Investment Clock insights

Buying dips as volatility persists


Trevor Greetham 

9 February 2018

We are adding to our moderate overweight position in equities on market weakness, buying stocks in the emerging markets in particular, and deepening the underweight in government bonds. We have also taken this opportunity to move commodities further overweight. 
The Investment Clock model that guides our asset allocation has moved into the Overheat phase of the global business cycle, characterised by strong growth and rising inflation. Commodities are usually the best performer at this time as higher than average demand depletes inventories and bids up prices. Bonds usually suffer on inflation worries. 
Stocks can do reasonably well at this stage of the cycle but volatility often picks up as there is a two way pull - strong earnings growth is good news as we saw in January, but interest rate hikes can cause valuations to drop, as we have seen in February.
We went into the sell-off only moderately overweight equities, holding back from a larger position on valuation grounds. Investor sentiment has swung rapidly from excessively bullish to excessively bearish. 
Our composite sentiment indicator is now at levels last seen during the China devaluation panic of summer 2015. Leveraged investors have been forced to sell equities in greater quantities as the price has dropped. As long-term investors we can take advantage of the rout to add to equity positions.
We have added to commodities and the emerging markets as we expect the current period of strong global growth to persist. 
We expect stocks to remain volatile for the next few weeks, depending on the run of inflation data in the US, and there could be some more scary moments. However, we are buying dips as we don’t expect markets to peak out until the current expansion in the world economy comes to an end. With US interest rates below the rate of inflation and the two largest non-US central banks still printing money it’s hard to argue monetary policy is tight enough for that to happen just yet.

We are adding to our moderate overweight position in equities on market weakness, buying stocks in the emerging markets in particular, and deepening the underweight in government bonds. We have also taken this opportunity to move commodities further overweight. 

The Investment Clock model that guides our asset allocation has moved into the Overheat phase of the global business cycle, characterised by strong growth and rising inflation. Commodities are usually the best performer at this time as higher than average demand depletes inventories and bids up prices. Bonds usually suffer on inflation worries. 

Stocks can do reasonably well at this stage of the cycle but volatility often picks up as there is a two way pull - strong earnings growth is good news as we saw in January, but interest rate hikes can cause valuations to drop, as we have seen in February.

We went into the sell-off only moderately overweight equities, holding back from a larger position on valuation grounds. Investor sentiment has swung rapidly from excessively bullish to excessively bearish. 

Our composite sentiment indicator is now at levels last seen during the China devaluation panic of summer 2015. Leveraged investors have been forced to sell equities in greater quantities as the price has dropped. As long-term investors we can take advantage of the rout to add to equity positions.

We have added to commodities and the emerging markets as we expect the current period of strong global growth to persist. 

 

We expect stocks to remain volatile for the next few weeks, depending on the run of inflation data in the US, and there could be some more scary moments. However, we are buying dips as we don’t expect markets to peak out until the current expansion in the world economy comes to an end. With US interest rates below the rate of inflation and the two largest non-US central banks still printing money it’s hard to argue monetary policy is tight enough for that to happen just yet.

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.