Monday, May 21st, 2012

Multi Asset Model Commentary 21/05/2012

(This commentary was written originally specifically for the US Dollar Multi-Asset Model)

Market conditions

Last week was one of those weeks when everything apart from US treasuries went down. But there was little internal consistency in the moves. US REITs were the biggest single loser, and commodities did comparatively well. Emerging markets extended their losing run to seven consecutive weeks. 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 which all risk asses need to beat in order to be risk-efficient keeps on rising.

Current positions

Despite the big loss last week, US REITs are now the largest single position in the portfolio. If risk assets recover or even stabilise we would expect them to react better than US equities, which are the other significant risk position. REITs have a history of sharp declines whenever there is a sell-off in equities, followed by an equally sharp rally as soon as investors regain their nerve. The model now has virtually no exposure to commodities or emerging markets. The position with the biggest increase  was US treasuries followed by investment grade credit.


The speed of last week’s sell off clearly took investors by surprise, so it is quite possible that markets will be range-bound until the end of the month, trying to work out exactly how much of the move was justified by the increase in eurozone risk. We expect the model to carry on reducing its exposure to risk assets for the rest of the quarter, subject always to the actions of central banks around the world. 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.

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