There are plenty of good reasons to be cautious, with regard to one’s equity allocation, and very cautious on certain pockets of the market (tech, secular growth narratives).

But a low ERP isn’t one of them.


Not a terrible ex-ante return, should it hold. We continue to see this as a reason to deploy capital in line with one’s SAA, and then tweaking contingent on the DAA view (which for us is a slight underweight to international equities, having done a bunch of dip buying in European equities, emerging market equities, and more recently Japanese equities). We are much more underweight Australian equities, a trade that is hurting, at present.

That view aside, we also note a recent Credit Suisse chart, below, in which readers comment “think full employment has been reached in the US? Might want to lighten up on stocks.

As we said in our opening, we too are mindful that whilst some indicators are quite positive (e.g the ERP graph) others are very late cycle, and this is one of them. The inverted yield curve is right up there, although, a little like this graph above about the NAIRU, as a macro market timing indicator, you’ve usually got a little time up your sleeve after the signal triggers.

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