Friday , December 6 2019
Home / how+to / 2 The main investment cycles are close to the peaks, here’s how to prepare

2 The main investment cycles are close to the peaks, here’s how to prepare




<div _ngcontent-c15 = "" innerhtml = "

Shutterstock

If you do not know where you are going, any road will take you there. "

– Lewis Carroll

Unless you have taken a completely passive approach, with your investments, it is important to maintain a sense of direction.

The main objective of the tactical asset allocation is to stay on the right of the main market trends. This means diagnosing & nbsp; the& Nbsp;more & nbsp; likely& Nbsp;path ahead, using a mix of empiricism and common sense.

The two biggest opportunities I see for US investors over the next 5 years are: (i) protect capital ahead of the next bear market and (ii) subsequently overweight international assets.

1. The & nbsp; Stock market cycle

Throughout history, there & nbsp; they are multi-year cycles in which stocks have fluctuated between two basic environments:

  • high yield / low volatility
  • low return / high volatility

The following table shows these cycles, using the S & amp; P 500 as a proxy.

S & amp; P 500 cyclesSilverlight Asset Management, LLC

You do not have to be a financial professional to see the recurring pattern & nbsp; and & nbsp; diagnose which type of regimen will probably come later. & Nbsp; At some point, probably not in the distant future, we will see a return to lower returns and greater volatility.

The maximum weight of hedge funds, Ray Dalio, pushed home this point last week in a interview with CNBC. He said the business cycle is probably in the "seventh inning," & nbsp; which implies that there is less upside remaining than downside risk. & nbsp; & nbsp; "Whatever your strategic risk … I would be more defensive than aggressive," said Dalio.

When it comes to multi-year cycles, Dalio is one of the brightest minds on the market. I follow Hedgeye Research for quarterly indications. & Nbsp; They maintain a predictive monitoring algorithm that measures and maps the trajectory for growth and inflation. In recent years, they have been spot on.

The next quarter, & nbsp; Hedgeye is calling for a slowdown in both growth and inflation. & Nbsp; Call & nbsp; this macro configuration "Quad 4." & nbsp; Historically, it is & nbsp; an environment that favors defensive games (ie bonds & nbsp; defensive sectors).

Things that normally not does it work well in Quad 4? Virtually all this has it has worked well in the last two years. Momentum, technology and high beta are some of the factors that could see a downward rotation in the coming months.

Even if the forecasts of Dalio and Hedgeye do not materialize immediately, I am perfectly comfortable in settling the risks.

For most people, money management is a long-term combination game. Seen through that prism, it's not how much you earn during a bull market that counts, & nbsp; but & nbsp; how much you keep and move on to the next cycle. & nbsp;The average bear market sweep away over half of the profits of the previous bull market. & nbsp; This makes capital conservation & nbsp; fundamental in an advanced cycle environment.

2. The global leadership cycle

Imagine being a Japanese investor with all your money tied up in domestic actions. This market peaked in 1989, e yet he has not recovered. & nbsp; This illustrates why & nbsp; foreign diversification is important.

Canterbury Consulting provides advice to institutions and investors with a high equity on the asset allocation. Recently I came across Matthew & nbsp;He, chairman of the Canterbury Global Capital Research Committee, said: "Investors who ignore international actions because of the "prejudice of the country of origin" are losing opportunities for growth in other parts of the world. "

Case in point: & nbsp; After adjusting to purchasing power parity, China became the world's largest economy in 2014. & nbsp; China is growing & nbsp; GDP four times faster than the United States

However, the & nbsp; U.S. has significantly outperformed this cycle. This year is a continuation of this trend. The S & amp; P 500 increased by about 10%, while foreign markets such as the German DAX (-7%) and the Shanghai Chinese index (-22%) faltered.

But if you're a long-term investor, & nbsp; He would recommend keeping at least some foreign diversification. "Including & nbsp; & nbsp; both; U.S .. and non-US stocks may result in a more uniform overall performance model," he says.

