Volatility – Harlyn Research LLP

How to Hedge an Equity Sell-Off

Friday, September 18th, 2020

Not with government bonds

Bonds don’t always go up when equities go down. In 2003, holding long-dated government bonds offset 50% of average local currency losses in developed equity markets. That ratio has fallen steadily in each of the following major sell-offs, 2009, 2016 and 2020. This year, it was effectively zero on average for the seven largest developed markets. For some countries, it was negative – i.e. bonds went down just when you needed them most.

Filed under: Categories: Diversification, Government Bonds, Inflation, Volatility

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Lessons from a Fast Market

Friday, June 12th, 2020

China plays a different game and Healthcare suffers

Yesterday’s sell-off was so brutal that it probably marks the start of a different regime in equity markets. We are out of Phase 1 of the recovery and into a second more sceptical and nervous regime. Both the US and the UK broke of out the uptrends in our daily indicator that have been in place since March. The technical situation is better in the Eurozone and Japan, while the level of financial repression is China so severe, in our view, that the indicator has lost most of its signalling power.

Filed under: Categories: China, Eurozone, Government Bonds, Harlyn's Process, Japan, United Kingdom, United States, Volatility

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One Disease; Three Themes

Friday, April 3rd, 2020

Consensus is looking for mean reversion in the wrong place

Three interesting ideas emerge from our regular reports. First, the volatility shock will almost certainly be as bad as 2008. Second, we believe that a long Technology /short Energy trade will have a positive pay-off no matter whether equity markets rise or fall. Third, our models are increasing exposure to EM Equities. We recognise this is a contrarian trade, but it is well-supported by our process and doesn’t depend on one or two countries.

Filed under: Categories: Emerging Markets, Energy Prices, Equities, Technology, Volatility

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Asia: First In, First Out

Thursday, March 19th, 2020

Already producing better risk-adjusted returns

The recent volatility shock is as big as the one in the middle of the GFC and it isn’t over yet. It has also happened three times faster, in three weeks rather than nine. Fear is inevitable, but the are some interesting opportunities, especially in Asia. Countries like Taiwan and South Korea have managed the corona virus better than the US or Europe, while China is already recovering. If you wait for the bounce in the West, you may miss it in the East.
There

Filed under: Categories: China, Emerging Markets, Global Equities, Japan, Market Timing, Risk-Adjusted Returns, Volatility

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EM Bonds: the new safe haven

Friday, March 6th, 2020

Higher yields and lower volatility

Many investors, brought up on the Tequila crisis of 1994, or the Thai baht crisis of 1997, or others too numerous to mention, may be surprised to see EM Sovereign Bonds at the top of our euro asset allocation model and at #2 in the US$ version. Times have changed. The volatility of the EM bond portfolio (but not necessarily individual countries) is less than 7-10 year Treasuries and the yield is a lot higher. They deserve their ranking.

Filed under: Categories: Emerging Markets, Geo-Political Risk, Volatility

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New Risk Conditions Indices

Thursday, October 10th, 2019

Equity and bond volatility are behaving inconsistently

This week we introduce four new risk conditions indices covering the equity and government bond markets of selected emerging market and developed countries. They highlight the fact that the relationship between equity and bond volatility is abnormal, given their recent relative performance.

Filed under: Categories: Emerging Markets, Equities, Government Bonds, Volatility

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Show Me the Damage

Thursday, May 16th, 2019

EM equity weakness may cause FX volatility to surge

So far, most of the damage inflicted by US/China trade tensions has been on EM Equities. Our models suggest they peaked over a month ago and there is no support until we get well into underweight territory. The danger is that equity weakness turns into FX volatility, affecting EMs and DMs. We know this is always dangerous for risk assets in general.

Filed under: Categories: China, Emerging Markets, FX rates, United States, Volatility

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