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Equity Monthly: Embrace volatility as trade war could escalate

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Equity Monthly: Embrace volatility as trade war could escalate

By Peter Garnry, Head of Equity Strategy

As the books for the first half of 2018 were closed on Friday, the disappointing reality was clear to investors: almost all asset classes delivered flat or negative returns. Only momentum stocks (mostly technology shares) seemed to deliver strong results of around 7.5% for the first half. The biggest casualties were emerging market bonds (minus 10%) and equities (minus 5%) driven lower not only by the escalating trade war between the US and China, but also because of increasing financial pressure due to a stronger USD and higher US interest rates weighing on financial conditions.

Emerging markets could easily become the biggest victim in the second half if current trends continue. One thing stands clear in July: volatility will pick up as trade war headlines intensify and increase in frequency. Our overall message in July is to stay defensive and cautious as things could easily get more ugly before things turn around.

Emerging market equities (blue) versus bonds (black, source: Bloomberg)

Emerging market equities (blue) versus bonds (black, source: Bloomberg)

Stay defensive

Our dynamic asset allocation strategy (called Stronghold, which is a high-end service Saxo Bank offers to clients) went quite defensive in February due to the volatility shock altering the market structure and illuminating the fact that that tail-risks are constantly lurking around the corner.

In our Q1 Outlook, we highlighted that equities would soon take a hit as macro surprises would likely turn negative. While that call has been proven right, things have only become worse. We remain defensive on global equities as no firm positive catalyst is seen as ready to take equity markets to new highs. With the escalating trade war between the US and its biggest trading partners, uncertainty is going up and macro data will soon start to show the initial havoc from the tit-for-tat trade tactics.

In terms of industries, we recommend underweight exposure to semiconductors, industrials, and especially the car industry as these industries will become the battleground of the ongoing trade war. The best way to protect your portfolio (save for going all-cash or heavily into bonds) is to reduce cyclical sector exposure and increase exposure to health care, consumer staples, utilities, and telecom.

Outside these sectors, we believe software companies can also provide a good shield against volatility due to expected strong earnings in Q2.

Source: Saxo Bank

Source: Saxo Bank

Underweight trade surplus countries

June showed quite clearly where investors believe the biggest pain will be felt from the trade war. All countries with a significant trade surplus against the US performed worse than global equities. These countries are Canada, Mexico, Germany, China, Japan, and South Korea. It is our recommendation that investors reduce exposure to these countries for now. In the short term, China stands to lose the most as its hand is the weakest; the Chinese economy still needs a strong export sector to print high growth rates and thus an escalating trade war with the US is not in Beijing’s interest.

Single stocks

For the regular reader it should be no surprise that we run our equity research by quantitative methods. Our flagship model is called Equity Radar and is basically a factor model scoring around 1,800 global stocks across seven parameters: value, yield, quality, leverage, momentum, reversal, and volatility.

The table below shows the model’s top 20 picks based on the total score (a simple average of the seven factor scores). What has been interesting to note lately is that more Chinese companies have moved into the top 20 list; the main driver has been the reversal factor tied to the recent decline in Chinese equities.

Please note the two semiconductor stocks (Micron Technology and SK Hynix) in the list. While we are tactically negative on semiconductors, we do not overwrite the Equity Radar model with our tactical views on industries and sectors.

The top 20 global stocks based on our global equity factor model (source: Bloomberg, Saxo Bank)

The top 20 global stocks based on our global equity factor model (source: Bloomberg, Saxo Bank)

Investing

What should I invest and How do I invest

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What should I invest and How do I invest 1

By Imogen Clarke

With all the uncertainty that has arisen from 2020, with lockdown threatening businesses and the warning of a second wave, the topic of investments has taken on new meaning. Nowadays, more people are concerned with what makes for a good investment, or, if you’re a novice, how to best invest.

For instance, you might be unsure about the reliability of the company you’re looking to invest in, as well as the long-term prospects of your investment.

If you are unsure of your investments, then it is best to seek advice from financial experts like The Fry Group, who deal with tax, wealth and estate planning. They will see that you have a strong financial plan in place to help meet your objectives. They will develop a strategy that is built around your needs and asses any risks that could hinder your plans.

There are some things you’ll need to consider for your strategy; for instance, are you looking to make investments that are more of a risk and will take longer to come to fruition? Or, alternatively, are you wanting a faster approach that will result in a steady income? Whether or not you decide to play it safe all depends on your current financial situation and whether you have the means to take more of a risk. Do you have any other debts that take precedence over your future plans? Is your investment strategy realistic?

With the aid of a specialist – or investment manager – you can design an investment concept that works for you and your goals, and start to build a regular income from your investments. There are four main areas when it comes to assets (groups of investments) that you can consider:

  • Equities
  • Bonds
  • Alternatives
  • Cash

Your investment manager will test the risks associated with your investment, and if it proves to be a positive investment choice, then you will be able to invest more over time.

So, how do you decide where to invest?

According to The Fry Group, ESG investing (Environmental, Social and Governance) is a good option for investors looking to support businesses that meet their similar ethics.

The main areas of ESG investing include:

  • Environmental challenges (climate change, pollution, etc)
  • Social issues (human rights, labour standards, child labour, etc)
  • Governance considerations relating to company management

According to The Fry Group, “Many investors choose to consider ESG investing in order to ensure any investment decisions reflect personal beliefs and values. As a result, they choose to support companies who are making informed, responsible decisions which take into account their wider societal and global impact. In this way investors can achieve peace of mind that their investments are creating a positive effect.”

