Volatility – Page 2 – Harlyn Research LLP

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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My Enemy’s Enemy

Thursday, May 17th, 2018

Bond volatility not necessarily bad for equities

10-year Treasury yields have moved decisively above 3% and there is much excitement about what this could mean for equities. We prefer to look a bond volatility as the basis for comparing the two asset classes. Based on its historic relationship with the slope of the US yield curve, bond volatility is still below its predicted value, while equity volatility is in line with it. The hurdle rate which US Equities have to beat in order to be risk-efficient is therefore too high and would fall if bonds experienced a bout of volatility.

Filed under: Categories: Government Bonds, Volatility, Yield curve

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Selectively Europe

Wednesday, April 18th, 2018

It’s still a relative call

By the time equities regain traction relative to fixed income, we believe Europe will provide the leaders. The main reasons are abnormally low volatility compared with the US and global equities and the ongoing stabilisation of the trade-weighted dollar index. Our preferred countries are the UK, France and the Netherlands. It is too early for Germany and Spain, and maybe too late for Italy. Avoid Switzerland, Sweden and Austria.

Filed under: Categories: Eurozone, FX rates, United Kingdom, Volatility

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Enjoy Your Long Weekend

Wednesday, March 28th, 2018

US buy-backs to the rescue

Risk conditions have deteriorated faster than we expected and the deterioration has been led by the US, which is unusual. The excess volatility of US Equities relative to Treasuries has experienced the sharpest three-month increase in the last 22 years, including the run-up to the GFC. The current correction could well be as bad as early 2016. To end it, we may need the Fed to take a time-out on the June rate-hike. We will certainly need US corporates to resume their buy-back programmes as soon as the earnings timetable allows. Apart from Emerging Markets, buying the dip in international equities, without doing the same in the US, is not an attractive strategy.

Filed under: Categories: Market dislocation, United States, Volatility

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Fear Volatility not Bond Yields

Wednesday, February 7th, 2018

This is what drives asset allocation

The Great Volatility Slide is Over and it is time to compare the relative impact of rising bond yield vs rising volatility on asset allocation. We conclude that consensus earnings estimates for 2018 provide a substantial margin of safety against the threat of rising bond yields and rising volatility. The margin of safety declines in 2019, but the big threat comes from volatility, not bond yields. On current forecasts, we would need to return to an ultra-low volatility regime in order to maintain an overweight in equities into 2020.

Filed under: Categories: Earnings Estimates, Harlyn's Process, Volatility, Yield curve

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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.

Filed under: Categories: Global Equities, Government Bonds, Risk-Adjusted Returns, Volatility

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International Bears

Wednesday, October 18th, 2017

Excess volatility as an indicator of trouble ahead

After last week’s note about excess volatility in the US, we look at the experience of other developed markets in 2000, 2007 and 2015. In a majority of occasions, material increases in excess volatility signaled the onset of a correction and/or the transformation to a full-scale bear market. There are no such signals at the current time, which we regard as comforting, though not conclusive, evidence in favour of our equity overweight.

Filed under: Categories: Bear Markets, Eurozone, Harlyn's Process, Japan, Volatility

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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.

Filed under: Categories: Bear Markets, Risk aversion, Tail Risk, Volatility

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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.

Filed under: Categories: Harlyn's Process, QE / QT, Volatility

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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.

Filed under: Categories: Harlyn's Process, Risk-Adjusted Returns, Volatility

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