Note Jan. 23,2024: Q1/2024 – Market Run On Wild Side. After the FOMC of December 13, 2023 and into early 2024, capital markets globally have run on the wild side ostensibly based on both early Federal Reserve (and others) ease and recovery. Such repositioning has appeared from equities worldwide to junk corporate fixed income; from benchmark U.S. Treasuries to emerging country fixed income aggregates. Globally, this momentum tinge seems overstepping ever rising geopolitics from wars to shipping risks to policy risk from a substantive election cycle already underway. It started in Taiwan, with May elections in India and then in November 2024 in the United States, with many others in between. Frictional risk exists from autocracies. Tensions appear amongst weak governments in Europe.
Evidence appears of bifurcated activity within annual GDP global economic growth of 2 ½-3% annually. In the OECD countries, inflation did peak in the summer of 2023 but is still well above 2% and appears in zigzag. Even if Fed Funds rates do not reach 6% as benchmark, the major central banks give little indications of rate cuts by mid-2024 and appear instead to be signaling a wait and see stance. In emerging countries appear the contradictory forces of high inflation and extended real estate leverage. Stress potential exists in currency markets.
Capital markets need to return to the fundamentals of quality of delivery and valuation. In late 2023/early 2024, reappeared a playbook of consensus earnings being cut but market valuations expanded on concept. Post the laissez faire of quantitative ease, little epiphany has appeared about self-restraint. The 2023 background has been egregious, including alleged blue skying via SPVs and shell companies. In 2024, more stringent regulation is likely. It would likely mean companies and countries (as seen in post banking crisis Germany and then Switzerland) having to tighten corporate operational and financial control.
Much as earlier when German Bund yields were below zero ostensibly on safety of capital, there recently appears decline in JGB yields to close to zero, likely on speculation of Bank of Japan policy reversion. Rather than currency alone providing return, we see events as being U.S. dollar and Federal Reserve driven, without early ease. In Fixed Income, we overweight the U.S. Dollar zone (including Canadian and Australian instruments in a basket for diversification), now market weight Europe (including Gilts for diversification). As currency hedge, we prefer to overweight precious metals in asset mix.
Amid elevated global tensions and central banks collectively looking to less quantitative ease, we expect sector imperatives to override geographical rotation. Heightened volatility is likely. We espouse diversification and operational and balance sheet quality as being paramount considerations.
Even in quality and for a coterie of equities with 30+ P/E ratios emergent from momentum, actual long term delivery is likely to be difficult. For growth, we have espoused a cap on Information Technology at 25% with diversification within, an underweight in Communications Services and an overweight in Healthcare.
Even as inflation likely peaked in the summer of 2023, compared to prior aspiration cycles, consumers appear globally faced with daily sustenance and living costs having increased.Also exist are anticorruption drives in emerging countries and logistic challenges to costs. Likely to be is sustained consumer focus on value and basics. We expect the stronger Consumer Staples to gain ground but are underweight the consumer. Instead, we prefer Industrials.
The Ukraine war and the Gaza war have in ferocity reinforced that the peace dividend is over. New facilities and weaponry are likely needed for drone and space asymmetrical applications. Climate change, availability of inputs and global logistics weaknesses are likely for civilian companies to have to build new facilities. Arguably not since the 1940s/50s has there been a need to strategically overweight Materials from food to rare, precious and base metals. Central banks embarked on exit from quantitative ease augur currency volatility favoring precious metals as an asset.
Instead of Utilities which we underweight for interest rate and cost reasons, the energy reality is likely to incorporate a variety of sources but revolved around crude oil pricing, likely $70/Bbl..WTI. It would be favorable mix for strong energy integrated companies with experience in managing the business of Energy.
We are underweight Real Estate awaiting restructuring from housing to office space to shopping malls but advantages are likely in efficiency built industrial space. Unlike during momentum fervor, the Financials are likely to be critical for capital markets but even 15 years post credit crisis, the overweight advantages likely lie in the strongest banks aggressive in restructuring and cost control.
