Investment strategy in a fast changing environment
Investment strategy in a fast changing environment.
Dec 27, 2015
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Investment strategy in a fast changing environment
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Introduction
1. Initial lessons from the credit crises
a. Inflation or disinflation
b. Are we still in a low growth environment?
2. Applying the lessons learnt
a. How have the fund strategies changed in the wake of the
crisis?
b. How does asset allocation protect against disasters?
c. How do funds avoid negative return years?
d. What should is the correct time horizon for investments?
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Initial lessons
Post crises
Regulation
Light regulation does not
work
Volcker Rule limits prop
trading & exposure to hedge
funds
Frank-Dodd regulates banks,
rating agencies, buyout firms
& hedge fund
Financial market regulation on the increase
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Initial lessonsInitial lessons
Post crises (continued)
Lessons for monetary policy Macro financial stability
An open capital account reduces effectiveness
Lessons for fiscal policy Counter cyclical policy to mitigate booms
Save for rainy days
Wider remit for monetary policy
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Source: OECD
Fed Balance Sheet vs. US CPI growth
2003 2005 2007 2009 2011 20130
500000
1000000
1500000
2000000
2500000
3000000
3500000
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Fed Balance Sheet ($ Millions) US CPI % annual change
“Inflation is always and everywhere a monetary phenomenon” Milton Freidman
More money ≠ inflation
Banks can create 10X more money than central banks through fractional reserving
Weighing in on the inflation, deflation or disinflation debate
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1949 1956 1963 1970 1977 1984 1991 1998 2005 20120.00
10000.00
20000.00
30000.00
40000.00
50000.00
60000.00
Total Credit Market Debt Owed GDP ($ Billions)
Source: OECD
US Credit Market Debt vs. US GDP
Rate of growth will slow as the supply of credit is restricted
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Applying the lessons learned
from the financial crisis
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How has fund strategy changed in
the wake of the crisis?
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Source: ICI, Deutsche Bank Research
How has fund strategy changed in the wake of the crisis?
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Source: Haver Analytics, Deutsche Bank
How has fund strategy changed in the wake of the crisis?
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Domestic Vs. International equity
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How asset allocation protects against disasters?
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Barclays US Aggregate Total Return Un-hedged USD versus S&P 500
Source: Bloomberg
Bonds versus Equities
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1937
/12
1940
/02
1942
/04
1944
/06
1946
/08
1948
/10
1950
/12
1953
/02
1955
/04
1957
/06
1959
/08
1961
/10
1963
/12
1966
/02
1968
/04
1970
/06
1972
/08
1974
/10
1976
/12
1979
/02
1981
/04
1983
/06
1985
/08
1987
/10
1989
/12
1992
/02
1994
/04
1996
/06
1998
/08
2000
/10
2002
/12
2005
/02
2007
/04
2009
/06
2011
/08
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0S&P 500 Rolling 10 Year Return
Equity returns were very poor between 2000 & 2008
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Source: BlackRock
Do trustees and members have the correct time horizon for investments?
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Questions
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Global Interest Rates at Historical Lows
17
91
92
10
10
61
10
18
11
93
31
28
44
13
75
91
46
71
15
58
51
64
97
17
41
11
83
23
19
23
82
01
49
21
06
42
19
76
22
89
02
38
02
24
71
62
56
28
26
54
32
74
54
28
36
92
92
81
30
19
53
11
07
32
02
13
29
33
33
84
83
47
59
35
67
43
65
86
37
50
03
84
12
39
32
64
02
38
41
15
3
0
5
10
15
20%
10-year US Treasury Bond Yield
3-Month US Treasury Bill Rate
Fed Funds Rate
The
Gre
at In
flat
ion The Great Deflation
Source: Bloomberg, Futuregrowth
The Developed WorldMonetary versus fiscal policy, unemployment headwinds to growth
18
BrazilToo much government & consumption
ChinaToo much investment & not enough
consumption
IndiaLarge infrastructure and private sector
backlog to overcome
USAFed steps back – can Treasury play its part?
EUStructural impediments remain
JapanStructural impediments remain
The Emerging WorldRe-calibration for the BRICs (18% of global GDP)
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19
EM Twin Deficits
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-8 -4 0 4 8
-8
-4
0
4
8
2.14
-0.26
-4.5
4.58
-1.14
0
-2.3
0.06
-2.03
0
-2.87
-4.4
-1.43
-3.34-3.87
-1.78
-5.88-5.45C
urr
en
t a
cco
un
t a
s %
of
GD
P
Budget deficit as % of GDP Source: Bloomberg, Futuregrowth
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20
A weakening rand trendThe Rand has depreciated between 25% & 50% against its major trading partners since Jan 2011
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Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-1380
90
100
110
120
130
140
150
160
US Dollar Euro Japanese Yen Chinese Renminbi
% Exports % ImportsAsia 35% 46%USA 11% 12%Europe 25% 32% 48.3%
37.2%
25.2%
48.3%
Source: Bloomberg, Futuregrowth
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Implications for investment
• JSE All Share Index at record levels
• Central Bank Policy rate at record low
• Bond yields at multi-decade lows
Capital preservation as an investment strategy?
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Questions
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