Monday, June 11th, 2012

Global Equity Models Commentary 11/06/2012

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

Market conditions

These recommendations are based on prices which do not reflect the confirmation of the Spanish bank rescue, details of which are still being released, though clearly some of this news was already in the price by the end of last week. So the question arises, “Are they already out of date?” We think not. The soap opera that is the euro-crisis has merely reached the end of an episode. Tune in next week to see if the Greeks have elected a government. In case we appear overly pessimistic, we think the Spanish deal is good news; but its impact on the dynamics of risk and return is marginal.

Current portfolio

There is virtually no change to the portfolio which results from last week’s newsflow. Equity exposure is now down to less than 20% of the portfolio. Only US equities have any noticeable weight. Everything else is so small that it makes little sense to talk about orders of preference. In these circumstances it is tempting to believe that equity exposure must be close to its nadir, but the lesson of 2002 and 2008 is that risk conditions can be so hostile that exposure to equities should be zero.


We still have not had any intervention from central banks in the developed world.  If these interventions are to be effective they would need to be so large as to distort the currency markets, unless all central banks including the Fed and the BoE (and possibly the PBoC and BoJ) intervene at the same time.  In the meantime we note that volatility in the UK is now higher than all other regions apart from the Eurozone. This includes emerging markets. This is significant because the UK normally has a reputation for being a low risk market, and it highlights the potential for collateral damage should the euro- crisis remain unresolved.

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