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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How Low Do We Go?

Wednesday, October 24th, 2018

This is a correction, not a bear market

Our asset allocation model cannot get much more bearish. In our view the reason for the recent weakness has been the need for US equities to adjust to PE ratios in line with their long run average now that everything else – real interest rates, risk conditions and earnings growth – is also approaching its own average. We are less concerned about the prospect of a US recession, partly because we see no warning signs from the credit markets. Our model is unlikely to get more optimistic in the next six weeks, but this may happen just in time for Christmas.

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