We wrote a note earlier, talking about End of Financial Year returns, and I’ll avoid over-hashing that note again, here.
But I suppose my mind does keep going back to the “why be defensively positioned” proposition/positioning.
And eventually, it does return (or collapse down) to a valuation argument. The equity risk premia (ERP) on average, is still good. But, it is shrinking.
Note: the annotations below are just different ways of doing the calculation, you shove a proxy for growth into it (wg) or, leave it out (xg) you can use measures like Treasury inflation-protected securities (TIPS), or you can use longer-run survey-based data (SPF). They all tell you pretty much the same thing.
In the past, when it has gotten down to this level (on a CAPE Shiller PE) we’ve had some reasonably violent market reactions.
Now, a smaller ERP, or rather, a shrinking one, doesn’t change the fact that US macro is resilient, and keeps surprising to the upside. It doesn’t change the fact that EU markets trade at a much lower PE, and therefore has a better “margin of safety”.
Or Australia in between, on a PE and growth basis (more unbalanced, though, we’d suggest).
It just nets out to “good reasons to be bullish, good reasons to be bearish, we are moderately defensively positioned”.
This means acceptable if perhaps a touch unspectacular returns, if life trundles along, and some likely good relative returns if things go badly. All weather sailing tends to mean you are neither in a speedboat nor a luxury yacht, but rather something of a cargo tanker / containership.
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