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.

Under UK regulations, our research is only available to professional clients and eligible counterparties; they are not available to retail (investment) clients. Harlyn Research is not registered as an investment advisor with the SEC and therefore any information about our investment products or services is not directed at nor intended for US investors.

The Great Undiscounted Risk

Friday, August 5th, 2022

Our models expect a bear-steepening in the US yield curve

There is a widespread and unspoken assumption that the Fed will curtail QT if the US economy starts to suffer and that there are no circumstances in which it would accelerate it. We think this assumption needs to be tested. Our models suggest a bear-steepening in the US yield curve is more likely than continued inversion or a bull-steepening. If we are right, this can only be bad news for US and global equities, because our models suggest that the equity rally is completely explained by the recent collapse in 10-year yields. Indeed, equities have underperformed bonds on a risk-adjusted basis since the end of June. If the bond market becomes less supportive later this year, we think there is another significant down-leg in store for equities.

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Pivot to Asia

Friday, July 22nd, 2022

It may be the least-worst option

There is a leadership vacuum in global equity markets. The US, the Eurozone and the UK all have serious issues to confront, ranging from valuation excess and monetary tightening to political uncertainty and energy rationing. Japan and Emerging Asia share some of these problems but are not as badly affected. One is a low return, risk reduction trade, while the other offers high risk and high reward. Both strategies have a place in a well-diversified global equity portfolio.

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Estimate Breadth

Friday, July 8th, 2022

The raw data look reassuring but the trends aren’t

The percentage of companies in the S&P500 with no drawdown in their earnings estimates is declining and just about to drop below its median for the last 15 years. The percentage where there is a drawdown of more than 20% is about to start rising, but from a low level. We are still within normal ranges on both measures, but if they move out of this, the downside is significant and the recovery takes much longer than the decline. At the sector level, we cannot make sense of the relative rankings in several cases. In particular, we think the consensus is far too optimistic about the outlook for Industrials.

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Lower for Longer

Friday, June 24th, 2022

New worst-case scenario for US Equities

We have cut our reasonable worst-case estimate of where the S&P500 may bottom from 3,400 to 3,000. This follows on from our last note which argued that current consensus earnings were likely to drop by at least 15% before hitting their trough sometime in 2023. Our new target implies a forward pe ratio of about 15x, which is slightly lower than the median for this century.  As consensus forecasts are reduced, we expect the earnings mix to move away from highly-valued sectors like Tech and Consumer Discretionary towards lowly-valued sectors like Energy and Materials. The other reason for our new target is that nobody has any profits from other investments which they can reinvest into equities. US 7-10 Treasuries are down by about 17% since the equity market peaked, compared with gains of about 10% at the equivalent stage of the bear markets in 2001 and 2008.

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How Earnings Recessions Behave

Friday, June 10th, 2022

Consensus estimates aren’t reliable in a bear market

Bear markets can make the most rational of investment approaches look pretty stupid. Any concept of fair value based on consensus estimates can be downright dangerous. The typical delay between the peak in the index and the peak in estimates is more than 30 weeks, so we should not expect the consensus to start cutting until late August.  The typical drawdown in 12-month forward estimates lasts between 115 and 170 weeks. So, the estimates you are using for 2022/23 may also be the numbers for 2025/26.

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Normality Reasserts Itself

Friday, May 27th, 2022

Monetary policy distorted the mechanics of risk and return

The huge monetary interventions during the pandemic in the US and other countries were designed to protect equities from a surge in economic and financial risk. They succeeded, but at the cost of distorting the normal relationship between risk and return: specifically, the excess volatility vs the excess return of equities vs bonds. This is now reverting back to normal. As the volatility of equities rises relative to the volatility of bonds – and this figure is well below its long-run average, let alone its potential peak - their return relative to bonds must decline. The only developed market which may escape the worst of this adjustment is Switzerland.

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Something Is Going to Break

Friday, May 13th, 2022

Volatility has entered the danger zone.

Realised volatility continues to march higher every week and we have now got to the danger zone, where this creates the conditions for more volatility - especially if the FOMC is committed to much tighter monetary policy. In these circumstances, traditional valuation metrics lose a lot of their power and investors should assume that markets in one or more major asset classes will become disorderly. We think this has already begun in Nasdaq, Italian government bonds and the Chinese yuan. Other assets, which may follow in due course, include US High Yield, credit ETF’s and US housing.

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Go Direct

Friday, April 29th, 2022

Compare equity sectors against Treasuries, not other equities

We think US equities as an asset class are going to struggle against US Treasuries over the next few weeks, partly because bonds have already priced in a lot of bad news, and partly because earnings estimates for 2022 and 2023 are too high. It may take investors some time to realise this, so positioning within equities or between equites and bonds may give rise to significant timing difficulties. However, our models are really clear about the relationship between Treasuries and some sectors, like Energy. There are at least four of these sectors now and this number could rise to eight. Investors may find that using this direct approach, comparing equities against Treasuries, rather than other equities, helps to clarify their thinking.

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What’s Working Now

Thursday, April 14th, 2022

Our equity sector models do well when markets are under stress

Asset allocation is difficult at the moment, with bonds and equities falling in tandem in Q1. We are in favour of broader diversification strategies including other asset classes, but they should not be the result of hasty decisions after a bad quarter. All of our equity sector models have produced excess returns in the year to date and have a history of doing well when markets are under stress. Their best year for excess returns was 2020, during the first wave of the pandemic, and so far, 2022 is shaping up to be another good year.

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