Monday, August 13th, 2012

Global Equity Models Commentary 13/08/2012

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

Market conditions

Sterling government bonds have never enjoyed quite the same safe haven status as their US counterparts, and the same can be said of sterling versus the dollar. The recent rally has been strong enough to nudge the portfolio into taking more risk. It is just possible that there may be a touch of Olympic euphoria in the performance of FTSE, but it is hard to ascribe this reason to overseas equities. As with the US model, committed bears will be happy to let risk assets drift upwards for the next few weeks so that they can have the chance of selling at higher prices in September.

Current portfolio

The portfolio is still significantly underweight equities, but it has definitely moved in the direction of adding risk over the last two weeks.  The major beneficiaries are US and UK equities, which represent the two largest equity holdings. But all equity regions, including the Eurozone, have seen their weightings increase. Although the differences between the Eurozone, Japan and emerging markets are not that great, it is still worth noting that emerging markets are the least preferred equity region.

Outlook

It is just possible that the sterling-based investors will be surprised by the speed of the move back into risk assets. A combination of thin summer markets, a little bit of sterling weakness and some profit-taking in UK gilts would be enough to persuade the portfolio to keep on adding to equities every week. Pretty soon, this mixture could be mistaken for real momentum, and it might be enough persuade the bears to reduce their short positions, thereby adding some more buying power. But come the middle of September, it could all reverse just as quickly, if the ECB fails to deliver a convincing answer to the Spanish question.

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