Monday, July 16th, 2012

Multi Asset Model Commentary 16/07/2012

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

Market conditions

Market conditions remain depressed. It is still early days in the US results season, but the tone is clearly not euphoric and the surprise data is weak. Macro data in the US and China are disappointing. The good news is that risk conditions continue to improve. Excess volatility is falling for all asset classes apart from commodities. The bad news is that it feels like the quiet of the graveyard. It is tempting to wonder whether the sheer number of scandals and existential threats to the banking industry (Libor Scandal, Volcker Rule and Eurozone Crisis) have resulted in a permanently lower level of risk appetite.

Current positions

There is no significant change to the recommended asset allocation, with the two largest positions remaining US Treasuries and REITs, as they have been for the last few weeks. Exposure to emerging markets and commodities is virtually zero. There is the potential for a rally in soft commodities as a result of the freak weather in the US, but we doubt whether this will have any impact on the other groups like industrial or precious metals. Given the poor macro outlook we see no prospect of sustained outperformance from emerging markets. US equity exposure is oscillating in a narrow range, as is exposure to corporate bonds.

Outlook

Two weeks ago we argued that the only real catalyst for better performance by risk assets was likely to be QE3 or the equivalent. Recent macro data have made the onset of QE3 more likely, but we are sceptical about its ability to have anything other than a short-term impact. Our simple equity bond models show that QE2 had a much shorter and less powerful impact than QE1. We fear the sequence will continue with QE3. It is not that we think it won’t happen, just that the transmission mechanisms to the real economy are so weak as to render it pointless. Memo to the US and European authorities: you need to remove the uncertainty overhanging the structure of the largest banks. If you are going to break them up, get on with it. If not, say so.

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