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Fidelity’s Trevor Greetham, Portfolio Manager and Asset Allocation Director in the Investment Solutions Group, told the MIC 2011 audience that he’s pleased to be able to set the record straight on asset allocation. He starts by highlighting that if one has a lot of volatility and there’s a low correlation between asset classes then diversification really works. The last few years have been difficult for tactical asset allocation but there’s also been a lot of opportunity, he says. The environment he fears more is one where equities, bonds and commodities all yield 7% and there’s nothing to differentiate between them.
Greetham addresses some of the dominant themes in the global economy. Following mention of the Japan earthquake, he moves on to the risk of an oil-induced slowdown in 2012 and poses the real oil price as a lead indicator for GDP growth. The 2008 crisis was a lot to do with $145 oil, he says, not only the financial crisis and Lehman’s collapse. It’s very hard to build a story at the moment for a strong 2012, but that doesn’t mean things won’t remain strong this year, he adds.
Risk factor number three is Chinese tightening, but rather than pose a threat this in fact confirms the global strength, Greetham says.
Number four on his list is the end of QE2 and he notes that some lead indicators are beginning to look a bit ‘peaky’ particularly US new order inventories, which are suggesting weak sales and could be indicating a downturn.
But Greetham notes that the US is pro-growth and he’s strongly supportive of approach. There are major differences in opinion between Barack Obama and leading forces in Europe, he notes, with the US expanding fiscal policy, while Europe is contracting it very strongly. We should be thankful that US has loose monetary policy as it’s underpinning the recovery in Europe, he says.
As a tactical allocator, one cannot wait six months to confirm turning points in the cycle, so Greetham explains how, looking back over history, he’s plotted how different assets usually perform at different points of the cycle. He notes of course that there will always be problems with this approach but also says that hindsight has its benefits too.
A clear pattern emerges, he says: during the ‘reflation’ stage, bonds tend to offer the best returns, at almost 11% real return (return above inflation); during recovery, stocks are the most attractive and offer almost 21% on average across 38 years’ of data; during the overheating phase—the phase we’re currently in, Greetham says—commodities on average offer near to 19%; and during the stagflation phase, he’d opt for cash with negative returns of close to 1%. He notes, however, that in this final phase, commodities are offering almost 30% but he’s not comfortable investing in commodities when you know that global demand is slowing, especially given that during the next phase—that of reflation again—they’re going to offer a c.35% drop.
All this is obviously based on looking backwards, Greetham highlights, which only tells us what usually happens.
In conclusion, Greetham’s outlook is that the end of QE2, the higher oil price, monetary tightening in Europe, as well as fiscal tightening in Europe, will all weigh on us later this year. As such, in around six months’ time, he expects he may b e reversing his overweight in commodities and instead selling commodities and stocks.
