This action might not be possible to undo. Are you sure you want to continue?
private banking - investment strategy
investments when the financial environment changes colour
Introduction ____________________________________________________________5 Summary ______________________________________________________________6 Portfolio strategy _______________________________________________________8 Theme: A change of engines in the American economy ______________________ 11 Theme: Investments when the financial environment changes colour __________ 15 Theme: A dualistic world _______________________________________________ 18 Macro summary ______________________________________________________ 21 asset CLasses Equities ______________________________________________________________ Fixed income _________________________________________________________ Hedge funds _________________________________________________________ Real estate ___________________________________________________________ Private equity _________________________________________________________ Commodities _________________________________________________________ Currencies ___________________________________________________________
23 26 28 30 32 34 36
Investment OutlOOk - september 2010
kase@sebprivatebanking. information about taxation: As a customer of our International Private Banking offices in Luxembourg.com rickard Lundquist Portfolio Strategist + 46 8 763 69 27 rickard.se Carl barnekow Global Head of Advisory Team + 46 8 763 69 38 carl. For more information please see inter alia the simplified prospectus for funds and information brochure for funds and for structured products. Information relating to taxes may become outdated and may not fit your individual circumstances.kohonen@seb. Their value may fall as well as rise.seb.com Liza braaw Communicator and Editor +46 8 763 69 09 liza. Although the content is based on sources judged to be reliable.se Cecilia kohonen Global Head of Communication Team +46 8 763 69 95 cecilia. and historic returns are no guarantee of future returns. residence or domicile with respect to bank accounts and financial transactions.peterson@seb. Its contents are based on information and analysis available before September 3. losses can exceed the initial amount invested. Singapore and Switzerland you are obliged to keep informed of the tax rules applicable in the countries of your email@example.com. Hans peterson Global Head of Investment Strategy + 46 8 763 69 21 hans.se victor de Oliveira Portfolio Manager and Head of IS Luxembourg + 352 26 23 62 37 victor. SEB will not be liable for any omissions or inaccuracies.se This document produced by SEB contains general marketing information about its investment products.september 2010 . or for any loss whatsoever which arises from reliance on it. You alone are responsible for your investment decisions and you should always obtain detailed information before taking them. in some cases. If investment research is referred to. SEB does not provide any tax reporting to foreign countries meaning that you must yourself provide concerned authorities with information as and when required.se Lars gunnar aspman Global Head of Macro Strategy + 46 8 763 69 75 lars. available at firstname.lastname@example.orgemail@example.com Johan Hagbarth Investment Strategist + 46 8 763 69 58 johan.aspman@seb.Investment Strategy This report was published on September 14. 2010. Where either funds or you invest in securities denominated in a foreign currency.seb.braaw@seb. you should if possible read the full report and the disclosures contained within it. changes in exchange rates can impact the return. Investment products produce a return linked to risk. or read the disclosures relating to specific companies found on www. 2010. 4 Investment OutlOOk .firstname.lastname@example.org reine kase Economist +352 26 23 63 50 reine. If necessary you should seek advice tailored to your individual circumstances from your SEB advisor.
The economic world is divided − dualistic − and will remain so during the foreseeable future. their yields are historically low. something usually happens. real crises rarely occur during periods when growth is good. One thing is worth keeping in mind: risks have eased in Europe partly because of improved northern European economic performance. Financial markets are driven by the generation of value in the real economy. as well as the industries these companies belong to. Today’s long-term bond yields might be an example of such a bubble. We should thus not let ourselves become overly distracted by crises. the United States. This is what we are trying to do in this issue of Investment Outlook. This provides a degree of hope that markets will stabilise and can gradually begin to discount better economic growth. The importance of the EM sphere is continuously increasing. Markets have reacted as they should: risks premiums have risen. has lost some of its dynamism and is weighed down by heavy debts and weak government finances. the US. This type of economic environment creates both opportunities and bubbles. Our challenge as investors is to navigate properly in today’s financial world − divided. Opportunities for returns exist in all market scenarios. When the real economy sputters. Companies with a presence and good sales in fast-growing economies. In addition. This is where we are today. are in a class by themselves. Stable assets become overvalued. Government bonds are more expensive. This means that conditions in the stock market are strategically attractive. and other assets become discounted by historical measures. Also new is the relentless growth surge in new emerging market (EM) countries. but changing market environments offer opportunities for returns. which implies that the overall world economy will grow by 4-4. perhaps discounted and partly bubble-prone. even though there are risks. The theme is that after ten years of poor returns. as it has now been doing for a while. investors will now demand a much higher risk premium for owning equities. strategically attractive stock market conditions One of our most important conclusions is that a double dip recession in the US and other Western countries is unlikely. Emerging economies will continue to grow and will increasingly trade with each other. Many governments face major fiscal challenges. especially in relation to the profits we foresee. Stock markets have unusually low valuations. The future will show what happens when the economic situation improves. which is the case at global level. Hans Peterson CIO Private Banking and Global Head of Investment Strategy Investment OutlOOk . which has been especially clear in the six-month interim reports of companies.september 2010 5 . But experience tells us that as soon as a new paradigm is declared. Stock markets are now in a valuation interval that has caused some observers to speak of a new paradigm for the valuation of equities. The American consumer – once regarded as the world’s growth engine − will not deliver the demand to which we have become accustomed. Two key concepts today are low valuations and exposure to emerging markets.5 per cent annually during the next couple of years. emerging markets take over as global growth engine What is new today is that the world’s largest economy. valuations have fallen and safe assets have become a focus of attention. in other words. but should instead maintain an open mind about where to seek returns.introduction Generating value even in times of uncertainty Decelerating growth in industrialised countries has created uncertainty in financial markets. Demand from the old OECD industrialised countries will decline in global importance. This will mean a slow recovery. Japan and elsewhere as sovereign bond issues grow in size. and there is a risk of new debt crisis discussions in southern Europe. this creates uncertainty.
Companies with exposure to growth. Continued arbitrage opportunities make Credit L/S and Distressed strategies attractive. Currencies = BarclayHedge Currency Trader. Continued economic recovery still favours this asset class.07 1. Hedge funds = HFRX Global Hedge Fund. risk appetite is driving the market instead of fundamentals. Hard-to-interpret housing market data and prevailing macro uncertainty are fuelling uncertainty and risk.00 0.53 0.00 -0.38 0.32 -0. PositivE. making government securities unattractive. PositivE.00 -0. 2010) Hedge funds Real estate Currencies 1. High interest rate (EM) currencies will strengthen against low interest rate currencies in developed markets (DM) as risk appetite returns. should perform well in the prevailing range trading.05 Fixed income HistOriCaL risk anD retUrn (aUgUst 31.Summary expected 1-year return risk reasoning PositivE.09 Private equity Real estate Private equity 30% 20% 25% Commodities Currencies Historical values are based on the following indices: Equities = MSCI AC World.00 -0. nEutral/PositivE. 2000 tO JULy 30.00 -0. such as emerging markets and capital goods. while Event Driven is likely to benefit from increased merger and acquisition (M&A) activity.01 0.18 1.00 0. Looking ahead.00 Historical return 0% -2% -4% -6% -8% -10% 0% 5% 10% 15% Historical volatility Equities Fixed income Hedge funds 1. The prevailing high risk premiums are one argument for equities. 2010) 8% 6% 4% 2% Real estate Fixed income Hedge funds Currencies Equities Commodities HistOriCaL COrreLatiOn (aUgUst 31. but uncertainty about macroeconomic perspectives is hampering investor willingness to take risks. The yield spread over Investment Grade has also narrowed.09 0. ** This opinion refers to the alpha-generating capacity of a foreign exchange trading manager.54 0. Private equity = LPX50. The macro map indicates continued low key interest rates and government bond yields in Western countries. and from a risk/return standpoint High Yield is now by far the most attractive. interest rate differentials will once again drive currency flows.17 0. equities 9% 17% Fixed income 6%* 6% Hedge funds 7% 6% real estate private equity 4. making the secondary market attractive.12 0.65 -0. Commodities = S&P GSCI TR. Emerging market (EM) debt also remains appealing due to high yields and possible exchange rate appreciation. 2000 tO JULy 30.5% 3% 15% 22% Commodities 6% 18% Currencies 3% 3% * Expected return on corporate bonds that are weighted about 1/3 Investment Grade and 2/3 High Yield. Global Macro and CTA strategies should perform well in volatile markets. PositivE towards High Yield.81 0.08 0. nEgativE towards government securities. while low interest rates should further benefit gold. 6 Investment OutlOOk .00 -0. Continued focus on strategies with sources of returns other than the stock market. Real Estate = SEB PB Real estate. nEutral/PositivE. At present. Fixed income = JP Morgan Global GBI Hedge.17 0. New regulations may trigger new flows. but the real estate market will recover more slowly.01 Equities 1.33 1. sustained economic recovery will boost demand for industrial metals.september 2010 2010-05 .00 0. eXpeCteD risk anD retUrn (1 year HOriZOn) 16% 14% 12% 10% Private equity CHange in OUr eXpeCteD retUrns 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% Expected return 8% 6% 4% 2% 0% -2% 0% 5% Equities Hedge funds Fixed income* Real estate Currencies Commodities 2008-11 2009-02 2009-05 2009-08 2009-12 2010-02 Equities 10% 15% Expected volatility 20% 25% 30% Fixed income* Currencies Hedge funds Commodities Real estate Private equity Private equity Commodities 1.18 0. nEutral/nEgativE**. As worries about a US and global double dip recession fade. This asset class took a beating during last spring’s financial worries but still has a 30-40 per cent discount on already conservative net asset values.
National Product Account [c. But on a quarterly basis the economy has decelerated.6 2002 2003 2004 2005 2006 2007 2008 2009 26% 30% 40% Fixed income Private equity Hedge Commodities Real estate Currencies Changing engines in the american economy: the US will avoid a double dip recession. residential construction (brown) and private consumption (lilac). Residential Personal Outlays.0% 20. The American economy seems to be accelerating if its growth is measured year-on-year.0% Previous Current 30.0% Current WeigHts in mODern grOWtH Equities Fixed income Hedge funds Real estate Private equity Commodities Currencies Cash 0% 2.5% 3% 4% 4.2 0 -0.0% 40.5% 5% 10% 20% Previous Current rOLLing 36-mOntH COrreLatiOns vs.6 0.5% 7. provided that underlying demand increases investments when the financial environment changes colour: A focus on assets with stability in the form of low valuations and revenue streams a dualistic world: Micro and macro reflect different aspects of economic life tHeme: CHanging engines in tHe ameriCan eCOnOmy Contributions to GDP. Nonresidential Investment Account. Overall Source: Reuters EcoWin National Income Account.o. msCi WOrLD (eUr) 1 30% 25% 0.8 0.5% 10.Summary WeigHts in mODern prOteCtiOn Equities Fixed income Hedge funds Real estate Private equity Commodities Currencies Cash 0% 2% 0% 0% 5% 2% 10% 20% 30% 40% Previous WeigHts in mODern aggressive Equities 35% 25. reflecting a weaker cyclical upturn. They include corporate capital spending (blue).2 -0. percentage points 5 4 3 2 1 0 -1 -2 -3 -4 -5 2000 2002 2004 2006 2008 5 4 3 2 1 -1 -2 -3 -4 -5 tHeme: a DUaListiC WOrLD 5 3 1 Per cent 5 3 1 -1 -3 Source: Ecowin 0 -1 -3 -5 -7 Q1 Q3 2007 Q1 Q3 2008 Q1 -5 -7 Investment Account.p 4 quarters] Q3 2009 Q1 2010 During the past year. largely because the first half of 2009 was characterised by a deep economic slump.5% 21% 0% 10% 5% 0% 3.0% 0% 83. PCE.5% Fixed income Hedge funds Real estate Private equity Commodities Currencies Cash 50% 60% 70% 80% 90% 0. Change in Private Inventories. Overall Investment Account. Private Fixed Investment. Private Fixed Investment.4 -0. National Product Account [ar ma 1 quarter] National Income Account. Investment OutlOOk .4 0. the inventory cycle (green) has been a crucial growth engine in the US.september 2010 7 . but now other forces must take over in order to avoid a new recession.
