Monday, July 16th, 2012

Global Equity Models Commentary 16/07/2012

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

Market conditions

Risk appetite is at a low ebb. None of the individual equity regions looks more attractive relative to bonds than it did one or two months ago. The best that can be said is that volatility is falling, which means that it will require less momentum to generate a change in sentiment and to improve the probability of risk-adjusted excess returns. Investors who are allowed to, might want to consider some out of the money equity call options as a way protecting against a sudden upward move resulting from QE3. But the underlying portfolio should be heavily slanted towards fixed income.

Current portfolio

UK gilts account for some 80% of the portfolio, a figure which has been broadly stable for the last month. US and UK equities are the most preferred with Japan in third position. Investors should note that this is the only market where volatility has picked up in recent weeks. Recommended exposure to the Eurozone and emerging markets is virtually zero. Most defensive sectors are still outperforming the cyclical and financials, which is further evidence that the turn is unlikely to come soon.


Our views on the likelihood of QE3 are written up in detail in the US multi-asset commentary. From a UK perspective the extension of the gilts purchasing programme announced by the Bank of England is welcome, but little more than a palliative. A decisive change in risk appetite requires stimulus from broad sweep of central banks, including the Fed and the ECB, and probably their counterparts in China and Japan. The news will have to deteriorate significantly from here before that happens.

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