Becoming less negative on Europe
Markets are unimpressed today by Europe finally agreeing to bail out Greece for the second time, with European stocks down -0.6% on the day.
But here’s some encouraging news: Credit Suisse has become less negative on Continental European stocks for the first time in almost two years.
The bank has moved to benchmark weighting from 5% underweight for a currency hedged portfolio.
Why?
We think that the ECB is increasingly dovish (and we would not rule out another three-year LTRO after the one on 29 February), which should help weaken the euro; and we now only expect a 1% decline in European credit (down from our previous estimate of a 5% decline); relative to other regions, economic momentum and earnings momentum have troughed. But there is not enough for us to raise weightings to overweight.
In CS’s earnings momentum scorecard, Europe ex-UK has moved up one place, off the bottom of the list, with a total score of -0.1 — above Japan’s -1.2.
On previous occasions when relative Continental European earnings revisions have troughed, Europe ex UK equities have on average outperformed 75% of the time and when they did outperform, it was by 3–5% in the next three to six months (in local currency terms).
Currency hedging — should we bother?
Currency hedging — should we bother?
Maybe not as much as you think, if we are talking purely from a equity return point of view — according to the new research that analysed 112 years of the financial assets history released by Credit Suisse and London Business School this week.
Exchange rates are volatile and can significantly impact portfolios — but one can never predict if currency moves erode or enhance returns. Moreover, hedging costs (think about FX overlay managers, transaction costs, etcetc).
For example, the average annualised return for investors in 19 countries between 1972 (post-Bretton Woods) to 2011 is 5.5%, hedged or unhedged. For a U.S. investor, the figures were 6.1% unhedged or 4.7% hedged (this may be largely because only two currencies — Swiss franc and Dutch guilder/euro — were stronger than the U.S. dollar since 1900).
“The impact of hedging on returns (as opposed to risk) is a zero sum game. The profit a German investor makes on Swiss assets if the franc appreciates is offset by the loss the Swiss investor incurs on German assets… Averaged over all reference currencies and countries, the mean return advantage to hedging both equities and bonds was zero, both over 1900-2011 and 1972-2011.
LBS’ Elroy Dimson and Paul Marsh, who presented the report at a briefing this week, were keen to emphasise hedging has its use. Mainly, it does reduce volatility, hence risk.
However, the study showed that the benefits of hedging on volatility did shrink; On average, hedging reduced equity volatility by 15% over 1900-2011, but by only 7% over 1972-2011. For bonds, the figures were 36% and 30%.
from Summit Notebook:
Geneva is for wealth management
Even for an American who's not wealthy, Geneva has a reputation as a global centre for wealth management - the place the world's rich come to stash their money and (they hope) make it grow.
But you don't necessarily expect it to be so aggressive -- after all, the rich tend to be demure when it comes to their banking.
Imagine one reporter's surprise, then, on arriving in the airport in Geneva and seeing bank ads everywhere. Think of the casino adds in Las Vegas's McCarron Airport or the technology ads in San Jose's Mineta Airport: it's the exactly the same in Geneva, only with wealth managers.
Look left - there's UBS. Look right - there's Julius Baer. Look up in the baggage queue - there's a Swiss bank that emphasises a focus on the Arab world. A complete unscientific guesstimate suggests the display ads in the terminal run about 75 percent wealth management and 25 percent fine watches. (No surprise that every other storefront in the Ville Centre area of Geneva has watches on offer.)
There is one plus to all of the bank ads in the airport for the less wealthy though. Tell your cab driver to head toward their addresses and you're likely to find the city's best cafes.
One Minute Manager
One minute, one manager. An occasional word about what to expect from the economy and financial markets. Today is Giles Keating, global head of research at Credit Suisse Private Bank.
It is time, Keating says, to prepare for a bottoming out of the global economic downturn.
How low will hedge funds go?
How bad will hedge funds’ year-end performance figures look?
According to Credit Suisse/Tremont, funds fell 6.30 percent in October after a 6.55 percent drop in September, taking losses for the first ten months to 15.54 percent.
Seven strategies are now nursing double-digit losses, with only two — managed futures and dedicated short bias — in positive territory.
Even global macro, which bets on the likes of global equity markets, world currencies, sovereign debt and commodities, is now back in the red. These funds are down 7.10 percent after substantial losses in September and October.
Many investors who have not already pulled out their money will be keenly watching year-end figures as they review their portfolios.
The last time hedge funds lost money over a calendar year, according to Hedge Fund Research, was in 2002 when they fell 1.45 percent.
The questions for hedge funds are how bad will it look in 2008, and will it be any better in 2009?
