Where To Be Long As Low Vol. Persists, According To Goldman

Were you wondering where you need to be long as the low vol. regime drags into its 482nd year?

I’ll answer that for you: no, you weren’t. Wondering that is.

Because you’re long every damn thing. And thanks the rampant proliferation of ETFs, you can simultaneously be an armchair vol. seller, an EM bond investor, a high yield pirate surfing the illiquid seas of junk, and the proud owner of South Korean equities at a time when the entire country could be reduced to a smoldering pile of ash overnight.

All from the comfort of your home laptop and all while gorging yourself on string cheese as the Sesame Street characters on CNBC narrate your transformation from Home Depot floor manager to homemade hedge fund hero.

It’s so easy: just ask John Brown…

https://twitter.com/ReformedBroker/status/920038563365949440

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— Golden State Warriors (@warriors) October 16, 2017

All of that notwithstanding, there might still be something to be said for being selective or otherwise at least taking a minute to wait and see if it goes in before you turn to the camera and grab your “big league” balls.

So for those interested, here’s a quick note from Goldman on “where to be long as low vol. continues”…

Via Goldman

Last week the US CPI again came in below expectations but positive consumer spending data led our US economists to increase their Q3 GDP tracking estimate. The combination of low inflation but strong growth (“Goldilocks”) continues to support the low vol regime. Lower-than-expected inflation is supportive for risky assets as it limits the need for central banks to tighten policy. With this backdrop the joint rally of equities and bonds continued last week, with emerging markets doing particularly well. And this has been the dynamic since the current low vol regime began in late June 2016, with the macro backdrop gradually improving.

As we have written before, low vol regimes are risk on with equities and credit historically outperforming bonds – credit actually delivered the highest Sharpe ratio historically in those periods. But this time we continue to see equities as more favorable than credit due to the relative valuation, particularly in Europe where the Stoxx 600 dividend yield is now higher than the yield on EUR High Yield credit. Credit spread compression has outpaced equity risk premia compression, particularly in places like high yield (Exhibit 1). In addition, historically credit spreads tend to widen in advance of recession and credit total returns have high exposure to rates compared with growth, while equities tend not to sell off until closer to recessions and have more leverage to the growth environment remaining strong.