SUMMARY
Our Quad Regime has indicated a change in ‘regime’ – moving from ‘Reflation’ to ‘Goldilocks’, although we must caution though, goldilocks with defensive characteristics. In doing so, we will sell the US tech related equity positions, and raise cash until we have a better grip on employment data in particular.
INCREASING DRY POWDER
Just about every major stock market globally has been consolidating/ticking lower in recent weeks, except US (big tech) – which continues to trend higher. Ultimately, this extension is unsustainable and a number of relationships have become so extreme, so as to suggest a warning sign for broader markets generally.
Underneath the bonnet of stock markets, US tech stocks are hiding some divergences – namely that many global markets are not keeping pace and actually trending lower. Emerging markets in particular is being weighed down.
One relationship which we follow is that of ‘cyclicals’ relative to ‘defensives. The chart below shows that having reached this position before, it has foretold of a meaningful correction.
Global Cyclicals vs Defensives
Source: ARIA, LSEG, Topdown Charts.
Our interpretation of this is that investors have now put too much store into the strength of the US economy; whilst the US Federal Reserve continues to hold the line, other global central banks have already begun to cut interest rates given anticipated economic weakness in Canada, Europe for example. The UK’s Bank of England we imagine will not be far behind.
Therefore, currently defensive sectors – like consumer staples which include L’Oreal, Proctor and Gamble and utilities – predictable, cash generative but hardly flashy companies have dramatically underperformed those ‘cyclical stocks’ more geared to the economic cycle, not to mention anything ‘AI’ related.
So our models – including those tracking growth, liquidity and inflation – are suggesting a slowdown that will likely cause investors to pull their horns in a little.
QUAD POSITIONING
By tracking the respective directions of growth/liquidity and inflation, we can identify one of four macro quadrants which reflect economic conditions. In doing so, we can identify which assets have performed well historically under a given set of conditions, which collectively we refer to as regimes.
By tracking the respective directions of growth/liquidity and inflation, we can identify one of four macro quadrants which reflect economic conditions. In doing so, we continue to research which assets have performed well historically under those conditions.
However, given the extended valuations, we will sell these holdings, raise cash and consider more defensive assets such as utilities that can also perform well in less precipitous environments.
Figure 1: Market Regime Summary
Quad Regime
GLOBAL REGIME: GOLDILOCKS
Goldilocks, which is a risk-on regime, in which investors are generally rewarded for having riskier rather
than defensive assets, as economies are accelerating.
Goldilocks Portfolio Characteristics:
| Risk Assets | > Defensive Assets |
| Low Beta | > High Beta |
| Defensives | > Cyclical Assets |
| Value | > Growth |
| Large Caps | > Small Caps |
| DM | > EM |
| Corporate Bonds | > Governments |
| Agricultural | > Energy > Industrial |
| Gold | > USD > FX |
CONCLUSION
There are changes afoot in markets, as a number of indicators, including market internals and deteriorating markets ex US, suggest a cautious approach to the coming weeks – a period where seasonality is often not favourable to markets.
The Navigator suite of strategies has raised cash, reduced equity exposure towards the bottom end of strategic asset allocations, and we will sit on the sidelines until better opportunities abound.