The hedge fund portion of Modern Protection remained defensive. The euro weakened by 8-14 per cent against such currencies as the CHF. mODern prOteCtiOn The financial drama that began late in April continued throughout the summer.5 per cent at most. and we have seen evidence that this management has worked extremely well from a portfolio perspective. During this period. for example. During the period MayAugust. JPY and USD. The risk diversification we achieve by investing in several asset classes provides good protection. but since the movements were a bit too dramatic for our taste. GBP. but Modern Investment programmes are stable Concerns about a possible double dip recession drove many investment markets in the second quarter as well as through the summer. We reduced our positions in the lowest-return segment in favour of more “cash plus” and “absolute return” securities.portfolio strategy Turbulent markets. The fundamental principle for the hedge fund portfolio is to have holdings with low expected volatility and several types of management strategies that drive returns in the desired direction. But although most of the fixed income portfolio in Modern Protection consists of investments with short-term maturities. Although certain corrections occurred. have offered good downside protection. During this turbulent period. Modern Protection was up 0.5% 83. At the core of market worries was the financial strength or weakness of individual countries. and not only as independent management mandates. This led to some changes in the fixed income portfolio. with Market Neutral exposure only. Our view of High Yield securities has become more positive. we will devote a lot of time to analysis about hedge funds and “cash plus” funds. 2% 5% 2% 7. but we can see that their correlation with stock markets in particular was less. we chose to replace half our Multimanagement Currency holding with a lower-risk currency strategy. it closed down about 9 per cent for the period.5% Cash Currencies Real estate Hedge funds Fixed income 8 Investment OutlOOk . we had the opportunity to study our active risk mandate closely. After the latest changes. we chose to increase the cash portion of our programme portfolios in order to reduce risk. the level of yield is too low to offset the downturn in our cautious risk assets. We feel very comfortable with our choice of managers. On the whole we are satisfied with the nature of these programmes. Fixed income markets were not spared from the turbulence in any way. and we may increase our holdings in this segment. the MSCI World Index in local currencies was down 12. Hedge funds and High Yield bonds. which created tensions in the foreign exchange market and a flight to the safest government bonds at the expense of corporate bonds and the government securities of financially weaker countries.5 per cent (NAV in SEK on July 30) during 2010. these movements were costly to our active currency managers in Modern Protection. but we continuously re-examine our holdings. This resulted in turbulent markets. Looking ahead. Despite the market turbulence. These may actually have somewhat higher volatility.september 2010 . World stock exchange performance was volatile. a new overall risk assessment must be carried out. Unfortunately we can see that the contribution from these investments did not match our expectations. We are nevertheless sticking to currencies as an asset class. Currency rate movements were rather large during the period. After some corrections and further turbulence. and to protect the portfolio. We sold it off and have instead adopted new strategies: Global Macro and Multistrategy. During the spring and summer. we experienced an undesired high correlation in one of our Equity Market Neutral funds. with a negative tilt.
at first consisting of fears that global growth would be hampered by government budget austerity. which we believe will be of greater importance ahead. Unexpectedly weak US economic statistics as well as questions about Chinese growth strengthened the arguments for the most widely used economic term of the summer − double dip − meaning that the world (or the US in particular) would slide into another recession within 12 months of the previous one. We still have a positive view of hedge funds. Currency rate movements were rather large during the period. too. while others continued to perform negatively. but in order to avoid being dependent on stock market developments. The euro weakened by 8-14 per cent against such currencies as the CHF. We have thus chosen to supplement the fixed income portion of the portfolio with government securities from emerging market countries. Corporate bonds were hurt by the flight to safer government securities that market turbulence generated. since together their weighting in Modern Growth is about 7 per cent. we did not suffer especially great damage from either commodities or private equity either. This is being financed in part from the large cash reserve we built up during the spring and summer. we chose to replace half our holding with a lower-risk currency strategy. And since we are dissatisfied with the return that our Market Neutral strategies have delivered. Just as in Modern Protection. although we have adjusted our expected return slightly downward. In May. JPY and USD. No major drama. We are replacing our commodities ETF with an actively managed fund that. thanks to both our choice of the right managers and our exposure to emerging markets. These movements adversely affected the currencies asset class. We are doing further research on additional foreign exchange market concepts that may contribute better returns to the portfolio. Equities. We are increasing our focus on the choice of strategies.5% 4% 3% 2. portions of our hedge fund holdings recovered relatively well. Mounting concerns about a double dip recession of course include uncertainty about corporate profits.Portfolio strategy mODern grOWtH The second quarter of 2010 and most of the summer were dominated by worries. we chose to sell our Equity Long/Short holding. we have boosted our expected return and are thus choosing to increase our High Yield holdings by adding one more bond fund. although their movements were far smaller than those of equities.september 2010 9 . This gradually shifted to dread of a renewed global recession. making the segment even more attractive. commodities will continue to benefit from structural changes and demand from emerging markets. We are sticking to our view that the risk-adjusted return potential of the corporate bond segment is high.5% 26% 30% Cash Currencies Commodities Private equity Real estate Hedge funds Fixed income Equities Investment OutlOOk . Our shareholdings also did extremely well compared to the overall stock market. We have recently also seen a trend towards decoupling from the stock market. but meanwhile we are seeing a steady decline in bankruptcy risks. In absolute figures. has good potential to beat underlying indices. a number of hedge funds demonstrated a similar negative growth pattern and correlated significantly more than desired. We made various changes in our share portfolio based on analysis from our fund analysts. when volatility rose sharply. we are reducing these holdings and gradually replacing them with Global Macro and Multistrategy. In June. then strengthened an already robust portfolio. Here. Compared to other bond markets. 5% 25% 4. and in part from the hedge fund portion of Modern Growth. in our judgement. GBP. private equity and commodities were the weakestperforming asset classes during the period. We will retain this exposure. yields on corporate bonds with somewhat lower credit ratings also seem more attractive. since our assessment is that the climate for mergers and acquisitions is favourable (to private equity companies) and that in a slightly longer perspective.
since holdings of these asset classes comprise a larger percentage of our total allocation. We are doing this by adding a new actively managed fund and replacing our ETF with active commodity management. bankruptcies are steadily decreasing (for example there were only two bankruptcies in the High Yield segment in the US during June). but downturns in the equities and private equity portions were more dramatic. We increased our expected return on commodities and are thus restoring our holding to its original 5 per cent of the portfolio. Our hedge fund portfolio bounced back quite nicely during June and July. the cash holding in Modern Aggressive reached about 10 per cent during the period. with a cautious wait-and-see attitude. Just as in Modern Growth. Our assessment is that growth in these parts of the world will be superior to that of mature markets. we are leaving our private equity holdings intact. Since our assessment is that the climate for acquisitions and mergers is favourable.5% 10 Investment OutlOOk . when market volatility rose sharply. correlating significantly more than desired.73 per cent in the same currency. The portion of Modern Aggressive consisting of equities has demonstrated very good portfolio characteristics. We have also adjusted our expected return upwards and are considering increasing our holdings in this segment within the near future.5% 5% 10% 35% 21% Cash Commodities Private equity Hedge funds Fixed income Equities 25. At most. 3. While there is greater uncertainty about corporate profits as worries about a double dip recession mount. The fixed income portion of the portfolio − which largely consists of High Yield securities − was hurt by last spring’s market turbulence. we chose to sell our Equity Long/Short holdings. especially in a rising market. we have made some changes in our shareholdings based on fund analysis. and our holdings have performed extremely well in comparative terms.Portfolio strategy mODern aggressive Modern Aggressive suffered the same adverse impact from the various risk asset classes as the Modern Growth portfolio. while our equities portfolio decreased by 1.september 2010 . the MSCI World Index measured in euros lost 5. We are dissatisfied with the return. but we regard the yields on corporate bonds with somewhat lower credit ratings as attractive. During the period. This was mainly because we abstained from investing when the market climate deteriorated. We are choosing to gradually invest this surplus liquidity.03 per cent. We will also increase or decrease our exposure to the stock market with the help of normal equity mutual funds when we consider this suitable. and will replace these holdings with other types of strategies. a number of hedge funds demonstrated a similar negative growth pattern. In Modern Aggressive. compared to mature markets. We marginally increased our shareholdings in emerging markets. we thus dare to increase the proportion of overall holdings in this historically riskier market segment. In May. In order to avoid being dependent on stock market developments. Extensive analytical work on hedge funds and their various characteristics and behaviours is currently under way.
will resume quantitative easing through large-scale Treasury bond purchases. financial market worries in June still focused on government fiscal problems and the health of the European banking system. In late June. Initially. This led to a long. the stock market fell again in response to fears of a US double dip recession. speculations that China − in response to less vigorous national macro data during the summer − will steer its economic policy away from a tightening bias. market players revised their future outlook more than macroeconomists did. according to numerous statistics. and thanks to the growing likelihood that the US Federal Reserve (Fed). mainly because of fewer worries about government finances and strong European macro data. risk appetite in financial markets rebounded thanks to surprisingly upbeat European economic news. caused by increased concerns about a US economic slump. Markets also liked the results of the stress tests of European banks. In August. Spain and Portugal − launched sizeable budget-tightening programmes. downside surprises were less distressing to the markets than during the late spring. MSCI World Index. During July and early August. days when unexpectedly weak American economic figures were reported were generally characterised by falling share prices on US stock exchanges. For the first time since the recovery began shortly after mid-2009. But in mid-April. the focus of market worries moved across the Atlantic to the American economy. large price decline for risk assets. Investment OutlOOk . stock market upswing after ism report Weak US economic data also dominated the peak summer period. But these concerns faded when several countries − especially Greece.september 2010 11 . however. 345 For this reason. which was then about to decelerate sharply. was followed in July by splendid stock market weather. both among macro forecasters and market players.theme: a change of engines in the american economy Heavy odds against double dip recession • The deceleration in the US economy since last spring… • … has increased worries about a double dip recession • History and the prevailing demand outlook clearly indicate this is unlikely The rally in risk asset markets last spring was primarily fuelled by surprisingly good company earnings and higher growth expectations. local currencies 340 335 330 325 320 315 310 305 300 295 290 Jan Mar May 2010 Jul Source: Reuters EcoWin CHangeabLe stOCk market WeatHer tHis past sUmmer The late June bear market. but since expectations before their publication had been lowered. the “double dip” concept thus appeared frequently both in the media and in analyses of the US economic outlook. strong earnings reports from countries around the world. with equities not bottoming out until early July. the European sovereign debt crisis burst into full flower. Nevertheless.
september 2010 . and during the second quarter of 2010 for about 50 per cent. the situation changed when a series of American economic reports − including labour market. But shortly afterward. annualised Q/Q GDP growth has been 1. surprisingly downbeat macro news dominated US markets. Over the past 90 years. which together have laid the groundwork for low inflation and low interest rates. similar to what it now happening in the US − a kind of double dip without a recession. macro expectations seemed to have been adjusted sufficiently downward. Even looking at the economic history of other countries. Many other American macro reports were also unexpectedly weak. the term “double dip” was soon being heard again everywhere. these forces accounted for nearly 100 per cent of total GDP growth.5 0. as reflected in a strong positive stock market reaction on August 2 when the July ISM purchasing managers’ index for July fell a bit less than estimated. initial unemployment insurance claims rose to their highest level since autumn 2009.0 2.6. 3.5 2000 2002 ar ma 1 quarter 2004 2006 2008 2010 Virtually all US GDP growth during the second half of 2009 and early in 2010 was due to temporary stimulus effects. was the fundamental cause of the dramatic financial and economic crisis in the US − and elsewhere in the world − that dominated 2008 and part of 2009. four of them in Ireland. It is also more of a rule than an exception that risk assets such as equities. industrial activity in the Fed’s Philadelphia district fell markedly in August. A burst housing market bubble. this time starring sub-prime mortgages. retail sales and home construction data − fell short of predictions while the Fed lowered its economic forecasts. in 14 industrialised countries that recorded a total of 80 recessions during the post-war period. The meaning of the term “double dip” is ambiguous (there is no official definition).6 per cent. final demand must take over as the economic engine. private equity and commodities enter a weaker phase once the recovery has been under way for a few quarters. hedge funds. the prices of risk assets have generally begun a new upturn phase.5 -5. as the economy has progressed further.0 Source: Ecowin -7. But assuming that it refers to a new recession in the US economy − usually implying at least two quarters of falling GDP − that starts at least 12 months after the previous recession. even with the odds stacked against it? Since the latest American recession ended late in the summer of 2009 (though no official dating of the economic cycle has been presented yet). 12 Investment OutlOOk . What has instead typified periods after the bursting of housing market bubbles has been several years of slow growth and large idle economic capacity. reversaL in pHiLaDeLpHia inDeX 40 30 20 10 naturally arises is whether double dip recessions have usually followed in the wake of burst housing bubbles.0 7. new home sales plunged to an all-time low and so on. As a result.7 and 1. corporate bonds. the phenomenon seems rare. Now that these factors are leading to slower growth. the Philadelphia Federal Reserve unexpectedly reported declining industrial activity. Here the statistics show that none of the 18 major collapsed bubbles − home price declines exceeding 15 per cent − in the industrialised countries of the OECD since the early 1970s were followed by a double dip recession. manufacturing order bookings turned out to be shaky. the US has thus experienced only two such recessions. And after a while. double dip recessions have occurred only six times. fuelling worries about a double dip recession. One question that % Q/Q annualised 5. reCOvery by artiFiCiaL respiratiOn 10. the trade deficit soared. During subsequent weeks. 5. Historical probabilities thus indicate that the US is not on the verge of a new recession.Theme: A change of engines in the American economy By early August. This was the first time in two months that important US economic data catalysed a significant stock market upswing.0 -2. the last time there was a double dip recession was in 1981-1982 and before that in 1921. From the third quarter of 2009 to the first quarter of 2010. Double dip without recession The usual cyclical pattern is also that an initially rapid upswing is followed by a deceleration.5 Index 0 -10 -20 -30 -40 2000 2002 2004 2006 2008 2010 Source: Reuters EcoWin Contrary to the anticipated acceleration. This growth profile has essentially been attributable to the degree of stimulus from the inventory cycle and fiscal measures. But can a double dip happen.
