tHE FIRST SHOE IS NOW DROPPING
We appreciate that it’s a rear-mirror view but end December data from our friends at CrossBorder shows unequivocally that investors have moved to being risk-off. Their World Risk Exposure* index moved from approximately neutral to -37 (‘normal’ range -50 to +50), or approximately two standard deviations below trend. We would suggest that a capitulation of this scale is a necessary pre-condition to a new bull market but we don’t believe that it is yet sufficiently sustained to send a buy signal. Long experience tells us that bear markets rarely end in a single sell-off, though there are exceptions such as 1987. Our reasoning is primarily that funding liquidity globally remains at a level (16 on a range of 0 to 100) which is predicting recession. No surprises that the US Federal Reserve is the biggest drag but it is worrying that the People’s Bank of China, until now the least tight major central bank, has shown signs of tightening. It may only be a temporary phenomenon ahead of the Chinese New Year, but given that central banks are in our view far too tight in their policy already, it is not helpful. The ECB, perhaps with the possibility of a no-deal BREXIT in its head, is now the loosest major central bank. We continue to think an economic downturn is almost inevitable and a global recession likely. However, for investors trying to time when to dial up their risk exposure again, the first shoe is now dropping. The second shoe will be an upturn in funding liquidity. We’d expect that to happen in the second half of 2019. *Risk Exposure data measure the % of the global portfolio held in risk assets as against ‘safe’ assets such as cash and bonds.