Presentation Transcript

1. Cycles & Psychology : What have they revealed and what do they foretell?

   FELIX STEPHEN Head of Strategy & Research ADVANCE Asset Management Limited August 2012
2. Typical economic cycles and their durations Kitchin Inventory Cycle – 3 to 5 years (Joseph Kitchin) Juglar Fixed Investment Cycle – 7 to 11 years (Clement Juglar) Kuznets Infrastructure Investment Cycle – 15 to 25 years ( Simon Kuznets) Kondratiev Waves – Super cycles – 40 to 60 years (Nikolai Kondratiev)
3. Principle characteristics of the various phases of Kondratiev Super cycles (50 – 60 years) Growing confidence Inflation quickens (peaks end – summer) Increasing credit, mainly to corporates Pace of rate increases picks up Real estate, commodities, precious metals Increasing confidence, Euphoria Falling inflation Massive increase in credit, mainly to consumers Interest rates fall throughout Autumn Stocks, Bonds, Real Estate Autumn Summer Winter Spring Fear or return of depression, fragile confidence Inflation gradually increasing Slow increase in credit Rate hikes start from very low levels Stocks, real estate Concern, fear, panic, despair Fall in inflation leading to outright deflation Virtually no credit following credit crunch Rates fall, volatility due to credit crisis Gold, cash, Bonds Source: Soc Gen & Advance Asset Management
4. The vertical specialisation model and “just-in-time” inventory management have a significant impact on business cycles Source: sciencedirect.com & Advance Asset Management
5. Investor sentiment, emotion and behaviour directly influence business cycles Source: optionalpha.com & Advance Asset Management
6. Mutual fund investor sentiment surveys are a reasonable guide to investor positioning and their risk appetite Source: AAII & Advance Asset Management
7. Extreme readings in “Investor Risk Appetite” are a reasonable guide to key turning points in financial market cycles Source: Credit Suisse & Advance Asset Management
8. Stock markets peak well before a business cycle Source: StockCharts.com & Advance Asset Management
9. Business cycles: Transition periods and regime uncertainty(Lessons from the Great Depression) The Great Contraction (1929 to 1933) The Great Depression (1930 to 1940) The Great Escape!!! (1941 – 1947) Source: Regime Uncertainty – Robert Higgs & Advance Asset Management
10. Corporate Investment is vital for sustained GDP growth (USA 1929 to 1950 – GDP billions of 1987$ and GPI billions of 1987$) Source: Regime Uncertainty – Robert Higgs & Advance Asset Management
11. Regime uncertainty:US policy-related economic uncertainty remains elevated Source: Baker, Bloom & Davis –University of Chicago working paper (2011) & Advance Asset Management
12. Regime uncertainty:European policy-related economic uncertainty remains elevated Source: Baker, Bloom & Davis –University of Chicago working paper (2011) & Advance Asset Management
13. Global manufacturing purchasing managers surveys show a decline in global economic traction Source: J P Morgan & Advance Asset Management
14. Central banks to the rescue: Central bank policy rates Source: Credit Suisse, Thompson Reuters DataStream & Advance Asset Management
15. Central banks to the rescue: The expansion of G4 Central Bank balance sheets (Central bank assets as a percentage of GDP) Source: Fed Reserve, BoJ, BoE, ECB, Bloomberg & Advance Asset Management
16. Central banks to the rescue: The transmission mechanism of Quantitative Easing (Fed) Source: ECB, Bank of Italy, JP Morgan & Advance Asset Management
17. There is an observable divergence in global GDP growth:US, Japan and Europe Source: UBS & Advance Asset Management
18. The divergence in global GDP is visible through the decoupling in loan demand: Senior loan officer surveys in the US and Europe .... Source: ECB, FRB, Haver, UBS & Advance Asset Management
19. Globalisation: The Great Global Power Shift and demographics
20. Globalisation: The world has never before been so interlocked, interconnected and/or interrelated ever... Source: Beautidialogues.com & Advance Asset Management
21. Globalisation & Regulation: Proper governance and the application of relevant laws would usually follow major power shifts: However ... New power bases are a law unto themselves– un-regulated and beyond the jurisdiction of the nation state or the scrutiny of world authorities Terrorism and criminal activity Multi-national corporations Media empires VERTICAL Financial industry Electronic media The rise and fall of “the lateral shift” in power (hegemon) HORIZONTAL History shows that major power shifts precede the introduction of proper governance and the rule of law by the hegemon
22. Globalisation: The inequitable distribution of global income and wealth (Gini Coefficient - income disparity) remains elevated Source: CIA World Factbook 2009 & Advance Asset Management
23. Globalisation: There has been a sharp increase in corruption, nepotism, cronyism etc.(The corruption perception index – 2011) Very Clean Highly Corrupt Source: Transparency International & Advance Asset Management

24. Demographics & Geopolitics

25. A long positive “SUPPLY” driven business cycle: From a demographic cycle to economic foundations Source: Soc Gen & Advance Asset Management
26. The end of long SUPPLY side effects:From the demographic cycle to economic foundations Source: Soc Gen & Advance Asset Management
27. Unfavourable demographics: A profound change in the world population breakdown (5 year change in world population by age group) Source: UN, Soc Gen & Advance Asset Management
28. Geopolitics: A politicians dilemma in a liberal democracy “We know what to do, we just don’t know how to get elected after we do it”Jean-Claude Juncker Prime Minister of Luxembourg and President of the Euro Group
29. Geopolitics: Vicious cycle of “C”s – crisis management by politicians Counter-action Comfort Policy Market Crisis Complacency Source: Barclays Capital and Advance Asset Management
30. A political geometric shift: The risk of polarisation in the aftermath of a financial crises Source: CitiGroup & Advance Asset Management
31. Geopolitics: A Politician vs. a Statesman “ A politician thinks of the next election. A statesman, of the next generation”James Freeman Clarke American theologian and author (1810-1888)

