Wednesday, May 10th, 2017

Prices Move Before News

Every now and then the newspapers allow their correspondents to write an opinion piece which starts with a phrase like, “who could have predicted…”. The desired answer, of course, is no-one. This thought is prompted by the rash of articles which have greeted the election of President Macron, all harking back to the big gamble he took in setting up his own party a year ago. Other recent articles have focussed on the impossibility of predicting the rally in Greek bonds and the behaviour of the oil price. We have a long standing aversion to forecasts of any sort. This allows us to have an uncluttered view of what is happening in financial markets. We never claim to have the sole lease on wisdom or to identify every important trend in real time, but our hit rate is really quite good. The only way to illustrate this by reference to the charts we published in real-time.

At the start of 2017, French elections were just one piece in a complex narrative about the rise of populism in Europe and the first test was the Dutch Parliamentary elections in the middle of March. Our exposure to Eurozone equities saw a big increase in early March as opinion polls showed that the PVV, the right wing party led by Geert Wilders, was no longer likely to be the largest party in Parliament. By the end of March, Eurozone equities were our preferred equity region and the largest single exposure in the portfolio, where they remain today. During that time the Eurozone has outperformed the US, the previous #1, by 10.7%. The perfect time to have switched out of the US would have been two weeks earlier, which would have produced an outperformance of 14.4%.

Regarding the rally in Greek bonds, we have had an overweight position against other Eurozone government bonds since the second week of November, during which time they have outperformed by 11.2%, against a “perfect” score of 21.6% if we had gone overweight four weeks earlier. None of our models invest directly in commodities, but we can track our recommendations for the Energy sector vs the US equity index. We moved to underweight in the third week of February, since when the sector has underperformed by 10.5%. Perfect timing would have involved selling in December 2016, at a 15-month relative high, to avoid underperformance of 16.6%.

These are, of course, examples we have selected, but only in response to what the business pages have published over the last week. We never get the perfect score, buying at the bottom and selling at the top, but over the years we have learnt that prices move before news, and certainly before there is a detailed explanation of all the underlying issues. Here are some of the charts we are currently watching.

(1) The Materials sector is under pressure in our regional equity models for China, the UK and the Eurozone. Two weeks ago we downgraded to Neutral in the Eurozone; this week we downgrade to Neutral in China. We expect the UK to go to Underweight shortly.
(2) This week we downgrade China to Underweight in our global equities model.
(3) We have not had confirmation, but we think that dollar-denominated EM sovereign bonds have peaked in our fixed income model. This is to be expected if China and the commodity-related sectors remain under pressure.

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