Monday, September 10th, 2012

Global Equity Models Commentary 10/09/2012

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

Market conditions

UK investors are equally sanguine about the concatenation of event risk this week. Excess volatility is at or close to 52 week lows, which means that the hurdle rate for the return to be risk-efficient continues to decline. Our view is that investors understand the risks inherent in the decision of the German constitutional court, the Dutch elections and the FOMC and think that they are manageable. Whether they are right or not remains to be seen, but they have had the whole summer to think about them.

Current portfolio

UK bonds remain the largest single exposure on the portfolio, but the weighting has fallen by 10% percentage points this week, with UK and European equities benefitting equally from the change. UK equities have now overtaken US equities as the largest single risk exposure. Given the source of last week’s major newsflow it is not surprising that Europe should have benefitted rather than the US. This could easily be reversed this week if the FOMC walks the walk instead of talking the talk. Emerging market and Japanese equities continue to attract little interest.


Two weeks ago we commented: “It is just possible that the sterling-based investors will be surprised by the speed of the move back into risk assets. A combination of thin summer markets, a little bit of sterling weakness and some profit-taking in UK gilts would be enough to persuade the portfolio to keep on adding to equities every week. Pretty soon, this mixture could be mistaken for real momentum.” So far we see nothing to change our minds, as we move into autumn. This looks and feels like a wall of worry, which risk assets can continue to climb.

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