An ugly word - even if it is a word - but what is Japanification? The central idea behind the word is that an economy loses altitude in its growth trajectory for an extended period. It is associated with low interest rates, low inflation and high government indebtedness. The extent to which these factors are causal agents, or just the side effects of, is hotly debated by economists. The notion that the economic of the future of the world might resemble that of Japan in the past 25 years took flight following a speech by Larry Summers at the IMF in 2013. Larry Summers is an economist who was Treasury Secretary in the US Government during the tenure of President Clinton. His speech featured the following section: “Yet, in the four years since financial normalization, the share of adults who are working has not increased at all and GDP has fallen further and further behind potential, as we would have defined it in the fall of 2009. And the American experience of dismal economic performance in the wake of financial crisis is not unique, as Ken Rogoff and Carmen Reinhart’s work has documented. Japan provides a particularly clear example. I [...]
A short history of Italian government debt Italy’s titanic national debt, similarly to Rome, was not built in a day. In Italy, like much of Europe, the saga begins benignly in the ashes of World War II. The economic miracles experienced by states such as Greece, Germany and Japan in the 1950s-60s as the countries rebuilt their economies from the ground up (with aid from the US Marshall plan) resulted in two decades of breakneck economic growth. In Italy this period was known as ‘il miracolo economico’. GDP growth averaged just below 6% until 1963 and 5% thereafter until 1973. This boom eventually gave way to fiscal largesse in an attempt to continue the dramatic growth rates and associated quality of life improvements the domestic population had grown accustomed to. With the puncturing of ‘il miracolo’ during the 1973 global oil crisis, subsequent Italian governments borrowed their way to increased prosperity. From the Years of Lead in the 1970s to Rampartism in the 80s and the Second Republic of 1992, Italian debt steadily rose from 30% of GDP, along with real living standards. Italy Debt to GDP ratio 1900-2018. Source: Bloomberg By the early 90s where our overview begins, Italian [...]
Our view on gold has changed recently and we have sold the positions in full across all portfolios. Gold has a few things going for it. It has had a prescribed value for thousands of years – stemming directly from the fact that it was, for much of the past three millennia, a medium of exchange, a savings product - in effect a currency. In 1971, when the US finally came off the gold standard, the direct link between paper currencies and gold was lost. Forty years is a relatively short time in a period measured in centuries, so institutional and personal memories of the linkage remain strong. However, Gold is an example of a putatively safe asset which is, on investigation, not reliable in all environments. Gold is not necessarily a beneficiary from higher inflation, as is commonly thought. The price of gold demonstrates no stable statistical relationship with the measured rate of inflation. No matter whose CPI series one adopts, the relationship is unstable by virtue of the very large swings in the gold price. The case for believing that gold offers a very long run store of value is not well constructed. In face of these inconvenient [...]
Whilst the headline indices held up in 2015, the drivers behind the US equity market have been weakening for sometime. Index levels have been pendant on flows into a concentrated number large cap technology growth shares and, outside these, supported by extraordinary levels of share buy-back activity. Meanwhile the model-dependent Fed is hawkish as long as employment numbers hold up. Should they do so, higher rates crimp equities but should they weaken, other aspects of the US economy will presumably be weakening in tandem. These are an unattractive set of payoffs and our core thesis now calls for a bear market in US equities. We have been reducing risk within portfolios and have moved to a more defensive position.
The above chart, which is sourced from the Bank Credit Analyst, depicts the deviation from mean real yields since 1980 for the world's major government bond markets. The picture it paints is stark: with a very few exceptions, the valuation of most bond markets stand at more than one standard deviation from long term norms. Some bond markets are approaching or have exceeded two times normal levels. For the kind of new normal described by these valuations to prevail, something definitive and long lasting has to have taken place with regards to inflation. We continue to be of the view that greatest risk facing markets is that either growth or inflation surprises to the upside. Bond markets, inflated by non-price sentive buyers, are now priced for only one environment: pervading disinflation.
