Commentary

Summary Sovereign debt markets have obviously been fragile. We explore some potential drivers and assess their durability This fragility is increasing the importance of political outcomes for markets. The political choices that countries make look set to have a larger impact on investors than in the last cycle French, Spanish, Italian and German political developments are becoming important Whilst the…

Summary We believe investors should be prepared for the risk of a US-led bear market, given valuations and allocations that we show are similar to 1929 Rising global bond yields and weak fiscal positions may start to put pressure on broad equity market valuations; value stocks ought to be less impacted Semiconductor valuations appear especially extended Geopolitical risks remain significant,…

In this note we assess various structural arguments to support the case for a multi-year period of European equity outperformance. These include valuations, allocations, capital flows, treasury and central bank policy, AI, private equity and the Russo-Ukrainian war. European equities are experiencing their seventh best year versus US equities since 1969. Despite the AI euphoria, US underperformance has been significant…

Europe outperformed the US by 18% in the first half of the year. We expect this outperformance to continue over a multi-year period The fall in the dollar is masking weakness in US equity indices Liquidity is likely to become more negative for US asset prices soon The combination of record valuations, record allocations and weakening liquidity is usually bearish…

In moments of high volatility it can be helpful to assess markets using a long-term perspective. In this note we look at the long-term case for European equities compared to US equities in absolute and relative terms. The recent tariff announcements appear to reflect a longer-run trend, which is the accelerating reversal of globalisation. Economic nationalism is on the rise…

Sovereign debt pressures are likely to remain a key theme in markets in the coming years, including in parts of Europe But despite this and the perceived threat of Trump, we see tactical reasons for optimism for Europe We expect European equities to outperform the US in 2025 Sovereign debt fragility in some countries Market crises often result from a…

Value is performing better than is widely perceived, with broad outperformance across geographies and market caps. The performance is even stronger when adjusted for risk. US mega-cap growth is the major hold-out for growth outperformance in price terms. But strikingly US mega-cap growth is exhibiting high downside volatility, meaning that in risk-adjusted terms it is underperforming US large-cap value. Despite…

Investors are preoccupied with European political risk, but we see greater risks in the US equity market US equity underperformance may finally be imminent Upcoming changes to Bank of Japan policy may have a large impact on global markets We have moved to a more defensive footing, with the Consumer Staples weighting up and Energy down European politics Emmanuel Macron…

Markets have a habit of pulling investors in the wrong direction at the wrong time. Because megacaps performed well in 2023, investors are feeling pressured to go passive. But they must resist these siren voices. Whilst active managers are never great supporters of passive funds, today seems a uniquely dangerous time for this kind of investing. The risks embedded in…

Valuations for parts of the equity market are now extremely stretched, at levels that preceded significant price declines in the past. Extreme valuations can persist provided liquidity remains abundant. But liquidity conditions look set to peak and then decline within a few months. This suggests we are in the late stages of this growth equity rally. Technology stocks appear to…

At certain times in 2023, it has felt like quantitative easing (QE) has returned. Markets have seen sudden liquidity-driven price moves where expensive equities sharply outperformed. This was particularly the case from March to May and in November. How can we have seen “QE-like” conditions with no QE? A deeper look into the Federal Reserve’s balance sheet shows that at…

Over the summer we published two notes looking at the balance of supply and demand for government bonds. The conclusion was that there appeared to be an excess supply of bonds relative to demand, which could push up yields. This feature is particularly stark for those countries running large fiscal deficits, leaving three potential outcomes for those economies impacted: Taxation…

In the last few economic cycles, investors knew what a defensive allocation looked like. In fixed income the main shift was to increase sovereign debt holdings. In equities a defensive position involved adding a combination of bond proxies and the early cycle beneficiaries of lower interest rates. The problem this time is that sovereign bonds may no longer be defensive…

It sounds radically contrarian to anticipate a rise in yields. Recession is expected, inflation is forecast to decline further and so bond yields ought to fall. Certainly the case for higher yields is not clear cut, but investor expectations appear committed to lower rates, setting up an asymmetry in the risk profile of asset prices. Falling yields appear to be…

First, let us address the bear case for Energy. A recession may be coming and this will likely see oil demand fall. How do we think about potential oil consumption decline scenarios? Recession scenarios and oil demand Global real GDP growth has a relationship with oil consumption, but with oil consumption consistently lower than GDP growth. Below we show annual…

