All posts in category: Risk aversion (10)

FOMO can be rational

Friday, July 5th, 2024

“Probability of unacceptable losses in US equities less than 3%”

Sometimes it helps to look at the world from another perspective. Most institutional investment regard risk as a cost, something which must be used efficiently. But there is another approach, which views volatility as something which enables high returns, which should be accepted, provided that the asset can be sold when losses are worse than those which are predicted from the distribution of returns. This view is typically associated with retail investors and the benchmark asset for comparison purposes is normally cash. If we use this approach, based on data for the last four quarters, we find that the probability of incurring unacceptable losses in US Equities is less than 3%. Sure, it’s a short data set, but with numbers like this, FOMO can be rational.

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Recession Watch

Friday, November 3rd, 2023

An underweight in Industrials is rare and often spells trouble

We have downgraded the Industrials sector in four regions this week – to neutral in the UK and Pan Europe and to underweight in the Eurozone and Japan. In the last four weeks, it has lost ground in every region. Since the inception of our models, the Industrials sector has had the lowest number of underweight recommendations out of all eleven sectors (including Small Caps) and this is normally an indicator that investors are concerned about the onset of a recession. Small Caps have also seen a big reduction in their recommended weight over the same period, which reinforces these fears. Taken together, Pan Europe and the Eurozone are the worst-affected regions. The US, China and Japan all affected but not as badly. The UK is somewhere between the US and Europe. The narrative that the US will escape, while the rest of the world suffers, is not borne out by recent investor behaviour.

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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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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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China Out of Sync

Wednesday, January 17th, 2018

What do they know that we don’t?

Our equity sector models suggest that Chinese investors are much more defensive and less pro-cyclical than investors in every other region. This is odd considering that China is forecast to be the largest single contributor to global growth. The obvious, but not the only possible, explanation is that Chinese investors don’t share this optimism.

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A Bolt from the Blue

Thursday, October 12th, 2017

How to spot the next bear market

Provided that that causes of the next bear market in US equities originate in the US, investors should have time to adjust their asset allocation before the correction turns into a full-scale bear market. The necessary rise in excess volatility (equities minus bonds) takes several months and cannot happen without someone noticing.

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Untangling the Currency Effect

Wednesday, September 13th, 2017

Risk-appetite set to decline unless dollar recovers

What would happen to investors’ risk appetite if global currency markets stabilised at their current levels? In our view, the cumulative shock from the weak dollar has already reduced the recommended allocation to equities for most developed markets. This includes the US, though not by very much. The only way to avoid further reductions is for the dollar to retrace some its losses. If all major currencies stay where they are, risk appetite in most countries is likely to trend lower. The only significant exception is China.

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Euro-Schizophrenia

Thursday, July 27th, 2017

Domestic investors don’t like a strong euro

International investors are still in love with Eurozone equities, but the strength of the euro is starting to cause problems for domestic investors. The euro is probably overbought in the short-term, but further strength later this year would cramp Eurozone earnings growth in 2018 and tighten monetary conditions in which would allow the ECB to delay interest rate rises and shrinking its balance sheet.

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Comforting Conclusion

Wednesday, May 24th, 2017

Low volatility not always followed by an explosion

We are now very close to the all-time low on our index of multi-asset volatility, but setting a new record is not really important. What matters is how quickly we revert to the median and what leads us higher. Previous episodes suggest that the reversion takes 8-10 months and is led by US High Yield and US REITs. The numbers also suggest that global equities could correct by 10-15% without significantly damaging investor psychology.

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The Uncrowned King

Wednesday, December 7th, 2016

Cash compared with a balanced mandate

Nothing illustrates the cumulative distortions QE has imposed on US financial markets, better than the historic returns of a balanced 50/50 portfolio relative to cash. The current upswing has lasted almost eight years in an unbroken trend, as opposed the usual five. Our probability indicators suggest that we are getting close to a break of trend. If the Fed raises rates by more than expected in 2017, cash may yet be king.

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