How Broad Was My Rally

Friday, May 31st, 2024

Quality available at a discount in Europe

Many investors are still waiting and hoping for the rally in US equities to broaden out. We see no evidence of this in terms of size. Our US equity model has Small Caps almost exactly in line with their benchmark weight, and they have been in the neutral zone for most of the last two years. If anything, their outlook has deteriorated in recent weeks, as hopes for rate cuts continue to be disappointed. We also think that the idea of broadening out is dangerous if it means reducing the liquidity and quality of the portfolio this late in the cycle. There is one area where we think this may be an attractive strategy. There is plenty of quality available in large-cap European equities at a significant discount to US valuations. This could be one reason why the Eurozone and the UK both rank ahead of the US in our tactical allocation model.

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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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Tickets to the Moon

Friday, February 12th, 2021

After Small Caps, Energy could be next

The recent outperformance of Small Caps is starting to generate headlines, but we think there is more to come, especially in Europe. We don’t see any need to take profits, nor do we think that Small Cap outperformance is a reliable indicator of an upcoming peak in the equity index. We do accept that it may be too late to start a big overweight position, So, if you are looking for the next big thing, you may want to consider Energy.

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Two Big Ideas for 2021

Friday, December 11th, 2020

Underweight US Equities, Overweight Small Caps

In 2021, we expect our models to recommend an extended underweight in US Equities and an overweight in Small Caps, particularly Europe, The US underweight is controversial and has often been wrong, but investors need to know that we have been significantly overweight for most of the last 10 years. The underweight worked well in the recoveries of 2003-04 and 2009, and we participated on both occasions. The same is true of our overweight on Small Caps, which is our preferred way of playing the economic recovery and equity rotation at the same time.

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The Meaning of Boris

Friday, January 10th, 2020

Three half-full glasses and an alternative

The result of the UK election has made the country more attractive to international equity investors, but not to domestic investors, except in the sense that equities everywhere have become more attractive relative to fixed income. We do have substantial overweight positions in cyclical sectors like Industrials, but these are funded by underweights in other cyclical sectors like Materials. We expect to upgrade Small Caps to overweight in the near future, but we have already done so in Japan and the Eurozone. It’s all a bit underwhelming. But our models are clear that if you think that the UK will prosper outside the EU, you should buy Ireland.

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Three Unrelated Ideas

Wednesday, February 1st, 2017

Energy, Spain and Small Caps

Nothing has happened to move the dial on any of our major themes; so this a time for housekeeping and some small ideas. The three we have chosen are: reducing exposure to the Energy sector, using Spanish government bonds as the safe-haven against election shocks in Europe, and increasing exposure to UK and Eurozone Small Caps.

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