For some time. which will benefit private sector demand. But where will this demand come from? It will hardly come from the public sector. Underlying demand must grow During the remainder of 2010. the inventory cycle (green) − a shift from a large-scale inventory run-down to a build-up − has been a crucial growth engine in the US economy. Overall Source: Reuters EcoWin Investment OutlOOk . both long-term US bond yields and short-term market interest rates have fallen to historically low levels. percentage points 5 4 3 2 1 0 -1 -2 -3 -4 -5 2000 2002 2004 2006 2008 5 4 3 2 1 0 -1 -2 -3 -4 -5 time FOr OtHer grOWtH engines tO take Over During the past year. Financial conditions are thus unusually stimulative. US politicians − in any event − face sizeable cost-cutting needs. Nor should we rule out the possibility that the Fed will resume quantitative easing later this year. Nonresidential Investment Account. The reason is that the pace of inventory build-up is clearly slowing − the second derivative (change in the pace of change) is turning negative − while the growth impulse from fiscal policy will also change from plus to minus.Theme: A change of engines in the American economy The overall stimulus effect in the American economy is thus in the process of fading and is likely to turn negative starting in the third quarter of 2010. Instead. Inventories may occasionally make small temporary positive contributions to growth. there are also doubts about the need for new budget measures to prop up the economy. Residential Personal Outlays. there is potential for faster growth in demand during the coming year. This is jeopardising continued Democratic control of the House of Representatives following the November 2 congressional election. In addition. Investment Account. Private Fixed Investment. Despite its appreciation since the beginning of 2010. Even among Democrats and the general public. US domestic politics has been dominated by growing discord and by Republican attempts to stop or delay reforms. PCE. Washington risks political paralysis until the autumn 2012 presidential election. the US dollar is still undervalued against the euro on the basis of purchasing power parities (PPP). but now other forces must take over in order to avoid a new recession. Change in Private Inventories. The bottom line is thus that events in the political landscape have made it more difficult to assess US fiscal policy. underlying demand must consequently grow by about 3 per cent. this indicates that the low interest rate environment in the US will continue for longer than we previously forecasted. private sector will shoulder responsibility In the private sector. In order for the US to avoid a double dip recession (prevent GDP from falling). the average negative effect of these factors can be estimated at about 1 per cent of GDP. all indications are that it will dominate the economy over the next few years. The Fed’s latest Senior Loan Officer Survey of the US banking system is also showing a gradual easing of lending terms and higher demand for loans in most fields of business. First. or whether belt-tightening is required instead.25 per cent until 2012. These include corporate capital spending (blue). The fiscal pendulum thus seems to be swinging towards support for greater austerity. The Republicans oppose further fiscal stimulus and also question the size of the positive impact from earlier stimulus packages.5 per cent. Private Fixed Investment. however. In order to achieve SEB’s forecast of a GDP increase averaging just below 2 per cent (quarter-on-quarter annualised growth) during the second half of 2010. but there are many indications that there will be no further additional stimulus to speak of during 2010-2012. underlying economic demand − demand that is not dependent on inventory effects and fiscal stimulus − must grow by more than 1 percentage point during the second half of 2010. Contributions to GDP. residential construction (brown) and private consumption (lilac). With a weakened president. Overall. Nor will this shift from acceleration to deceleration effect be temporary. but the need to pursue tighter fiscal policies in order to shrink the federal budget deficit will have a stronger impact in the opposite direction. Overall Investment Account. and during 2011 around 1.september 2010 13 . we expect the Fed to leave its key interest rate − the federal funds rate − unchanged at a record-low 0-0. There is also disagreement as to whether the economy actually needs further stimulus. President Obama’s public approval rating has also fallen sharply. Looking further ahead. Operative indications of this are that President Barack Obama’s plan for another large-scale stimulus package underwent radical cuts and that the extension of unemployment benefits to 99 weeks was pushed through only with great difficulty.
both fiscal and monetary policy must begin to be normalised.september 2010 . hiring will also increase when businesses can no longer squeeze the existing workforce further (productivity falls) in order to meet final demand and any inventory build-up. Overall. both historically and factoring in the housing demand resulting from the shape of the population pyramid (demographics).0 -2.7 per cent of GDP. furniture. If this occurs. our conclusion is that the probability that the US will end up in a double dip recession is very low. One key factor is what happens to the household savings ratio (saving as a percentage of disposable income). In some regions there is indeed an oversupply of homes. National Product Account. judging from second quarter 2010 statistics (+17.p 4 quarters] Source: Reuters EcoWin 14 Investment OutlOOk . or if it declines. 60 Year-on-year percentage change 17. the lowest level since the Second World War. both the stock market and the economy have usually regained their energy. Looking a bit further ahead. Worn-out consumer capital goods Fourthly. 500 Composite. AR. in turn. This has in fact begun. and well above that of the 2002 recovery. which will decelerate the economic expansion. 2005 prices [c. which has climbed to about 6 per cent from about 2 per cent at the end of 2007.5 per cent of GDP last year − the third lowest level since the Second World War. In net terms (expansion investments).0 2.0 -7. is a key factor for both income and household sentiment − two important private consumption parameters − and so far the trend has been weak. Thirdly. capital spending totalled an almost negligible 0. In the corporate sector. however. Employment. residential construction has fallen to an extremely low level.p 4 quarters] Standard & Poors.6 per cent quarter-on-quarter. it is well in line with the usual situation during the recovery period following burst housing market bubbles.5 0.0 Year-on-year percentage change 50 40 30 20 10 0 -10 -20 -30 -40 -50 1980 15.o. Index. Meanwhile there is reason to expect slower growth during the second half of 2010 than in the first half − entirely in keeping with the usual pattern 4-5 quarters into a cyclical recovery − as well as modest GDP growth over the next couple of years. This is why many observers have dusted off the expression “jobless recovery”. but in many others there is a shortage − one reason for the latter being that Americans move unusually often. last year American businesses cut their capital spending so much that they largely covered only wear-andtear (depreciation). no double dip recession Judging from historical experience as well as the currently prevailing demand outlook in the private sector. After that. home purchase contracts and non-farm payrolls − have also surpassed expectations. there is thus reason to anticipate an upswing in capital spending. As with business capital spending.0 aFter a strOng start COmes a paUse FOr breatH US economic history shows that the stock market and the economic cycle have usually begun recoveries with large share price increases and rapid growth. there should thus also be pent-up demand here. Constant Prices. but this may be misleading. net purchases of cars. and then − about 4-5 quarters into the recovery − have taken a pause for breath. National Income Account. job growth has been on a par with the job growth during the 1991-1992 cyclical recovery.5 5. No matter what. Yet in the private sector. Average [c. The savings ratio is a bit higher than it usually is when total household balance sheets and income statements look the way they do now − an indication that the savings ratio may possibly fall somewhat. households have cut back dramatically on buying capital goods. annualised). If the savings ratio does not increase further. Some of the recent American macro figures − for example the ISM manufacturing index.5 12.Theme: A change of engines in the American economy Secondly. Total. SA. Gross Domestic Product.o.5 10. this will favour such purchases as consumer capital goods.0 7. kitchen equipment and so on fell to 0. There is a large supply of unsold homes at the national level. and this has usually been enough for a long period of share price and economic upturn.5 -5.5 1990 2000 -10.
The world economy is more complex than before. change y/y Investment OutlOOk . change y/y ECB Money supply. Overall. and emerging markets in Asia and elsewhere will continue to deliver satisfactory growth figures. and the money supply has cautiously begun to rise in the US.5 per cent. Central banks around the world hate deflation and stagnation like the plague and will do what is required to counteract this risk. Meanwhile there are more opportunities and alternatives than ever. Liquidity a key factor The supply of liquidity is a key issue in ensuring that capital markets can function. But it is crucial to maintain a selective approach and a conviction that valuations are reasonable and that no “double dip” recession will materialise. we foresee a continuously improving liquidity situation. Liquidity helps bring about underlying economic growth. All this is enough to enable the global economy to show a moving GDP growth rate of 4-4. It is possible to generate returns in today’s market climate too.september 2010 15 . Nor can it be ruled out that the Fed will resume its monetary policy of quantitative easing. China is probably moving towards loosening its austerity measures. we see an obvious and likely risk that the US will undergo a period of very weak growth. liquidity triggers market movements ahead of the real economy − a process we have observed in various places during the past few months. The new Basel III-related rules in Europe are less stringent than feared. Many other countries will grow quite nicely during the next few years. looks set to bounce back both in the US and Europe. Today’s capital markets are driven by worries about a dramatic weakening in growth. The US has shown strong determination. 12 10 8 6 4 2 0 -2 2000 2002 2004 2006 2008 2010 Source: Bloomberg The other major driving force in the world economy is actions aimed at preventing deflation. Normally. measured as broad money supply.theme: investments when the financial environment changes colour Asset management in a volatile world • A focus on high-growth regions… • …and assets with attractive valuations… • …while waiting for double dip risks to fade Capital markets must deal with a mixed scenario. and the situation of banks in Europe and the US is improving. This problem is most acute in the US. Although we are humble about the risk that such worries could be justified and might eventually lead to a double dip. especially in the US but also in other parts of the world. LiQUiDity WiLL bOUnCe baCk Liquidity. There are many indications that liquidity will remain good in many regions. with rapid growth in emerging economies and debt problems in mature industrial countries. US Money supply. we do not believe that such a scenario will unfold. However. whose central bank (the Fed) is combating the risk of deflation by communicating that it will maintain very low interest rates for an extended period.
The role of the US is gradually diminishing. but with certain divergences. there was a dividing line between companies that export to emerging markets and other areas. Sectors such 16 Investment OutlOOk . During bouts of worrying like the one that dominated markets late this summer.2 1 0. em Firms eXpeCteD tO grOW Faster 20 15 10 5 0 -5 -10 2004 2005 2006 2007 2008 Source: Bloomberg signs of a shifting trend During 2010 the trend has been that economic sectors with low cyclical sensitivity have been good investments.2 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 EM/DM Discount Source: Bloomberg 2009 2010 MSCI THE WORLD . When the economic pattern eventually changes. has gradually risen over the past decade and is at about 0. an increasingly cyclical portfolio strategy will be justified. Stress-tested banks in more positive liquidity climates can also be mentioned. Investments in emerging markets can be justified by stable growth and relatively attractive valuations compared to Western countries.12 months forward sales growth Emerging market-based companies are expected to show sales growth of about 14 per cent during the coming 12 months. and the market will perform well. even sound assets are affected to some extent by downturns. Companies in the West with EM exposure should also benefit during this period. and the factors commented on above. The emerging market (EM) ratio. this type of sectors will see an upswing. measured here as the price-earnings (P/E) ratio for the EM sphere divided by the P/E ratio for the Western world. em/Dm ratiO rising 1. Emerging markets are one. and companies with exports to countries with stable high growth and demand are another. On the whole. It is crucial to be invested in this part of the market. which in some cases are stagnating. we are focusing on the portions of the stock market with the best potential in terms of growth and valuations.6 0. often creating good investment opportunities for the persistent. We are also looking at portions of the capital market where valuations are attractive. geographically imbalanced economic growth − is to focus on the healthy parts of the world. The country is also an important engine of overall Asian trade and now buys a sizeable proportion of the exports of most Asian countries. rose in July and fell again in August after growth-rate problems materialised. The Swedish stock market is an example of how assets with good fundamentals can perform relatively better than others. While awaiting this.9 today − a sign that emerging markets are considered less risky than before and that capital is continuing to flow to countries with higher growth potential. In stock markets. and we are seeing early signs of a shift towards more cyclical sectors.Theme: Investments when the financial environment changes colour These issues. When more and more investors believe that the risk of a double dip recession is receding. This pattern has been relatively uniform. the stock market was in a negative phase during the second quarter of 2010. But in order to achieve sustainably positive performance. China should then revert to a higher growth rate.12 months forward sales growth MSCI EM . the risk of double dip recession must disappear from the radar screen.september 2010 . These key areas have the advantage that even if we undergo a general recovery − which appears likely during the coming winter − these sectors will perform like the stock market as a whole. are crucial when we search for sources of investment returns. consistent with a more stable growth scenario. the focus will be on a few key areas. One guiding principle in scenarios such as the one we are now experiencing − characterised by uneven.4 0. Stock market sectors with exposure to good geographic demand are another key area.8 0. compared to about 7 per cent for their Western counterparts. stock markets in emerging countries have recently performed as well as − or somewhat better than − global stock markets (in comparable currencies). we can see that these shifts have begun. To some extent. we can say that this trend is now relatively mature. as commodities have recently shown gradually improved performance. In this past summer’s quarterly reports. China has been a source of concern. To some extent. but there are many indications that Chinese authorities are easing their economic tightening measures as they gain control over bank lending and price trends. Generally speaking.
