Investors on the watch for a bear market in global equities should keep their eyes on Europe, according to Gavekal Research.

“This animal is the sneaky sort and victims rarely see it coming,” said Charles Gave, founder of the Hong-Kong based asset-allocation consultancy, in a note to clients Wednesday. “If a bear market is to unfold, this will probably start outside of the U.S.”

The likely location would be the euro zone, Gave said, where the single currency system “has now been destroying southern European economies for 20 years and local populations are increasingly unwilling to take the beating.”

Two indicators developed by the researcher, one technical and one fundamental, paint a “worrying picture” in non-U.S. markets, according to the report. They show stocks outside America have started to underperform, and risk appetite is falling, it said.


The MSCI World ex-U.S. Index has fallen over 1 percent over the last three months, compared with almost a 1 percent gain in the S&P 500 Index, according to data compiled by Bloomberg. Treasuries have returned about a half a percent over the same period.

While noncommital on whether a bear market will follow, Gave concluded the “easy” period for investors from mid-2016 to the end of 2017 is probably over.

“My recommendation remains to focus on high-quality Asian bonds, while equities should be chosen on merit rather than by geographical location,” Gave said....

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