Long-term rating: Overweight

Short Cycle Rating:

Bitcoin accumulation

Lighten up in small-cap cryptocurrencies

Long-term rating: Overweight

Short Cycle Rating:

Bitcoin accumulation

Lighten up in small-cap cryptocurrencies

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Today's point of view

"Merrill Lynch Investment Clock" was proposed by Merrill Lynch Securities in a research report "The Investment Clock" in 2004. Based on the research of 30 years of historical data from 1973 to 2004 in the United States, Merrill Lynch Securities combined the economic cycle and asset rotation It is a classic theory in the field of asset allocation to link dynamics and industry strategies.

Merrill Lynch divides the active cycle into four stages, in which certain asset classes will give higher than average returns.

In a recession: the economy goes down, inflation goes down. Monetary policy tends to loosen, with bonds performing most prominently. We know that the valuation of bonds is to discount the future fixed interest cash flow using the interest rate, and the loose expectation of monetary policy means the decline of the discount rate, and the decrease of the discount rate as the denominator leads to the increase of the face value of the bond.

When the economy is in a downturn, the consumption level of the society drops, leading to a drop in demand for commodities and a drop in prices; corporate revenue and profits shrink, causing stocks to fall; the fall in the stock market leads to an increase in the demand for cash. So in this cycle, bonds>cash>stocks>commodities.

In the recovery period: the economy goes up, and inflation goes down. The economy is improving, monetary policy is stable, corporate profits are improving, and stocks have gained excess returns. At this stage, investors expect corporate profits to rebound quickly, but the central bank maintains a loose monetary policy, which leads to the discount rate of the future cash flow of the company to remain at a low level, and the future cash flow is expected to rise sharply, leading to stock valuations value rises rapidly.

Lower interest rates continue to maintain the boom in the bond market, while commodities have also begun to gain demand from investors due to rising demand. Stocks > Bonds > Commodities ≈ Cash.

In the overheating period: the economy is on the rise and inflation is on the rise. Rising inflation has increased the cost of holding cash, tightening monetary policy and the possibility of raising interest rates have reduced the attractiveness of bonds. Affected by the increase in demand from a strong economy, commodities, as a tool that can combat inflation, are clearly bullish.

The rise in interest rates will increase the cash discount rate of companies and bonds and reduce their valuations. However, compared with fixed bond interest, corporate profits have a greater room for growth, so the return on stocks is still higher than that of bonds and cash. Commodities>Stocks>Cash/Bonds during this cycle.

In a period of stagflation: the economy goes down and inflation goes up. Due to inflationary pressures, it is difficult to relax monetary policy at this time. At the same time, the economic downturn will drag down corporate profits and have a negative impact on stocks. Based on long-term allocation needs, the attractiveness of bonds has increased. Cash > Bonds > Commodities/Stocks.

Comparing the recent economic and financial headlines, it is not difficult to find that the current world economy is between the recovery period and the overheating period. The rapid recovery of the economy has led to strong expectations for higher inflation in the market, and it is believed that the Fed is about to tighten monetary policy. At the same time, bonds were sold off quickly, stocks maintained good growth, but commodity markets entered a boom phase.

We previously reminded investors that gold may bottom out around $1,700. After gold completed a W-shaped bottom, we reminded investors that gold has bottomed out. Now gold has once again broken through the downward resistance level and entered an upward trajectory. This is also due to inflation expectations.