Our flagship product, called Synopsis, is published every two weeks. It uses the data generated by our process to address whatever we think are the most important issues in global investing at the time.

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All our notes are tagged thematically, so feel free to click on any of the topics and explore what we have written.

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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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Pick Your Preferred Narrative

Monday, June 17th, 2024

But switch out of Cyclicals into Defensives

All our equity sector models in developed markets are switching out of cyclicals and into defensives. At a global level, the peak exposure to cyclicals vs defensives occurred in late April and since then the gap between these two groups has been closing every week. We can’t be sure about the explanation, but our models frequently detect these changes before the consensus settles on a narrative. We do know that the current episode is the seocnd longest continuous net exposure to cyclicals in the 29-year history of the model and that the indicator can swing as far the other way in favour of defensives. Right now, we think the numbers are more important than the narrative.

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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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Two Fashion Victims

Friday, May 17th, 2024

UK and China climbing a wall of worry

Over the last month, two large equity markets, which have been out of fashion for many years, have suddenly surged up our rankings. There is no natural linkage between the UK and China, but both may be benefitting from a view that the authorities are making progress in tackling the big issues relating to their economies: the real estate crisis in China and stagflation in the UK. In China, we don’t think this is the end of the housing crisis, but we do think that recent announcements will successfully insulate the banking industry from any further contagion. China can once again be evaluated on the basis of its growth prospects, and not its balance sheet.  In the UK, recent data paint a picture of accelerating non-inflationary growth, which should be rewarded with falling interest rates. The real causes of the lack of enthusiasm for UK equities are more structural and relate in part to the biases of UK domestic investors. Behind the scenes, the Government is working hard to change these attitudes and these efforts will come to a peak with the planned sale of some its stake in NatWest Bank to UK retail investors, later this summer.

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Treasure not Treasuries

Friday, April 26th, 2024

We are increasing our exposure to commodities

We believe US core CPI will remain above 3% for the whole of 2024 and that equities and bonds are likely to suffer in this environment. Diversification away from these asset classes is a good idea and commodities are the obvious choice. We have a long-only commodities model with 10 constituents which produces better returns and a similar Sharpe ratio to the S&P 500, despite the fact that it went nowhere between 2011 and 2021. (All commodity indices are still below their 2008 high.) We also have a simplified multi-asset model with three commodities – crude oil, gold and copper – capped at a total of 25% of the portfolio. This model beat our standard equity/bond model by an average of 400 bps a year between 1997 and 2007, the last time commodities enjoyed a major bull run. We think we could be about to repeat this part of the cycle and cite the recent uptick in M&A in the sector as evidence.

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Sticky

Friday, April 12th, 2024

US core CPI will be above 3% in 2024 and for much of 2025

Our standard probability approach suggests that the probability of US core CPI falling below 3% in 2024 - let alone down to 2% - is effectively zero. We think the central point of the forecast range should be between 3.5-4.0%. There parts of the US economy which are exhibiting disinflationary trends, but the cost of shelter, especially Owners’ Equivalent Rent, is likely to remain elevated for several quarters. The Fed needs a major policy rethink about how it manages market expectations on the outlook for core CPI, and on how it addresses the rising cost of home ownership in its overall policy mix.

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Respect the Seasons

Tuesday, April 2nd, 2024

Bonds expected to correct before equities

US Equities have been overbought for the last nine weeks, but there have been three longer streaks than this since 2000. Late March is one of two seasonal peaks for expected returns on the S&P 500. Q2 normally produces sub-par but positive returns and the greatest risk of negative returns only comes in Q3. Seasonality also suggests that Treasuries can be weak in Q2, which would fit very nicely with a narrative of only two rate cuts from the Fed in 2024. So even if equities are due some profit-taking, we are reluctant to switch into Treasuries, until they have corrected. We do expect some change in sector leadership, but not a wholesale switch into the laggards. Relative strength and sector persistence data both suggest that leadership will rotate around the top five groups: Financials, Industrials, Technology, Communications and Consumer Discretionary.

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New EM Equity Model

Friday, March 15th, 2024

More visibility and better risk-adjusted returns

Our new EM equity model replaces the global country model and is designed to give us greater visibility on this asset class. We show that our normal process outperforms the benchmark in absolute and risk-adjusted terms. The average annual outperformance since inception is 2.9% and this is achieved despite the model’s volatility being lower than the index. It has outperformed the index in 20 out of 28 years and has good persistence of recommendation. The average stay in the top and bottom five (out of 25 countries) is about 18 weeks. India is the top-ranking country at the moment and close to maximum overweight, while China is at the bottom and close to maximum underweight.

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Have We Missed Japan

Friday, March 1st, 2024

Not if we account for yen deprecation

In our view, Japanese equities cannot outperform on a sustained basis, until Japanese investors start to rebuild exposure to their domestic equity market – something they haven’t for over 25 years. We agree that there have been significant moves to make local companies more investor-friendly, but our models suggest that US equities are still outperforming on a common-currency, risk-adjusted basis. When we run our standard process, but in yen terms, we find that Japanese equities are #2 behind the US. There are some sectors where Japan is preferred, but they are small in comparison to the ones where it isn’t. We like Japan on a tactical basis, but there is nothing to suggest that Japanese investors are about to fundamentally restructure their portfolios.

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