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A Warning from Japan

Japan has had a good run at the top of our regional equity model. A shift in risk appetite like the one earlier this month normally implies a change in regional leadership. The yen has broken up through an important trend against the dollar and our Japanese equity sector model is reducing the underweight on defensives, unlike any other developed market. Four good reasons why we expect to downgrade Japan to neutral soon.  [Read More... ]

Final Thoughts & First Decisions

The agenda for January starts to take shape. It’s too late to make any significant adjustments to the portfolio this year, but there are several themes which may have matured sufficiently to be immediately actionable when markets restart in January. On the downside, we may have to cut exposure to China and to the Technology sector in the US, and globally. On the upside, there may be an opportunity in UK equities and certain defensive sectors like Staples and Telecom.  [Read More... ]

The Anti-Forecast

Investors don’t need to read the outlooks for 2018 to know that they are not being adequately rewarded for holding supposedly safe assets like US Treasuries. They are effectively forced into US and international equities, because the returns generated by traditional fixed income or alternative assets are unattractive in risk-adjusted terms.  [Read More... ]

What next for EM?

Three key messages for EM equities. (1) We expect to be underweight by early Q1 2018. We are already underweight EM in fixed income. (2) EM equities are not behaving like a single asset class at present. Only specialists should attempt to pick favourite countries. (3) The inclusion of China A shares in the main EM indices will force investors to rethink the way they allocate money, and they will be underweight while they work out what to do.  [Read More... ]

The Days of Future Past

We are not concerned about the Tech sector in the US. We are concerned about it everywhere, particularly in China. There are obvious parallels between the behaviour of the Chinese Technology sector now and the US in the run-up to the dot-com bubble. Valuation tends not to be helpful in these circumstances, but Harlyn’s approach, based on return per unit of risk, can be.  [Read More... ]

No Yellow Flags

A large rise in excess volatility (equity volatility minus bond volatility) is a good indicator of the onset of a bear market in the US and elsewhere. It also works at the sector level for those sectors which peak early, before the dynamics of contagion take over. Every bear market is different, but there are similarities in the early phases. Apart from Telecom which is a very small sector, there are no warning signs at the US sector level at the moment.  [Read More... ]

International Bears

After last week’s note about excess volatility in the US, we look at the experience of other developed markets in 2000, 2007 and 2015. In a majority of occasions, material increases in excess volatility signalled the onset of a correction and/or the transformation to a full-scale bear market. There are no such signals at the current time, which we regard as comforting, though not conclusive, evidence in favour of our equity overweight.  [Read More... ]

A Bolt from the Blue

Provided that the causes of the next bear market in US equities originate in the US, investors should have time to adjust their asset allocation before the correction turns into a full-scale bear market. The necessary rise in excess volatility (equities minus bonds) takes several months and cannot happen without someone noticing.  [Read More... ]

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