Results for search of category: Diversification

Three Quick Ideas

We are always wary of making big calls on the basis of thin summer markets, so here are three quick ideas. First, Japan produced an important technical buy signal just before Prime Minister Suga announced his resignation. It is very similar to the one at the start of the Abenomics rally in 2012. Second, the recommended weight of US equities to the rest of the world is at a 10-year high and it does not normally hold this level for more than a month. Third, we think European industrials are out of line with US Industrials and potentially vulnerable.  [Read More... ]

China vs US Exceptionalism

Our recommended exposure to Chinese equities is effectively zero, but EM Equities (of which China is by far the largest part) are critical to the success of any global balanced portfolio. So, we have looked at individual Chinese sectors to see which ones have been the most successful diversifiers compared to their US counterpart. The good news is that it is easy to identify those which fail the test badly: Financials, Industrials, Telecom and Small Caps. The bad news is that only Technology has offered successful diversification over the whole of our test period, but now is not a good entry point. There may also be opportunities in Consumer Staples and Healthcare, but, again, we prefer to wait for a better entry point.  [Read More... ]

Time to Separate China from EM

We think it is time to take China out of the main EM equity indices. Some of the arguments made for its inclusion are no longer valid. It doesn’t make sense to have separate benchmarks for companies listed in China and Hong Kong. Separate indices for China plus Hong Kong and the rest of Emerging Markets would increase flexibility for all investors, not just those who no longer wish to have passive exposure to the current regime in China. Once we make the split, we can see that EM ex China has already begun an interesting rally.  [Read More... ]

Adding REITs and TIPS to the mix

Successful diversification using publicly-traded alternative asset classes, like commodities, REITs and TIPS is possible. We can select from a family of systematically-managed portfolios, which allow us to capture the upside of diversification and avoid most of the downside. However, the big takeaway from this process is that multi-asset diversification itself has been largely redundant since the end of the financial crisis, thanks to the actions of the Federal Reserve. Since that time there have been two false dawns, when it looked as though the concept was about to make a comeback and we may be on the verge of another one now. If it turns out to a real dawn, we have the regime management skills to exploit it. If not, we should be able to get out without too much harm.  [Read More... ]

Is it Time for Commodities?

We know how to incorporate commodities into our asset allocation process. Over the last 25 years as a whole, our process would have generated significant outperformance on an absolute and risk-adjusted basis. This is achieved by systematically managing exposure to a limited number of commodities: oil, gold and copper only, and by actively managing a small number of other assets, spread across equities and fixed income. Passive exposures don’t work as well and too many assets create unnecessary and counter-productive complexity. The problem with including commodities is that US exceptionalism in equities, currencies and fixed income has made this strategy unattractive since 2010. If you think that this regime may be ending, it may be time to take another look at commodities.  [Read More... ]

To See Ourselves as Others Do

Eurozone equities may be cheap when compared to the US, but that’s not really important. Over the last10 years, US investors have never been able to generate a superior risk-adjusted return by diversifying into the Eurozone index, no matter what tactical allocation strategy they follow. The picture is marginally better if we look individual sectors over a shorter time-frame, but Japan and Asia ex Japan, do much better on this test.   [Read More... ]

How to Hedge an Equity Sell-Off

Bonds don’t always go up when equities go down. In 2003, holding long-dated government bonds on average offset 50% of local currency losses in developed equity markets. That ratio has fallen steadily in each of the following major sell-offs, 2009, 2016 and 2020. This year, it was effectively zero on average for the seven largest developed markets. For some countries, it was negative - i.e. bonds went down just when you needed them most.   [Read More... ]

Where Have All the Leaders Gone?

Two weeks ago, we had the lowest number of net buying opportunities for individual countries since May 2000. It’s hard to be bullish about global equities as an asset class when there are so few leaders. Japan is one of just three countries which look attractive on our system, but nobody seems to care.  [Read More... ]


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