Global Horizon --Season supports second half bounce:: Macquarie Research,

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Global Horizon
Season supports second half bounce
Event
 We take a more detailed look at seasonal patterns in the US, Europe and
emerging markets to form a view on timing for a second half bounce.
Impact
 While not everyone is a believer in stock market seasonality, over the long
term the US, Europe and emerging markets have tended to deliver stronger
returns in November to April compared to the weaker May to October period.
 Over the last 20 years, the volatility of returns for the S&P500 and MSCI
Emerging Markets is also greatest between August and October, with
volatility falling in November and December.
 Looking at risk and returns, by dividing average returns by their standard
deviation over the last 20 years, November to April is clearly superior, with
ratios of 0.77 for emerging markets, 0.61 for the US and 0.60 for Europe. In
contrast, the same ratio for May to October is far worse at 0.15 for the US
and close to zero for emerging and Europe.
 Monthly differences in equity returns in the S&P500 are closely related to the
VIX, which tends to rise between May and October, before falling away
again between November and April. We found the reverse tendency in 10
year US bond yields, which tend to rise between November and April, before
falling again between May and October. These trends fit with our view that
equity returns, the VIX and bond yields all capture seasonal risk.
Outlook
 We continue to expect improved growth and valuations to drive a second
half rebound in equity markets. That said, a study of seasonality confirms
our view that volatility is likely to continue over the coming months. Thus,
while the move is coming to an end, we continue to recommend a more
defensive approach. Some of the key picks from our defensive portfolio are
Tesco (TSCO LN), Sanofi (SAN FP) and Telefonica (TEF SM).
 While every year will not follow the same pattern, we believe there is
sufficient evidence that reducing equity exposure or switching from cyclicals
to defensives near April is a sound strategy, as it reduces exposure to
negative returns (which are more likely). While mid year declines often make
many stocks look cheap, history also suggests waiting until September or
October before increasing your allocation to equities.
 We also continue to highlight that the key factor driving our asset allocation
view is the expected direction in US bond yields, and we expect the next
signal on rates is likely to come at the Fed’s Jackson Hole meeting. Talk
that higher rates are needed would be positive for equities, as changes in
Fed policy are generally a good leading indicator, and with emerging
markets having a negative 85% correlation with US 10 year bond yields, and
still offering the most attractive equity risk premium, we still believe emerging
market equities will have the most upside in a rising rates scenario.