issue SEVEN | june 2011
Two years on: opportunities and
risk in a post crisis world
Gideon Rachman
Zero-sum world: politics, power and prosperity after the fall p4
Olivier Ginguené
Are we truly in a post-crisis world? p7
Sir Chris Llewellyn-Smith
Nuclear matters p14
Ilian Mihov
Emerging markets: trends, risks, uncertainties
and opportunities p17
Rolf Banz
Standard asset allocation is no panacea p22
Sébastien Eisinger
Overcoming fundamental flaws in bond indices p24
Renaud de Planta
Closing remarks from
‘the paranoids’ paranoid’ p27
Joël de Rosnay
How to live better for longer p29
Foreword
Crises and choice
This Pictet Report, based on our conference in The Hague,
concentrates on investment opportunities in a post-crisis
world. The sub-prime crisis blew up in mid-2008, but it
was only when it exploded that—rather like nuclear power—
some investors discovered exactly what they had bought.
When Greece ran into trouble in February 2010, we no longer
had the theory but the reality of a sovereign debt crisis.
In April 2010, the Eyjafjallajökull volcanic ash
cloud forced us to hold our first virtual Reaching Higher
Ground, by video and phone conference. By November the
sovereign crisis had spread across Europe, and finally came
the Arab spring—if we can still call it that—and Fukushima.
All that in just two and a half years. It’s clear that we are
immune to nothing that happens worldwide. Now that’s
true globalisation.
Pictet remains a partnership, with eight partners.
We have only one business—asset management for private
individuals and institutions. We don’t do commercial lending, mortgages or investment banking. We are still hiring
and gaining net new money.
A final word, on choice. Developments in technology
and medicine, combined with social change, give us abundant choice in some of life’s biggest personal decisions.
But the effort of obtaining enough information to make an
informed decision often outweighs the benefit of the extra
choice. Trop de choix tue le choix. In our business, without
an intimate knowledge of investment teams and processes
and a long-term perspective, it’s very difficult to make the
right investment choices. Our aim is to equip you to make
these choices.
Rémy Best
Managing Partner
Pictet & Cie
Pictet & Cie editorial team–Stephen Barber, Ninja Struye de Swielande and Olivier Capt
Design & editorial consultancy–Together Design | Rapporteur–David Buchan | Photography–Magnus Arrevad
contents
PART i: The big picture
PART ii: Interlude
Gideon Rachman
Zero-sum world: politics, power
and prosperity after the fall p4
Sir Chris Llewellyn-Smith
Nuclear matters p14
Olivier Ginguené
Are we truly in a post-crisis
world? p7
PART iii: Issues in
emerging markets
Panel One
Mixing the structural and
the cyclical p10
Ilian Mihov
Emerging markets: trends, risks,
uncertainties and opportunities p17
Panel Two
Testing opinion on
emerging markets p20
PART iv: Investment
theory and practice
Rolf Banz
Standard asset allocation
is no panacea p22
Sébastien Eisinger
Overcoming fundamental
flaws in bond indices p24
PART v: Summing up
and postscript
Renaud de Planta
Closing remarks from
‘the paranoids’ paranoid’ p27
Joël de Rosnay
How to live better for longer p29
pictet report | june 2011
two years on
3
The big picture
Zero-sum
world: politics,
power and
prosperity
after
the fall
The economic crisis has
introduced new tensions
and new rivalries into the
international system
Gideon Rachman
chief foreign affairs columnist
Financial Times
For people who have to manage funds
and think about the direction of markets,
politics is, or should be, very important.
The mega-trend of the past 30 years has been
globalisation. While we are used to thinking
of this as an economic phenomenon, to do
with more trade, more investment, it has
also been a mega-trend in politics. It required
a whole set of changes across the world to
make it possible. And it requires certain
political arrangements still to be in place
for it to continue.
Globalisation is likely to continue,
though it cannot be taken for granted.
As Rémy Best said earlier, one of the
characteristics of the world we live in is
incredible choice, consumer choice, but
also as economic freedom has spread
around the world, more people in
developing nations have more choices
in their lives, things they can do and
places they can live. Along with this
has spread political choice. Although
there is no direct connection between
economic and political freedom, it has
been noticeable that in these last 30
years markets prefer a spread in power.