Asset Mix
After the FOMC of December 13, 2023 and into early 2024, capital markets globally have not just walked but veritably run on the wild side ostensibly based on both early Federal Reserve (and others) cutting rates and economies in recovery helping corporate delivery. The scope of such repositioning has appeared from equities worldwide to junk corporate fixed income; from benchmark U.S. Treasuries to emerging country fixed income aggregates. Globally, this momentum tinge in the capital markets about central bank policy ease by mid-2024 seems overstepping ever rising geopolitics from wars to shipping risks to policy risk from a substantive election cycle already underway. It started in Taiwan with May elections in India and in magnification, in the United States in November 2024, with many others in between. Frictional risk exists from autocracies. Tensions appear amongst weak governments in Europe.
From well-regarded sources and anecdotal evidence appears of bifurcated activity within annual GDP global economic growth of 2 ½-3% annually. and elevated inflation. In the OECD countries, inflation did peak in the summer of 2023 but is still well above a stable zone around 2% and appears in zigzag. Even if Fed Funds rates do not reach our risk assessment of 6% as benchmark, the major central banks give little indications of rate cuts by mid-2024 and appear instead to be signaling a wait and see stance. In emerging countries appear the contradictory forces of high inflation and extended real estate leverage. Stress potential exists in currency markets.
Capital markets need to return to the fundamentals of quality of delivery and valuation for countries and companies alike. Much as earlier when German Bund yields were below zero ostensibly on safety of capital there recently appears decline JGB yields to close to zero, likely on speculation on the Yen and Bank of Japan policy reversion. Rather than currency alone providing return, we see events as being U.S. dollar and Federal Reserve driven, without early ease. In Fixed Income, we overweight the U.S. Dollar zone (including Canadian and Australian instruments in a basket for diversification), now market weight Europe (including Gilts for diversification). As currency hedge, we prefer to overweight precious metals in asset mix.
In late 2023/early 2024 besotted with artificial intelligence, reappeared has a playbook from earlier quantitative ease of consensus earnings being cut but market valuations and fervor expanded based on concept. Post the laissez faire of massive quantitative ease, little epiphany has appeared about self-restraint in containing financial excess. The 2023 background has been egregious, including alleged blue skying via SPVs and shell companies. Just self-restraint did not contain excess as seen in 1930s,nifty fifty 1970s, TMT 1990s,credit 2000s. In 2024, more stringent regulation is likely. It would likely mean companies and countries (as seen in post banking crisis Germany and then Switzerland) having to tighten corporate operational and financial control.
Amid elevated global tensions and central banks collectively lessening quantitative ease, we expect sector imperatives to override geographical rotation. Heightened volatility is likely. We espouse diversification and focus on operational and balance sheet quality as being paramount considerations.
Even in quality and for a coterie of equities with 30+ P/E ratios emergent from momentum, actual long term delivery is likely to be difficult. For growth, we have espoused a cap on Information Technology at 25% with diversification within, an underweight in Communications Services and an overweight in Healthcare.
Compared to prior aspiration cycles, consumers appear globally faced with daily sustenance and living costs having increased even as inflation likely peaked in the summer of 2023.. Also exist are anticorruption drives in emerging countries and logistic challenges to costs. Likely to be is sustained consumer focus on value and basics. We expect the stronger Consumer Staples to gain ground but are underweight the consumer. Instead, we prefer Industrials.
The Ukraine war and the Gaza war have in ferocity reinforced that the peace dividend is over. New facilities and weaponry are likely needed for drone and space asymmetrical applications. Climate change, availability of inputs and global logistics weaknesses are likely for civilian companies to have to build new facilities. Arguably not since the 1940s/50s has there been a need to strategically overweight Materials from food to rare, precious and base metals. Central banks embarked on exit from quantitative ease augur currency volatility favoring precious metals as an asset.