Given this combination.Theme: Investments when the financial environment changes colour plenty of liquidity in companies Investment goods producers are another attractive area. It is thus difficult to see any point in investing in them. but in our assessment the High Yield segment is very attractively priced. HY. Improving liquidity often leads to better risk appetite and credit expansion. By all indications. 2006 2007 2008 2009 2010 Emerging Markets. where we continue to see a combination of attractive yields and potential currency rate appreciation. this situation will be corrected. and companies also have plenty of liquidity. EM North America. BB Rated Source: Reuters EcoWin Investment OutlOOk . Around the world there are other fixed income investment opportunities. During periods when the world is in a phase where a variety of factors are influencing the market. and as a result the yields on shares of many good companies are higher than bond yields. banks valuations are not high. and in a normalised scenario. the European sovereign debt crisis is now limited or “quarantined”. The volatility of returns is also lower than in the stock market. the market risk premium rises and we require lower valuations in terms of price/earnings ratios. the market views EM securities as less risky. government bond yields are extremely low. CDX Index. Unreasonably low bond yields In mature industrialised countries today. But phases like these are succeeded by new periods. what investors must pay to protect themselves against bankruptcy in underlying fixed income securities − have fallen dramatically since September 2008. Although we foresee EM bonds offering return potential similar to HY bonds. Although there are still sizeable budget deficits. Businesses around the world are probably underinvested after many years of thrift. Corporate bonds offer attractive possibilities. when today’s higher risk premium may be replaced by a lower premium. this autumn may very offer good investment opportunities. Investors are buying bonds on a large scale today. these yields reflect worries about deflation and weak economic conditions. which makes this segment interesting. IG North America. this is often a good buying opportunity. But when worries subside and risk appetite increases again. their impact is currently being offset by unexpectedly strong economic conditions in Europe. We have previously singled out the government bonds of emerging markets. Historically. If we do not undergo a double dip recession and if the world economy continues to grow by 4-5 per cent annually until 2012. On the whole. consistent with a slow global recovery. since it will have more confidence in the future. capital spending may be a factor worth monitoring in the near future. CDX Index. Good liquidity in capital markets probably means that yields have been squeezed to unreasonably low levels. Banks are a sector that stimulates thoughts. In a situation like this. Here it is important to take one’s base currency into account. Investors that use the euro as their base currency still have even greater potential. This hurts securities with uneven returns and quality more than others.september 2010 17 . In the US we foresee a slight trend towards higher lending. there may be reason for Swedish-based investors to be extra careful in evaluating their opportunities. 1100 1000 900 Basis points 1100 1000 900 800 700 600 500 400 300 200 100 0 800 700 600 500 400 300 200 100 0 em Debt nOt as risky as Hy CDS spreads for emerging market debt and High Yield bonds − in other words. bond yields etc. The stock market will boost the value of all companies to a higher P/E ratio. it is extra important to invest in assets that are stable in terms of low valuations and revenue streams. today’s relatively low valuations and thus high risk premiums may be regarded as offering good investment opportunities. Viewed in this perspective. with a negative undertone and uncertainty about the future. If we are moving towards a sharp appreciation in the krona. Those with the very highest credit quality are depressed. CDX Index.
there are many bright spots in the crystal balls of corporate analysts. Companies have ample cash reserves.o. Although our assessment is that a double dip recession is highly unlikely to occur (see the theme article “Heavy odds against double dip recession”). National Product Account [c. reflecting a weaker cyclical upturn.. quarter-on-quarter. As a consequence. about 50 per cent of US listed companies surpassed analysts’ expectations by a wide margin.p 4 quarters] Q3 2009 Q1 2010 The US seems to be accelerating if its growth is measured year-on-year.0 per cent during the second quarter of 2010. For example. growth forecasts have been lowered on a broad front. Despite the relatively gloomy macro picture. macro statistics largely set the market tone. 18 Investment OutlOOk . growth peaked at 5 per cent in the fourth quarter of 2009 and then gradually decelerated to 1. the index instead rose by an average of 0. This is because the comparative period − the second quarter of 2009 − was particularly weak. these methods are leading to different results.september 2010 ..8 per cent on days when important American macro statistics were published. It is rare for outlooks to diverge as clearly as macro and micro perspectives have done..theme: a dualistic world Micro and macro are out of step • Economic growth is slowing but. National Product Account [ar ma 1 quarter] National Income Account. year-on-year. low debt and high productivity will create good potential As the number of downside American macro surprises has increased. there is no gigantic asset bubble of the “subprime” variety waiting to explode in the near future.6 per cent in the second quarter of 2010. On other days. But on a quarter-on-quarter annualised basis. depending on whether we look at the economic world from a micro (“bottom-up”) or a macro (“top-down”) perspective? Different comparative methods One possible explanation is that there are certain differences in how we choose to study data. however. GDP growth is reported as an increase or decrease compared to the preceding quarter. the S&P 500 index of US shares fell by an average of 0. The same pattern applies to many listed companies elsewhere. worries have emerged about a major slump − especially in the US economy. But why is the picture is so different. By all indications. profit growth is accelerating and productivity is high. To avoid seasonal patterns. the result is that growth continued to accelerate at 3. During the summer.3 per cent. But in the US. At present. This is also a common method of reporting changes in GDP growth around the world. • . that is. Due to America’s leading role in the world economy. But on a quarterly basis the economy has decelerated. Conditions are not the same today as then. Profit forecasts have generally been revised upward in recent months. statistics published in recent months indicate low growth during the second half of 2010. DiFFerent metHODs.share prices reflect more than GDP growth • Ample cash reserves. In both the first and second quarters of 2010. corporate analysts generally choose to compare the results from one quarter to the same quarter a year earlier. a sharp economic slowdown there would not pass unnoticed in other countries. and we are painfully aware of the subsequent course of events in the world’s financial markets. DiFFerent resULts 5 3 1 Per cent 5 3 1 -1 -3 Source: Ecowin -1 -3 -5 -7 Q1 Q3 2007 Q1 Q3 2008 Q1 -5 -7 National Income Account. The last time this happened was when the financial crisis broke out. largely because the first half of 2009 was characterised by a deep economic slump. however. According to a recent analysis from Goldman Sachs.. that is. if we report American GDP statistics year-on-year.
the gloomier scenario painted by macro data risks materialising. however. The purpose of macroeconomic analyses is to explain and forecast economic activity at an aggregate level. The effect has been sharply higher productivity. Smaller businesses have fewer contacts in the financial sector and lack the op- In the past year. If higher sales do not gradually contribute more and more to corporate profits. they often have a far easier time gaining access to lending. however. But because of globalisation during the past decade. comparisons of corporate and macro analyses are like comparisons of apples and pears.Theme: A dualistic world Another explanation is that in some respects. fewer working hours and postponements of capital spending. For example. tion of financing themselves with the help of corporate bonds as an alternative to traditional bank loans.september 2010 France Japan UK US 19 . The financial insolvency of many Western countries has had a particularly large impact. Recently. are published on a monthly basis − for example employment. share prices are determined by corporate profits and expectations about what will happen to them in the future. all indications are that the proportion of exports is even higher. Corporate analyses − on the other hand − track activities at the enterprise level. Investment OutlOOk . however. these companies risk lower demand and higher taxes than competitors based in economies that are on more stable financial ground. a relatively high percentage of their production is often exported and they can thus target their sales to areas where demand remains high. so the negative macro signals of recent months should not have fully impacted corporate second quarter reports. consumption will take off sooner or later after every recession. while stock markets in countries with large debt burdens have been at a disadvantage (Japan. profits rose nearly 100 per cent during the first quarter. The final company reports for the second quarter were published in late August. it is actually not so remarkable that their view of the future may diverge. a rather clear connection has been noted between the economic health of countries and the performance of their respective stock markets. and secondly. Hints of a deceleration in the American economy began to be discernible in May macro data. but has instead been a consequence of aggressive cost reduction. large companies have performed significantly better than small businesses. One old fundamental principle − which ought to be partly reassessed − is that corporate earnings or share prices should reflect the performance of a country as a whole. This cost reduction has occurred mainly by means of employee cutbacks. it will not be possible to maintain rapid profit growth by means of cost reductions alone. Looking ahead. investors have prioritised stock markets in countries with sound finances (such as Denmark. are dependent on underlying economic performance in the market where the company operates. companies and their shares have an ever-weaker connection to the economy of their “homeland”. inflation and home price statistics. for example. Sweden and Finland). firstly. Most macro statistics. there are many indications that the impressive growth in corporate profits has not primarily been due to sharply higher sales. an investor achieves relatively little exposure to the Swedish economy by purchasing a Sweden fund. and among the companies with Swedish stock market listings. Decoupling firms from national economies In the past year. profits rose by “only” a bit above 30 per cent. Since corporate analysts focus on the portion of the business sector that is currently performing best − large companies − it is reasonable that their future scenario is brighter than that of macro analysts. Profits. the United States and the United Kingdom). compared to the first quarter of 2009. If smaller US companies are also included. macro statistics may be regarded as more current than company reports. Source: Ecowin -20 Finland Germany Russia apples and pears In some respects. Since different data are being analysed. stOCk markets DO better in HeaLtHy eCOnOmies 25 20 15 10 5 0 -5 -10 -15 Denmark Sweden Cost-cutting behind profit growth Furthermore. in turn. On the other hand. In the long term. Looking at the 500 largest companies in the US as measured by the S&P 500 index. and large listed companies are the primary focus of study. Investors have considered it risky to put their money into companies that operate in weak economies. Among other things. so the upward adjustments in company profit forecasts may be justified. The economic slowdown in the OECD countries and the launching of gigantic bail-out packages have dug deep holes in many Western government treasuries. About 50 per cent of everything produced in Sweden is exported. for example the output of all goods and services in a country. These reports thus reflected activity in companies that occurred nearly 5 months earlier. The reasons for the success of larger companies are that. since there is a limit to how much a company’s operations can be streamlined. which in turn has generated rising profits. however. pay reductions.
there are also numerous companies that have good potential to meet corporate analysts’ high profit forecasts. Many medium-sized companies are also steadily expanding their exports as a share of total sales. This is primarily a matter of exposure to emerging markets. 25 20 15 10 5 Source: Bloomberg braZiLian stOCk market vs CHinese stOCk market The Brazilian stock market has performed significantly better than that of China. In other words. GDP growth is now slowing in many places as the contributions from government stimulus measures and company inventory build-up fade. is about to decelerate. China is a growth engine that can boast annual GDP growth rates of nearly 10 per cent since 1994. Winners in a weakening economy At the aggregate level. The same reasoning also applies to investors who choose to put their money in the German. Although China thus easily wins the growth competition. there are many indications that the US economy. Viewed from a global perspective. low debt and recordhigh productivity. China and Brazil are also examples of how share prices are related to more than just the GDP growth of a country. The companies with the greatest potential are those that have the world as their playing field and can target their sales to areas with high demand. final demand is also showing a rather weak trend. the corporate giants are not alone in realising that demand also exists outside their national boundaries.Theme: A dualistic world This is because listed companies are significantly larger and more international than the average company in Sweden. but also the global economy. 0 1994 1996 1998 2000 2002 2004 2006 2008 2010 Brazil vs China 20 Investment OutlOOk . successful business models. In addition. which is above the historical trend. We expect the global economy to grow by nearly 4. while Brazil’s annual GDP growth has only reached 3 per cent during the same period. even though economic growth has been far higher in the Chinese economy than in Brazil. we are thus not in an economic slowdown at all. However. but also to prosperous OECD markets such as the Nordic countries.5 per cent this year and nearly 4 per cent in 2011. Coupled with the fact that companies have ample cash reserves. share prices need not always reflect GDP growth. Brazil’s stock market has performed significantly more strongly than the Chinese stock market during the period.september 2010 . But having said this. this will set the stage for good economic conditions ahead. So far. for which cyclical fluctuations are of minor importance. The slower economic upturn is likely to have an adverse impact on the order books and profit growth of many companies. American or Chinese stock market − although the share of exports in these countries is lower. the outlook appears bright for companies with welltested.
which − as is now occurring in the US − is likely to shift from positive to negative later this year. however. Today consumer prices are rising at less than 2.5 5. some other influential industrialised economie have presented upside surprises this summer. inflation will not slow. Our main scenario is that this shift will occur fairly satisfactorily but will not be good enough to keep the OECD countries from moving into a slower growth phase during the second half of 2010 and the early part of 2011. In the euro zone. reducing the risk of deflation (generally falling prices) around the world. Investment OutlOOk . the world’s largest economy − the United States − will grow very slowly during the remainder of 2010 and early in 2011 (see the Theme article on page 11). and in the OECD the key will be… • .o. inflation in the industrialised OECD countries has trended downward. After last winter’s rapid upswing...0 2.p 12 months Year-on-year percentage change 1990 2000 Source: Reuters EcoWin Since the early 1980s. then gain a little better momentum. export goods from these countries will also become more expensive in the global market. Our forecast for the euro zone thus includes an economic slowdown. was driven by exports and to some extent by capital spending. growth will remain very rapid in the near future. and the upswing may have been partly due to positive effects from the inventory cycle.5 0. Since many EM currencies appear likely to appreciate in the near future. coupled with good productivity growth. yet our forecast path for growth until next summer is bit higher than in the euro zone. This upswing. since numerous macro statistics − especially in the US − have been surprisingly weak.5 15. Household demand remains uncertain. In Sweden. Looking ahead. The reasons are high growth and faster pay increases. growth speeded up significantly in the second quarter. while in other Nordic countries growth will occur at a more moderate pace. The Nordic countries are characterised by public finances that are in relatively good shape and by low central government debts. this bodes well for a decent economic upturn.0 -2. however.5 1980 c. inflation may fall below 1 per cent in 2011. Sharp budget tightening in the Mediterranean region will also restrain growth.5 per cent year-on-year.0 12. British GDP also climbed more than expected during the second quarter. how the shift from stimulus to final demand will go • Decent world growth thanks to ultra-loose monetary policy in major industrialised countries and dynamism in the emerging market sphere World economic prospects have become significantly more uncertain lately. In the emerging market (EM) sphere. led by Germany.0 7. Inflation will continue to fall in the OECD countries during the coming year as low pay hikes. LOWer OeCD inFLatiOn aHeaD 17. but it appears unlikely to be too pronounced. Thanks to low pay increases and good productivity growth at companies. the key to economic growth in the industrialised countries (OECD) will be the shift in emphasis from stimulus attributable to the inventory cycle and fiscal policy measures to final demand in the form of capital spending and private consumption. Euro zone GDP growth may average about 1. The Danish economy is still being hampered by the repercussions of the housing market crash. While many macro figures in the US have caused disappointed reactions. Tough fiscal tightening will hamper expansion. squeeze production costs at companies. Combined with sizeable current account surpluses.macro summary Much depends on shift to final demand • The economic outlook is uncertain.5 10.5 per cent during the coming year.september 2010 21 .