Here is a table & nbsp; which demonstrates why this is the case. & Nbsp; Similar to the way in which & nbsp; performance and volatility schemes mean restoration, as well as global leadership cycles & nbsp;

International leadership cycles.

No single region ever outperforms. & Nbsp; If not, everyone overlapped the best market, & nbsp; and & nbsp; it would become prohibitive. & Nbsp; So, it is not surprising that the developed countries in the MSCI EAFE index have had similar results to S & amp; P 500 & nbsp; from & nbsp; 1970-2017. & nbsp; Within that long duration, however, there have been long-term high dispersion periods.

Since 2008, foreign stocks have declined by around 6% in the year. This made developed and emerging markets less expensive than US equities, pushing many on Wall Street to recommend overstaing foreign stocks. So far, & nbsp; this recommendation has been anticipated. Part of the reason is that: & nbsp; investors often & nbsp; confuse the assessment & nbsp; how & nbsp; a catalyst. It is not. Foreign stocks will not only lead because they are less expensive than US stocks.

The spark for a rotation is usually a mix of buyer / seller exhaustion, combined with a fundamental catalyst that reverses sentiment. & Nbsp; Flows follow.

So the evaluation starts to be important. The cheapest is a good or a market, the longer its catwalk for a potential excess return.

By studying the table above, c & # 39; is & nbsp; another subtle model, which in my opinion provides a valuable clue. & Nbsp; Or: global leadership& Nbsp;the pins occur during bear markets. & nbsp;

The MSCI World Index & nbsp; includes both the United States and foreign markets. If you keep track of the performance history of that index, you can see it & nbsp; it has been engulfed in the bear market drawdowns (decreases of over 20%) during the key years when global leadership cycles have been reversed, ie 1970, 1990, 2002 and 2008.

Europe and the Chinese economies have started to slow down at the start of this year and have followed their markets.

The US economy is still high on fiscal stimulus. But as those effects vanish, my hypothesis is that the United States will follow the trend that takes shape in the rest of the world.

Will it be enough to push MSCI World into a bear market? Difficult to know

But whenever the time comes, foreign markets are likely to finish first, because they are already ahead of their economic upturn.

However, I am not yet buying foreign securities aggressively. Reason: sequencing is important.

For now, I'm still overweight in the United States, & nbsp; because when tremors hit capital markets, the United States is normally a safe haven. I think the tremors come first, so a big rotation of leadership. Probably one of the best chances of overexposure of foreign titles that I will see in my career.

">

If you do not know where you are going, any road will take you there. "

– Lewis Carroll

Unless you have a completely passive approach to your investments, it is important to maintain a sense of direction.

The main objective of the tactical asset allocation is to stay on the right of the main market trends. This means diagnosing the more likely path ahead, using a mix of empiricism and common sense.

The two biggest opportunities I see for US investors over the next 5 years are: (i) protect capital ahead of the next bear market and (ii) subsequently overweight international assets.

1. The cycle of the stock market

Throughout history, there are multi-year cycles in which stocks have fluctuated between two basic environments:

  • high yield / low volatility
  • low return / high volatility

The following table shows these cycles, using the S & P 500 index as a proxy.

S & P 500 cyclesSilverlight Asset Management, LLC

You do not need to be a financial professional to see the recurring pattern and diagnose what type of regime will come next. At some point, probably not in the distant future, we will see a return to lower returns and greater volatility.

The maximum weight of hedge funds, Ray Dalio, pushed home this point last week in an interview with CNBC. He said the business cycle is probably in the "seventh inning", which implies that there is less upside remaining than downside risk. "Whatever your strategic risk … I would be more defensive than aggressive," Dalio said.

When it comes to multi-year cycles, Dalio is one of the brightest minds on the market. I follow Hedgeye Research for a quarterly orientation. They maintain a predictive detection algorithm that measures and maps the trajectory for growth and inflation. In recent years they have been perfect.

