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Vermilion Int'l Compass: Global Equity Strategy

Still Bearish at the Index Level; Continue to Overweight Defensives & Commodity Sectors

Our outlook remains bearish at the index level as downtrends remain intact on the MSCI broad global indexes and also within Japan, Hong Kong, Europe, Germany, and China. Our preferred Sector overweights continue to be defensives (Utilities, Staples, and Health Care) and commodity Sectors (Energy and Materials).

Downtrends Intact. Downtrends remain intact for Japan's TOPIX/Nikkei 225, Hong Kong's Hang Seng, Europe's EURO STOXX 50, Germany's DAX, China (MCHI-US, KWEB-US), and all the MSCI global indexes (ACWI, ACWI ex-US, EM, and EAFE). We are bearish as long as these downtrends continue, but it is worth noting that the DAX is currently testing key downtrend resistance while the Hang Seng, MSCI China (MCHI-US), and China Internet (KWEB-US) are each testing their respective accelerated downtrends. Reversals would be good news, but we need to see it to believe it... see charts below and page 2.
US Dollar, High Yield Spreads Remain Concerning. The rising US dollar (DXY) and widening high yield spreads in the US and Europe have been major risk-off signals for global equities. We want to see the US dollar stay below $104, and US high yield spreads fall, and remain, below 375 bps, to have further confirmation that the broad equity market is bottoming... see page 3.
Actionable Theme: Commodity Sectors, Energy & Materials. The secular bull market in commodities (Bloomberg Commodity index, WTI and Brent crude oil, etc.) remains intact, which continues to support our overweight recommendations on the Energy and Materials Sectors. We believe this secular bull market has months and likely years to go. We highlight several attractive and actionable names from these Sectors... see pages 5-16.