TACTICAL ASSET ALLOCATION AND MARKET INDICATORS€¦ · developed market stocks and aggressively upgraded emerging markets. Meanwhile, in the bond portfolio, the allocation was large

Pablo Sciarra GWM ADVISORY SERVICES 249182

June 2, 2014

[email protected] • TEL 514.499.9550 • www.bcaresearch.com Copyright © 2014 BCA Research Inc. All Rights Reserved. Refer to last page. 1

TACTICAL ASSET ALLOCATION AND MARKET INDICATORS

In this Issue: F Performance ...........2

F Weights ..................3

F Currency Allocation ...............4

F Capital Market Indicators ...............5

F Currency Technicals ............11

F The model underperformed both global equities and the S&P 500 in May.

F For June, the model has only mar-ginally increased its risk exposure (Chart 1).

F The model downgraded most developed market stocks and aggressively upgraded emerging markets. Meanwhile, in the bond portfolio, the allocation was large-ly unchanged, with only Australia receiving a small downgrade.

F The risk index for global equities remains in neutral territory while that of global bonds has moved up sharply in the high-risk zone.

Periodical

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CRB Futures: 0% %

Cash: 0% %

Bonds: 8% %

Recommended Weights For:Equities: 92

% %

CHART 1

Model Weights

© BCA Research 2014

GLOBAL INVESTMENT STRATEGY

Editorial BoardChen Zhao Managing Editor

Emin Baghramyan Senior Editor

Mathieu Savary Editor/Strategist

Chester Ntonifor Editor/Strategist

Laura Lin Senior Analyst

USUARIO

Resaltado

USUARIO

Resaltado

USUARIO

Resaltado

USUARIO

Resaltado



BCA RESEARCH INC. GLOBAL INVESTMENT STRATEGY - TACTICAL ASSET ALLOCATION AND MARKET INDICATORS JUNE 2, 2014

CHART 2

Portfolio Total ReturnsPerformance F In May, the recommended balanced

portfolio gained 1.8% month-to-month in local-currency terms and 0.6% in U.S-dollar terms because of the weak euro. This compares to a 2.1% increase for the global equity benchmark as well as a 1.5% gain for the S&P 500 (Chart 2).

F As in April, May’s underperformance was due to both the 8% allocation to fixed-income securities as well as to the large allocation to European equities within the stock portfolio.

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Total Return*AbsoluteRelative To U.S. 10-Year

Government Bonds

Total Return*AbsoluteRelative To G7 10-Year

Government Bonds

Total Return*AbsoluteRelative To U.S. S&P 500

Total Return*AbsoluteRelative To Global

Equities**

* Shown in US$ returns and rebased to January 1985 = 100.** Source: MSCI Inc. (see copyright declaration).





Weights

TABLE 1

Model Weights (As Of June 2nd, 2014)

F For June, the model slightly increased its allocation to risk. Equity weightings were raised to 92% from 91%, while the bond allocation was pared back slightly to 8% from 9%. As in the past several months, cash and commodities continue to remain excluded from the portfolio (Table 1).

F Within the equity portfolio, higher-risk Italian and Spanish stocks bore the brunt of the developed markets downgrade, with their weight falling by 5% and 6% to 10% and 9%, respectively. At the other end of the spectrum, emerging Asia was upgraded by 18% to 20%, and Latin America by 16% to 19%. Only the Swiss bourse maintained constant weights at 8% (Table 1).

F The bond portfolio kept a relatively similar composition, as only Australian bonds experienced a changing allocation, with their weight falling to 1% from 2% (Table 1).

EQUITIES BONDS CASH CRB FUTURES

U.S. 6 (7) 0 (0) 0 (0) N/A

CANADA 1 (1) 0 (0) 0 (0) N/A

JAPAN 0 (1) 0 (0) 0 (0) N/A

AUSTRALIA 4 (7) 1 (2) 0 (0) N/A

NEW ZEALAND 2 (3) 3 (3) 0 (0) N/A

GERMANY 4 (9) 0 (0) 0 (0) N/A

FRANCE 1 (5) 0 (0) 0 (0) N/A

ITALY 10 (15) 2 (2) 0 (0) N/A

NETHERLANDS 3 (4) 0 (0) 0 (0) N/A

SPAIN 9 (15) 2 (2) 0 (0) N/A

U.K. 0 (4) 0 (0) 0 (0) N/A

SWITZERLAND 8 (8) 0 (0) 0 (0) N/A

SWEDEN 5 (7) 0 (0) 0 (0) N/A

EMERGING ASIA 20 (2) N/A N/A N/A

LATIN AMERICA 19 (3) N/A N/A N/A

TOTAL 92 (91) 8 (9) 0 (0) 0 (0)




Currency Allocation

CHART 3

U.S. Trade-Weighted Dollar* And Capitulation

F Local currency-based indicators drive the construction of our model; as such, the performance of the model’s portfolio should be compared with the local-currency global equity benchmark. The decision to hedge currency exposure should be made at the client’s discretion, though from time to time we do provide our recommendations.

F The dollar began May on a down note, falling to its upward sloping trend line established since 2011. At this point, the euro buckled and the greenback ultimately finished the month with a flat performance. As a result, our Dollar Capitulation Index also stabilized at a low but not extreme level, suggesting the USD could strengthen in June (Chart 3).