32. Risks associated with unstable Geopolitics

33. Europe: Are they still at war? Source: Nations online & Advance Asset Management
34. Europe: Political consequences of reform fatigue:(The rise and spread of EMU withdrawal parties) Source: JP Morgan & Advance Asset Management
35. U.S.A: The political gridlock – A threat to global economic stability (Projected electoral college votes by state -2012) Electoral College Votes:Barack Obama 332 - 33 Mitt Romney 206 + 33 Senate: Democrats: 48 - 3 Republicans: 50 + 3 Popular Vote: Barack Obama 49.4% Mitt Romney 49.1% Battle ground States: Colorado, Iowa, Indiana, Nevada, North Carolina, Ohio, Pennsylvania, Florida, Virginia, Wisconsin. Source: www.electionprojections.com & Advance Asset Management
36. Geopolitics: Middle East & North Africa – Storm clouds keep blowing across this highly volatile & turbulent region Source: GlobalconflictMaps.com & Advance Asset Management
37. Geopolitics: The sectarian divide between Islam's Sunni & Shiite factions places a huge burden on a fragile global political system Source: Google Maps & Advance Asset Management
38. China: The winds of change are blowing across the nation Source: Maps.com & Advance Asset Management Source: Nations online & Advance Asset Management
39. Politics remains pivotal in 2012 & 2013 (Important events & dates) 10th August’12 - RBA Statement on Monetary Policy 27th August’12 - US Republican Party Convention (Tampa Bay) 3rd September’12 - US Democratic Party Convention (Charlotte) 6th September’12 - ECB policy announcement 11th September’12 – EU Banking Union Plan to be presented 12th September’12 - Netherlands parliamentary elections 12th September’12 - German Constitutional Court to rule on ESM and Fiscal Compact 12thSeptember’12 - US Fed policy announcement
40. Politics remains pivotal in 2012 & 2013 (Important events & dates) 13th - 14th September’12 - G20 Meeting of Central Bank Governors and Finance Ministers 14th & 15th September’12 - Informal Ecofin meeting (Cyprus) October - 2012 Chinese Communist Party 18th Congress – China 4th October’12 - ECB policy announcement 8th & 9th October’12- Eurogroup/Ecofin meetings 12th – 14th October’12 - IMF Annual meeting (Tokyo) 18th – 19th October’12 - European Leaders summit 23rd – 24th October’12 - US Fed policy announcement 6th November’12 - Presidential and Congressional Elections in USA
41. Politics remains pivotal in 2012 & 2013 (Important events & dates) 8th November’12 - ECB policy announcement 9th November’12 - RBA Statement on Monetary Policy 9th – 10th November’12 - Meeting of G20 Finance Ministers and Central Bank Governors 12th – 13th November’12 - Eurogroup/Ecofin meetings 3rd- 4th December’12 - Eurogroup/Ecofin meeting 6th December’12 - ECB policy announcement 11th December’12 - US Fed policy announcement 13th – 14th December’12 – EU leaders summit
42. Politics remains pivotal in 2012 & 2013 (Important events & dates) March 2013 – Plenary of the National People’s Congress – China April 2013 – Parliamentary elections – Italy June 2013 - Presidential elections - Iran August 2013 - Parliamentary elections - Japan September 2013 - Legislative elections - Austria September 2013 - Parliamentary elections - Norway October 2013 - Federal parliamentary election in - Germany November 2013 ?- Federal parliamentary elections – Australia (latest date !!!)

43. Risk Management

44. What is Risk Management in a rapidly changing environment? Modern Portfolio management is about anticipating future risks, mapping out a plan to mitigate these risks, monitoring these risks and managing them efficiently. We are all caught up in a vortex of confusion and turbulence that is symptomatic of a world that is experiencing rapid innovation and change. This demands that we do some serious soul-searching at every pivot point of change and initiate changes in order to protect and enhance client funds invested with us. Creative and disciplined change is the only way to survive an unforgiving and demanding world. Targeting and managing “risk” efficiently should deliver a better risk adjusted return outcome.
45. Summary and conclusions It is likely that the present business cycle would be “short and sharp” and end due to heightened political instability. It is unlikely that sufficient counter-cyclical monetary or fiscal policies would be introduced to extend the duration of the cycle because of domestic and global political impediments. We would need to modify our asset allocation profile by being prepared to manage risk efficiently and let returns be a bi-product of good “risk Management”. Work tirelessly to build a powerful domestic and global network Change your business model (if necessary) to thrive in a “New World Order”

46. Financial Market Outlook

47. THE FUTURE.... “ In a time of drastic change, it is the learners who inherit the future. The learned usually find themselves equipped to live in a world that NO LONGER EXISTS”Eric HofferAmerican Social Writer & Philosopher 25th July 1902 – 21st May 1983
48. Award winning process We’re the 2012 Money magazine Best Fund Manager. We also won the Best Balanced Fund for our Moderate Multi-Blend Fund and the Best Growth Fund for our Balanced Multi-Blend Fund. We’re the 2011 Financial Review Smart Investor Fund Manager ofthe Year. We also won the Multi-Sector Conservative category for ourDefensive Multi-Blend Fund and the Multi-Sector Growth category for our Balanced Multi-Blend Fund. We won the 2009 Money Management – Lonsec Multi Manager ofthe Year 2009. Our Multi-Blend Funds are rated ‘Highly Recommended’ by Lonsec. Advance Asset Management is rated 5 Apples by Chant West.
49. BT Financial Group – a multi-brand strategy
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