Navigating risk, reaping reward. Getting the Asset Allocation Right. Trevor Greetham Asset Allocation Director

Transcription

1 Navigating risk, reaping reward Getting the Asset Allocation Right Trevor Greetham Asset Allocation Director For Investment Professional Use Only and should not be relied upon by private investors

2 Dominant themes in the global economy Japan s earthquake, oil price shocks, Chinese tightening and the end of QE programme However a strong global growth re-acceleration, backed by US policy, remains firmly in place Overweight commodities and developed market stocks as multi-year recovery continues

3 Risk Factor 1: Japan Earthquake Nikkei and OECD Lead Indicator (199s) 1 Nikkei and OECD Lead Indicator (now) 8 USD Trillions, Nikkei Index Kobe earthquake % OECD LEI USD Trillions Nikkei Index Tohoko earthquake % OECD LEI NIKKEI 5 stock average - Price index OECD lead indicator, 6m roc%, annualised (RHS) Source: Datastream, 15/1/199-15/1/1999 NIKKEI 5 stock average - Price index OECD lead indicator, 6m roc%, annualised (RHS) Source: Datastream, 15/1/ - 15//11

4 Risk Factor : An oil-induced slowdown in 1? $/barrel Real oil price as a lead indicator for GDP growth % Real Oil Price, $/barrel Inverted axis G7 Real GDP % (RHS) Source: Datastream, oil price to Q1 11, GDP to Q3 1.

5 Risk Factor 3: Chinese tightening confirms global strength 7 Index Is Chinese tightening a risk or just a confirmation of strength? Commodity Index (LHS) Global Equity Index (LHS) China Reserve Ratio % (RHS) % Source: Datastream, /3/11.

6 Risk Factor : The end of QE programme The QE and the economic cycle ISM survey: new orders - inventories (WHITE) S&P s 5 Index (GREEN) US Money Supply, M1 (BLUE) OECD Lead Indicator, LEI (RED) Source: Datastream, S&Ps 5Index to 15//11, ISM survey and US M1 to 15/3/11, OECD to 15//11,.

7 ..But the US policy is pro-growth THE WHITE HOUSE Washington, June 16, 1 Barack Obama THE EURO ZONE Brussels, June, 1 Angela Merkel Dear G Colleagues: we should reaffirm our unity of purpose to provide the policy support necessary to keep economic growth strong. Someone has to be wrong! Yesterday, during a phone call with Barack Obama, I told him how important budgetary consolidation was. Note: This represents the opinion of the portfolio manager.

8 We are in the Overheat stage of the Cycle Inflation Growth BONDS STOCKS` Reflation Recovery Rate hikes Overheat COMMODITIES Stagflation CASH Rate cuts July 8 Mar 9 Aug 9 May 1. Sep 1 Source: FIL Limited. For illustrative purposes only. This represents the opinion of the portfolio manager.

9 Analysis over Thirty-Eight Years % U.S. Headline CPI % (RHS) U.S. Output Gap % (LHS) % Reflation Recovery Overheat Stagflation Source: FIL Ltd (proprietary calculations for the phases of the economic cycle). Datastream: Q1 11 US Output Gap, Q 1 US Headline CPI.

10 A Clear Pattern Emerges Bonds Stocks Commodities Cash Reflation 1.6% -.1% 5.3% 3.% Recovery 6.7%.7% -8.%.1% Overheating.% 8.1% 18.9%.8% Stagflation -1.1% -1.9% 9.6% -.8% Average Return 3.% 5.%.% 1.3% Source: FIL, April 1973-January 1. This represents the opinion of the portfolio manager. Note: A back test is a simulated exercise for illustration purposes only. It is not based on an actual portfolio s performance and should not be relied upon. Past performance is not a reliable indicator of future results. In this back test figures show annualised geometric average US$ total returns in real terms using the ML U.S. Treasury/Agencies Master index for bonds, S&P 5 Composite for stocks, GSCI Total Return for commodities and 3-Month T-Bills for cash.

11 Global lead indicators are strong 3 1 Growth Score (FWD 6M) 6 G7 Real GDP Growth YoY % (RHS) % Source: Fidelity. Data to Q 1. The Lead Indicator (global growth score) is a diffusion index taking into account central banks stance, OECD leading indicators, business confidence and consensus GDP forecasts. It is pushed forward 6 months on this chart. This represents the opinion of the portfolio manager.

12 Global inflation indicators point upwards 3 Global CPI Score (FWD 6M) G7 Headline CPI (%, RHS) 6 5 % Source: Fidelity. Q1 199 Q 1. *The Lead Indicator (global inflation score) is a diffusion index taking into spare capacity, energy prices in local currency, pricing power surveys and consensus CPI forecasts. It is pushed forward 6 months on this chart. This represents the opinion of the portfolio manager.

13 The Investment Clock GROWTH MOVES ABOVE TREND INFLATION RISES RECOVERY OVERHEAT March 11 March 9 REFLATION STAGFLATION INFLATION FALLS GROWTH MOVES BELOW TREND Source: Fidelity as at March 11. For illustrative purposes only. This represents the opinion of the portfolio manager.

14 Current asset allocation positioning Underweight Neutral Overweight Equities Commodities Property Bonds Cash Source: Fidelity as at April 11.

15 Global growth favours commodities and stocks Overweight commodities, underweight bonds Overweight commodities and underweight government bonds Overweight technology, resources and industrials within equities Monitor events closely: Risks of a slowdown will increase later in the year Source: FIL Ltd. This represents the opinion of the Portfolio Manager as of April 11

16 Important information This information is for Investment Professionals only, and should not be relied upon by private investors. This document may not be reproduced or circulated without prior permission. No statements or representations made in this document are legally binding on Fidelity or the recipient. FIL Limited, established in Bermuda, and its subsidiaries are commonly referred to as Fidelity International. Fidelity, Fidelity International and the Pyramid logo are trademarks of FIL Limited. Issued by FIL Investments International, authorised and regulated in the UK by the Financial Services Authority. CSO11/911 ISG5 For Investment Professional Use Only and not for general public distribution 16