ESG investing is also more relevant now than ever, as more businesses are looking to present themselves as an environmentally conscious corporation that recognises the values of their consumers.

As The Fry Group puts it, “In the past, ESG investing has been seen as a niche investment approach, for a relatively small number of people with specific requirements. This has changed significantly in recent years, with a growing awareness of environmental issues such as climate change and an increasing understanding of social issues and human rights. As a result, many people are increasingly interested in reflecting their opinions and lifestyle choices through the way they invest.”

So, if you want your investments to pave the way for your personal values and reflect your own morals, then this is the route to go down. But how does it all work?

There are four areas of ESG investing:

  • Responsible ownership and engagement: when companies are encouraged to make necessary improvements.
  • Avoidance or negative screening: whereby businesses are ‘graded’ based on how ethical their business practices are and are avoided altogether if their methods are not approved.
  • Positive screening strategies:when companies meet the ESG goals and are approved for investments.
  • Impact investment strategies: the purpose of this is to use investment capital for positive social results such as renewable energy.

You will need to take into account your own personal objectives as well as the objectives that meet the ESG investment criteria. And, in terms of financial performance, ESG investing can be hugely beneficial. Those who opt for ESG investing perform a more in-depth analysis into long-term and future trends that affect industries, meaning that they are better prepared for changes in consumer values when they arise. And, with all the unpredictability that this year has offered us so far, isn’t it better to do the research and have all angles covered?

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Investing

Investment Roundtable: Live with Jim Bianco

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With Q4’s macro picture still looking grim amid the return of exponential coronavirus waves in Europe and the U.S. and Europe, we speak with veteran macroanalysis strategist Jim Bianco, CMT for a data-driven deep-dive into the global economy and financial markets on Sept. 7th at 12pm EDT.

Sign up for this exclusive webinar now

Key themes:

  • Learn from Jim’s unique combination of quantitative and qualitative analytics which provide an objective view on Rates, Currencies and Commodities to make smart investment decisions
  • Identify important intermarket relationships he is watching with respect to Global Equities
  • Roadmap a global outlook for 2021 in view of socio-political backdrop giving viewers key takeaways and intermarket perspectives on global investing.

Sign up for this exclusive webinar now

Jim’s robust technical analysis includes a broad look at trends and themes in the markets, market internals, positioning such as the Commitment of Traders (COT), sentiment, and fund flows. Don’t miss out on this exclusive session from one of the investment world’s most insightful thought leaders.

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Equity markets react to a rise in Covid-19 cases, uncertain Brexit talks and the upcoming US election

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Equity markets react to a rise in Covid-19 cases, uncertain Brexit talks and the upcoming US election 2

By Rupert Thompson, Chief Investment Officer at Kingswood

Equity markets had another choppy week, falling for most of it before recovering some of their losses on Friday and posting further gains this morning.

At their low point last week, global equities were down some 7% from their high in early September. US equities were down close to 10%, hurt by the large weighting to the tech giants which at least initially led the market decline.

The market correction is nothing out of the ordinary with 5-10% declines surprisingly common. Indeed, a set-back was arguably overdue given the size and speed of the market rebound from the low in March.  As to the cause for the latest weakness, it is all too obvious – namely the second wave of infections being seen across the UK and much of Europe and the local lockdowns being imposed as a result.

These will inevitably take their toll on the economic recovery which was always set to slow significantly following an initial strong bounce. Indeed, business confidence fell back in September both here and in Europe with the declines led by the consumer-facing service sector. A further drop looks inevitable in October – fuelled no doubt in the UK by the prospect that the latest restrictions could be in place for as long as six months.

The job support package announced by Rishi Sunak did little to boost confidence. Its aim is to limit the surge in unemployment triggered by the end of the furlough scheme in October. However, the scheme is much less generous than the one it replaces as the government doesn’t want to continue subsidising jobs which are no longer viable longer term.  A rise in the unemployment rate to 8% or so later this year still looks quite likely.

Aside from Covid, for the UK at least, there is of course another major source of uncertainty – namely Brexit. Another round of trade talks start this week and we are rapidly reaching crunch time with a deal needing to be largely finalised by the end of October.

Whether we end up with one or not is still far from clear. That said, the prospects for a deal maybe look rather better than they did a couple of weeks ago when the Government was busy tearing up parts of the Withdrawal Agreement. With significant Covid restrictions quite probably still in place in the new year and the Government already under attack for incompetence, it may not wish to take the flack for inflicting yet more chaos onto the economy.

Markets remain unimpressed. UK equities underperformed their global counterparts by a further 2.7% last week, bringing the cumulative underperformance to an impressive 24% so far this year. The UK weighting in the global equity index has now shrunk to all of 4.0%.

It is not only the UK which faces a few weeks of uncertainty. The US elections are on 3 November. We also have the first of three Presidential debates this Tuesday. Joe Biden’s lead looks far from unassailable, a close result could be contentious and control of Congress is also up for grabs.

All said and done, equity markets look set for a choppy few weeks. Further out, however, we remain more positive – not least because the focus should hopefully switch from the roll-out of new lockdowns to the roll-out of a vaccine.

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