So it has been an era of democracy
spreading across continents from Latin
America, to eastern Europe and large
parts of Africa.
There is increasing
anxiety that a richer,
stronger China and India
is not necessarily conducive
to a richer, stronger west
But that period is now at least under
question. My argument is that the
economic crisis has introduced new
tensions and rivalries into the international system. We have moved from
a win-win world into a world that is
looking more zero-sum. In the period
before the financial crisis, all the major
powers—India, China, the European
Union, the US—felt globalisation
was working well for them, producing political, and above all economic,
benefits. In other words, win-win.
4
part one
the big picture
But in the aftermath of the crisis,
that is being questioned in the EU
and the US, in economic and political
terms. There is an increasing anxiety that a richer, stronger China and
India is not necessarily conducive to a
richer, stronger west, and may in fact
lead to higher unemployment. The
US is questioning its own power in a
way that it has not done since the end
of the Cold War, looking at the rise
of China and concluding that there
is more than just an economic aspect
to this change. These concerns are
reflected in diplomacy, increasingly
obvious strategic competition and
debates about economics.
1978 – 1991
The age of
transformation
This period was when the globalised
world was created. Think back to 1978:
the rich capitalist world was really
quite small—essentially the US, western
Europe and Japan. In that 1978–1991
period a whole series of major countries
entered the globalised capitalist system.
In retrospect, the most significant new
entrant was the first one, in 1978 when
Deng Tsiao Ping came to power and began the process of reform and opening
in China. Then there was the transformation of Latin America, with the fall
of a series of dictatorships which also led
to opening up of economies. There was
also a resurgence of confidence in the
free market in the West with Margaret
Thatcher and Ronald Reagan, and the
creation of the European Union single
market. The dramatic transformation
of 1989 and the fall of the Berlin Wall
allowed the half of Europe that had
been shut off from the capitalist system
to rejoin the other half, and to become
part of the globalised world. Finally,
in 1991 India opened up and embarked
on economic reform. So in just 13 years
we saw a transformation of the global
economic system that, importantly,
relied on a series of political changes.
pictet report | june 2011
two years on
oping world recovered much faster.
So the dominant picture in the US
became one of a rapidly-gaining China
and of an America mired in debt and
increasingly questioning whether it
could afford the role of the world’s
sole superpower.
The US and China began to regard
each other differently. The US perceived
a change in China’s behaviour in being
more assertive militarily in the South
China Sea and taking a tougher attitude in international negotiations,
and the US has begun to think the ‘sole
superpower’ period is coming to a close.
There has been an acceleration, too, in
projections of when China will become
the world’s largest economy, perhaps
as early as 2019. US-Chinese tensions
emerge at three levels:
It was the politics that came first. The
necessary condition was for Gorbachev
to come to power in the Soviet Union,
Manmohan Singh in India, Deng Tsiao
Ping in China.
1991– 2008
The age of optimism
This was a period when all the major
powers were comfortable with the way
the world was operating, ‘buying into’
this common system of globalisation.
The Chinese recovered from the shock
of Tiananmen Square, and resumed
incredible rates of growth of nine or
ten per cent a year. India also grew in
confidence, and its growth rate shot
up. There was even an optimistic era in
the European Union, which more than
doubled in size from 12 to 27 nations
and launched the euro, which was a
sign of faith in the future. Above all,
in the US, this was an age of optimism.
With the end of the Cold War, the US no
longer had a rival superpower, gained
military confidence in the first Gulf War
pictet report | june 2011
two years on
and felt a renewed sense of economic
optimism as Japan fell away as a rival
and the US economy produced a range
of world-beating new companies.
Many Americans identified globalisation with Americanisation. They
accepted globalisation, which under
other circumstances might have seemed
rather threatening, involving as it did
the rise of big new economies, because
America was doing well economically
and ideologically. China, the feeling
was, could not be a threat because to
succeed, it would have to become a bit
like the US. Successive US presidents
argued that trade and investment was
the way to create a positive political
dynamic with China.
