27 Nov 2012

Macro Strategy Update

Market Update and Portfolio Strategy

After the initial sell off in early November, markets have made a good recovery. Although still some way off from regaining the September highs, the odds are rising that the buying momentum can continue.

Digging into sector performance since the market made a bottom on November 15, we see that cyclical stocks (ie. those most sensitive to the economy), are leading the recovery (Figure 1). This is in line with the market signals we have seen since June, when cyclicals were leading the market, and even during the recent correction where some cyclicals fell less than the market. This continues to suggest that investors' appetite for risk remains high and is rising.

Figure 1: Cyclicals outperforming the market since November 15 bottom

Fundamentally, the economic news flow from the US continues to improve. Housing continues to be the key pillar for the recovery, with starts and sales rising. Markit's flash PMI for US manufacturing came in stronger, at 52.4 from 51.3 a month earlier, despite some disruption from Hurricane Sandy. Consumer sentiment remains steady, confirmed by retailers recovering almost all the recent losses (Figure 2).

Image courtesy of Stockcharts.com

Figure 2: S&P Retailers Index

Feet dragging by the Europeans, whether it is the next disbursement for the Greek government or the EU budget, does not seem to deter markets either. European financials continue to hold up well even during the recent correction (Figure 3). Clearly, the risk from the European issue is receding.

Image courtesy of Stockcharts.com

Figure 3: European financials relative performance


With the US economy showing signs of strengthening and investors' calm over Europe's slow approach on solving the debt crisis, the odds are rising that markets are likely to be higher going forward.

Portfolio Positions

No change to our existing portfolio positions.

1. U.S. corporate pensions bet on bonds even as prices seen falling. 24 April 2014 Reuters

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