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Cazenove’s Rice: my conditions for turning bullish on equities

Cazenoves Chris Rice has a four-point plan to set the global economy on a path to normalisation.


Rice, manager of the £1.1bn Cazenove European Fund, believes “the key conclusion for this year moving into next is that the outperformance of cyclicals is more or less over”.

The fund is not favouring growth stocks, believing them to have re-rated to historic premiums, particularly in the case of sectors such as luxury goods, but does have an overweight to “growth defensive” equities.

Cazenove’s head of pan-European equities said there are two business cycles running concurrently: that involving materials, consumer discretionary and industrial stocks, which he says are trading close to levels seen at the peak of the previous boom, and one focusing on areas such as financials, utilities and telecoms, which are “heavily depressed”.

“Industrials have passed the expansion phase”, he said, speaking at a Cazenove conference in London this week. Rice suggested that the correlation between equities and commodity prices has also passed its peak.

“Equity markets’ correlation to commodities broke down at the start of 2011 quite significantly, with the emergence of ‘bad inflation’. I expect this correlation to continue to trend down in the remainder of the cycle. Equities no longer like commodity inflation”.
Planning ahead

Rice’s four point plan for the global economy centres on an attempt to resolve the monetary policy imbalances seen on either side of the globe.

The first step, he suggests, is for emerging market growth to continue to slow down, which would in turn produce commodity prices that are significantly lower than current levels.

This reduction in prices will, Rice believes, allow emerging market interest rates to peak. “We need to see the end of the tightening cycle before we can get structurally bullish on equities”, he said.

While this process will take time to play out, the final part of the plan, in 2012 or 2013, will be when these trends finally allow the US, the UK and others to raise rates themselves. For now, however, Rice advises that commodity prices will be a key indicator of his positioning.

“Commodity prices are a very useful test of how bullish we can be about equities”, he said. “The more they drop, the more bullish I will be on equities”.

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