Categories



TheLibertyMill




The Phaserl






AvatarProducts



JPMorgan Lays Out “The Worst Case”

from Zero Hedge:

“Longer term the implications for markets could be more serious. Investor positioning during the euro debt crisis can be thought of as the worst case for markets in the current conjuncture.  It would require another 10% decline in global equity indices from here, for the equity weighting of non-bank investors in the world to return to euro debt crisis levels in a worst case scenario. Such a decline would also push the current bond allocation of 22% to above the 23% peak seen during the euro debt crisis.”

The worst case

The unexpected result of the UK referendum threw the UK and Europe as a whole into uncharted waters, introducing a protracted period of uncertainty. Naturally, equities and risky markets more generally reacted very negatively to this new higher level of uncertainty.

It is difficult to say by how much more investor positions could eventually shift to reflect this increased uncertainty. On the positive side, there are no events for markets to focus on in the near term, as it’s unclear when and under what conditions Article 50 will be invoked.

Longer term the implications for markets could be more serious. The last time Europe entered uncharted waters was during the 2010-2012 euro debt crisis. Admittedly that period was characterized by an acute sovereign debt crisis which triggered a banking crisis in Europe, something that has low probability of happening in the current conjuncture, in our view. As such, investor positioning during the euro debt crisis can be thought of as the worst case for markets in the current conjuncture, in a very adverse scenario where Brexit ends up causing a lot of economic disturbance in terms of trade, people and financial flows as well as business confidence in Europe.

How far are investor positions currently relative to this worst case?

To gauge how overall investors are positioned at a macro level, we looked in the past at the holdings of cash, bonds, and equities of non-bank entities in the world. After excluding banks, i.e. entities that typically invest in bonds rather than equities, the amount of bonds held by the rest of the world, i.e. non-bank entities, stands at around $27tr currently. This compares to $47tr of cash and $49tr of equities.

That is, non-bank entities, which invest in both bonds and equities, have an allocation to equities that is close to 40% currently of their combined cash/bond/equity holdings. This is around three percentage points above the average level seen during the 2010-2012 euro debt crisis.

 

On our calculations it would require another 10% decline in global equity indices from here, for the equity weighting of non-bank investors in the world to return to euro debt crisis levels in a worst case scenario. Such a decline would also push the current bond allocation of 22% to above the 23% peak seen during the euro debt crisis.

In other words, in our assumed worst case the gap between equity vs. bond allocations would look even wider than that seen during the euro bond crisis.

European equities in particular were hit hard during the euro debt crisis of 2010-2012 and look vulnerable post Brexit referendum. We typically use two indicators to gauge European equity overweights. The first one is based on US balance of payment data. In particular, we use holdings data to calculate the share of Europe in US investors’ foreign equity holdings minus the equivalent share of Europe within global equity indices. The difference between these two shares gives an idea on how overweight or underweight US investors are with respect to European equities. Figure 5 and Figure 6 show the calculation for UK and euro area equities, respectively. These figures show that, as of last March the last available observation, US investors were significantly overweight European equities relative to their allocation in the 2010-2012 period of the euro debt crisis.

Read More @ ZeroHedge.com

Help us spread the ANTIDOTE to corporate propaganda.

Please follow SGT Report on Twitter & help share the message.

Leave a Reply

You can use these HTML tags

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>