Records Are There to Be Broken

Wednesday, February 28th, 2018

Defensive underweight lasts a long time already

Underweight Defensives is such a consensus call that nobody really bothers to argue the reasons for it any longer. In Europe, our underweight position on Telecom, Utilities, Staples and Healthcare is the biggest it has ever been. The persistence of this underweight is well on the way to challenging the record for any combination of sectors. Consensus is right for now, but everything changes in the end.

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The Only Game in Town

Thursday, November 9th, 2017

Tech is crowding out other sectors

Everyone likes Tech at the moment. It is ranked #1 in every region apart from the Eurozone, where it is #2 and likely to rise within a few weeks. However, it is starting to crowd out overweight positions in other sectors and the level of dominance is becoming dangerous in China. Other sectors and Tech in 1999 have enjoyed this level of dominance in the past but the longest similar episode was seven months, which would take us through to Q2 2018. After that a period of sustained underperformance nearly always follows.

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No Yellow Flags

Thursday, October 26th, 2017

Sector dynamics of early bear markets

A large rise in excess volatility (equity volatility minus bond volatility) is a good indicator of the onset of a bear market in the US and elsewhere. It also works at the sector level for those sectors which peak early, before the dynamics of contagion take over. Every bear market is different, but there are similarities in the early phases. Apart from Telecom, which is a very small sector, there are no warning signs at the US sector level at the moment.

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A Bit Weird

Wednesday, June 21st, 2017

The Curious Link between Energy and Tech

The fate of the US Energy and Technology sectors may be linked together thanks to the simple mechanics of portfolio construction. Our data suggest that investors may be herded into two large positions relative to the benchmark: a big overweight in Tech and a big underweight in Energy. It will be difficult to reduce one without reducing the other. So a bout of profit-taking in Tech may lead to a bounce in the Energy sector. More importantly, a bounce in the oil price could cause the Tech sector to underperform.

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Parlour Games with Volatility

Wednesday, March 8th, 2017

Curious and unsustainable sector effects

The new ultra-low volatility regime throws up some curious implications for equity sectors. Who knew that US Technology and EU Industrials are now attractive to risk-averse investors? What about Healthcare, which could deliver significant returns if investors were just prepared to give it the benefit of the new paradigm.

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Sector Breadth

Wednesday, February 15th, 2017

Measuring support for our overweight calls

Sector recommendations can be stock recommendations in disguise, if performance depends narrowly on one or two large companies. Our overweight recommendations on Financials in the US, the UK and the Eurozone all enjoy broad-based support, as do US and Eurozone Industrials and UK Materials. The overweight calls on US Technology and Eurozone Materials depend heavily on one stock and are therefore lower quality.

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Dodging a Three-Tonne Truck

Wednesday, November 2nd, 2016

Financials rally could be painful

Financials are rallying fast, driven by a significant decline in volatility in the US and the UK, which is exactly what our models expect. We don’t know whether this is justified by fundamentals, but we do know that every investor with an underweight position will have to consider reducing the risk relative to benchmark, sooner or later.

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Give Us a Sign

Wednesday, October 5th, 2016

Looking for turning points in equity sectors

Most of the main asset markets are range bound and moving sideways. So this week we focus on equity sectors where there has been a recent turning point in the risk/reward ratio. We also include a few sectors where the trend has clearly not changed even though some investors might wish it had.

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