Everyone likes Tech at the moment. It is ranked #1 in every region apart from the Eurozone, where it is #2 and likely to rise within a few weeks. However, it is starting to crowd out overweight positions in other sectors and the level of dominance is becoming dangerous in China. Other sectors and Tech in 1999 have enjoyed this level of dominance in the past but the longest similar episode was seven months, which would take us through to Q2 2018. After that a period of sustained underperformance nearly always follows.

We are not concerned about the Tech sector in the US. We are concerned about it everywhere, particularly in China. There are obvious parallels between the behaviour of the Chinese Technology sector now and the US in the run-up to the dot-com bubble. Valuation tends not to be helpful in these circumstances, but Harlyn’s approach, based on return per unit of risk, can be.

A large rise in excess volatility (equity volatility minus bond volatility) is a good indicator of the onset of a bear market in the US and elsewhere. It also works at the sector level for those sectors which peak early, before the dynamics of contagion take over. Every bear market is different, but there are similarities in the early phases. Apart from Telecom, which is a very small sector, there are no warning signs at the US sector level at the moment.

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.

Across a broad spread of asset classes and strategies, investors have responded to recent dollar strength by putting on a series of trades which suggest they expect it to continue. This doesn’t prove that it will, but the market reaction has been consistent and immediate.

If we understand Janet Yellen correctly, there are no constraints in the real economy which critically affect the speed at which US interest rates can rise. But there must be a critical constraint, and we believe it is the requirement not to upset the low volatility environment in US equities. If we are right, the Fed wants an environment where single digit returns from equity are seen as risk-efficient, and a correction does not turn into a bear market. If they manage this, the bull market can carry on, but it will be walking not charging.

What would happen to investors’ risk appetite if global currency markets stabilised at their current levels? In our view, the cumulative shock from the weak dollar has already reduced the recommended allocation to equities for most developed markets. This includes the US, though not by very much. The only way to avoid further reductions is for the dollar to retrace some its losses. If all major currencies stay where they are, risk appetite in most countries is likely to trend lower. The only significant exception is China.

US investors are being bailed out of a tight situation by the weaker dollar. The chances of losing money on their overseas equity positions are much lower than they are in domestic fixed income. The same is true for domestic equities. They can afford to do nothing, but euro-based investors face a much tougher choice.