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U.S. Dollar Capitulation Index**

* Source: J.P. Morgan Chase & Co.** Based on dollar sentiment, traders' speculative positions, advances minus declines versus eight currencies and momentum.





CHART 5

Global Stock Market And RiskCHART 4

Commodities And Risk

After their sharp rally earlier this year, com-modity prices retreated last month (Chart 4). This move could have further to go as natural resources are somewhat expensive and their risk index remains elevated.

Global equities continued to power ahead in May, yet their risk index stayed stable right in the neutral zone (Chart 5). Since stocks are supported by an easy liquidity backdrop, not-yet-extreme valuations and well-behaved momentum, their upward motion should con-tinue through June and the rest of the summer.

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Continuous Commodity Index*40-Week Moving Average

* Source: Thomson Reuters.

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Equities*40-Week Moving Average

* Source: MSCI Inc. (see copyright declaration).

Capital Market Indicators

© BCA Research 2014© BCA Research 2014




CHART 7

Swiss Stock Market And RiskCHART 6

U.S. Stock Market And Risk

Swiss stocks were not downgraded in June. Indeed, their risk index is significantly lower than that of other European markets (Chart 7), as Swiss stocks are cheaper, less overbought and enjoy a very stimulative monetary environ-ment, courtesy of the Swiss National Bank’s currency peg.

While the S&P 500 is slightly more expensive and overbought than its global counterparts, the very loose monetary policy followed by the Federal Reserve has resulted in a more explosive liquidity environment in the U.S. than in most other economies (Chart 6). Thus, the risk index of U.S. stocks is marginally lower, explaining why American equities did not suffer as deep a cull as European stocks.

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Average

* Source: MSCI Inc. (see Copyright Declaration).


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CHART 9

Latin American Stock Market And RiskCHART 8

Emerging Asian Stock Market And Risk

Emerging Asia stocks enjoyed a sizeable 18% upgrade in June. While their risk index has stayed depressed for many years now, their expected returns have risen sharply, as mo-mentum is switching from negative to positive and the falling RMB is loosening monetary conditions in China, the regional locomotive (Chart 8).

Latin American equities are currently benefit-ing from a very similar risk-reward tradeoff as their Asian counterparts (Chart 9). As such, their large simultaneous upgrade is unsurprising.

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CHART 10

Global Bond Yields And Risk

In May, the risk index for global bonds rose sharply, driven by a surge in momentum (Chart 10). Nonetheless, the model enacted only a small downgrade for this asset class, as pockets of opportunities still exist in the fixed-income universe.

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10-Year Government Bond Yield40-Week Moving Average

% %

CHART 11

U.S. Bond Yields And Risk

While the risk index for U.S. bonds rose less than that of their global peers (Chart 11), the model continued to avoid Treasurys. Indeed, their low yield is depressing their expected returns, suggesting more attractive risk-adjusted returns are available elsewhere in this asset class.

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CHART 12

Japanese Bond Yields And Risk

Not only do Japanese bonds offer poor ex-pected returns thanks to their low yields-to- maturity, their risk index is quite elevated since JGBs are expensive (Chart 12). This suggests that even with the Bank of Japan buying in the background, Japanese notes are not attractive.

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CHART 13

Australian Bond Yields And Risk


Australian bonds endured one of the worst episodes of deterioration of their risk index in May (Chart 13). However, this was coun-terbalanced by their relatively high yield. Netting out both forces, Australian bonds were downgraded but were not completely dropped from the portfolio’s allocation.




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CHART 14

Italian Bond Yields And Risk

Swedish bonds are especially unattractive. Not only do they offer sub-2% yields, but based on Swedish economic conditions they are ex-pensive, which along with much-overbought conditions, contributes to their elevated risk reading (Chart 15).

CHART 15

Swedish Bond Yields And Risk

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Italian bond yields are flirting with all-time lows, yet they are fairly valued (Chart 14). While their risk index is elevated, this mostly reflects much overbought conditions, and hence this situation should dissipate in the months to come. As such, the model has maintained its allocation to BTPs .

© BCA Research 2014 © BCA Research 2014




CHART 16

U.S. Trade-Weighted Dollar*CHART 17

Canadian Dollar

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* Source: J.P. Morgan Chase & Co.13-Week Moving Average40-Week Moving Average

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CAD/USD

CAD/USD

13-Week Moving Average13-Week Moving Average

Currency Technicals

In May, the dollar’s upward trend line estab-lished since 2011 was tested. However, the trend was not broken, as both prices and the cyclical momentum measure rebounded, sug-gesting the greenback should strengthen in the summer months (Chart 16).

While the primary trend for the Canadian dollar remains down, the current rebound from deeply oversold levels has further to go. Both the tactical and cyclical momentum measures have more upside, even within the context of a CAD bear market (Chart 17).





CHART 18

Euro

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EUR/USD

13-Week Moving Average40-Week Moving Average

The euro is at a critical spot. Both the 13-week and 40-week rate-of-change measures are forming wedges, indicating a large move is in the offing (Chart 18). While our base case is that both momentum measures will break down, a failure to do so would lead to an upward breakout which could push EUR/USD as high as 1.45. In any case, investors should position themselves for increasing volatility in this market.

Mathieu Savary, Editor/Strategist [email protected]



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Documents

TACTICAL ASSET ALLOCATION AND MARKET INDICATORS€¦ · developed market stocks and aggressively upgraded emerging markets. Meanwhile, in the bond portfolio, the allocation was large