Monday, July 30th, 2012

Global Equity Models Commentary 30/07/2012

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

Market conditions

The unusual relationship between the volatility of week-end and week’s average prices, which we noted in US equities (and discussed in the US multi-asset model), applies to all major equity regions, including emerging markets. In some cases it has been going for a few weeks, in others it has only just started. You don’t have to believe in conspiracy theories to think that it is odd – and more important unsustainable. Most equity markets have been flat-lining in sterling terms over the last month. We would be surprised if this carried for the next month.

Current portfolio

The recommended portfolio has become even more risk averse since we last wrote two weeks ago. Given that the weighting in the Eurozone, Japan and emerging markets was virtually negligible already, the increase in the UK gilts’ position has been at the expense of  US and UK equities, more or less in proportion to their previous weights. If the expected upsurge in volatility manifests itself through a rise in equity markets, hindsight will call this a mistake. Whatever happens next, the reason for the current low exposure to equities is that they are not generating an acceptable return per unit of risk.


We cannot predict the action of central banks over the course of the summer. The ECB meets on Thursday amid high expectations that it will “do whatever it takes”  to preserve the euro. The Bank of England is already committed to further gilt purchases. The longer the Fed waits, the more its actions will be viewed through the prism of the US Presidential campaign. Given the downside risk, we prefer our heavily overweight position in bonds. If we have to cover the upside risk of equities, we would far rather do it in options markets than by increasing our underlying weight in equities.

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