In India − Asia’s second largest economy − domestic demand remains strong. yearly world GDP growth has averaged less than 3.5 per cent in 2010-2012 (since 1990.5 per cent in the coming year.5-7 per cent. 6 per cent in 2011 and around 6. Meanwhile inflation is falling and macroeconomic balance with other countries and in the public sector is improving.september 2010 . Total. both Estonia and Lithuania have recently reported positive GDP figures. But in China’s case the slowdown was from GDP growth of nearly 12 per cent in the first quarter of 2010 (year-on-year) to a still very good level of nearly 10. China’s growth may end up at around 9. growth rate India. China’s GDP may grow nearly 10 per cent in the coming year and India’s by about 8. second quarter 2010 GDP largely stagnated. In the Baltic countries. Since then the growth rate has again accelerated. GDP has a chance of growing at about an 8. the GDP growth rate will be about 2. High growth in China and India will benefit smaller economies in Asia. Although monetary policy has been further tightened. but the deceleration was mild − to annual GDP increases of 6. Total at factor cost. Chinese authorities have considerable room to stimulate the economy using both monetary and fiscal policy. In the Nordic countries as a whole. growth in China − now the world’s second largest economy − has decelerated. GDP may increase by around 4. but unlike such countries as the US. PPP) − to grow by nearly 7 per cent this year. highest figure in the world after Western Europe (more than 70 per cent). which is detrimental to exports. broader-based expansion in eastern europe In Eastern Europe − which is lagging the global recovery − expansion is now broadening and accelerating as private consumption joins the upturn that has characterised the manufacturing sector for some time.5 per cent until next summer.5 per cent pace in the next few quarters.Macro summary In Finland there is good potential for an export-led recovery. Japan is being helped by higher demand elsewhere in Asia (where more than 30 per cent of Japanese exports end up). We expect the emerging market sphere as a whole − which accounts for nearly 50 per cent of world GDP (in purchasing power parities. 2011. Smaller neighbouring economies will thus benefit as well. while Latvia has lagged behind. Although its fastest growth period is now past.5 per cent. Macro data for July indicate further deceleration. Japan − today only the third-largest economy in the world − seems to have lost most of the vitality and dynamism that characterised the 1970s and 1980s.5 per cent). Latin American economic expansion looks set to slow somewhat in late 2010 and early next year − with GDP increases averaging some 5 per cent − as growth figures in the dominant Brazilian and Argentine economies decelerate from their unusually high early 2010 rates (7-9 per cent). Deflation pressure is gradually easing. even though the world’s still-largest economy − the US − has moved into a clear short-term slowdown and will grow very slowly in a somewhat longer perspective. fading budget stimulus effects and higher unemployment. Unlike Europe. financial stability is strengthening and Estonia will join the euro zone on January 1. Overall. the global economy will be able to steam ahead at an annual rate of about 4-4. Developments in recent years have occasionally been reminiscent of the country’s years in the economic wilderness during the 1990s. 2004-2005 prices Source: Reuters EcoWin 22 Investment OutlOOk .5 per cent in 2012.5 per cent during the next few quarters. room for stimulus in China As in the US. since Asian intraregional trade is a full 50 per cent of total trade − the second 14 Year-on-year percentage change 12 10 8 6 4 2 0 2005 2006 2007 2008 2009 2010 big strOng emerging eCOnOmies in asia The financial and economic crisis of 2008/2009 also affected growth in China and India. China. Largely due to this macroeconomic vigour and ultra-loose monetary policies in major industrialised countries (see pages 26-27). Japan nevertheless appears to be the most uncertain card in the world economic deck. but domestic markets remain sluggish. but so far the upturn has been modest. There are also signs that they are making a U turn from the tightening policy that began in January 2010. Among today’s challenges are the strong yen. The Norwegian economy is being held back by a strong currency. The Baltic economies are being sustained by strong exports.5 per cent during the coming year.5 per cent in the second quarter. On the other hand. with GDP growth averaging 1-1.
The summer’s best outcomes were in emerging market (EM) stock markets.5 1. In China. first due to lingering worries about European government finances and later due to nascent concerns about the state of the US economy.so the best-positioned equities in terms of growth and valuation. perf %.5 Sep Nov Jan 2009 Mar May Jul 2010 Sep 7. due to rising concerns about a double dip recession. All Countries USD Index.5 per cent.0 -2.World. when risk appetite returned to risk asset markets and stock markets rose. All Countries USD Index. India and Hong Kong among the leaders.3702918476 9 7 Per cent 9 7 5 3 1 -1 Nov 2009 Jan Mar May 2010 Jul Sep -3 11. the stock market mood was occasionally weighed down by macro statistics showing a deceleration in growth.. among other things because macro statistics were still good.3827205891 12.. .0858997963 1. • .asset class: equities Waiting for better stock market times • It will be a while before the macro picture be comes clear.World.0 11.5 5.0 2. the world stock market (measured as the MSCI World Index in local currencies) fell about 1.World. perf % perf %. ma 20 Source: Reuters EcoWin Last spring the American stock market (right-hand chart) outperformed the World Index.. MSCI. Gross Total Return. All Countries USD Index.will now determine our investment strategy in the stock market During the summer. when a period of many negative macro surprises in the US began and the risk of a double dip recession (see Theme article.0 12.4878598521 10. among them Frankfurt and Stockholm.0 -2. with Russia. The first was in June.5 0.5 5 3 1 -1 -3 Sep perf %.6561799515 10. page 11) topped financial headlines. Since then the US market has performed considerably worse than the World Index.6744200516 7. strong company earnings reports in many parts of the world and the prospect of economic policy stimulation in China as well more easing by the American central bank.0 2. MSCI.World. where concerns about a double dip dominated stock exchanges. Gross Total Return. . Several European stock exchanges.. The third phase started several days into August. Investment OutlOOk .3865530126 11. perf % perf %. largely due to continued high economic growth... .september 2010 23 . perf %.. Meanwhile equities in emerging markets (lefthand chart) did far better than the global share price index.5 10.0 Per cent -16.794641066 15. Among the laggards were Japan − where an undesirably strong currency and a weak domestic market contributed to weaker share prices − and the US. Divergent regional stock market outcomes During the period June 1-August 31. Gross Total Return.5 5.. The second phase was in July and early August. Us eQUities LaggeD 15. emerging markets LeD tHe Way tHis sUmmer.8216718242 9. ma 20 Source: Reuters EcoWin perf %. the global stock market was dominated by three distinct phases. This occurred thanks to reduced worries about European government finances and banks. All Countries USD Index. MSCI.5 0. MSCI.0 -16. when a good start to the month − a rebound after dramatic share price declines in late April and during May − was followed by a renewed sharp downturn. causing share prices to fall on a broad front. Gross Total Return. recorded fine upturns this summer following unexpectedly good economic figures. the Federal Reserve (Fed). . • . unexpectedly positive economic data from Europe.
cyclical companies performed worse than stock market indices during the summer. stock markets are trading at price-earnings ratios of about 10-13 (expected 12-month profits). Considering the prevailing uncertainty about the macroeconomic outlook.5 per cent risk premium is very high and was surpassed most recently during the winter 2008/2009 financial crisis. In general terms. Measured in this way (yield on S&P 500 shares compared to yield on BAA-rated bonds). In a longer historical perspective.5 per cent during the second half. pharmaceuticals. This profit outlook. stock markets and other risk asset markets are characterised by rather low risk appetite and great uncertainty. They include telecommunications. The spread between the yield on equities and on certain corporate bonds is also wider than normal. since this reduces the risk of large negative share price movements when weak economic statistics are published. but in both the US and Sweden the shares of industrial companies did fairly well. Europe). market players now appear to be more pessimistic than macro analysts. This 4. the profit outlook remains good. the risk premium is also the largest since the financial crisis. The summer’s prices movements in the stock market thus appear to have reflected a macro scenario that includes a decoupling between a weak American − as well as Japanese − economy and a strong world economy otherwise (the EM sphere. this has resulted in declining priceearnings ratios in many stock markets. while sales focusing on the US domestic market were no recipe for success. eQUities Have LOW vaLUatiOns 19 18 17 16 15 14 13 12 11 10 Aug Oct Dec 2009 19 18 17 16 15 14 13 12 11 10 P/E ratio Feb DJ EuroStoxx 12MTH FWD P/E OMXS 12MTH FWD P/E Apr Jun 2010 Aug S & P 500 12MTH FWD P/E Source: Reuters EcoWin market players gloomier than macro analysts In this context. these variables have tracked each other closely. In itself. This was essentially true of companies that have a large proportion of their sales targeted to the EM sphere. forecasts show more than a 20 per cent profit increase during the next 12 months. SEB’s forecast is that American GDP will grow by an average of nearly 2 per cent. while the equivalent figure for China and Brazil is about 25 per cent. In the stock market. 24 Investment OutlOOk . stock markets are trading at P/E ratios of between 10 and 13. At present. According to the current Blue Chip macroeconomic consensus outlook. biotechnology and utilities. it is naturally advantageous if the market has discounted a worse American autumn scenario than macro analysts have done.5 percentage points higher than on 10-year government bonds. The risk that other parts of the world economy may be infected by an American double dip − in other words. GDP is instead expected to grow by an average of 2. Furthermore. As long as worries about a double dip recession persist and signs that final demand will take over as an economic engine are weak. From an investor perspective. however. has resulted in low share valuations.Asset class: Equities On the whole. along with share price declines during the past month. Companies with sizeable exposure to Europe were also favoured by the stock market. this lays the groundwork for higher share prices. in the context of “range trading”. and valuations are about the same in many EM stock markets. food. Sectors with low cyclical sensitivity − and thus defensive in nature − have been good investments. among other things because the recent search for returns (see pages 26-27) has resulted in falling corporate bond yields.september 2010 . in theory American GDP must decline both during the third and fourth quarter of 2010. Together with good profit forecasts. or around 4. In the US and Europe (including Sweden). At that time we foresaw continued sideways price movements for risk assets. where the yields on equities are more than 7 per cent. financial market patterns in recent months have closely matched the assessments we made in this year’s previous issues of Investment Outlook (March and May 2010). In the OECD countries. we predicted comparatively better returns for sectors and companies that usually perform well without strong support for the economic cycle (assets characterised by quality and low beta). primarily due to the danger of a renewed US recession. These low valuations are illustrated by the Swedish stock market. that decoupling might not work − has also been discussed by market players. some US economic data is nevertheless likely to result in disappointed reactions in stock markets during the next few months. which shows that equities have low valuations. however. Meanwhile there is no clear evidence yet that other parts of the world economy − except for Japan − face an immediate Share prices have fallen since last spring. and clear deceleration that might ultimately lead to a global double dip recession. high risk premiums are not sufficient reason to increase the proportion of equities in our portfolios right now. In the US and Europe (including Sweden). But in order for a double dip recession to occur.