The next quarter, Hedgeye is asking to slow down both growth and inflation. Call this macro configuration "Quad 4." Historically, it is an environment that favors defensive games (ie bonds and defensive sectors).

Things that normally not does it work well in Quad 4? Virtually all this has it has worked well in the last two years. Momentum, technology and high beta are some of the factors that could see a downward rotation in the coming months.

Although the predictions of Dalio and Hedgeye do not materialize immediately, I feel perfectly comfortable in cutting the risks.

For most people, money management is a long-term combination game. Seen through that prism, it is not how much you earn during a bull market that counts, but how much is maintained and you will get to the next cycle. The average bear market cancels over half of the previous bull market earnings. This makes it essential to preserve capital in an advanced cycle environment.

2. The global leadership cycle

Imagine being a Japanese investor with all your money tied up in domestic actions. This market peaked in 1989, e yet he has not recovered. This illustrates why foreign diversification is important.

Canterbury Consulting provides advice to institutions and investors with a high equity on the asset allocation. I recently joined Matthew He, chairman of the Canterbury global capital research committee, said: "Investors who ignore international actions because of the "prejudice of their country of origin" are losing opportunities for growth in other parts of the world ".

Case in point: after adjusting to purchasing power parity, China became the world's largest economy in 2014. China is growing GDP four times faster than the United States.

Nonetheless, the United States significantly outperformed this cycle. This year is a continuation of this trend. The S & P 500 index rose about 10%, while foreign markets such as the German DAX (-7%) and the Shanghai Chinese index (-22%) faltered.

But if you are a long-term investor, Mr. He would recommend keeping at least some foreign diversification. "The inclusion of US and non-US securities may result in a more general performance pattern," he says.

Here is a table that shows why it is so. Similar to how returns and volatility schemes mean restoration, as well as global leadership cycles.

International leadership cycles.

No single region always has better performance. If this were not the case, everyone would overlap the best market and become prohibitive. Therefore, it is not surprising that the developed countries in the MSCI EAFE index have achieved similar results to those of the S & P 500 from 1970 to 2017. Within the long term, however, there have been high multi-year periods. dispersion.

Since 2008, foreign stocks have declined by around 6% in the year. This has made the developed and emerging markets less expensive than US equities, pushing many on Wall Street to recommend overweighting foreign securities. So far, this recommendation has been anticipated. Part of the reason for this: investors often confuse evaluation as a catalyst. It is not. Foreign stocks will not only lead because they are less expensive than US stocks.

The spark for a rotation is usually a mix of buyer / seller exhaustion, combined with a fundamental catalyst that reverses sentiment. The flows follow

So the evaluation starts to be important. The cheapest is a good or a market, the longer its catwalk for a potential excess return.

By studying the table above, there is another subtle model, which in my opinion provides a valuable temporal clue. This is: global leadership the pins occur during bear markets.

The MSCI World index includes both the United States and foreign markets. If you keep track of the returns history of this index, you can see that it has been swallowed up in the bear market drawdowns (it decreases over 20%) during the key years when global leadership cycles have reversed, ie 1970, 1990 , 2002 and 2008.

Europe and the economies of China have begun to slow down at the start of this year and have followed their markets.

The US economy is still high on fiscal stimulus. But as those effects vanish, my hypothesis is that the United States will follow the trend that takes shape in the rest of the world.

Will it be enough to push MSCI World into a bear market? Difficult to know

But whenever the time comes, foreign markets are likely to finish first, because they are already ahead of their economic upturn.

However, I am still not aggressively buying foreign securities. Reason: sequencing is important.

For now, I am still overweight in the United States, because when tremors hit capital markets, the United States is normally a safe haven. I think the tremors come first, then a big rotation of leadership. Probably one of the best chances of overexposure to foreign titles that I will see in my career.


Source link

Leave a Reply

Your email address will not be published.