2008
The financial crisis
After the financial crisis, the outlook
became very different, with unemployment in the US rising to near 10 per cent,
and close to 17 per cent, by some measures, in Europe. Yet China and the devel-
Military The two countries are not
going to go to war. But there is clearly
more concern in Washington about
the Chinese military build-up. The US
is the dominant power in the Pacific,
even though this is China’s backyard
or neighbourhood. Over the long
term, the Chinese do not regard this as
a natural position. They are probably
placing their bets on American imperial over-stretch, calculating that America will not be able to afford to maintain
global military hegemony and so will
fall back. Meanwhile the countries in
the middle—Japan, Korea, Australia—
have found themselves facing two
directions. Their major military partner
is still the US, but their major trading
partner is China.
Global On a set of global climate and
macro-economic issues, the US and
China are more equally matched in
rallying international support for their
respective positions. As a result, there
is increasing risk of deadlock in international forums because neither side
is clearly the pre-eminent leader whose
word is going to set the agenda.
Bilateral The US-Chinese bilateral
argument over China’s currency has
been raging for a while. This may moderate if China lets its money appreciate.
part one
the big picture
5
But Congress has been debating the
imposition of tariffs on Chinese goods.
These protectionist impulses will not
disappear in the US, where it is questioned, even in respectable US academic
circles, whether this trading relationship with China is working well for
the US.
The EU is a microcosm
of how in good times
globalisation can create
political good feeling,
but in bad times the logic
can go into reverse
Europe
The US-China relationship is not the
only example of zero-sum logic. What
has happened in the EU is an interesting microcosm of how in good times
globalisation can create political good
feeling between nations, but how in
bad times the logic can go into reverse.
The EU single market programme
was classic globalisation, designed to
break down economic barriers with
the hope of creating positive political
spin-off. The financial crisis has put
this positive political-economic logic
into reverse. With no more joint prosperity to share, countries are arguing
about who is going to bail out whom.
Political tensions are rising in Europe.
The Germans, the Greeks, the Irish are
increasingly at each other’s throats.
Until there is a debt solution—which
Ken Rogoff suggested is some way off—
there will be a more difficult political
environment that will make it harder
to solve the economics; in other words,
a downward political-economic spiral.
has both guaranteed and profited
from. President Obama’s quite correct
insight is that the US has wasted too
much time, effort, blood and money
on the Middle East because the future
of the world will be shaped elsewhere,
in China, India, Latin America. But,
despite his best intentions, his attention has been dragged back there.
The Arab spring
This could be positive, in the sense of
restoring the narrative of the age of
optimism. If democracy were to take
root in Egypt, if there were to be political liberalisation across the Arab world,
this would be incredibly positive.
It would bring the ‘Arab exception’ to
a close, with the Arab world following
Latin America and eastern Europe on
the path from dictatorship to democracy, from stagnation to prosperity.
But if the Arab world enters a more
chaotic period, if stable democracy does
not emerge, then the post-2008 narrative will be about a weakening of US
power, influence and America’s central
role as organiser of the global system.
US influence has already taken a blow
with the fall of its ally, ex-President
Mubarak. If there were a toppling
of the Saudi regime or the pro-western regimes in the Gulf, this would
profoundly threaten the established
order in the Middle East that America
Gideon Rachman is Chief Foreign Affairs
Columnist, Financial Times. Since 2006 he has
been the Financial Times chief foreign affairs
columnist. His book, Zero-Sum World, addresses
international politics after the financial crisis.
His popular blog on the FT covers a variety
of topics from US foreign policy to European
politics and the Middle East – and ‘whatever
else happens to be in the news or catch his
attention’. Previously he spent 15 years at
The Economist, including as foreign correspondent in Washington, and as bureau chief
in Brussels and Bangkok. Rachman was also
The Economist’s deputy American editor, Asia
editor, Britain editor, and business section
editor. He began his journalistic career in 1984
with the BBC World Service. From 1987 to
1988, he was a Fulbright scholar at Princeton
University’s Woodrow Wilson School of Public
International Affairs. He was educated at Gonville and Caius College, Cambridge University.
