Yesterday’s much worse than expected PMI data from the euro zone has pushed the Citigroup economic surprise index for the region below zero.
Germany has been one of the strongest performing equity markets this year but is still in the middle of the pack compared to other European countries on valuation.
U.S. new home sales slipped 1.6 percent to a seasonally adjusted 313,000-unit annual rate. Economists polled by Reuters had forecast sales at a 325,000-unit rate in February.
Active vs passive investment is a long-lasting debate: active funds will tell you they deliver alpha (extra returns), but for a fee. Passive investment simply tracks the index so it’s cheaper. The risk is you may underperform your peers.
New research from Thomson Reuters Lipper throws up an interesting twist in the debate: It found that less than half of the actively managed mutual funds in Europe outperformed their benchmarks over the past 20 years.
The proportion of funds that outperformed varied from 26.7% in 2011, 40% over 3 years and 34.9% over the past 10 years. While bond funds fare better over 3 years with 45.4% outperforming, the proportion tailed off dramatically over the 10-year period, falling to 16.2%.
It’s the economy, stupid. Or isn’t it?
Brent crude has risen 15 percent since the end of last year, focusing people’s minds on the potential this has to choke off the recovery in world growth. But some reckon it is the recovery that’s at least partly responsible for the surging oil prices — economic data from United States and Germany has been strong of late. There are hopes that France and the United Kingdom may escape recession after all. And growth in the developing world has been robust.
Geopolitics of course is playing a role as an increasing number of countries boycott Iranian oil and fret over a possible military strike by Israel on Iran’s nuclear installations. But Deutsche Bank analysts point out that world equity markets, an efficient real-time gauge of growth sentiment, have risen along with oil prices.
Their graphic (below) shows a remarkably close relationship between oil prices and the S&P 500. Click to enlarge
Thursday’s crude oil price surge to its highest in almost 4 years (apparently due to a subsequently denied report from Iran of a Saudi pipeline explosion…phew!) illustrates just how anxious and dangerous the energy market has become for world markets yet again this year and HSBC on Friday spotlighted its threat to the global economy and asset prices in a note entitled “Oil is the new Greece”. The point of the neat headline hook was a simple one:
With Greece disappearing, at least temporarily, from the headlines, investors have quickly found a new source of anxiety thanks to the recent surge in oil prices
Just like many investors and strategists over the past month, HSBC rounded up its various assessments of the impact and fallout from higher oil prices, stressing the biggest risk comes from supply disruptions related to the Iran nuclear standoff and that any major political upheaval in the region would threaten significant crude spikes. “Think $150 or even $200 a barrel,” it said. It reckoned the impact on world growth, and hence the broader risk horizon depended on the extent of this supply disruption and the durability and scale of the price rise. Worried equity investors should consider hedging their portfolios by overweighting the energy sector. Obvious winners in currency world would be the Norwegian crown, Malaysian ringitt, Brazil’s real and Russia’s rouble, the bank’s strategists said. The most vulernable units are India’s rupee, Mexican and Philippines pesos and Turkey’s lira.
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.
How are hedgies performing this year?
The latest performance data from Nice-based business school EDHEC-Risk Institute shows various hedge funds strategies returned on average 1.46% in January, far behind the S&P 500 index which gained almost 4.5%. Hedge Fund Strategies Jan 2012 YTD* Annual Average Return since January 2001 Annual Std Dev since January 2001 Sharpe Ratio Convertible Arbitrage 2.22% 2.2% 6.5% 7.3% 0.34 CTA Global 0.49% 0.5% 6.6% 8.6% 0.30 Distressed Securities 3.28% 3.3% 10.3% 6.3% 1.00 Emerging Markets 4.55% 4.5% 10.5% 10.7% 0.61 Equity Market Neutral 1.01% 1.0% 4.5% 3.0% 0.16 Event Driven 2.95% 2.9% 7.8% 6.1% 0.62 Fixed Income Arbitrage 1.33% 1.3% 6.0% 4.4% 0.46 Global Macro 2.05% 2.1% 7.0% 4.5% 0.68 Long/Short Equity 3.36% 3.4% 5.3% 7.3% 0.17 Merger Arbitrage 1.03% 1.0% 5.4% 3.3% 0.43 Relative Value 1.95% 1.9% 6.4% 4.8% 0.51 Short Selling -6.85% -6.9% 0.3% 14.1% -0.26 Funds of Funds 1.65% 1.7% 3.6% 5.1% -0.07
Emerging markets strategy was the best performing, with gains of 4.55%. Interestingly, this is less than half of how the benchmark MSCI EM index performed (up more than 11 percent in the same period).
Corporate bonds are back in vogue this year but how sustainable is it?
Just to highlight how bullish people have become, see following comments from fund managers:
“We do see scope for 2012 to deliver narrower corporate credit spreads and that will be the major positive contributor to fixed income returns this year.” – Chris Iggo, CIO Fixed Income, AXA Investment Managers)
“Corporate bonds should be a major source of performance for the bond component of Carmignac Patrimoine (fund) in 2012.” – French asset manager Carmignac Gestion
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 an
d Dutch guilder/euro — were stronger than the U.S. dollar since 1900).
UK private bank Coutts (established in 1622, the year of the Glencore Massacre and two years before the Bank of England was founded) has been very bearish.
It still attaches a high, 25 percent chance to a partial or complete euro zone breakup and has been recommending its investors to position very defensively.
The chart below shows their base-case assumptions of S&P 500 index at 1,300 (about 3% below the current level), along with best and worst case scenarios.
Indian equities are among the best emerging markets performers this year, with the Mumbai market having posted its best January rise since 1994. That’s quite a reversal from last year’s 24 percent slump. The bet is faltering economic growth will force the central bank to cut interest rates from a crippling 8.5 percent. So, how safe is the rally?
Some conditions are already in place. Valuations look decent after last year’s drop. There has been a surge in global investors’ appetite for emerging market assets. So Apurva Shah, who helps manage $600 million at the BNP Paribas Mutual Fund in Mumbai, expects positive returns from Indian stocks this year. But for a decent rally to be sustained, interest rates have to fall in order to kickstart faltering growth, he says.
The risk is really the assumption that interest rates and inflation are actually on the way down. We’ve seen the first leg of that happening, but it’s just the beginning. Rates are still way too high. To trigger off any real revival in economic growth they need to fall a lot more.