Instead of Utilities which we underweight for interest rate and cost reasons, the energy reality is likely to incorporate a variety of sources but revolved around crude oil pricing, likely $70/Bbl..WTI. It would be favorable mix for strong energy integrated companies with experience in managing the business of Energy.
We are underweight Real Estate awaiting restructuring from housing to office space to shopping malls but advantages are likely in efficiency built industrial space. Unlike during momentum fervor, the Financials are likely to be critical for capital markets but even 15 years post credit crisis, the overweight advantages likely lie in the strongest banks aggressive in restructuring and cost control.
Equity Mix
In late 2023/early 2024, a replay has appeared from earlier quantitative ease. Consensus earnings appear being cut but market valuations and fervor expanded based on concept about artificial intelligence and early central bank ease. Still and over 2023, administered rates globally have increased and sovereign fixed income yields risen. Albeit on a narrow coterie, equity markets rose and for the S&P 500, significant earnings gain expectations of 20% annually have simply been pushed out into 2024. It indicates that after a period of value and valuation focus, by late 2023, the equity markets had reverted to momentum. As yet unsubstantiated and expectations of large administered rate reductions led especially by the Federal Reserve. We consider inflation to be high still and well above 2% stability. Global geopolitical tensions remain highly elevated and many countries facing outright strife and elections, not least the United States right into November 2024.
The immediate regulatory background has been egregious in alleged blue skying such as through SPVs and shell cos now into 2023. Just self-restraint did not contain excess as seen in the periods of 1930s,nifty fifty 1970s, TMT 1990s,credit 2000s. For 2024, more stringent regulation is likely. Further, company revenue and earnings delivery challenges appear numerous enough for earnings delivery to be well below consensus.
In an environment of elevated global tensions and central banks collectively looking to less quantitative ease, we expect sector imperatives to override geographical rotation. Heightened volatility is likely. We espouse diversification and focus on operational and balance sheet quality as being paramount considerations. Even in quality and for a coterie of equities with 30+ P/E ratios emergent from recent market momentum, actual long term delivery is likely to be difficult. For diversification in growth, we have espoused a cap on Information Technology at 25% with diversification within, an underweight in Communications Services and an overweight in Healthcare.
Compared to the prior aspiration cycle, consumers appear globally to be faced with a turbulent period. Even as inflation likely peaked in the summer of 2023. daily sustenance and living costs have increased. Also exist are anticorruption drives in emerging countries and logistic challenges to costs. Likely to be is sustained consumer focus on value and basics We are but for it, We expect the stronger Consumer Staples to gain ground but are underweight the consumer. Instead, we prefer Industrials.
The Ukraine war now into its third year and the Gaza war now into its third month have in ferocity reinforced that the peace dividend is over. New facilities and weaponry are likely needed for drone and space asymmetrical applications. In the civilian space, climate change, the availability of inputs and global logistics weaknesses appear continually being exposed. On obsolescence imperatives, companies are likely to have to build state of the art new facilities.
Arguably not since the 1940s/50s has there been a need overweight Materials from a strategic rather than cyclical perspective. War in Ukraine and the drought elsewhere have exposed food stress. Central banks embarked on exit from quantitative ease augur currency volatility favoring precious metals as an asset. Rare, precious and base metals are crucial in Information Technology.
In late 2023/early 2024, buttressed by euphoria on artificial intelligence applications, growth momentum was reconstituted by Information Technology, albeit via a small coterie. The spread seems acute between Healthcare and Information Technology valuations that appear at 30+ P/E in some cases accompanied by extended index weightings. Healthcare companies also possess weighty businesses. Using S&P 500 as benchmark and to balance portfolio diversification and risk within growth, we have Healthcare at overweight and capped Information Technology at 25% weight.
Instead of Utilities which we underweight for interest rate and cost reasons, the energy reality is likely to incorporate a variety of sources but revolved around crude oil pricing, likely $70/Bbl. WTI. It would be favorable mix for strong energy integrated companies with experience in managing the business of energy and for which we overweight Energy.
