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Paris 2012 02 09 handout Paris 2012 02 09 handout Presentation Transcript

  • Predicting the future: you know more than you thinkProf. Dr. Klaus W. WellershoffFebruary, 2012
  • Lessons learned…... from 12 years as chief economist of a large bank:•  Lesson I: We know little about the future!•  Lesson II: What we know is very powerful!•  Lesson III: We spend a lot of time and effort to forget what we know! 2
  • Things we know as money managers, …... but rarely reflect on:•  Low interest rates imply: •  lower returns on all asset classes •  asymmetric expected returns •  changed correlation patterns.•  Forecast errors exist and the investment process needs to reflect this. 3
  • A low interest rate worldImpact of low interest rates on expected risk/return trade off Private Equity Traditional view Consensus today Commodities Wellershoff & Partners view Equities Expected Return Real Estate Corp. Bonds Govt. Bonds Money Market Systematic Risk Source: Wellershoff & Partners 4
  • Forecast Accuracy Equity return forecast errors 30 Annualisierter Prognosefehler (RMSE)Annualised Root Mean Square Forecast Error 20 10 0 1 Month Monat 1 Quarter 1 Quartal 1 Year Jahr Years 3 Jahre Years 5 Jahre Years 10 Jahre Source: Goyal und Welch (2008), Wellershoff & Partners Source: Thomson Datastream, 5
  • Traditional portfolio construction Standard optimization procedure 100% Portfolio Composition, Share of Asset Classes 90%Portfolio composition 80% 70% 60% 50% 40% 30% 20% 10% 0% 0.5% 1.1% 2.0% 3.0% 4.0% 5.0% 6.5% 8.4% 10.7% 14.9% Systematic Risk Source: Wellershoff & Partners 6
  • Modern portfolio construction Robust portfolio optimisation that reflects forecast errors 100% Portfolio Composition, Share of Asset Classes 90%Portfolio composition 80% 70% 60% 50% 40% 30% 20% 10% 0% 0.5% 1.7% 3.3% 5.0% 6.9% 8.9% 11.2% 13.9% 16.9% 20.7% Systematic Risk Source: Wellershoff & Partners 7
  • Ecoonomic CertaintiesWe know that...•  ... trend growth in this decade will be significantly lower than in the last. 8
  • Future trend growth: WorldOptimistic scenario 3 60 Growth contribution of population growth Investment-to-GDP ratio 2 50Percentage points 1 40 Percent 0 30 -1 20 -2 USA Japan Germany 10 China India Switzerland -3 0 1950 1970 1990 2010 2030 1950 1970 1990 2010 2030 10 12 Growth contribution of factor productivity Trend growth 8 10Percentage points 6 8 Percent 4 6 2 4 0 2 -2 0 1950 1970 1990 2010 2030 2000–09 2010–19 2020–29 2030–39 Source: Penn World Tables, Wellershoff & Partners
  • Probability of recessionMajor economies: 2010 - 2019 40 1990s 2010s Recession probability per year 30 20 10 0 UK US Germany Switzerland Japan Source: Penn World Tables, Wellershoff & Partners 10
  • Economic CertaintiesWe know that...•  ... trend growth in this decade will be significantly lower than in the last.•  ... government revenue and spending eventually will have to be the same. 11
  • U Budget deficit as % of GDP ni te d 10 5 0 5 10 15 St U a ni I te te rela s d J n Ki ap d N ngd an ew G o Zeree m a ce Fiscal policy Fr lan Po an d Sl rtu ce ov S ga ak Slo pa l R ve in ep ni a Poubli C lan c a H na d un d a Augar D s y Deficit in percent of GDP in 2011 Euenmtria ro ar k Tuare C rk a ze Is ey ch Be ra R lgi el e u N pub m et he It lic rl al Esandy Au to s s nia Ic tral G el ia e an Lu Frma d x in n Swem lan y itz bou d er rg la Ko nd Sw r e N ed a or en w ay Source: OECD, Wellershoff & Partners12
