Monday, July 2nd, 2012

Global Equity Models Commentary 02/07/12

(This commentary was written originally specifically for the Sterling Global Equity Model)

Market conditions

In conditions such as these, where there is little direction for risk asssets and even less leadership, it is important that the asset allocation process does everything it can to reduce the volatility of the portfolio. When returns are hard to come by, this is the best way of maximising the available return per unit of risk. Over the last 12 months the model has produced a gross total return of 6.0%, which is well below the 10 year average and therefore disappointing. However the volatility has also been lower than average, which produces a Sharpe ratio of 0.9, in line with the 10 year average.

Current portfolio

Despite the gains for most equity markets last week, risk conditions over the whole of the sample period actually deteriorated. This means that exposure to the US and UK equity markets has been cut slightly, with the money going back into UK gilts. In total the adjustments amount to about 8% of the portfolio, which is not large for this model, but it does go against the trend of the last two weeks. Note that exposure to Japan has not been cut, and that this ranks as the third highest equity position, ahead of both the Eurozone and Emerging Markets, which does not often happen.


Last week, we expressed some scepticism about the quality and duration of the Japanese rally. There is still scope for disappointment, but for the sake of balance we should note that the Tankan came in ahead of expectations. This does not mean we think that Japan can decouple from other global equity markets, but of all the major equity regions, it is probably least affected by the ongoing Euro crisis. Elsewhere, we expect the dominant influence over the next month to be the Q2 results season in the US. On balance we expect these to be underwhelming, particularly regarding guidance, and unlikely to provide a catalyst for global equity markets.




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