Forced recapitalisation of Tier-2 banks has begun

Please explain the third leg of US monetary policy

One of the main reasons for the new high in US equities is the sharp decline in the volatility of their returns compared with those of other asset classes. Any institutional investor with a formal risk-budgeting approach will be forced to allocate more money to them, having not owned them when they were riskier, but cheaper. This looks dangerously like a “buy high, sell low” strategy.

The way in which different regions respond to good news can tell us a lot about investor attitudes. The recent US payroll data are a good example of this. The US, China and the Anglosphere - including the UK – responded well; the Eurozone and Japan didn’t. It’s hard to reconcile this reaction with IMF forecasts that make the UK the centre of a global slowdown over the next 12 months.

The scores for the Financials sector in our Eurozone and Pan-European equity models are catastrophically awful – as bad as those for US Financials at the onset of the Lehmans crisis. The only possible conclusion is that the Eurozone financial crisis has already begun. The three large banks with the worst individual scores are Unicredit, Intesa and Deutsche Bank.

Don’t waste time worrying about all the things which could go wrong after Brexit. It’s better to focus on areas where there is potential for positive returns. We maintain our exposure to a broad spread of US fixed income and are adding to Emerging Markets in equity and fixed income. Find the safe, deep water; stay away from the rocks.