14 December 2017 · 5 min read

Market volatility unsustainably low as bonds and equities diverge

Bonds and equities appear to be simultaneously pricing two scenarios – so why is volatility so low?

There is now a growing disconnect between low global government bond yields which appear to indicate that the global recovery of 2017 may prove transient and high equity market valuations which discount an extended period of strong profits growth. In addition, starting from Q1 17 there has been an astonishing and sustained decline in equity market volatility. While there is nothing which suggests a market regime change is imminent, we continue to believe that re-normalisation of monetary policy is likely to result in the re-normalisation of volatility, bond yields and equity valuations over the 2018-19 period. This is not in our view a good time to be seeking to maintain returns by increasing portfolio risk.

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4 December 2017 · 2 min read

US tax reform a modest positive for US equities and dollar

Estimated total corporate tax benefit of US$ 74bn per year is not a game-changer

The prospective headline cut to the US corporate tax rate from 35% to 20% is a positive but not as significant as it may look at first sight. Historically, the US corporate sector has enjoyed an effective tax rate closer to 25% due to ample scope for deductions. The US Congressional Budget Office believes that the total revenue lost from the US business taxes from the Senate tax bill would be $744bn over 10 years. Following implementation, this would represent approximately a 6% increase in net income for the US corporate sector from 2019.

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24 November 2017 · 2 min read

Economic surprise accelerating

Positive economic surprise still offering short-term support for risk assets

The positive economic surprise data seen over the last 3m continues to strengthen. If anything, the data is moving faster than any monetary tightening leading to a benign environment for risk assets such as equities. What is more of a conundrum is the lack of response in global bond yields, even as the final developed market central bank to move, the Bank of Japan, is now hinting that it is past peak monetary accommodation. Earnings forecasts for 2017 remain robust with median growth close to 10% for developed markets and a similar level of growth forecast for 2018.

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14 November 2017 · 3 min read

Valuations: An important part of the puzzle

Price/book multiples highlight worrying trend in risk appetite

In this cycle valuations have been, so far, the dog that did not bark. Globally, the median sector price/book multiple has risen from the trough of 2008 to a new peak. Such an expansion in market valuations is similar to that seen in the 1980-1987 period. Between 2012 and today we have come full circle in terms of tactical asset allocation. Earlier, we could not understand why investors were so uninterested in adding risk to portfolios despite such high expected returns in equities. Now, equity valuations suggest only modest long-term returns are on offer and there is greater prospect of short-term disappointment. It is however proving equally difficult to attract investors’ interest in this signal for caution. Perhaps the metaphorical - and silent - valuation dog knows the psychology of the current marginal investor rather too well.

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2 November 2017 · 5 min read

Government bonds in the firing line

The next twist in the story is likely to push global yields higher

It is always important to put aside preconceptions and let all the data speak – and not just that which confirms prior beliefs. At present, the data which best models the long-term outlook (valuations) are suggestive of relatively weak returns in global equities and this has informed our cautious positioning. Furthermore, bond yields and interest rates remain unusually low on a historical basis. Yet for the short-term, economic surprises are currently positive, business sentiment strong and profits growth relatively robust. It is this short-term data which also needs to be heard.

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19 October 2017 · 1 min read

Profits forecasts stable – but no positive surprises

Stronger PMI indices not following through to profits growth

While Q3 has brought something of a renaissance in economic surprise and purchasing managers’ indices we can at present see no sign of this improved sentiment in profits forecasts for 2017. Our weighted average consensus earnings forecast index remains steady for each of the UK, US and Europe ex-UK and the equal-weighted measures have declined, if modestly, since mid-year. In prior periods, our earnings forecast index tended to move slightly ahead of PMIs and economic surprise. The more recent data has not followed this pattern and highlights that what is good for the overall economy is not by necessity good for corporate profits. Furthermore, with central banks on a tightening path the risk for equity markets is that tighter policy is not offset by stronger profits growth.

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