Global Equity BMI

 

Global Equity

  • Valuations are modestly high; however, escalating risk makes it an uncertain trade.

  • US rates are minor contributor to risk and offer little protection from uncertainty.

  • The equity leader of the last decade, Technology, contributes disproportionately to risk.

  • Energy and Financials valuations are extreme levels for earnings and cash flows.

  • Diversification benefits exist in Consumer Staples and Utilities; however, the position is contingent on the unlikely scenario of higher inflation.

The global economy is showing signs of stress as economics data continues to disappoint in Asia and Europe. Economic uncertainty with the escalating US-based trade wars, Brexit, and political revolt in Hong Kong are conspiring to increase risk in the global equity markets. While China continues as a primary driver of the global economy, fractures are present in its proxies: Hong Kong, Singapore, and Taiwan, which belies the economic data emanating from China. As Japan in the 1990's, the work-out of their unprecedented credit expansion will cause global price deflation of goods, whose impact on equities remains uncertain. Constrained fiscal policies across the US and Europe give considerable pause to their ability to respond should a crisis emerge. The challenge of the time, however, is the combination of US political volatility and a global slowdown, which has neither precedent in models nor human experience. After a decade long bull run, investors will now determine their skill by answering the question how much is the global economy slowing?

 

Global Equity BMI Dashboard

Updated Daily (After Market Close)

Risk & Return

 

The primacy of the Technology sector continues to drive the expectation of efficient returns in the US. In contrast, Energy offers little efficiency to the investor as the combination of benchmark returns and high risk is unpalatable.

  • The low returns of Utilities and Consumer Staples reflect their defensive characteristics and provide a harbor of safety during uncertainty.

  • Little efficiency is implied for Technology and Energy, which may reflect the nascent global economic slowdown.

Valuation

The outlier for valuations in the developed markets is the Energy sector and, to a lesser extent, the Financial sector. In contrast, Consumer Staples offer sound valuations; however, growing economic uncertainty may suggest a value trap in a slowing economy.

  • Cash flows are a sign of a healthy company and Technology is the best relative value under this standard with earnings that parallel other developed markets.

  • Consumer Staples and Materials offer compelling yields relative to the aggregate for cash flow investors, where valuations reflect fair pricing of their growth prospects.

Risk & Factors

 

The Technology sector is contributing disproportionately  to global risk. With factor exposures delineated clearly between growth or not, the critical question is whether the US economy can act as the consumer of last resort?

  • Global exposure to Real Rates suggest a material impact from the declining yield curve in the US, while lower inflation expectations may impair the defensive sectors.

  • A stronger US dollar may benefit the Technology sector and mitigate some of the currency risk, while Consumer Staples and Communications may soften the blow of falling commodity prices.

San Francisco  |   Los Angeles  |  415-373-7152

 

©2003-2020 Capital Risk Management LLC

 

Capital Risk Management is a Registered Investment Advisor in California and may transact business there and in other states where it is notice filed or exempt.

Please note that although Capital Risk Management LLC is a Registered Investment Adviser, readers should be aware that registration with any state securities authority

does not imply a certain level of skill or training. Additional information about Capital Risk is available on the SEC’s website at www.adviserinfo.sec.gov or

through the Broker Check at FINRA.

Strategy | Investing | Asset Allocation | Liability Driven Investing | Pensions | Endowments | Enterprise Risk Management | Financial Planning | Wealth Management

Disclosures     Terms of Use     Privacy Statement      Form ADV