Within global equity markets, April saw value style indices outperform growth style indices. The relative return of one style versus the other would not typically be a significant event and the relative outperformance was just 1% according to the Russell Global Style Indices. However, the prolonged period of underperformance of the value style versus growth (a 5% difference over the last year and a 37% difference since 2005) and the associated headwind for equity investors with pronounced value style bias means that observers are in a mood to call for a change in trend. Can we observe a similar pattern in active manager universe data? For reliable style universe data we look to the Morningstar US large cap value and growth peer groups. The median value manager has underperformed the value and broad market indices over the last five years while outperforming over one and three months. Meanwhile the median growth manager has lagged the growth and broad market indices over the last month after a prolonged period of outperformance over the broad index (the median growth manager rarely outpaces the growth index). So perhaps we are onto something? It is important to remember that a value style index is [...]
I recently met Colin. He has the longest unbroken track record in the UK Equity Income sector. We did not talk about his Income fund; instead, we talked about his Blue Chip Equity Fund, which, notwithstanding a long track record has seen assets dwindle as investors joined the passive bandwagon – predominantly through Exchange Traded Funds (ETFs). Colin’s fund will be converted into a UK Rising Dividends Fund. The strategy makes a great deal of sense – focus on businesses with a track record of dividend growth and with the potential to maintain that growth. A set of rules whittle his universe down to a manageable list, then his experience and brain take over. The challenge for Colin is that the passive ferry may have already picked up his potential passengers. The growth in ETF-land is now focused on “Smart Beta”, “Factors” or “Advanced Beta”. The terminology proliferates as quickly as the number of ETFs. domain name search Total assets under management (AUM) in these products exceeds half a trillion dollars. If an active strategy can be defined by a set of rules using publicly available data, an index can be calculated and an ETF can be created to passively [...]
Friday, September 26th 2014 will be etched into the memory of followers of investment management companies and fixed income investors alike. Shortly after lunchtime, when London based manager researchers and consultants were probably settling down to an afternoon of email inbox and desk tidying, Janus Capital announced the recruitment of William “Bill” H Gross. Indeed, many will have missed this given the high likelihood of an email from Janus being ignored or deleted (Janus has struggled to reinvent itself after riding the tech bubble up and down and then becoming embroiled in the 2003 market timing scandal). Within minutes the newswires were alive with the news that PIMCO – Bill Gross’ home for the last 43 years - eventually confirmed in a statement which confirmed the general observation that relationships within PIMCOs Investment Committee and with the business heads had become increasingly challenging. This is the “big one” which will have transition managers salivating. Investment manager moves are not uncommon; sometimes they run a few hundred million dollars, maybe a few billion. Occasionally, a manager is responsible for a few tens of billions of dollars. The size of the AUM under a managers’ control will typically determine the workload for [...]
Infrastructure can be defined as the essential services, facilities and structures which societies and economies depend upon. A rising middle class throughout the world and the shift towards urban living has made infrastructure spending a priority for many emerging and developed market economies. For investors it offers the opportunity for long term, inflation protected cash flows and attractive yields. Infrastructure assets are typically characterised by a number of features - their long asset life, the ability to protect against inflation through concession agreements or other long term contractual arrangements, low correlation to other asset classes, their monopolistic nature, stable cash flows and inelasticity of demand and therefore resistance to economic cycles. The two broad categories of infrastructure investment are distinguished by the stage at which market participants enter the space; greenfield investments are made in the riskier, early stages of development and brownfield refers to investments made in already operational facilities. Within these categories, there are different ways to gain exposure; either through direct investment, pooled funds (listed and unlisted), listed equity or debt instruments, each providing differing levels of control and liquidity, resources required for achieving diversification and correlation to the general stock market. Direct investments typically offer the [...]
The UK government is to sell the 500-year-old Royal Mail. Veteran dealmaker James Leigh-Pemberton is to take on the helm of UK Financial Investments with its holding in Lloyds in his sights. Will the sale of Royal Mail come with a “Busby” or “Tell Sid” campaign familiar to those who lived through the BT and British Gas privatisations of 1984 and 1986 respectively? Both events took place during a well-entrenched equity bull market. The Royal Mail sale comes four years into a bull market which began in early 2009 and has made progress ever since, notwithstanding repetitive summer-time blues. The MSCI World Index has delivered a total return of +16% per annum in sterling terms in the period from March 2009 to August 2013. We have postulated that the stop-start nature of recovery since 2008 has held animal spirits in the corporate world at bay. Certainly, data from Mergermarket shows that while the equity markets have regained their highs, the value of M&A remains depressed in comparison. This summer has been marked by an absence of crisis news-flow and a continuation of a strong bull-market in equities. We have also witnessed the announcement of the sale of Vodafone’s stake in [...]