  • Percentage points change in deficit/GDP ratio 2009 12 0 5 10 15 20 25 Ire la nd G re e ce Sp Sl a o Po in r Fiscal policy va k tuga R ep l ub lic N et U he K rla n Be ds lg iu m Fr an ce Ita Change in deficit/GDP-ratio since 2009 Fi ly nl a Sl nd ov e G nia er m an Au y Lu str xe ia m bu rg Ja pa Es n to ni a U S Source: OECD, Wellershoff & Partners13
  • Fiscal policyStability of debt/GDP-ratios 12 Budget Deficit Nominal GDP Growth 9 Percent of GDP 6 3 0 3 Switzerland Eurozone UK Japan US Source: OECD, Wellershoff & Partners 14
  • Economic CertaintiesWe know that...•  ... trend growth in this decade will be significantly lower than in the last.•  ... government revenue and spending eventually will have to be the same.•  ... there is simply too much debt around. 15
  • Real interest ratesEx ante real interest rates from inflation protected bonds 8 Nominalzins 7 Realzins Inflationserwartung 10 Jahreszinsen USA in % 6 5 4 3 2 1 0 01/02 01/04 01/06 01/08 01/10 01/12 date Source: Thomson Reuters Datastream, Wellershoff & Partners
  • Economic CertaintiesWe know that...•  ... trend growth in this decade will be significantly lower than in the last.•  ... government revenue and spending eventually will have to be the same.•  ... there is simply too much debt around.•  ... inflation forecasting does not work. 17
  • UncertaintiesForecast errors for CPI inflation over different time horizons 2.5 US Switzerland 2.0 RMSE of forecast error 1.5 1.0 0.5 0.0 3 Months 6 Months 12 Months 18 Months 24 Months Source: Wellershoff & Partners 18
  • Economic CertaintiesWe know that...•  ... trend growth in this decade will be significantly lower than in the last.•  ... government revenue and spending will have to be the same eventually .•  ... there is simply too much debt around.•  ... inflation forecast models don‘t work at the moment.•  ... GDP forecasts don‘t work at all, but leading indicators do. 19
  • UncertaintiesForecast errors for real GDP growth over different time horizons 2.0 German Institutes 1998 2008 US Institutes 1990 2004 Root mean square error of forecast 1.5 1.0 0.5 0.0 Current 6 Months 12 Months 18 Months 24 Months Trend Time horizon of forecast Source: Jochum (2009) & Patton and Timmerman (2010), Wellershoff & Partners 20
  • Investment ClimateLeading W&P-Indicator 40 40 USA Today EurozoneNumber of months Number of months 30 3 months ago 30 6 months ago 20 20 10 10 0 0 3 2 1 Mean 1 2 3 3 2 1 Mean 1 2 3 40 40 Germany SwitzerlandNumber of months Number of months 30 30 20 20 10 10 0 0 3 2 1 Mean 1 2 3 3 2 1 Mean 1 2 3 40 40 Japan ChinaNumber of months Number of months 30 30 20 20 10 10 0 0 3 2 1 Mean 1 2 3 3 2 1 Mean 1 2 3 Source: Thomson Datastream, Wellershoff & Partners 21
  • Consumption ClimateLeading W&P-Indicator 50 50 USA Today EurozoneNumber of months Number of months 40 3 months ago 40 6 months ago 30 30 20 20 10 10 0 0 3 2 1 Mean 1 2 3 3 2 1 Mean 1 2 3 50 50 Germany SwitzerlandNumber of months Number of months 40 40 30 30 20 20 10 10 0 0 3 2 1 Mean 1 2 3 3 2 1 Mean 1 2 3 50 50 Japan ChinaNumber of months Number of months 40 40 30 30 20 20 10 10 0 0 3 2 1 Mean 1 2 3 3 2 1 Mean 1 2 3 Source: Thomson Datastream, Wellershoff & Partners
  • Economic CertaintiesWe know that...•  ... trend growth in this decade will be significantly lower than in the last.•  ... government revenue and spending will have to be the same eventually .•  ... there is simply too much debt around.•  ... inflation forecast models don‘t work at the moment.•  ... GDP forecasts don‘t work at all, but leading indicators do.•  ... purchasing power parity works in the long run. 23
  • Purchasing power parity (PPP) in the long-runProducer prices in USD Source Taylor & Taylor (2004) 24
