Monday, May 14th, 2012

Global Equity Models Commentary 14/05/2012

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

Market conditions

The profit warning from JP Morgan late last Friday was enough to unnerve the US equity market, which was struggling to make sense of the many possibilities opened up by the Greek and French elections. The trend of equity volatility is still declining but bond volatility is falling faster, which means that excess volatility – the hurdle rate – is starting to rise.

Current portfolio

There is a big shift in the portfolio this week. UK Government bonds, which were languishing in fifth place, are now the preferred asset with a weighting of just under 50%. Exposure to the eurozone and emerging markets has been reduced by over half, but even the US and UK markets have seen their weightings reduced. The strength of sterling has also reduced the momentum of US equity returns. It is sometimes tempting to explain away such a clear signal, or wait for further confirmation. Remember, the consequences of waiting too long are sometimes as painful as those of acting too quickly. The problem has been building for a while. Last week was the culmination of many themes.


In the context of the last year, last week’s sell-off was not that dramatic – less than one standard deviation in the US and the UK. But it follows several weeks of sustained pressure on equity markets. Political uncertainty in the eurozone will continue to grab the headlines. So, for the third year in a row it looks as though the second quarter will be dominated by a significant sell down in risk assets. They need to consolidate at lower levels before we can increase our exposure again. The question now is when – not if – the central banks will intervene.

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