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.
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.
Bull Market in Cash
Friday, March 3rd, 2023Bonds are not the best hedge for equities
The 40-year bull market in bonds is over and investors will have to adapt. We argued last time that cash should have a much more important role as the risk-free asset against which all investment propositions are evaluated. This week, we look at how cash has interacted with equities and government bonds over the last two years. We find that a three-asset portfolio, using our standard process, has significantly outperformed our standard equity/bond model, in both the US and Europe. Returns are higher in both absolute and relative terms and drawdowns are much lower. We think investors should consider raising their benchmark cash weighting to somewhere between 15-20%, with a pro-rata reduction in both equities and bonds. Some of this new cash weighting could be held in foreign currency.
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No Longer the Cornerstone
Friday, February 17th, 2023Cash is the new risk-free asset
Using the word “risk-free” to describe an asset which has fallen by some 20% during the course of the last two years, would offend most ordinary users of the English language. But finance professionals are still happy to do this when talking about long-dated government bonds. 10-year US Treasuries have failed to hedge the decline in US equities and the same is true in the Eurozone. Worse still, tactical allocation models based on this relationship have under-performed their benchmarks, removing the possibility of generating any alpha from market timing. All these problems go away as soon as we use cash instead of government bonds. It has higher absolute returns than bonds in the US and the Eurozone and the new models outperform their benchmarks with lower drawdowns and better risk-adjusted returns. It’s time for a rethink.
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If It Walks Like a Bull
Friday, February 3rd, 2023It can still fall over in the near future
Our mainstream sector and asset allocation models are producing signals which we would normally expect to see that the start of a new bull market, and not all what we expected in Q4. Much of this is because we have had two bullish surprises (end of zero-Covid in China and the postponement of the US recession), but we should also acknowledge that equities in the UK, and probably the Eurozone, are going to reach new all-time highs in the near future. What is this, if not a bull market? Alas, the same is not true of the US. There is already a recession in US earnings estimates, driven by tight labour markets, margin compression and over expansion in the Tech sector. Estimate drawdowns can last for over two years and the current one has only been going for 31 weeks. New bull market, or bear market rally, call it what you will, it isn’t going to last much longer.
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The Case for Europe
Friday, January 20th, 2023Currency, sector orientation and valuation are all favourable
The basic argument in favour of European Equities is that three of the largest sectors in the index, Financials, Industrials and Consumer are ranked in the top three in our models - unlike the situation in the US, where Technology is in the bottom three. All three have forces driving their outperformance which should last most of this year (respectively rising interest rates, re-opening of global supply chains and rearmament, and post-pandemic recovery). The region, its currencies and its equity markets were priced in October for a catastrophe which simply hasn’t happened, and which is now very unlikely. There may be some short-term profit-taking, but the excessive valuation discount and the currency misalignment will take longer than a few weeks to unwind.
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Weak Tech, Weak Dollar
Friday, January 13th, 2023Welcome to the new regime, which could last a long time
Our models don’t like US Equities or US Treasuries and they don’t like the dollar either. This is an unusual set of circumstances, but one which we think we can explain. The key is to understand the relationship between tighter US monetary policy, lower valuations for mega-cap tech and the unravelling narrative of US exceptionalism. US Bond yields may be rising, but yields in other currencies are rising faster. We strongly recommend that investors reduce their exposure to US Equities and increase their exposure first to Europe and then later to Emerging Markets.
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Eight Non-Consensus Views
Monday, December 19th, 2022A bearish consensus can still be complacent
We agree with the idea that US equities are going to suffer in the New Year, but disagree with many of the assumptions surrounding this view. We think US Treasuries are behaving like a risk-asset and cite their current elevated volatility as evidence. We highlight the positive correlation between equities and bonds, which means that there we may well repeat the bear market of everything we saw in H1 2022. On this basis, the dollar strengthens temporarily and the trough in equities is delayed till Q3. When the recovery comes, sectoral and geographic leadership in equities in likely to change and China will be a much bigger part of the story than Western investors currently imagine. The outlook for oil is anyone’s guess, but it will influence inflation expectations and generate bursts of volatility in all markets, contrary to its current benign behaviour.
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Santa’s Merry Massacre
Friday, December 2nd, 2022What Santa gives the New Year can take away
Recent strength is US and global equities is entirely consistent with normal seasonality, particularly the outperformance of the Eurozone. If normal seasonal patterns prevail, we would expect many of the recent trends to reverse in the New Year as follows: US equities will give up recent gains, Eurozone equities will underperform, US Technology will suffer further declines and the US dollar will strengthen once again. All of this would be consistent with normal seasonality, as is our new call that the bottom of the bear market will not come until Q3 2023 at the earliest.
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Upside Protection
Monday, November 21st, 2022The need to hedge against unexpected good news
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Bear Market Sector Strategy
Friday, November 4th, 2022What to focus on and what to ignore
It easy to be overwhelmed by the speed and quantity of information in a bear market. Investors need a clear focus on what matters and what doesn’t. In any bear market, there are about 10 sector pairs (out of 45) which really drive the performance of a regional equity portfolio and the rest don’t matter very much. These pairs vary from one bear market to the next but are relatively easy to identify. There is also another set of pairs, which may be significant in market cap terms, whose relative performance cannot be easily integrated with the rest of the portfolio. US sectors which feature heavily in this list in this bear market include Financials, Healthcare and Industrials. In Europe, they are Materials, Utilities and Financials.
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