  • Currencies: EURGBPActual and purchasing power parity (PPP) 1 EURGBP EURGBP PPP Neutraler Bereich .9 .8 .7 .6 1985 1990 1995 2000 2005 2010 Source: Thomson Datastream, Wellershoff & Partners 25
  • Currencies: EURUSDActual and purchasing power parity (PPP) 2.20 EURUSD EURUSD PPP Neutraler Bereich 1.80 1.40 1.00 0.60 1985 1990 1995 2000 2005 2010 Source: Thomson Datastream, Wellershoff & Partners 26
  • Currencies: EURJPYActual and purchasing power parity (PPP) 250 EURJPY EURJPY PPP Neutraler Bereich 200 150 100 50 1985 1990 1995 2000 2005 2010 Source: Thomson Datastream, Wellershoff & Partners 27
  • Currencies: EURCHFActual and purchasing power parity (PPP) 2 EURCHF EURCHF PPP Neutraler Bereich 1.8 1.6 1.4 1.2 1985 1990 1995 2000 2005 2010 Source: Thomson Datastream, Wellershoff & Partners 28
  • Simple Conclusions•  Expect to see •  weak trend growth •  the end of the trend of falling interest rates •  more fiscal problems – debt crisis and/or fiscally induced slow-downs•  Change your asset allocation •  in all likelihood your strategy is wrong!•  Remember the Alien Song! 29
  • Legal DisclaimerThis report has been prepared and published by Wellershoff & Partners Ltd. This publication is for your informationonly and is not intended as an offer, or a solicitation of an offer, to buy or sell any investment or other specificproduct. The analysis contained herein is based on numerous assumptions. Different assumptions could result inmaterially different results. Certain services and products are subject to legal restrictions and cannot be offeredworldwide on an unrestricted basis. Although all information and opinions expressed in this document wereobtained from sources believed to be reliable and in good faith, no representation or warranty, express or implied,is made as to its accuracy or completeness. All information and opinions indicated are subject to change withoutnotice. Some investments may not be readily realizable if the market in certain securities is illiquid and thereforevaluing such investments and identifying the risks associated therewith may be difficult or even impossible.Trading and owning futures, options, and all other derivatives is very risky and therefore requires an extremelyhigh level of risk tolerance. Past performance of an investment is no guarantee for its future performance. Someinvestments may be subject to sudden and large falls in value and on realization you may receive back less thanyou invested or may be required to pay more. Changes in foreign exchange rates may have an adverse effect onthe price, value or income of an investment. We are of necessity unable to take into account the particularinvestment objectives, financial situation and needs of our individual clients and we recommend that you takefinancial and/or tax advice as to the implications (including tax liabilities) of investing in any of the productsmentioned herein. This document may not be reproduced or circulated without the prior authorization ofWellershoff & Partners Ltd. Wellershoff & Partners Ltd. expressly prohibits the distribution and transfer of thisdocument to third parties for any reason. Wellershoff & Partners Ltd. will not be liable for any claims or lawsuitsfrom any third parties arising from the use or distribution of this document. This report is for distribution onlyunder such circumstances as may be permitted by applicable law. 30
  • Kontakt InformationContactWellershoff & Partners Ltd.Zürichbergstrasse 388044 ZürichT +41 44 256 80 40 // F +41 44 256 80 44info@wellershoff.ch // www.wellershoff.ch