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Lagging sectors and regions

What does an underweight in both really mean? This week we look at which equity sectors have historically been rated underweight when their region is also rated underweight. Causation is much harder to establish than for overweight sectors in overweight regions. The main lesson is that sector selection may not compensate for being in the wrong region in a bull market or the wrong asset class in a bear market.  [Read More... ]

Few places to hide

UK portfolios could be vulnerable to rising oil. We are concerned that oil may be entering a new trading range which could damage a conventional balanced portfolio. We look at two correlations: between equities and bonds and between oil futures and a balanced portfolio. In the Eurozone, investors don’t really need a hedge. In the US, it may be “nice to have”, but not essential. In the UK, equities and bonds are positively correlated at the highest level since 2001, which means that investors need some sort of hedge, even though we can’t yet be sure that oil is the right on.  [Read More... ]

Enjoy Your Long Weekend

US buy-backs to the rescue. Risk conditions have deteriorated faster than we expected and the deterioration has been led by the US, which is unusual. The excess volatility of US Equities relative to Treasuries has experienced the sharpest three-month increase in the last 22 years, including the run-up to the GFC. The current correction could well be as bad as early 2016. To end it, we may need the Fed to take a time-out on the June rate-hike. We will certainly need US corporates to resume their buy-back programmes as soon as the earnings timetable allows. Apart from Emerging Markets, buying the dip in international equities, without doing the same in the US, is not an attractive strategy.  [Read More... ]

The Great Volatility Slide is Over

We think our volatility index has stopped falling, though we can’t certain just yet. Once this has happened, it will probably take 10-11 months for it to return to its median level, based on past experience. All other things being equal, median volatility will require most investors to have a benchmark weight in equities, as opposed to their current overweight.  [Read More... ]

Actions Speak Louder than Words

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.  [Read More... ]

Systematic Diversification

What’s the best way of allocating an equity portfolio between the equity indices of the US and another country? We use nine different styles to discover the best regime for each individual country over the last 21 years. Sometimes the quest is hopeless; there is no way of beating the US by diversifying into any Eurozone country. But for the rest of the world, there is nearly always a process which has worked.  [Read More... ]


Everybody seems to be increasing their exposure to Eurozone Equities at the same time. We agree with the trade, but are cautious about some of the commentary. Eurozone investors need US equities to construct risk-efficient portfolios, but US investors do not need Eurozone equities in the same way. They do, however, need Emerging Markets.  [Read More... ]

Where To Next?

US Equities look as though they are due a 5-10% correction, so US investors have a chance to look at other opportunities. One option is a Northern Europe group of fiscally responsible countries in and out of the Eurozone. Our preferred option is a diverse group of EMs, including India, Korea, Mexico, South Africa and Turkey, which offer equivalent risk-adjusted returns, but much lower correlation with US Equities.  [Read More... ]

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