Week ending 16 October 2009

The past week has seen something of a pause in the recent strong equity performance. The major equity markets actually finished the week in negative territory, whilst government bonds posted positive returns. This opposing behaviour is more typical of these asset classes compared to the behaviour of late where both equities and bonds have driven higher in a concerted manner. Many commentators have suggested that this contemporaneous strength was a consequence of the large government fiscal stimulus which has come in many forms. The government cash has found its way into the capital markets and this has boosted the value of financial assets across the board. The wall of liquidity has, temporarily at least, driven up correlations between these historically opposing asset classes. After the relief that this wall of money brought to the markets, attention turns to how this influx of capital can be withdrawn in an orderly fashion.

The level of government debt that has been issued to fund much of this stimulus is huge. This will need to be unwound at some point. One oft-cited method through which central banks might reduce the real burden of debt would be to increase inflation to a level that effectively reduces the real value of the provisions being made. This has attractiveness in its simplicity and also in the fact that governments are almost having their cake and eating it. But, perhaps this inflationary escape would not be such a free lunch after all, at least not for the equity market. Recent research from Deutsche Bank1 suggests that in fact high inflation is harmful to equity markets and that the conditions that suit equity markets best are periods of moderate inflation.

There are also other practical considerations that would tend to argue against the inflation scenario as being an attractive one for central banks and governments. The US, for example, has heavily skewed its issuance towards the short end of the curve (Fig. 1). This diminishes the effect that anything short of very significant inflation levels soon could have on the ‘real’ level of debt. Furthermore, the increase in inflation will likely increase nominal yields which would make the refinancing of this debt higher in nominal terms when the government comes to ‘roll’ it. The US’s maturity profile is very different from, for example, the UK’s debt distribution (Fig. 2) which has a spike of issuance further out in the curve. As a result, one might conclude from this that there is a greater incentive for the UK authorities to allow a higher than average inflation level in future as this, cumulating over many years, could have a meaningful impact on the real size of their outstanding debt.

Markets were muted last week with global equities returning -0.7% in US dollar terms. Global government bonds were stronger, returning 0.5% in US dollar terms. The US 10 year yield ended the week at 3.41%, making government bonds fairly unattractive from a valuation perspective, unless the economic data worsens significantly in the short term. Property markets took a break from their strong year to date returns, posting a decline of -2.9% globally. Commodities were overall beneficiaries last week, with gold up 3.4% and oil up 1.2%. The broad commodities index returned 1.5%, with agriculture lagging, returning -1.0%. Among currencies the Japanese Yen was the strongest of the majors, returning 0.8% against the dollar. Most other major currencies devalued slightly against the greenback.

Source: Jim Reid, Muzinich Conference 9 October 2009

Returns to 9 October

Source: RMB Asset Management / Bloomberg / Lipper Hindsight.October 2009..

Important Notes

Disclaimer:
This document does not constitute an offer or solicitation to any person in any jurisdiction in which it is not authorised or permitted, or to anyone who would be an unlawful recipient, and is only intended for use by original recipients and addressees. The original recipient is solely responsible for any actions in further distributing this document, and should be satisfied in doing so that there is no breach of local legislation or regulation.  The information is intended solely for use by our clients or prospective clients, and should not be reproduced or distributed except via original recipients acting as professional intermediaries.  This document is not for distribution in the United States.

Prospective investors should inform themselves and if need be take appropriate advice regarding applicable legal, taxation and exchange control regulations in countries of their citizenship, residence or domicile which may be relevant to the acquisition, holding, transfer, redemption or disposal of any investments herein solicited.

Any opinions expressed herein are those at the date this material is issued. Data, models and other statistics are sourced from our own records, unless otherwise stated herein. We believe that the information contained is from reliable sources, but we do not guarantee the relevance, accuracy or completeness thereof.  Unless otherwise provided under UK law, Wealth management Group Ltd does not accept liability for irrelevant, inaccurate or incomplete information contained, or for the correctness of opinions expressed.

We caution that the value of investments in discretionary accounts, and the income derived, may fluctuate and it is possible that an investor may incur losses, including a loss of the principal invested.  Past performance is not generally indicative of future performance. Investors whose reference currency differs from that in which the underlying assets are invested may be subject to exchange rate movements that alter the value of their investments.

Our investment mandates in alternative strategies and hedge funds permit us to invest in unregulated funds that may be highly volatile.  Although alternative strategies funds will seek to follow a wide diversification policy, these funds may be subject to sudden and/or large falls in value.  The illiquid nature of the underlying funds is such that alternative strategies funds deal infrequently and require longer notice periods for redemptions.  These Investments are therefore not readily realisable. If an alternative strategies fund fails to perform, it may not be possible to realise the investment without further loss in value. These unregulated funds may engage in the short selling of securities or may use a greater degree of gearing than is permitted for regulated funds (including the ability to borrow for a leverage strategy). A relatively small price movement may result in a disproportionately large movement in the investment value. The purpose of gearing is to achieve higher returns associated with larger investment exposures, but has concomitant exposure to loss if positive performance is not achieved. Reliable information about the value of an investment in an alternative strategies fund may not be available (other than at the funds infrequent valuation points). 

Under our multi-management arrangements, we selectively appoint underlying sub-investment managers and funds to actively manage underlying asset holdings in the pursuit of achieving mandated performance objectives. Annual investment management fees are payable both to the multimanager and the manager of the underlying assets at rates contained in the offering documents of the relevant portfolios (and may involve performance fees where expressly indicated therein).

Wealth Management Group is licensed with the Hong Kong SFC for Type 9 regulated activity, Asset Management (ANM279)
Wealth Management Group PTE is registered with the Monetary Authority of Singapore (MAS) as Exempt Fund Managers
Wealth Management Group 2009