Stretched Sentiment Leaves EM Vulnerable

Liquidity conditions have deteriorated meaningfully for EM equities. The left chart below shows that the steep drop in G7 Excess Liquidity points to a risk of much lower EM equity prices in about 3-4 months’ time. This materially worse backdrop for EM equities is...

Extreme Complacency on Russell 2000: Buy Puts

(from our Weekly of 21st February) As we have been noting, the market remains in a risk-on regime, with positive momentum, falling volatility and confirmation from various inter-market relationships such as cyclical stocks outperforming high dividend stocks, high...

Profit Cycle Turning Down

The corporate profit cycle is now turning down, and our leading economic indicators point to further declines in return on equity (ROE) and profit margins.  This is not a short-term call on equity markets but a major structural factor investors should bear in mind in...

Japanese Equity Flows Diverge

October saw the BoJ’s announcement of increased stimulus, coordinated with the new targets for the GPIF, 25% each for foreign and domestic equities (up from 12% each), and a decrease in JGBs, from 60% to 35% of holdings.  Investors, both Japanese and foreign, have...

Profit Margins to Head Lower, Equities to Suffer

Profit margins in the US have hit modern-day record levels, and this has been used to help justify high equity valuations.  Consensus estimates are for profit margins to remain steady, or even increase from current levels.  We disagree for ironclad economic and...
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