All posts in category: Risk-Adjusted Returns (23)

Little Ray of Sunshine

Wednesday, December 5th, 2018

Invest in EM Equities without changing your risk profile

Our models are de-risking as fast as they can, with one exception – emerging market equities. Our individual country analysis suggests that high-quality emerging markets are becoming more attractive than high-quality developed markets and that high-risk EMs are doing the same versus high-risk DMs. Investors can make the switch from DM to EM without changing their short-term risk profile. This doesn’t happen very often.

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Don’t Forget the Skew

Thursday, November 29th, 2018

Plan for falling equities with violent changes of direction

Although our models are consistently bearish about the outlook for equities, we agree that there are several large problems which have depressed performance, which would allow the market to bounce if they were “solved” – even temporarily. Rather than prepare for an outright bear market, we think investors should focus on the bull/bear skew and sell countries which tend not to perform in rising markets, even though they are heavily exposed when they fall. This list includes several large Anglo-Saxon markets such as the UK, Canada and Australia.

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Almighty dollar

Wednesday, September 12th, 2018

Currency models don’t help with asset allocation

Many clients are surprised by our low exposure to US Equities given the strong dollar and their performance relative to global equities. It’s a direct consequence of the way we structure our asset allocation model. We could use a currency-based rather than an asset-class approach, but it doesn’t perform as well over the long-term and it doesn’t offer as much downside protection in the event of a correction. In any case, the risk-adjusted returns from US Equities have been bit underwhelming in 2018 to date.

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Because You’re Worth It

Wednesday, April 11th, 2018

Capital deserves the chance of an upside

Risk conditions continue to deteriorate and a number of signs suggest that we are entering a general rotation out of risk assets. These include the ranking of the Technology in all our equity sector models, the rating of US Treasuries vs other fixed income assets, and a loss of momentum in EM Equities. Your capital is not trapped and should only be invested where and when there is a good chance of a positive return.

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Delivery, not Potential

Wednesday, March 21st, 2018

European equities need some momentum soon

Equities in the Eurozone and the UK are not delivering the same returns as the US. This holds true for most sectors as well as the top-level index. Part of the problem stems from the weak dollar, but as most investors did not expect this, they find it hard to forecast the turn. Sooner or later investors will have to respond to this problem.

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Shooting Bad Assets

Thursday, February 15th, 2018

If it’s not worth the risk, sell it.

Risk-efficiency matters, especially as we move into the late-cycle. Assets which are not risk-efficient should be sold. Despite the significant increase in volatility, US and EM Equities are still far more risk-efficient than any of the mainstream US fixed income categories.

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The Great Volatility Slide is Over

Thursday, January 11th, 2018

It’s still very low, but it will start rising soon

We think our volatility index has stopped falling, though we can’t certain just yet. Once this has happened, it will probably take 10-11 months for it to return to its median level, based on past experience. All other things being equal, median volatility will require most investors to have a benchmark weight in equities, as opposed to their current overweight.

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The Anti-Forecast

Wednesday, November 29th, 2017

Current conditions trump medium-term outlooks

Investors don’t need to read the outlooks for 2018 to know that they are not being adequately rewarded for holding supposedly safe assets like US Treasuries. They are effectively forced into US and international equities, because the returns generated by traditional fixed income or alternative assets are unattractive in risk-adjusted terms.

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Walking, Not Charging

Wednesday, September 27th, 2017

The bull survives if the Fed can keep volatility low

If we understand Janet Yellen correctly, there are no constraints in the real economy which critically affect the speed at which US interest rates can rise. But there must be a critical constraint, and we believe it is the requirement not to upset the low volatility environment in US equities. If we are right, the Fed wants an environment where single digit returns from equity are seen as risk-efficient, and a correction does not turn into a bear market. If they manage this, the bull market can carry on, but it will be walking not charging.

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The Hurdle

Thursday, June 29th, 2017

Excess volatility & how central banks respond to it

We use excess volatility as the hurdle rate by which equities must beat bonds, in order to be risk-efficient. In the US, it has just hit a new low going back to 1995. In the Eurozone, it is at a new 20-year low. Risk conditions have never been more benign. This means that they are very likely to deteriorate, possibly quite soon. We also think that central banks want this to happen – but not too much.

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