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.

Three Big Risks

Friday, August 4th, 2023

Dollar, oil and Treasury yields

Our models suggest that the near-term outlook for crude oil and 10-year Treasury yields is higher, while the trade weighted dollar is lower. This is not the consensus view. More importantly, we think that the medium-term risk-case for Treasury yields and the US dollar is much worse than the consensus is prepared to consider. It is hard to imagine a world of high and rising yields, if you have spent your career in an era of falling yields. The same is true of the dollar but in reverse. Investors ought to make the effort to do so, lest they are unpleasantly surprised.

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A Label Without Meaning

Friday, July 21st, 2023

EM Equities have too much complexity and not enough return

All EM equity indices comprise a mix of countries which once shared some important economic characteristics, but no longer do. The whole asset class is dominated by China, where the investment outlook is increasingly uncertain. Looking at over 20 different countries with vastly different growth profiles and levels of income no longer makes sense. Investors who wish to reduce the complexity of their portfolios should think about swapping their EM equity allocation for one to India on its own. It has outperformed its benchmark by a substantial margin over the last 5,10, and 20 years and will probably continue to do so given its superior demographic profile and productivity outlook.

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False Sense of Security

Monday, July 10th, 2023

7-10 year Treasuries offer no hedge against equity declines

We are mystified by the ongoing strength of the long end of the US yield curve. We fully acknowledge our bias towards a higher-for-longer view of inflation. Even so, we don’t understand why investors are willing to put up with lower yields and higher volatility than they could get by investing in shorter-dated Treasuries. Over the last 18 months, 7-10 year US Treasuries have delivered absolutely no protection against a decline in US equities. In fact, they have a tendency to decline at the same time and this downside beta has been getting worse. The same relationship affects all Treasury maturities from 1-3, all the way out to 10-20, but the 7-10 year index has the worst beta.

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Worlds Apart

Monday, June 26th, 2023

US Megacaps are behaving like a separate asset class

For some time, we have been discussing with clients the possibility of dividing up the equity universe in a different way, to give us more flexibility with our regional equity allocation. To do this, we would have to split the US into two. There are many ways in which this could be done, but it is really hard (actually impossible) to come up with financial metrics or thematic approaches which would give us a consistently applicable framework, without lots of anomalies. So, we opted for a really simple definition: the top 10 stocks, from time to time, vs the rest. These typically account for just over 40% of the market capitalisation of the S&P500. We find clear evidence that this group behaves differently from the rest of the US, often having an overweight position, when the rest of the US is underweight. As far as the current situation is concerned, we suggest that the right way to fund an increased exposure to Nasdaq, FAANG or Megacaps, is not to sell European stocks, but the rest of US equities.

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For the Unbelievers

Friday, June 2nd, 2023

Low risk, not high return, makes Japanese equities attractive

Our proprietary volatility index dropped out of the danger zone three weeks ago, having warned us back in May 2022 that something was going to break. This helps to explain why investors feel so comfortable with equity risk at the moment. All equity regions have levels of realised volatility below their 25-year median and only US Treasuries are still in the danger zone. The volatility of Japanese equity returns is in the 13th percentile of its 25-year history. Investors don’t have to believe the new (or is it the old) shareholder activism story. The risk-cost of entry into Japanese equities is low by historical standards and that is enough to make the risk-reward calculations work.

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Nothing Doing

Friday, May 19th, 2023

Only high-conviction idea should be actioned

These are confusing times in financial markets, with little direction in any of the main asset classes. This week, we focus only on the high-conviction ideas generated by our models covering asset allocation, commodities, equity sectors, individual countries, credit and different maturities in government bonds. In general, there are more negative, than positive, high-conviction ideas. These include topping signals in many Eurozone countries such as France, Italy, Germany and Spain and for the Eurozone as a whole. We have high-conviction negative signals in Financials across all regions, apart from China, and other pre-recession signals in sectors like US Industrials and UK Materials. The positive signal in asset allocation is for US equities, but the level of conviction is lower than the negative call on the Eurozone, and is heavily dependent on the positive view of US Communications going forward. We like Europe, ex Eurozone, particularly Switzerland and Denmark, and detect signs that India may be bottoming, though the rest of EM Equities are highly unattractive.

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What To Do About China

Saturday, May 6th, 2023

It’s an ill wind which blows nobody any good.

EM Equities are in deep trouble and we see no early turning-point, mainly because China is also suffering. The strong outperformance promised after the end of lockdown has not materialised, but more importantly, our models suggest that the local equity market itself is not functioning as it should. Two relatively obscure indicators: active weight and persistence of winning and losing sectors are either at, or very close to, 20-year lows. This suggests that investors are struggling to construct portfolios, which deliver an appropriate balance between risk and return. This is not a problem China has suffered from until recently and if it continues, international investors may have to regard this as a secular trend, not a cyclical aberration. If EM and China are not attractive destinations for international capital, other regions must benefit on a relative basis - and the most obvious is Europe.

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Triple-Leveraged Cash

Friday, April 21st, 2023

With apologies to Bloomberg Surveillance

Most institutional investors are not allowed to use leverage in their portfolios, which is a pity, because one of our models, which switches between a 100% leveraged portfolio of US equities and cash, has outperformed the S&P500 since inception in 1996. It has exactly the same as inputs and rules as all our other asset allocation models and it produces better absolute and risk-adjusted returns than 100% equity exposure, with a smaller drawdown. It also beats our equity/bond model, but is not as risk-efficient. This disproves the theory that investors cannot use timing to beat the market. They can, if they have a margin account, and know how to use it. For most of the last 30 years, this result could be dismissed as a curiosity because a mixed equity/bond portfolio did so well. In particular, bonds rose when equities fell. But if equity and bond returns stay positively correlated – as they currently are – for an extended period of time, institutional investors may need to explore the opportunities created by cash and leverage strategies.

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