such as emerging markets and companies in industrialised countries with a large proportion of exports targeted to countries with high growth and demand.500 Composite. But in August. stock markets were dominated by worries about an American double dip recession. As a result.500 Composite. The stock market was probably speculating that the housing sector might bottom out fairly soon. but in August the curve flattened as long-term yields fell the most. Our investment focus is on regions and economic sectors with the best potential in terms of growth and valuations. perf %] Consumer Staples [perf %.Asset class: Equities Stock markets are also currently being propped up by exceptionally stimulative monetary policies in much of the OECD and by historically low government bond yields in many industrialised countries. for example. In July. the defensive trend in the stock market has begun to approach the mature stage. which is ordinarily welcomed by the stock market.500 Composite. In the US. but a look at history shows that the yield curve must be flat or have a negative slope before a recession is foreseeable. will apply for another while. What instead is important is the reason behind the decline in yields. In July. but late in the month there was increased interest in cyclical companies. perf %] Industrials [perf %. . This would set the stage for renewed growth acceleration. . and the latest movement in the curve has thus not benefited the stock market. Together with large liquidity in the corporate sector. . the association between the stock market and the government bond market has been highly erratic since mid-2010. To some extent. share prices rose concurrently with bond prices (bond yields fell). . perf %] Nov 2009 Jan Mar May 2010 Jul Source: Reuters EcoWin Investment OutlOOk . the US fixed income yield curve thus became steeper as short-term interest rates fell more than longer yields (the two-year yield hit a new record low). but there are signs that Chinese economic policy will ease. Part of the picture is that US residential construction has fallen to an extremely low level. range trading for another while But since it will probably be some time before the macro picture becomes clearer – the shift from stimulus to final demand is successful in the OECD. yields fell on expectations that the Fed would ease monetary policy further. perf %] Materials [perf %. Sectors specialising in investment goods are also attractive. Especially in the OECD countries. perf %] Health Care [perf %. even though statistics on both housing demand and residential construction published around the same time were more or less dismal. this increases the likelihood of stronger capital spending ahead. thus benefiting the stock market. Consumer Discretionary [perf %. led by the US. defensive sectors (such as health care and consumer staples) performed better than cyclical sectors (for example industrials and health care) on US stock exchanges.september 2010 25 . housing-related US equities performed better for a while than the American stock market as a whole. The level of government bond yields is thus not the important thing. What is happening in China’s economy and economic policy has occasionally worried the stock market this year.500 Composite. however. 20 15 10 5 0 -5 -10 -15 Sep 20 15 10 5 0 -5 -10 -15 earLy signs OF greater interest in CyCLiCaL eQUities In August.500 Composite. and emerging market growth remains high – our forecasted stock market scenario. companies sharply reduced their capital spending during the economic and financial crisis and in many places capital spending is only equivalent to wear-and-tear (depreciation). while August was characterised by falling share prices and a continued upturn in bond prices (yields kept falling). worries about a double dip recession − something that hurts the stock market − pushed down bond yields. In July. taking into account both history and national demographic trends (see also page 14). . Recently. Our conclusion is that changes in the slope of the yield curve are a very important stock market variable. There are early signs of increased interest in more cyclically sensitive economic sectors. characterised by range trading and a focus on alpha companies that hold their own on the stock market when risk appetite is feeble.
• . the European Central 8 7 6 5 4 3 2 1 2006 2008 2010 0 8 7 6 key rates anD yieLDs Have FaLLen A key interest rate (brown) close to zero and possible further easing by the Fed. A rapid rise in household savings ratios in the OECD industrialised countries during the past few years − partly channelled into government securities − has also contributed to low yields. government bond markets in influential industrialised countries have functioned as “safe harbours” when financial worries have escalated. Central banks have strong motives to preserve their ultra-loose monetary policies for a long time.september 2010 . Since early summer. Yield. It thus appears as if the Federal Reserve. 5 Year.. Inflation pressure will remain very low and growth will continue to be relatively slow.. Close Policy Rates..asset class: Fixed income HY benefiting from search for returns • Yields on government securities are historically low… • . yields on US Treasury bonds have fallen substantially more than the equivalent yields in Germany and Sweden. for example. This was most apparent last spring. There will also be major consequences if premature interest rate hikes should halt the economic recovery. Looking ahead a few years. Yield Government Benchmarks. 5 Years. but by all indications this upturn will be modest. while worries about government finances in many European countries are no longer in the spotlight. In addition. falling inflation expectations and signals from various central banks that they are prepared to prop up their economies with exceptionally low interest rates for an extended period. Government bond yields in industrialised countries are indeed likely to rise during the next couple of years. less concern about inflation and increased appetite for “safe” government securities resulted in a sizeable decline in US Treasury bond yields (blue) this summer.so investors searching for high effective returns.have no alternatives other than High Yield and EM bonds Government bond yields on both sides of the Atlantic have fallen sharply since last spring. they remain very attractive. when a government financial crisis with its epicentre in southern Europe was the focus of attention.. enabling them to correct the prevailing imbalances in their competitiveness and public finances.. Fed Funds Target Rate Source: Reuters EcoWin 26 Investment OutlOOk . deflationary forces (a squeeze on prices) will also dominate the OECD countries and southern European countries will be especially grateful for low government bond yields over a long period. BBB Rated. since many countries have very little room for manoeuvre in fiscal policy and their monetary policy weapons are essentially exhausted. Per cent 5 4 3 2 1 0 2004 Corporate Benchmarks. greater concern about the economy. There are several reasons − increased worries about the economy. This can be viewed as indicating that the foremost source of concern this summer was the risk of a US double dip recession (see the Theme article on page 11).. Bid. Although yields on corporate bonds (green) have also fallen. reaching historically low levels.
Prospects also remain bright. especially after last spring’s widening of yield spreads. where continued rate hikes are in the cards. stronger economic conditions. Divergent conditions for central banks The divergences in conditions surrounding major OECD central banks and the central banks of commodity-producing countries like Canada. many central banks are confronted with high economic growth and mounting risks of overheating. while corresponding US figures are 6 and 3 per cent.Asset class: Fixed income Bank and the Bank of Japan will keep their key interest rates unchanged until 2012 and then begin to raise these rates very cautiously. High yield remains attractive Government bond yields in the EM sphere are still substantially higher than in the OECD countries. but resulting bond price risks are nevertheless regarded as fairly small. however. while the corresponding volatility figures were 8. the average annual return on US High Yield bonds has been 9. While the major central banks have reasons to hold off for a very long time before beginning their key rate hikes. while the yields on the highest-rated Investment Grade bonds − which today are marginally above the equivalent government bond yields − would be forced upward. with price declines as a consequence. In July.september 2010 27 . According to SEB’s forecast. especially when the economic outlook is more uncertain than usual. the Fed will start buying Treasury bonds on a large scale (quantitative easing). the euro zone and Japan. Effective yield is far higher and the room for narrower yield spreads against government securities − and thus for price gains − is larger. respectively. and August was another good month. for example in India and Brazil. The Bank of England. and if uncertainty about the growth outlook increases − illustrated by the speculation about a US double dip − corporate bonds are in a far better situation than equities. when risk appetite returned to financial markets. During the coming year.4 per cent. The downturn that dominated risk assets during the second quarter of 2010 also affected corporate bonds − yield spreads against government securities rose and bond prices narrowed − but the decline in value was far less than for equities. however. rapidly falling bankruptcy levels The percentage of companies that go bankrupt is falling rapidly on both sides of the Atlantic. Investment OutlOOk . at least during the remainder of 2010 and the first half of 2011. may use its interest rate weapon somewhat earlier − late in 2011 − since British growth and inflation are both predicted to be higher than in the US. emerging market debt as an asset class thus appears attractive to investors with such currencies as the euro or Swedish krona as their base currency. aDvantage: HigH yieLD During the past 25 years. In China. Corporate bonds − meaning High Yield − also remain attractive. and instead the authorities will probably soon ease the country’s economic policy a bit. The total number of companies whose bonds are classified as High Yield is about 250 in Europe and more than 1. the economy has begun to slow down. Corporate bonds will benefit from the world economic upturn.5 per cent this coming winter. relatively rapid price increases and other factors. This means that the need for further monetary tightening in China has diminished. In the emerging market (EM) sphere. though from very high gear. The wide yield spreads in the High Yield segment also provide a sort of “cushion” in the event that US and European government bond yields (the benchmark for yield spreads) should unexpectedly begin to rise rapidly. certain inflation risks and in places somewhat overheated real estate markets give the other central banks reasons to gradually ratchet up their key rates during the next couple of years. Australia and New Zealand as well as Norges Bank in Norway and the Riksbank in Sweden are becoming ever clearer. This means that effective yields are far more attractive.7 per cent and on equities (S&P 500) 10. Such bonds are thus a good alternative to equities. too.500 in the US. Also worth noting is that a portfolio of US High Yield bonds in the B and BB segments had a historical correlation of less than 50 per cent with equities. and inflation pressure excluding food is apparently starting to ease.6 per cent. corporate bonds again performed strongly.5 and 15. Thanks to the prospects for stronger EM currencies. the share of European issuers of High Yield bonds going bankrupt (12-month figures) will fall from the current 6 per cent to 1. our expected return on High Yield bonds is considerably above that of Investment Grade bonds. EM government bond yields may indeed rise somewhat as a result of key interest rate hikes. Nor should it be ruled out that within a few months.
The chart shows how hedge fund returns occasionally followed (un)willingness to take risks. the same index in local currencies was down about 11 per cent. The financial market year began well and then underwent a crisis period in late January and early February. This was followed by a very good period. as measured by the VIX index (inverted in the chart). This is more than stock markets. giving genuine quality hedge funds an opportunity to prove their merit and value. for example can boast. and this year has been challenging to date. Volatility Index (VIX) Source: Reuters EcoWin 28 Investment OutlOOk . So far this year. World. it will be substantially more important for investors to take advantage of qualitative funds that thoroughly hedge their downside…”.asset class: Hedge funds Hedge funds withstood turbulence • The rules of the game are changing… • …in a volatile market… • …but good portfolio characteristics can be found In this year’s first Investment Outlook (March). Worries about overheating in China.september 2010 . there is a wide divergence in results between hedge funds. As usual when it comes to hedge funds. better risk-adjusted return In portfolio terms. we wrote that “Looking ahead. Global Hedge Fund Index United States. Most of 2009 consisted of a recovery after the financial crisis − a relatively simple market from a hedge fund management perspective. We expected 2010 to be more difficult. This asset class is helping us improve the odds in our overall investments and is providing a better risk-adjusted return.8 per cent. the oil leak disaster in the Gulf of Mexico and the risk of double dip recession were other events that made the investment climate more difficult. There 10 15 20 25 Per cent have been major divergences in market performance between different strategies and also between different hedge funds. hedge funds as a group have generally performed in ways that have preserved present value for those who have been invested in the asset class. 1190 1185 1180 1175 1170 1165 1160 1155 1150 1145 Jan Feb Mar Apr May 2010 Jun Jul Aug 1140 Index 30 35 40 45 50 55 60 maJOr FLUCtUatiOns DUe tO LOW risk appetite Most hedge funds have had a difficult time coping with volatile markets this year. our hedge funds have provided good protection in a difficult market climate. The chart below shows the performance of hedge funds compared to the VIX volatility index. then a government finance crisis in which Europe was the main focus of attention. with major fluctuations in returns as a consequence. global stock markets measured as the MSCI AC World index in local currencies was down about 5 per cent from the beginning of 2010. At the end of August. like all other asset classes. while the HFRX Global Hedge Index lost 2. and it is crucial to invest in the “right” hedge fund. HFR. Hedge funds were naturally affected by their surroundings. CBOE. Looking at the second quarter. Our collaboration with Key Asset Management helps enable us to identify good hedge funds with sound characteristics over time and to build portfolios with the characteristics we are looking for.
Event Driven. They have the potential to cope with short-term volatility and worries. hedge fund ownership structure will become more transparent. with hedge funds still successfully manoeuvring through these problems in a satisfactory way. and in the short term their situation may even become a bit tougher. whose managers generally like trends and predictability.. we believe that a modest recovery will continue should favour these strategies. where a total of more than USD 2 trillion is invested. Another consequence of the nascent world economic improvement will be mergers and acquisitions. which specify that a maximum of 3 per cent of a bank’s Tier 1 capital may be invested in hedge funds etc. New legislation (including the Volcker rules) will affect hedge funds − especially their ownership − but in investment terms. companies will encounter divergent conditions. this need not be a disadvantage. This will mean that we will focus more on Global Macro. Hedge funds are thus an asset class that we are more than pleased to include in our Modern Investment programmes. it will do so at an uneven pace. such analysis is extra important because hedge fund liquidity is often poorer. hedge funds are still able to operate relatively undisturbed since the competition from banks is still low. This should not be a disaster in a hedge fund market. The question is whether it will matter very much. we expect Global Macro and CTA (Commodity Trading Advisors) to function nicely. This will change the market. Absolute return and driving forces other than stock markets are characteristics we look for among managers.september 2010 29 . there is potential in the wake of crisis At the strategy level. and this is also what we think hedge funds will deliver in the future. The market should be able to swallow the expected future assets offered for sale. This means it takes longer to sell our holding if we are unable to achieve the desired return profile. which might benefit investors. In order to comply with the new Volcker rules. The market has been unstable so far this year. while other companies are doing very well − a good breeding ground for Distressed and Credit L/S transactions. The alternative would be to increase their Tier 1 capital. We believe that opportunities in the wake of crisis will remain very good in parts of the investment universe. but there will be positive elements as well. This has caused difficulties for hedge funds. The market battle between micro (company profits) and macro (weak economic statistics) has been a theme during the year. In this type of climate. including some fairly large transactions. For these strategies. According to documents submitted to American authorities. There are naturally disappointments here and there. Looking ahead. In terms of competition. since we believe we can now achieve a stock market allocation cheaper and better via “ordinary” equity funds. Credit L/S and Multistrategy funds. we see M & A deals being announced here and there. while benefiting from trends. Some companies are having a slightly tougher time. Goldman Sachs and Morgan Stanley alone have nearly USD 20 billion invested in hedge funds. Event Driven hedge fund strategies will deliver good earnings. CTA. Because of the uneven pace of recovery. Investment OutlOOk . For example. but on the whole our chosen investments have performed well. More and more such transactions between companies will occur. Some countries still face major challenges. The legislation has been debated during 2010. Correct analysis by hedge funds is important if they are to contribute to good returns in relation to the risk they take. this would mean that Goldman Sachs and Morgan Stanley must reduce their exposure by more than 60 per cent during the coming decade. but we can benefit from Equity L/S funds with more neutral elements such as trading. credits and real estate. We are reducing our focus on Equity L/S. Although the world economy is recovering. private equity. Even today neW rULes oF tHe GaMe For HeDGe FUnDs New US legislation on who may own hedge funds may potentially be important to this asset class.Asset class: Hedge funds Considering the market we expect in the near future − a modest recovery − we will focus even more on hedge funds that are “genuinely” diversified. Stable returns (even if they may be considered a bit boring) are exactly what we are looking for.