We are underweight Real Estate awaiting restructuring from housing to office space to shopping malls before bargain hunters swoop. The advantages are likely in industrial space built on modern efficiency tenets.Unlike during momentum fervor, the Financials are likely to be critical for capital markets but even 15 years post credit crisis, the overweight advantages likely lie in the strongest banks aggressive in restructuring and cost control.
Communication Services: In late 2023 as fervor built over artificial intelligence, the social media portion of Communications Services again built up concept excitement. Little attention appeared being paid by media concept participants on the immediacy of regulation, on very real pressures to contain fakery including political and even down to the normally staid academic levels. However, lax internal management has had impact in the form of advertising being withdrawn. In the telecommunications space, dividend yields exist but many companies currently appear to be pressed to restructure/divest some and even whole portions of less than successful entertainment empires. Deriving tangible revenue and earnings from these arms has turned out to be more problematic than anticipated – hence the restructuring urgency. It could nevertheless take two years or more for full benefits to be in fruition. In addition for Communications Services overall and much like print media in its infancy, more regulation is globally likely from the authorities to press providers on social media stream quality of content, such as excluding incendiary missives. Entertainment complexes like movie theatres and theme parks also have repositioning imperatives. We have underweight for Communications Services.
Consumer Discretionary: As the pandemic moved into a lower but not eliminated stage of urgency regarding personal interactions and as cash infusion built up from governments to consumers, U.S. consumers performed yeoman service in being at the forefront of spending surprises. These spending surprises appear continued in late 2023. However, a step back is required from the immediacy so favored before in the quantitative ease cycle. Compared to the prior aspirational decades, consumers appear globally to be faced with a turbulent period. Even as aggregate inflation likely peaked in the summer of 2023. daily sustenance and living costs have increased. It needs reminding that the extra global consumer stimulus came not just from the U.S. consumer as key bedrock but also from emerging economy consumers. However, excess leverage is being unwound and anticorruption drives seem extending in crucial countries like China. With the possible exception of those catering to the ultrarich, the consumer in the upcoming cycle is likely to be focused more on value and basics rather than high price point aspiration, including malls. Global logistic challenges such as high seas navigation also appear as long term in nature. While Consumer Discretionary is repositioned in both product and delivery, we are underweight.
Consumer Staples: Often being regarded as more stable than Consumer Discretionary, several challenges currently appear for Consumer Staples. The pruning of brands in response to lackluster performance and to private labels was underway before. It was accentuated in 2023 by sharply rising input costs such as in foods from grains to coffee and cocoa. Private label competition is likely to expand in advanced economies like North America, Europe and Japan and to be potentially less aspirational twigged in emerging areas like India which also possess favored local brands. Some prior business short term strategies have emerged like those including for instance lower volume at the same package price point or simplified ingredients. Longer run in the consumer space, we expect the stronger Consumer Staples to gain ground and about which we have preference over Consumer Discretionary.
Energy: For reasons ranged from geopolitics to the internals of the energy markets, whether in alternates or hydrocarbons, energy pricing is likely to be a function of crude oil, likely to revolve around $70 Bbl. WTI – The recently concluded COP28 conference has revealed environmentally sustainable growth (ESG) to appear a lofty goal. Reduced actual hydrocarbon energy use appears pushed out, especially in large emergent economies like China and India. Amid elevated tensions from oil rich but sanctioned Russia to the Caucuses to violent west Asia to Latin America, there is now tension in the sea lanes. Under the leadership of Saudi Arabia, OPEC+ appears attempting to maintain availability and pricing. Meanwhile such as in the U.S., solar panel producers face severe fissures in profitability. The energy reality is likely to incorporate a variety of sources including the conventional, hydrogen LNG, solar, wind and green plants. It would be a favorable mix for strong energy integrated companies with strong balance sheets, dividends and experience in managing the business of energy and for which we overweight Energy.
