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SocGen Warns "Hide In Cash" - Avoiding Risk Will Be Pivotal In 2015
Via Societe Generale's Andrew Lapthorne,
Style performance dictated by weak fundamentals
Investment style performance during 2014 was far more consistent with that of global bond yields (which dropped to historically low levels) than an acceleration in economic growth. The two charts below make this point. The relative performance of our aggregate quality investment style typically performs inversely to global equities but has a high positive correlation to bond prices. Given our quality measures are often by construction low beta, this inverse relationship with global equities is not unusal.
What is striking is how sovereign bond markets and investment style performance have been in lock-step for the last couple of years. In particular both started reacting to a slowdown in economic growth early in 2014, whilst headline indices only really started to come unstuck in the second half of 2014. Investors were willing to take equity risk, thanks largely to the unerring support of central bankers, but they seemed not so keen to take economic risk. These risks then became all too apparent in the second half on 2014 with the collapse of commodity prices, most notably oil along with economic growth and inflation expectations.
One argument we have made in the past is that the particularly strong performance of equity quality and US Treasuries last year was a function of these assets bouncing back after quite a savage drop post the intital May 2013 Fed-tapering induced sell-off. Back then bond yields rose and defensive assets sold off in the expectation of an end to QE and better global economic growth prospects. While the former has now occurred (though replaced by other countries’ QE), the latter is proving harder to come by. In fact the dominant theme we see across asset, sector and style performance is a market responding to disappointing economic growth momentum. As we show below, the performance of quality equities is entirely consistent with the direction of global earnings momentum (note that quality performance is inverted in the chart).
So it turns out Fed tapering was largely a distraction. The driver has been weaker than expected global growth, and if the performance of global sovereign bonds and quality equities is to be believed then overall equity volatility is likely to be much higher in 2015 than it was in 2014, in the absence of any improvement of economic conditions.
Quality stocks along with everything else are expensive
The upshot of all this strong performance is that quality stocks are trading at very elevated levels, having only exceeded these levels during the Tech boom in 1998/99. This is undoubtedly a concern going forward especially as the higher beta alternatives (whether value or growth stocks) are not exactly offering enticing valuations either. As we also show below value stocks, while by definition the cheapest part of the market, are also trading at high PE multiples to where they typically trade. None of this is very encouraging.
These expensive “style” valuations have to be put in the context of equities overall being really expensive. For example, the median EV/EBITBDA on both Europe and US stocks have rarely been this elevated, a worry for many, but for others this expense is simply explained away by equally expensive valuations on fixed income asssets or indeed cash.
The reality though is that higher valuations have historically led to disappointing future returns and a greater danger of loss. We quantified this by sorting all stocks into four valuation buckets based on their starting EV/EBITDA valuation and measured their performance over the next three years. We did this monthly since 1989 using all stocks that existed in the FT World index during this time, and as we show below, the expected price return from US stocks was just 1.6% and in Europe you actually made a loss.
Conclusion
So what to do? Increasing risk while valuations in the equity market are so elevated seems dangerous, so the obvious answer is to hide in cash. But for many this is a difficult to do. Our quality income strategy has been reducing the number of stocks it holds, concentrating on those which still meet our quality and valuation criteria. This keeps the dividend yield high and the balance sheet risk low, but also comes at the cost of increasing idiosyncratic risks. For those willing to take on greater volatility, our value styles and our Global Value index continues to highlight Japan, with all its macro volatility, as a region of interest. But as we highlighted last month, given valuation dispersion is so tight, avoiding risk will be pivotal in 2015.
To that end, avoiding or even shorting companies with a high degree of earnings manipulation seems sensible. This style was a particular strong performer in Europe and Japan last year. We expect to see similar effects emerging in US stocks this year.
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Maybe it's just a personal preference, but I'm hiding in PM for the most part. You can keep your "cash," thank you.
I was flush in PM's too, but I unfortunately had this terrible boating accident...
To the Banks, Gold is a little like, "Voldermort". It can never be mentioned by name....
I'm hiding in gold.
edit: To differentiate my comment, I'll add "I'm hiding my gold."
Gold is still cheap, but will the cartel let it run?
Thats irrelevant. The physical price will decouple from the paper price (as set on the comex in New York, and in The City of London), potentially as the Shanghai physical exchange ramps up.
Either way, its not the price of your gold you need to worry about, its the price of the dollar that is the issue.
I went all cash last Friday (except for my stack of PMs). But if SocGen is recommending it...
It always makes me wonder if my response is the "desired" response...
We know we are under continual manipulation. Its all they do. Its just impossible to know for sure if your perceptions are real or implanted.
Bitcoin is cash too.
Your cash ain't nothing but trash.
But American trash may smell less than Euro trash in a few days
I agree, bitcoin is fiat.