scaring world stock markets silly. we note that some large investors.september 2010 . There are still cities with high residential and commercial real estate price levels. so a decelerating economy is good for real estate markets in this situation. Meanwhile recently published US real estate statistics were nearly catastrophic − the worst figures in 15 years. statistics on existing US home sales in July were released and were significantly worse than expected. DATE January 18. This trend could accelerate during 2011 if the world economic situation turns significantly better. Their worries will have to subside and consumers will have to become more comfortable with their situation before we can count on any major upswing in home sales. we will probably have to wait until the end of September or maybe until early next year to see clear trends in the US real estate market. The alternative would be an unwanted price crash. 2010 march 18. Incidentally. The labour market is important to consumer confidence and will thus be a key factor in the housing market. 2010 april 15. but the steps taken by Chinese authorities have meanwhile worked well. The federal tax credits enjoyed by first-time home buyers in America during the spring created a real estate market on steroids and caused many buying decisions to be accelerated from the third to the second quarter of 2010. there are many cities and regions in China that have much better market conditions and real estate prices at more reasonable levels. an economic deceleration in China only means that growth will fall by a few percentage points to around 9 per cent instead of double digits. Banks may not lend to speculators. We rank better labour market statistics as the most important factor. Their population also has a household financial situation that is more in phase with prices (and they will simply have more money left over). In Beijing. families are prohibited from buying more than one new house. Before we can draw any relevant conclusions about how Americans are dealing with the housing situation after the end of the tax credit. State-owned firms that are not real estate companies are ordered to withdraw from the real estate market. In China. 2010 The table shows the actions that Chinese authorities have taken to help cool off the market. we expect consumers to regain their willingness to buy. If the labour market improves. One result has been a falling rate of increase in home prices. To make consumers eager to buy again. 2010 ACTIONS TAKEN TO COOL CHINESE GROWTH Central bank raises capital reserve requirement for lenders − the first of three hikes. It is thus completely natural that the statistics turned worse once the tax credit has expired. We also regard this as a sign that the 30 Investment OutlOOk . Aside from the very largest cities. Looking at China specifically. statistics on July new home sales were published and were also abysmal. exactly what was wanted. something will have to trigger a market upturn. During the prevailing phase of worrying about the world economy. These sales figures are worrisome. including private equity companies. American consumers are naturally hesitant. which in turn is important to the labour market. april 11. but this is not our main scenario. The cash down payment for secondhome buyers is increased from 40 to 50 per cent. chose to buy properties during the summer. but a clear trend for the better. This will probably not be a rapid recovery. On August 25. or at least stabilises. the economy is slowing down and pessimists who warned about a real estate bubble during the first half of 2010 are starting to fall silent. On August 24.asset class: real estate Better and worse • Bad US statistics but… • …their reliability is still unclear • Asian initiatives to cool the market are working The world economic recovery has improved the situation of real estate. 2010 april 30. but in our view they were instead in fact largely an expected effect.
But our main scenario of modest global economic recovery is an argument in favour of real estate investments.Asset class: Real estate market has become more reasonable and that the bubble tendencies that have existed are largely under control. this will have no actual consequences from an investment standpoint. borrowing costs are also low and prices have stabilised. ask. The next stage might be that the world economy stabilises and that final demand may boost profitability among real estate companies. we are lowering our forecasted returns for the real estate asset class. The precarious conditions then prevailing have been replaced by a kind of normalcy that is generally supportive of the real estate market. provided that one is able to identify quality managers with a high level of asset and real estate management skills. For financial investors who have not yet bought into the real estate market. and the ball would be rolling again. somewhat lower forecasted returns Recent real estate market statistics. and this is vastly better than no loan at all. a lot has happened. Certain real estate investments that carry slightly higher risks may be suitable investments even today. One consequence of this is that on the margin. Instead. This factor grew in strength during the second half of August and today poses a genuine danger. If the economy improves. we still believe that it will still make sense to own real estate in the future. Yet it is still not entirely clear what this new normalcy is. have led to a somewhat more sombre recovery scenario. the situation today is far better. It is not possible to borrow as much today as previously. This would significantly improve rental markets. Low financing costs together with economic recovery mean good potential for real estate. real estate investors were even finding it hard to roll over their loans. we anticipate that businesses can hire more people and that private consumption will increase. Today the situation is completely different. At present. higher-risk investments. 5 year Bank margin (assume 0. Investors also have more confidence in the market. The upturn we have seen so far has been investor-led (see Investment Outlook. A large majority of the real estate investors we meet confirm that there is no major difficulty getting loans in the banking system.september 2010 31 . 7 6 Financing cost. May 2010). % 5 4 3 2 1 0 2005 Source: Bloomberg FinanCing COsts Have LargeLy HaLveD in a FeW years Transaction volume has risen since the crisis raged. though with marginally lower returns than we had expected just over one quarter ago. In 2008. but is showing a brief pause at the moment. At present. broad real estate funds and later to add more niche-oriented. Starting with zero availability of credit. One risk that we believe exists in the market is that risk appetite among investors is becoming dramatically worse. varying credit opportunities Since the financial crisis raged at its worst during 2008. however. but banks and other credit institutions have maintained a more cautious attitude towards the size of the loan-to-value ratio. What will credit opportunities be like when we have left the crisis completely behind? We believe this is the core of the uncertainty still found in the real estate market. as evidenced by higher transaction volume.5%) Investment OutlOOk . it may be suitable to start building up an allocation. Our recommendation is to begin with cautious. 2006 2007 2008 2009 2010 US Interest rate swaps. together with other world economic data. Loans totalling a bit above half the purchase price seem fully obtainable. if this scenario proves correct.
corporate profits are increasing and the financing situation has improved. Although it is too early to declare an end to such problems. but still a confirmation that prospects are improving and there is growing willingness to invest. there are several sources of concern for PE companies. a better functioning market now in place Aside from the economic and regulatory situation. Although the US economy is a cause for concern. which seriously hurts the PE market. The listed company Blackstone is one example. meaning that American banks will not be allowed to own PE investments on a large scale. In Europe. when markets were fretting about the US economy.september 2010 . which may become critical if they are highly leveraged. When this reform is implemented. the risk of rule changes is on the radar for the PE sector. we have seen evidence that the situation is still fragile. the economy showed upside surprises this summer. and several initial public offers (IPOs) had to be cancelled or postponed. The acquisition and merger market has also sprung to life again (except for brief spells of uncertainty). share prices of PE companies held up relatively well. it is especially hard on such companies when the transaction market grinds to a halt. There are other signs of strength as well. and the corporate bond market is again open to PE companies. The most central. mentioned above. after a completely “dead” 2009. the economy is stabilising. the financing situation has previously been singled out as an uncertainty factor for the PE industry. Although the picture is gradually improving. Another signal that PE is now past the worst obstacles is that a number of new funds have been created this year. with sale prices ended up 30-40 per cent above the reported net asset value (NAV) of the companies sold. During various bouts of worrying in economies and in financial markets this summer. Banks are once again lending money to the PE sector. recently started a fund that has raised USD 13 billion − admittedly only half of what its predecessor fund brought in a few years ago. During the late summer. economic worries generally mean weaker risk appetite. Since they are dependent on such divestments to generate revenue. 32 Investment OutlOOk . is how the economy is performing. Blackstone. of course. and the PE industry’s portfolio companies generally delivered strong second quarter earnings.asset class: private equity A winner as the economy stabilises • A functioning financing market and strong reports are good for private equity • But financial worries are hurting the PE market • Good macro growth and big discounts to NAV make PE investments attractive The fundamentals underlying the private equity (PE) industry have improved in many ways. Meanwhile share prices of listed PE companies have fallen. Transaction activity has lost momentum. It is thus not surprising that the share prices of listed PE companies. This summer the US House of Representatives also approved a “carry tax” − a tax increase on general partners − which the Senate has not yet approved. The flare-up of worries about a US double dip recession affects the PE industry in several ways. however. the picture has nevertheless improved faster than expected. like the stock markets. Various transactions took place during the spring and summer. Secondly. Various initiatives are underway. Large PE firms such as 3i and KKR carried out divestments. it will increase the holdings available in the secondary market by the equivalent of nearly 10 per cent of existing PE holdings in the US. among them the Volcker rules. General partners are companies that do not invest directly in PE but instead get a return in the form of a portion of the revenue that PE companies generate when they sell portfolio companies at a profit. For example. In addition to these economic developments. a weaker economy would in itself mean that businesses owned by PE companies will perform more weakly. fell this past spring and summer when the European sovereign debt crisis culminated (or at least the market’s focus on the crisis). which directly impacts the share prices of listed PE companies and the ability of these companies to carry out good transactions. as it has done several times during the summer. other parts of the world are showing decent to good rates of economic growth. Firstly.
Sellers are also now beginning to accept the new price levels.Asset class: Private equity The latter is especially encouraging. As mentioned earlier. the average PE firm has generated similar or slightly higher returns. Together with the large supply and high discounts. worries about the economy. One important factor in PE market performance is flows – access to investable capital and a supply of investments. Due to the market turbulence of recent years. In a number of 275 250 225 200 Index 275 250 225 200 175 150 125 100 75 2003 2004 2005 2006 2007 2008 2009 2010 50 175 150 125 100 75 50 big DeCLine – strOng reCOvery After doubling during the 2009 rebound. 2003-01-01 = 100 Source: Reuters EcoWin Investment OutlOOk . with many companies giving their investments an “illiquidity discount”. We are prepared to increase the proportion of private equity investments in our portfolios as soon as the market situation becomes clearer. however. a listed company. Assuming that more transactions can be carried out at valuations similar to the above example − 30-40 per cent over NAV − the market should be reasonably willing to shrink the discount significantly. One study* shows that while world stock markets provided a long-term return of around 10 per cent. prices of PE portfolio companies have fallen substantially. the period after a recession is often the best time for PE investments − there are opportunities here for a skilled PE investor to generate large value. this creates good business opportunities. cases. but fundamentals are steadily improving. there will be an underlying investment need. the banks will probably have a lengthy period to divest their PE holdings. Financial market worries have hurt share prices. Various other market players are now taking initiatives to take advantage of the big discounts − a business opportunity for those with money to invest. however. As we described earlier. which means rising net asset values. 10-15 per cent. resulting in a higher share price. This should help increase valuations as the discounts shrink. was traded earlier this year at a discount of well above 50 per cent on its NAV. LPX50 TR Index. But in a short-term perspective.september 2010 33 . Apollo Alternative Assets (AAA). bearing in mind that listed PE firms are still traded with a 30-40 per cent discount to NAV (the historical average is around 10 per cent). The company carried out a share repurchase. These funds have so far only carried out a fraction of the investments they intended to make. * Source: EVCA: Venture Economics and Banncock Consulting room for shrinking discounts Assuming that the world economy continues to grow decently. it is worth pointing out the importance of investing with the right PE market player. the implementation of the Volcker rules will result in a large quantity of PE investments in the secondary market being sold off by American banks. In this context. coupled with continued low interest rates. but the most successful one quarter have generated annual returns in the 20-25 per cent range over time. share prices of listed PE firms have run into headwinds. At the same time. Those who have a long-term perspective and capital to invest in PE thus have good opportunities. which will create buying pressure. fuelled in part by newly established funds and those that were created in recent years. should lead to very good PE investment performance in the future. These large discounts are also a source of opportunities. In order not to disrupt the market excessively. regulatory fears and continued transaction market uncertainty may hold back the market. perhaps mainly among “secondaries” − purchases of existing PE investments or obligations. probably better than for a very long time. once financial uncertainty eases. the investment periods specified by the funds are drawing to a close. Decent economic growth leading to rising NAV and simultaneously shrinking discounts to NAV. the value of portfolio companies should grow the near future. 2003-01-01 = 100 MSCI World Gross Index. These net asset values are often conservatively calculated.
