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Is Deflation Coming to Europe?
How to Invest for Retirement
Chris Hills – Chief Investment Officer
October 2014
Our role on behalf of clients
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Investment
approach
“To invest successfully over a lifetime requires a sound intellectual
framework for making decisions and the ability to keep emotion from
corroding that framework.”
Warren Buffett 1974
Economic conclusions
3
and implications for investors
•
Economic growth good in US/UK, sluggish in Europe/Japan, slowing in the emerging markets
•
Debt levels, both sovereign and consumer, slow to fall
•
Corporate balance sheets and profitability encouraging
•
Inflation not currently a problem,
•
Central Banks need reflation so will remain very accommodating
•
The search for returns that exceed cash without volatility remains testing
Current Risk Position
4
Top 5 Potential Icebergs
1. Resurgence of Euro Crisis, insufficient growth
2. Deterioration in Russia/Ukraine
3. China Financial Crisis
4. Middle East War
5. Hong Kong politics and mainland reaction
? Ebola?
4
5
PMI Surveys suggest there is little coordinated growth...
Source – UBS
5
When will rates go up?
6
Source: Barclays
Inflation – an enemy in waiting?
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Investment
approach
“Inflation is as violent as a mugger, as frightening as an armed robber and
as deadly as a hit man.”
Ronald Reagan
“Inflation is the one form of taxation that can be imposed without legislation.”
Milton Friedman
“By a continuing process of inflation, governments can confiscate, secretly
and unobserved, an important part of the wealth of their citizens.”
JM Keynes
“Economic history is largely a history of inflation, usually inflation that is
engineered by government for the gain of government.”
Friedrich von Hayek
Forcing the ECBs hand...
Inflation is weak and still falling...
...and so are core bond yields
G E R M A N Y B E N C H M A R K 1 0 Y R Y IE L D
2 .2 0
2 .0 0
1 .8 0
1 .6 0
1 .4 0
1 .2 0
1 .0 0
0 .8 0
O
N
D
J
F M
A
M
J
J
A
S
O
N
D
J
F M
A
M
J
J
A
S
O
S o u rc e : D A T A S T R E A M
...and the currency has finally weakened...
110
ECB HAS EVENTUALLY RESPONDED TO W EAKER YEN
105
100
95
90
85
80
75
2011
2012
E U R O T R A D E W E IG H T E D
J A P A N Y E N T R A D E W E IG H T E D
2013
2014
S o u rc e : D A T A S T R E A M
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Japan has taken up the slack; will the ECB reverse its shrinkage?
11
Expected inflation in EU 5yr/5yr fwd
A bounce since ECB’s last comments
12
Government bond yields – where to from here?
13
No income growth to protect against higher inflation
U.S. Long-Term Government Bond Yield & Cycles, %
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14
12
10
8
6
4
2
0
1871.01
1887.09
Source: William Blair Intl. Ltd.
1904.05
1921.01
1937.09
1954.05
1971.01
1987.09
2004.05
Characteristics of different asset classes
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and their appropriateness for your objectives
Income
Income
Growth
Capital Gains
Predictability
Equities



XX
Governm ent Bonds
X
XXX
X

Corporate Bonds

XXX
?

?



Hedge Funds
XXX
XXX

Infrastructure Funds




Com m odity Funds
XXX
XXX

XXX
XX
XX

XXX
Com m ercial Property
Private Equity
despite recent news

probably
Defining objectives
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What sort of investor are you?
UNFORTUNATE
DEFENSIVE
ADVENTUROUS
IDEALIST
Uncertainty
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Measured by the volatility of annual returns
•
Low volatility is ideal, but often at the expense of returns
•
Less critical in savings in build-up phase due to “pound-cost-averaging”
•
Much more relevant in drawdown phase
•
Attempt to underpin total returns with income
How have the main asset classes performed?
classes stack up?
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Data 1925-2013
30
25
Uncertainty
Unfortunate
Adventurous
20
Global Equities
Corporate
Bonds
15
10
Government Bonds
Defensive
Property
Idealist
5
Cash
0
0
2
4
6
Annual Return % above inflation
Source: Barclays Capital, CSFB, Deutsche Bank
8
10
Risk versus return
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Including the alternatives
Commodities
30
Private Equity
Unfortunate
Volatility
25
Adventurous
20
Global Equities
Corporate Bonds
15
Hedge Funds
Government Bonds
10
Property
Defensive
Idealist
Period of data 1925-2013
•
Government Bonds
•
Corporate Bonds
•
Global Equities
•
Property
•
Cash
Commodities since 1966
Private Equity since 1986
Hedge Funds since 1992
Infrastructure Funds since 2005
Infrastructure
5
Cash
0
0
2
4
6
Annual Return % above inflation
Source: Barclays Capital, CSFB, Deutsche Bank
8
10
The importance of time horizon
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Probability of returns at least matching inflation over various time horizons
1925-2013 data
120.0%
100.0%
80.0%
UK Equities
OS Equities
Gilts
60.0%
Corp Bonds
Property
Cash
40.0%
20.0%
0.0%
1year
3years
5years
10years
Source Investec Wealth & Investment
20years
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Conclusionss
Determine a time horizon and taper your volatility as you approach it
Agree the pecking order of your needs: capital growth, certainty, income, income growth
Understand what each element in your portfolio is contributing to these needs
Appreciate the difference between income and capital gain as elements of return
Be overweight “real assets” such as equities and property, at the expense of bonds
Apply common sense
Contact details
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Chris Hills
Chris Hills
Chief Investment Officer
Telephone:
Email:
020 7597 1234
[email protected]
Chris splits his time between the internal task of ensuring that the firm plays to its collegiate
strengths in research and portfolio management, together with the external tasks of ensuring
the firm receives the best input from its suppliers amongst the large investment banks and
asset management organisations and presenting the firm‘s thoughts about current markets to
a range of external clients and interested advisers.
In his capacity as Chair of the firm’s coverage of collectives, he has been responsible for
leading its efforts to develop relationships with external sources of business.
With over 40 years investment management and industry experience, Chris assists clients in
developing the appropriate investment benchmarks and policies to meet their requirements.
Investec Wealth & Investment Limited is authorised and regulated by the Financial Conduct Authority and is a member of the
London Stock Exchange and the Investec Group.
Please note that the value of investments and the income derived from them may fluctuate and investors may not receive
back the amount originally invested. Past performance is not necessarily a guide to the future. Current tax levels and reliefs
may change and the investments and investment services referred to may not be suitable for all investors.