Monday, May 21st, 2012

Global Equity Models Commentary 21/05/2012

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

Market conditions

For the second week in a row global equity markets have delivered an unpleasant message. UK equities were the biggest faller in sterling terms. The G8 meeting over the weekend gave us no new information about how the eurozone crisis was going to be solved – not that it was ever going to. Excess volatility continues to rise, which means that the hurdle rate all risk asses need to beat in order to be risk-efficient keeps on rising. The risk profile of UK and US equities used to be broadly similar, but since the end of March the UK has become noticeably more volatile than the US. This is a trend which needs watching.

Current portfolio

Equity exposure has been cut hard again. In the space of two weeks, the model has gone from having little exposure to bonds to a weighting of some 75%. The poor performance of equities has played its part but bonds have also put in a 5% return since the middle of March. The US remains the preferred equity market, with the UK second. Japan is now third, followed by the eurozone and emerging markets as last equal.


The last big move in UK bonds generated a positive return of just under 20% in 18 months, even though yields were clearly in bubble territory. If the crisis in the eurozone continues to develop investors will once again become completely indifferent to any sort of yield considerations and think about capital preservation only. 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. We would need to see them consolidate somewhere close to the current level (or slightly lower) before we can increase our exposure again. The question now is when – not if – the central banks will intervene.

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