Financials: The Financials are likely to be critical for capital markets. During momentum periods including those of late 2023/early 2024, Financials have appeared to be secondary to market performance.Even with low and minimalist administered interest rates for some three decades, Japanese banks still appear in convalescence; for at least two years, Chinese banks need to address overleverage especially in real estate; German banks have first consolidated then restructured. In 2023 were banking crises in Swiss SIFIs and major regional U.S. banks. Recent stresses in the Financials cannot be ascribed to well telegraphed administered rate changes nor to a sudden external event as were energy price changes in 1973. Management control controls are likely spawning more close regulatory supervision and capital requirements such as those contained in Basle III. As it adjusts to declining quantitative ease, net interest margin and credit quality management appears crucial in banking. In insurance after surviving low interest rate challenges to income, operating stresses appear from weather and conflict. We are overweight the Financials. Even some decade and a half after the peak of the credit crisis, the advantages likely lie with the strongest banks that are aggressive in restructuring and cost control.
Healthcare: Buttressed by euphoria on the potential for growth arising from artificial intelligence applications, growth momentum was recaptured in late 2023/early 2024 by Information Technology, albeit led by a small but influential coterie. Meantime, the short term enthusiasm for Healthcare faded about the applications for mRNA. Healthcare had reared in the earlier stages of the Covid pandemic but which now been faced even among vulnerable cohorts, by popular resistance to booster shots. The resultant surplus of doses have had to be discarded and their value written off in financial statements. Medical device companies have had tribulations in managing businesses. These travails should not distract from the potential for Healthcare growth from demographics ,rising standards of living and from new discovery applications such as for mNRA. The spread seems acute between Healthcare and Information Technology valuations at 30+ P/E in some cases and extended consequent index weightings seems. Healthcare companies also possess weighty businesses. Using S&P 500 as benchmark and to balance portfolio diversification and risk within growth, we have Healthcare at overweight and capped Information Technology at 25% weight.
Industrials: The Ukraine war now into its third year the Gaza war now into its third month have in ferocity reinforced that the peace dividend is over. The weaknesses that has been exposed in defense item production and procurement capacity will require years of expansion and renewal not just in weaponry but also in facilities. Drone incorporated warfare from land, air and sea are likely to be one salient change in asymmetrical warfare. Space defense is yet to come. These defense changes would be as salient as were those during the introduction of tanks and aircraft carriers which determined military plans for a century. Not only are there tensions in the south China seas but in the whole Indo Pacific, safety vulnerabilities have been exposed in the sea lanes. In the civilian space, climate change, the availability of inputs and global logistics weaknesses appear continually being exposed. On obsolescence considerations, companies are likely to have to build state of the art new facilities. While the consumer space is much larger, we prefer to overweight the Industrials
Information Technology: To balance portfolio diversification and risk within growth with the S&P 500 as benchmark, we have a cap on Information Technology at 25% weight and placed Healthcare at overweight. In the markets, the spread seems extreme in comparisons between Healthcare versus Information Technology valuations, in some cases at 30+ P/E accompanied by extended index weightings. In a market besotted with short term delivery, write downs of expired Covid vaccinations do compare unfavorably with concept excitement generated about artificial intelligence Information Technology applications. Momentum euphoria has swung from social media to ESG and now to artificial intelligence with tangible delivery in revenues needing to be assessed. Also, Information Technology has a Darwinian history in which competitive advantage timeframes are short and can ruthlessly shift. Currently, regulatory change and geopolitical tensions are elevated, in hardware down to semiconductors and in software down to fake activity, plagiarism and political interference .Even for well regarded companies, it is likely to be a challenge to be able to operationally deliver without turbulence, enough growth to justify 30+ P/E valuations.
