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Current positioning backdrop from our October note:
US Tech = $11T or 31.2% of aggregate $SPX+ $RTY mkt cap
Adding in bond proxies/lower real rate beneficiaries ( $XLV, $XLU, $XLP) total mkt cap rises to $24T or 69% of the aggregate mkt cap, highest in history.
1/n
US Tech = $11T or 31.2% of aggregate $SPX+ $RTY mkt cap
Adding in bond proxies/lower real rate beneficiaries ( $XLV, $XLU, $XLP) total mkt cap rises to $24T or 69% of the aggregate mkt cap, highest in history.
1/n
On the other hand, sectors like energy and materials now make up $1.4T of the aggregate mkt cap, or 4.1%.
So the whole equity space is positioned for deflation/lower real rates at a time when the probabilities of outcomes favor higher real rates over next 12mo.
2/n
So the whole equity space is positioned for deflation/lower real rates at a time when the probabilities of outcomes favor higher real rates over next 12mo.
2/n
Higher real rates either come from a sharp move lower in breakevens due to slowdown in economy, or pick up in nominals from a eco recovery (vaccine helps there).
Both scenarios weigh on the $24T that is betting on a lower probability outcome.
3/n
Both scenarios weigh on the $24T that is betting on a lower probability outcome.
3/n
As a dumbed-down illustration: 1% flow from the $24T to energy $XLE would lead to a 40% appreciation in the space.
Shows the power of rotation here and given the size of the numbers the potential violent nature of that rotation.
4/n
Shows the power of rotation here and given the size of the numbers the potential violent nature of that rotation.
4/n
That said, the problem with this rotation is these non-deflation/ lower real rate beneficiaries are too small to power the aggregate mkt cap higher over the medium/long term, which dampens the prospects of US outperformance vs. the ROW, in-line with our longer term view.
5/5
5/5
