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The Days of Future Past

We are not concerned about the Tech sector in the US. We are concerned about it everywhere, particularly in China. There are obvious parallels between the behaviour of the Chinese Technology sector now and the US in the run-up to the dot-com bubble. Valuation tends not to be helpful in these circumstances, but Harlyn’s approach, based on return per unit of risk, can be.  [Read More... ]

No Yellow Flags

A large rise in excess volatility (equity volatility minus bond volatility) is a good indicator of the onset of a bear market in the US and elsewhere. It also works at the sector level for those sectors which peak early, before the dynamics of contagion take over. Every bear market is different, but there are similarities in the early phases. Apart from Telecom which is a very small sector, there are no warning signs at the US sector level at the moment.  [Read More... ]

International Bears

After last week’s note about excess volatility in the US, we look at the experience of other developed markets in 2000, 2007 and 2015. In a majority of occasions, material increases in excess volatility signalled the onset of a correction and/or the transformation to a full-scale bear market. There are no such signals at the current time, which we regard as comforting, though not conclusive, evidence in favour of our equity overweight.  [Read More... ]

A Bolt from the Blue

Provided that the causes of the next bear market in US equities originate in the US, investors should have time to adjust their asset allocation before the correction turns into a full-scale bear market. The necessary rise in excess volatility (equities minus bonds) takes several months and cannot happen without someone noticing.  [Read More... ]

Walking, Not Charging

If we understand Janet Yellen correctly, there are no constraints in the real economy which critically affect the speed at which US interest rates can rise. But there must be a critical constraint, and we believe it is the requirement not to upset the low volatility environment in US equities. If we are right, the Fed wants an environment where single digit returns from equity are seen as risk-efficient, and a correction does not turn into a bear market. If they manage this, the bull market can carry on, but it will be walking not charging.  [Read More... ]

No Case for Emerging Markets Yet

Europe, apart from the UK, is producing better risk-adjusted returns than most emerging markets. These have been flattered by favourable FX movements, but there are good fundamental reasons for this as well. Unless the euro gets too strong, we don’t see why investors would want to change a winning formula, anytime soon.  [Read More... ]

Lucky Dip

We agree with consensus that an equity correction could happen at any time. However, we will not be buying the dip in the US. We much prefer the Eurozone, which has a habit of late-cycle outperformance. We also prefer Japan, which has just hit a new 22-year high, to EM, which keeps failing at resistance just above current levels.  [Read More... ]

The Missing Piece of Chewing Gum

We don’t have the killer chart that says China is going to blow up or shoot the lights out. Our models are curiously inconclusive, which is unusual for China, and the underlying data are trading in a very narrow range. All of which makes us nervous.  [Read More... ]


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