We began reducing our weight in banks a month ago and continued further last week and today. The fund’s current weight in Financials is 12.9%. This compares to an index weight of 16.9%. Within Financials we do not own any insurance companies. Our Financials holdings are all European banks. The Banks and Capital Markets weight of the benchmark is just…

In early October last year global central bank liquidity started to move higher, led by the Bank of Japan and the People’s Bank of China This balance sheet expansion more than offset the decline in liquidity from the Federal Reserve, the European Central Bank and the Bank of England, and it coincided with the rally in equities Dollar weakness occurred…

Structural forces suggest higher inflation may persist this decade, for the following reasons: The rarity of 2% inflation Demographic changes and the impact on labour’s pricing power Globalisation in partial reverse The ESG Transition and its cost The political imperative – do Governments want 2% inflation? Before we discuss inflation, we provide a short market update: Despite the significant increase in…

Interest rates and multiple compression remain the biggest threats to asset prices. This could be a multi-year process But Europe has some defensive characteristics: low valuation, record negative sentiment and investors are deeply underweight Investors should be prepared for some better news: Europe’s energy crisis may not be as bad as expected this winter; Russia’s military position in Ukraine is…

Problems remain but the global economy may beat deeply pessimistic expectations for the remainder of the year There is logic behind the Fed pausing interest rate hikes at a lower peak than is discounted Well positioned cyclicals operating in supply constrained industries can beat earnings expectations and are at low valuations Index valuations remain constrained over the long term by…

Inflation is likely to moderate for a few months. This may bring down bond yields - but to a smaller degree than expected. This scenario may provide some support for expensive equities and value may lag the equity market for a short time. But this is unlikely to last. Valuation polarisation remains extreme and long term fundamentals support the continued…

A new geopolitical alignment is taking place, separating democracies and autocracies. This is raising the cost of capital for countries that are not democracies – and driving an economic and political wedge between those countries that operate liberal democracies and those that do not. When assessing different countries as an investment destination, favourable characteristics flow from the principle of individual…

Multiple compression in equities appears to have started. The more expensive the asset or the index, the more vulnerable. This suggests a cautious outlook may be appropriate for the US equity market. For Europe the message appears more nuanced. Parts of the market are expensive and so may be vulnerable, parts are not. Despite a challenging set-up for passive and…

Value investing posted some modest victories in 2021. Whilst growth outperformed at the index level, the outperformance was narrow, propelled by a handful of large cap companies. Down the market cap scale value mostly outperformed – a notable divergence that may signal further improvements for low priced securities in 2022. 2021 saw broad based returns in European equities, but with…

In this brief note we highlight some risks for markets in 2022 and discuss current portfolio characteristics. As we look forward to 2022 where is the vulnerability for equity markets? Equities can get hurt from two areas. Share prices can fall because earnings decline – and they can also fall because the multiple that the market is willing to pay…

The latest wave of QE has absorbed the entire available supply of the German Bund market. Over the summer, QE purchases have pushed the free float to zero. The ECB is still trying to purchase c.€20bn per month. This has sharply decoupled bund yields from economics, potentially misleading investors – providing an opportunity and a risk. The decline in bond…

European equities have priced in a significant growth scare in recent months, such that there is now an attractive asymmetry in the risk profile of cyclical value compared to defensive growth. In the second year of a recovery, investors often become nervous about the durability of the economic cycle. The second derivative in economic growth peaks, some reduction in extraordinary…

Rebuilding the reflation wall of worry Over the last decade, value has had brief bursts of outperformance, only for the outperformance to be given back over subsequent months. Since Q3 2020 European value has outperformed growth by 10%, but over recent weeks value has cooled and post the latest Fed commentary, underperformed. Investors are wondering if value’s recent outperformance was…

The wall of worry for reflation and value appears rebuilt. Whilst absolute returns for indices have been contained recently, relative returns have not. The magnitude of relative sector dispersion in Europe over the last 6 weeks has been identical to the 6 weeks prior to the March 2020 pandemic low. This has reset expectations and valuations in our favoured companies…

In an earlier note this year we argued that full employment appears to be taking precedence over price stability: a higher tolerance for inflation might be justified by our society today – in the name of reducing unemployment. Underneath this policy shift and catalysed by the current crisis is a growing awareness of inequality – and the appetite to reduce…