a continuous series of storm clouds and questions about the strength of the global recovery have caused commodity prices to level off.september 2010 . Our scenario of global growth exceeding 3 per cent during the next couple of years points towards rising commodity prices ahead. with great uncertainty about the economic trend. In a short-term perspective. Since last spring. commodity prices are being driven primarily by the risk appetite of market players rather than by changes in the fundamentals underlying this asset class. the historically strong association between the dollar and oil prices has loosened. Iran and Iraq also have major potential to increase the oil supply. While the dollar has fluctuated significantly. Saudi Arabia can boost production and push down oil prices if global economic growth turns out to be slowing down too rapidly. however. In such a situation there is no reserve capacity and OPEC thereby loses its ability to control prices. For example. it looks as if the global economic pulse will slow a bit. We foresee decent global GDP growth during both 2010 and 2011. There is large reserve capacity for oil production − especially in Saudi Arabia − which gives the Organisation of Petroleum Exporting Countries (OPEC) the muscle to control prices by controlling supply. Agri-commodities Industrial metals Energy Source: HWWI 34 Investment OutlOOk . but in the prevailing uncertain political situation they are hardly likely to make any big changes in production. The commodity price increase will thus be modest. At present. in recent years the price trends for commodities have resembled a roller-coaster ride. however. commodity prices rebounded early in 2009 (somewhat before the stock market). which is likely to increase the demand for commodities. oil prices are welcome to move as high as possible before they hamper GDP growth in the emerging market sphere or in the OECD countries (an oil price ceiling). Today’s extremely low interest rates and high liquidity in the banking system also signal rising commodity prices. After a sharp slide at the time of the credit crisis. From OPEC’s perspective. Prices are likely to remain volatile as long as we are in a fragile situation. Like most other risk assets. oil prices have remained fairly calm in the USD 70-80/barrel range. marginally rising oil prices In recent months.asset class: Commodities Economic recovery lifting commodities • Moderate price increases due to decent world economic conditions • Low interest rates and an uncertain economic outlook favour gold • Oil prices will remain in the USD 70-90 per barrel interval Commodity prices large follow global economic performance. 500 450 400 350 300 250 200 150 100 50 2000 2002 2004 2006 2008 2010 500 450 400 350 300 250 200 150 100 50 COmmODity priCes reFLeCt tHe eCOnOmiC sitUatiOn Commodity prices have followed the pattern of the global recovery. But oil prices should not fall to levels where demand exceeds production (an oil price floor).
which is the factor that has driven gold prices to today’s high levels. demand for industrial metals is increasing in most OECD countries.50 1. The difference. USc/Bushel 800 600 400 200 Source: Reuters EcoWin Extreme drought has led to sharply rising wheat prices. If the global economy sinks back into a recession or climbs due to final demand. During the summer. Today.Asset class: Commodities Our current assessment is that OPEC will try to keep oil prices in the USD 70-90/barrel interval. demand for jewellery among consumers in the emerging market sphere is high and central banks would like to expand the share of gold in their foreign exchange reserves. there are prospects of price increases as the economic recovery regains strength. But there are external factors that may cause oil prices to break out of this interval. Demand for industrial metals taking off Like oil prices. Late in 2010. Russia banned continued exports of wheat during the rest of 2010. The natural phenomenon known as “El Niño” has been replaced by “La Niña”. A price shock is thus unlikely this time around. Gold was the big winner amid fluctuating risk appetite in the first half of 2010. oil prices will probably climb if important production areas are affected. agricultural prices levelling off A heat wave and drought in the major wheat-producing countries of Russia and Ukraine led to a 70-80 per cent rise in wheat prices during July and August. however. The result was agri-commodity price increases that affected food prices worldwide.20 110 90 70 50 30 2005 2006 2007 2008 2009 2010 1. but since there are ample stockpiles a price shock can probably be avoided. Weaker Link betWeen OiL priCes anD UsD 150 130 USD/barrel Oil. Investment OutlOOk . But the unclear future outlook is likely to keep prices at today’s levels at least during the third quarter. The introduction of trade restrictions in one country has a tendency to spread to other countries. A modest price increase is nevertheless in the cards. which lasts from June to November. To ensure domestic supplies and prevent price increases at the consumer level. industrial metal prices are sensitive to changes in economic growth forecasts. So far this year. there are large stockpiles − especially in the US − that more than offset the year’s meagre Russian and Ukrainian harvests. is that stockpiles were low at that time. producers demand higher payment for their commodities in dollar terms. This means that around USD 70 is a good buying situation and USD 90 is a good selling situation. When the dollar declines. Right now we are in the middle of the Atlantic hurricane season. The anatomy of the recovery is another factor that may have an impact.40 1.september 2010 35 . or a new danger would have to appear. and vice versa. this is likely to be reflected in oil prices. resulting in rising commodity prices. this year’s hurricane season is expected to be intensive. which in that case would lead to sharply rising agri-commodity prices. Brent EUR/USD The gold price increase during the past six months was about 12 per cent. financial worries are likely to persist for a while.70 1. the average price has in fact been USD 80/barrel. so there is a sizeable risk of major disruptions in gas and oil production in the Gulf of Mexico over the next few months. however. however. WHeat priCe raLLy is Over 1200 1000 1200 1000 800 600 400 2006 2008 2010 200 1. A similar scenario occurred a few years ago. however. there has been a strong association between the dollar and oil prices.60 1. following poor harvests. These prices fell steadily when the southern European financial crisis broke out. Considering its reserve capacity. since interest rates are low. market storm clouds (the European debt crisis. gold and American government securities were virtually the only assets that investors wanted to buy. whereas today there is a grain surplus after two years of good harvests. but grain prices will probably remain at today’s levels because a high risk premium for extreme weather is justified. According to forecasts. In order for gold prices to continue climbing at the same pace. This association has not been apparent during the past six months. OPEC looks likely to be able to keep prices within its desired interval during the rest of 2010. In addition.30 1. Although US oil stockpiles are at record levels.10 Source: Reuters EcoWin Since oil is traded in US dollars. prices remained low due to worries about the American economy and when China’s efforts to slow economic growth began to have an impact. as evidenced by falling stockpiles. According to a report published by the US Department of Agriculture on August 12. the US double dip or tightening measures in China) would have to grow in strength. When markets were at their stormiest. increasing the likelihood of extreme weather and hurricanes during the winter of 2010-2011.
Volatility Index (VXO). USD Euro Zone. too. are nevertheless unhappy about seeing their currencies appreciate. while the Swedish krona and the Norwegian krone as well as the Polish zloty have the best potential in the West. the strengths of countries dominated foreign exchange markets. High-interest rate countries are found mainly in the emerging market (EM) sphere. In this respect. LOW risk appetite beHinD UsD strengtH 1. today we can note that concerns about European sovereign debts caused the euro to plunge and the US dollar to rise – at the bottom. Over time.45 1. in which investors borrow in low-interest rate currencies and invest in high-interest rate countries. The foreign exchange market is driven mainly by three factors: risk appetite. the dollar is likely to weaken against smaller emerging market currencies. connected to risk appetite and tends to control medium-term trends.50 1. has largely determined the performance of the US dollar (measured against the EUR). Meanwhile countries with strong government finances and good economic growth will see continued inflows of foreign currencies. our assessment was that countries whose government finances were in relatively good shape would see their currencies appreciate. Japan and the US are among the low-interest rate areas.15 1. That trend was reversed late in July when worries about an American double dip recession caused safe currencies like the yen and the US dollar to strengthen. but late in June resurgent risk appetite became the main driving force. During the first half of 2010.30 1.35 1.25 1. the EM countries are best positioned. These countries thus have incentives to try to “talk down” their currencies through political actions or employ quantitative easing measures to influence the exchange rate in their favour.20 1. As risk appetite returns. Countries whose economic growth is mainly due to exports. As concerns about the US and global economy fade and risk appetite recovers.september 2010 .and long-term currency trends. interest rate differentials will set the tone Our main scenario is that worries about a double dip recession in the US and globally is exaggerated and that markets will eventually normalise (see page 11). EUR/USD Source: Reuters EcoWin Risk appetite. while the yen strengthened and reached a 15-year high against the USD late in August. Singapore dollar and Indonesian rupiah should be among Asian winners.40 1. such as South Korea. and sound government finances were rewarded (with powerful downward pressure on the euro as a consequence). interest rate differentials and the fundamental strengths of countries. measured here as the VIX index. causing them to appreciate.60 Jan Apr Jul Oct 2008 Jan Apr Jul Oct 2009 Jan Apr Jul 2010 100 90 80 70 60 50 40 30 20 10 United States. while the euro zone.19.asset class: Currencies Shift in driving force ahead • Risk appetite has driven currency rate trends… • …but interest rate differentials may take over as a driving force • Emerging market currencies are ready to soar Some three months ago. is 36 Investment OutlOOk . CBOE. Looking back.55 1. The “carry trade”. and since mid-July the market focus has shifted to the US budget deficit and slowing economic growth. interest rate differentials will again dominate the currency rate trend. a euro was worth USD 1. The South Korean won. these three forces vary in their impact on short. Spot Rates. both via the stock market and via direct investments by companies. Results of the stress tests of European banks showed that worries about the banking sector were exaggerated. As a consequence. Countries with strong government finances have resumed their currency appreciation path since mid-June. fixed income and foreign exchange traders will be demanding EM currencies. the euro regained ground.
These two forces are putting pressure on the European Central Bank (ECB) from two directions. Meanwhile a higher key rate and a stronger euro would risk pushing down the PIIGS economies even further. are thus likely to be followed by similar steps in both the US and the euro zone. As the market begins to realise that the US is only facing a slowdown.75 7.25 8. Late in August. Japan − with its enormous government debt and political paralysis – will continue its zero interest rate regime for a long time. We can thus expect a volatile foreign exchange market for another while. Close Source: Reuters EcoWin The Japanese yen appreciated significantly during the financial crisis. the euro zone and Japan − would like their currencies to be at low levels in order to stimulate exports. If one of them takes steps that directly or indirectly affect their currency. not a double dip recession. In addition. The question is whether the US. The risk that China will be branded a “currency manipulator” by the US has diminished. the Japanese yen has seemed more and more like a safe currency.50 7. USD/JPY. from about 120 yen to less than 85 yen per USD. JPY [ar 1 quarter] Spot Rates. However. On several occasions the government has expressed its interest in a depreciation of the yen. As long as the market is worried about the health of the American economy. But so far. the yen is likely to weaken − though slowly. this would disrupt the currency rate balance between them. and this has caused the market to predict interventions or other quantitative measures.25 7.50 8. Total. SA. and is close to a historical high. This should be regarded as more of a political goodwill gesture than as a serious attempt to reduce global imbalances. with possible expansion of quantitative easing ahead in order to prop up southern European countries. Japan will try to counter yen appreciation through political actions and/or quantitative easing by the central bank. the overall assessment of the ECB is that it must keep its refi rate unchanged for a long time.Asset class: Currencies Weaker yen again? As concerns about the US and Europe have escalated. A strong yen hurts Japan’s export sector. This will make it one of the most attractive countries in which to borrow money when risk appetite and the carry trade resume.00 6.25 8. such as quantitative easing. Exports. for example. Because of the low ECB key interest rate and the cheap euro. especially Japanese and Korean bonds.50 7. euro under pressure The euro zone economies continue to be pulled between two forces: zero or slow growth accompanied by deflation in the PIIGS countries (Portugal. Italy. This currency movement should be regarded more as a symbolic gesture. This indicates a policy of Investment OutlOOk .75 7.00 USD/CNY 8.50 8.00 7. with German exporters as the main winners. the yen will remain strong. creating incentives for politicians and/ or the central bank to take steps to weaken the currency. with protests and political instability as a consequence. the CNY has only climbed about 1 per cent against the dollar. In order not to risk renewed worries about the sustainability of the euro. not as a serious attempt to reduce global imbalances. strOng yen HUrting eXpOrts 160 150 140 130 USD/JPY diversification towards the east and away from the US dollar. There are also reports that China has begun to purchase Asian government securities. Japan − whose economy is strongly dependent on exports − would like a weak currency. China no longer a currency manipulator As we predicted.75 2000 2002 2004 2006 2008 2010 Source: Reuters EcoWin 120 110 100 90 80 70 25 The renminbin (yuan) was revalued against the US dollar in mid-June but has only risen by around 1 per cent. in mid-June China began an appreciation of the renminbin (or yuan. the exchange rate fell below 84 yen per US dollar. A resumption of risk appetite late this year will generally favour stronger EM currencies. will try by political means to force a further appreciation of the CNY in the neat future.25 125 100 75 50 0 -25 -50 -75 1996 1998 2000 2002 2004 2006 2008 2010 -100 Percent 7. The euro will remain cheap in German terms. which is seeing its economy decelerate rapidly right now. Steps taken by Japan. and Germany’s economy will continue to pull ahead. there are large global imbalances and investors are jittery.75 7.00 6. Greece and Spain) and high export-led growth in Germany. Various factors now indicate that the yen will weaken in the future. CNY) against the US dollar.september 2010 37 . the German economic machine is spinning ever faster and risking higher inflation. HarDLy any eFFeCt 8. Ireland. Today all three economic superpowers − the US. the highest value in 15 years.
Private equity = LPX50. Hedge funds = HFRX Global Hedge Fund.Historical values are based on the following indices: Equities = MSCI AC World. . .Return in 2010 is until July 31. Fixed income = JP Morgan Global GBI Hedge. Real estate = SEB PB Real Estate. Commodities = S&P GSCI TR. Currencies = BarclayHedge Currency Trader.perFOrmanCe OF DiFFerent asset CLasses sinCe 2000 60 40 20 0 -20 -40 -60 -80 Equities Private equity Fixed income Commodities Hedge funds Currencies Real estate 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 .
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue listening from where you left off, or restart the preview.