

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The Roundabout Accelerates

Friday, November 12th, 2021

Global equities are about to start rotating faster than usual

We expect global equities to start rotating faster than usual on a country/regional basis. We discuss the technical rationale in some detail, but the important message is that this not about the recent winners such as the US and India, or the losers like China and Korea, but all the others, which are somewhere in the middle. There are several European countries like Germany, the Netherlands and Sweden, which are at risk of dropping down the ranking, while selected EM countries in Asia and Latin America could benefit. If our analysis is correct, this should happen before Christmas.

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