Materials: Arguably not since the 1940s/50s has there been a need to view Materials from a strategic rather than cyclical perspective. Rare metals, precious metals and base metals are crucial in the production and use of Information Technology. They have until now been given little forethought before 2020 but are crucial for newer civilian, business and defense networks. The trade and rivalry tensions between the United States and China have solidified these realities as undertone. We expect security of supply imperatives to be rising. War and technology change holds true broadly for energy. Transition is likely to be a long term process requiring for instance platinum for catalytic converters integral in process design.
Separately, the war in Ukraine and the drought conditions being experienced in crucial agricultural regions in advanced and emerging countries alike have exposed food transport and distribution mechanisms. Last but not least, central banks led by the Federal Reserve have saliently embarked on exit from quantitative ease, even if speculation about post peak rate cuts waxes and wanes. From a strategic prism, we favor an overweight in Materials which is a stark contrast to the last several cycles of investors considering Materials from a cyclical slant.
Real Estate: Prolonged quantitative ease replete with low interest rates stoked fervor in real estate dependent on leverage of equity capital, from land acquisition to building to sale and to its maintenance. As conditions tighten such as lesser quantitative ease currently, weaker holders of real estate have tended to collapse. It conventionally would be followed by strong hands swooping in onto bargain basement prices but several twists remain. Particularly benefiting from prior ease was financial center activity.. Now for example London’s Canary Wharf faces challenges likely to be typical elsewhere. Covid restructuring has amplified focus on lessened requirements for office space. Repurposing into residential and/or entertainment uses will take time as will that for shopping malls hard hit by demographically changed shopping behavior. Affordability appears exacerbated by asset price gains during quantitative ease. We are underweight Real Estate with restructuring likely to be in multi years. The advantages are likely to accrue to the strongly capitalized as is conventional and also in industrial space built on modern efficiency tenets.
Utilities: Much like Real Estate, also with long time horizons and external debt needs in the past, Utilities have been developed and capitalized on leverage. Utilities have previously had the added advantages of allowed rates of return being essentially regulatory determined. Much has evolved. For instance, alternate energy plans to shift away from coal have not been seamless in transition. In several instances, consumers have balked at rate increases and applied political pressures on that which used to be a technical exercise. In a number of countries, natural disasters have demonstrated vulnerability in energy infrastructure. Water utilities appear back to facing the prior tenets of being regarded to be a necessity and hence not free flowing in terms of investor returns. We see the present reality as being far from being defensive and stable for Utilities and hence are underweight.
Asset Mix
Global U.S.
Equities-cash 49 % 54 %
-priv. 6 6
Fixed Income 25 20
Cash 15 15
Other 5 5
Total-% 100 100
Geographic Mix
Currency/ Equities Fixed Cash
Real Income
Americas 61% 65% 67% 55%
Europe 22 20 26 37
Asia 9 13 6 3
Other 8 2 1 5
Total -% 100 100 100 100
Global U.S. Stance
Comm. Serv. 1.5 % 8.6 % Under-weight myriad challenges
Cons. Disc. 10.4 10.8 Under-weight favor frugal basics
Cons. Stap. 9.6 6.2 Market-weight for brand pruning
Energy 4.8 3.9 Over-weight favor strong cos..
Financials 17.2 13.0 Over-weight, restructuring
Healthcare 10.5 12.6 Over-weight across segments
Industrials 12.2 8.8 Over-weight, capex suppliers
Info. Tech. 25.7 28.9 Capped for diversification
Materials 3.82.4 Over-weight diverse and prec.
Real Est 1.8 2.5Under-weight, favor ind. ppty
Utilities 2.5 2.3 Under-weight -rate risk.
Total-% 100.0 100.0
Note Précis Nov. 20 , 2024: Many a Slip Between Cup and the Lip
Note Précis Oct 11, 2024: Q4/2024 –Slow and Steady to Win as Nexus Evolves
Note Précis Sep. 3 2024: Momentum Dominance and Valuation Agnosticism To Fade.
Note Précis Jul. 24,2024: Q3/2024 –Eddies Swirl In Market Waters
Note Precis Jun 14 2024: Fractious Environment Requires Steady Hand Central Banks