"bitcoin is fiat"?? How do you figure?
http://www.merriam-webster.com/dictionary/fiat
1 : a command or act of will that creates something without or as if without further effort
2 : an authoritative determination : dictate
3 : an authoritative or arbitrary order : decree
Bitcoin is a nerd wet dream. Nerds who are too young to have lived through serious market disruptions. If you lived i southern manhattan in the afterward of superstorm sandy, when the whole grid was down, your bitcoin wealth was non-existent. Too many ducks have to be ined up in a row for bitcoins to work, and yes they may work now, but with the kill switch, hackers, and other digital related issuesk it;s just too open to risks. PM's that are in for physical possession avoids all these weaknesses.
Now if we can just have a knock down of the gold pirice one more time, it will giving us one last buying opportunity. If that happens one more time, I suspect it will be the last time before it takes off, never to look back..
Not remotely true. Bitcoin is more absolute than gold.
The darkness is still rampant among idiots here.
One question though: why the banks and TPTB fight it if it's not their antidote?
If you don't know what a word means, try not to use it.
It's the exact opposite of fiat.
It cannot be created from thin air and it is independent of any central authority.
The system is opensource and the blockchain is public...it's a transparent system.
it is electrons, and thus depends on a) a running infastructure (internet), b) enough believers that the bitcouns are worth something (fiat), and c) your not being screwed or hacked on any exchange or d) taxed to death or outlawed. that's not good enough for me, but I hope for you that it'll work out.
Do you really think so? So it's also an IOU, but a virtual one? Doesnt give much comfort.
no power grid no bit coin. snowmen leaked more info that the NSAIDs can get into the system so internet cash is not smart paper is stupid so I'll stay physically stron
Woodchipper might be a good investment.
Got mine. 30 hp vermeer. bring it
Any regrets on that investment?
Only after feeding it for hours on end. But a hell of a machine if you have lots of trees. Hydraulic self feed makes all the difference. New ones are too expensive for most us to justify for home use. I bought it with a bad engine and put a new Generac V-twin on it. I have a lifetime supply of firewood and mulch though.
That baby and a wood gasifier could be one hellava combo.
Yes. I've looked into that, but more to power my home generator. Its currently set up on natural gas but would be unaffordable to run for any length of time. Seems odd no one makes one, or even a kit. I have thought about taking a round at building one...just no time.
Yep thats the ticket. Power for the undependant.
Hiding in long dated puts, very long dated.
Speaking of options WTF is going on in the NQ options right now?
Check em out, front month at the money's are 200 points wide..... Been like that since they opened. Something is up. I'm taking some crazy swings on the mark to market and my NQ options position is fairly small and relatively delta neutral.
I don't recall ever seeing index options spreads this wide for this long. Am I getting a bad feed or are you too seeing stuff bid 90 offered @300.
I just keep buying guns and ammo. An asset that can directly contribute to its own defense.
Adjust your allocation. Underweight stocks, overweight long bonds.
Sit in cash, if you are a fool.
What can I buy with bonds? Its all government paper at the end of the day and will be valued as they see fit.
Bonds can buy cash or PMs at the end of 2015.
No apocalypse in 2015.
If we only knew when...on anything.
$100M condo sale breaks city record
http://m.nydailynews.com/life-style/real-estate/100m-condo-sale-breaks-c...
Hide in cash?? Like the schlubs that got creamed in the Euro? think the dollar is immune? BAH!!!
We can't hide anywhere, in anything. This is THEIR economy now. They monitor and control everything including what most people think. Outliers will be eliminated, financially if not physically.
But hey, I was bored anyway. Resistance is futile, but I'm kind of used to that now.
"performance during 2014 was far more consistent with that of global bond yields (which dropped to historically low levels) than an acceleration in economic growth"
That is the situation in a nutshell. The financial crisis which began in 2008 has not ended. It has become a marathon. Various players, including giant institutions, are getting winded, tired of running. Some are admitting defeat, as the SNB in its unprecedented (in modern times) action last week.
The growth they talk about in the media is not there. Debt--and the whole social system--depend on growth. If it is not there for a long enough time, then the system collapses.
The dollar will be the last currency standing. Hiding there would be a great investment. Avoid sovereign debt. http://investfts.blogspot.co.uk/
I have no idea. I'm paralyzed in confusion. All I do know is that this disaster we faced was largely precipitated by the financial industry. An industry that contributes very little relative to the profits they take from it. And I simply refuse to participate in it. I will not buy any financial instruments of any kind. I realize that cash is probably no better but it is my base line. I also realize I am "losing money" relative to these other alternatives but I really don't care. I'm done with these fuckers. Some other thief will get my money.
There are so many ways this could go, that I am happy in cash. If PMs end up going down then stocks will likely be going up, so I will buy some more PMs. If PMs go up then stocks likely will go down, so I will count my stack and smile - then wait for buying opps there.
Short GB Packers.
This entire season I have seen incredible athletic specimens with nothing between their ears making incredibly stupid plays - or failing to make plays. The 'football IQ' in the NFL is as low as I have ever seen.
I keep my money in Cocain and Doll Heads.
Cash is king.
I do have gold and silver,enough for a long while ,but if the U.S. dollar is screwed,then,everything is screwed.
Plan accordingly
Bitcoin, PM, weapons and ammo FTW.