Results for search of category: Volatility

How Low Do We Go?

Our asset allocation model cannot get much more bearish. In our view the reason for the recent weakness has been the need for US equities to adjust to PE ratios in line with their long run average now that everything else - real interest rates, risk conditions and earnings growth – is also approaching its own average. We are less concerned about the prospect of a US recession, partly because we see no warning signs from the credit markets. Our model is unlikely to get more optimistic in the next six weeks, but this may happen just in time for Christmas.  [Read More... ]

My Enemy’s Enemy

Bond volatility not necessarily bad for equities. 10-year Treasury yields have moved decisively above 3% and there is much excitement about what this could mean for equities. We prefer to look a bond volatility as the basis for comparing the two asset classes. Based on its historic relationship with the slope of the US yield curve, bond volatility is still below its predicted value, while equity volatility is in line with it. The hurdle rate which US Equities have to beat in order to be risk-efficient is therefore too high and would fall if bonds experienced a bout of volatility.  [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... ]

Delivery, not Potential

European equities need some momentum soon. Equities in the Eurozone and the UK are not delivering the same returns as the US. This holds true for most sectors as well as the top-level index, Part of the problem stems from the weak dollar, but as most investors did not expect this, they find it hard to forecast the turn. Sooner or later investors will have to respond to this problem.  [Read More... ]

Shooting Bad Assets

If it’s not worth the risk, sell it. Risk-efficiency matters, especially as we move into the late-cycle. Assets which are not risk-efficient should be sold. Despite the significant increase in volatility, US and EM Equities are still far more risk-efficient than any of the mainstream US fixed income categories.  [Read More... ]

Fear Volatility not Bond Yields

The Great Volatility Slide is Over and it is time to compare the relative impact of rising bond yield vs rising volatility on asset allocation. We conclude that consensus earnings estimates for 2018 provide a substantial margin of safety against the threat of rising bond yields and rising volatility. The margin of safety declines in 2019, but the big threat comes from volatility, not bond yields. On current forecasts, we would need to return to an ultra-low volatility regime in order to maintain an overweight in equities into 2020.  [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... ]

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... ]


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