6
part one
the big picture
pictet report | june 2011
two years on
The BIG PICTURE
Are we truly in
a post-crisis world?
A new amplitude and acceleration of risks
Olivier Ginguené
Head of Balanced and Quantitative Investment
Pictet Asset Management
I am neither a nuclear physicist, nor a specialist in geo-politics or
a chess master. I am merely an investment manager. But investing
is similar to playing chess—we also have to concentrate on the next
move, or the move after that.
What are the themes and risks likely to dominate the market
in the coming months? What is surprising today is that
all the big themes are more or less inter-related. If we are
concerned about growth–about the momentum of growth –
we do not need to be concerned about the Fed’s potentially
deflationary exit strategy; equally, if we are concerned
about the Fed’s exit strategy, then we need to be worried
about growth. Today, while the ‘double dip’ story very
much the theme of the market 6 months ago is behind
us, ahead of us is the exit strategy of the Fed, and how the
promised end of quantitative easing this June is achieved.
The second interconnection is between inflation and
geopolitical tensions. Six or 12 months ago we were very
worried about inflation, arguing that while quantitative
easing may be inflation-free for the US, it is not inflationfree for everyone. It contributes to commodity bubbles
as much of the surplus money feeds directly into inflation
in emerging markets. And here is a likely connection to
the geopolitical tensions and events we see today in the
Middle East and North Africa.
Last but not least is sovereign risk, as Ken Rogoff says
earlier. Certainly we are concerned about sovereign risk
but, if the fiscal tightening is too rapid, the outlook for
growth in debt-laden countries would be jeopardised.
Our task is to balance all these risks and the price we
pay for these risks. We remember bird flu, terrorism, subprime housing, regulation; what is different this time is the
amplitude of the risks or at least the perceived amplitude,
and how fast we have passed from one to the next. In three
months the prime risk seems to have moved from sovereign
pictet report | june 2011
two years on
to geopolitical. But whatever the risk is, it has its price.
In assessing whether a market is fairly valued, we make
a reasoned assessment in terms of sentiment, liquidity
and valuation.
Currently the market is driven by macroeconomic
factors. What is surprising is that cause seems to follow
effect; the market is supposed to be the consequence of
economic conditions, but in fact seems to precede them.
We expect 3.6 per cent growth in world GDP in 2011,
very similar to 2005 (see chart below). The difference today
is that emerging markets now contribute two-thirds of
this growth, compared with half in 2005. But the difference is not enormous and the risks are the same—the risk of
monetary tightening (the end of QE is a monetary tightening) and the rise in the oil price (the best sector in the first
quarter of 2005 was energy).
CONTRIBUTION TO WORLD GDP IN REAL TERMS
% pts
5
4
3
2
0.4
0.4
0.5
0.6
0.6
0.4
0.7
0.7
0.6
0.7
10
11
1
0
0.8
0.7
0.5
0.8
-0.9
-1
-2
-3
04
05
US
China
06
Eurozone
India
07
08
09
Japan
Other emerging
Advanced ex US, EA, JP
Source: PAM S.A. Fixed Income, CEIC; Datastream
part one
the big picture
7
The position of the business cycle is different. Now the
inventory cycle is coming to an end; the housing cycle
is as low as it can be, for various reasons; and we expect
a revival of the capital expenditure cycle. It is this capex
story that determines much of our investment policy.
We were often told that country
risk was dead, and all that mattered
was sector or regional allocation;
now it matters again
Another difference is sovereign risk. There was no talk of
sovereign risk in 2005. Now the swap spreads suggest we are
almost at the maximum level of risk. It means investors fear
the worst case–and they may well be right. True, at present
the impact of the eurozone on global growth is not significant and overall the eurozone has been resilient. But the
eurozone’s plans for the most indebted countries do not
look realistic.
So country risk matters. Ten years ago the mantra at
many international forums was that country risk was
dead, and that sector or regional allocation was everything.
The contemporary reality is very different. Even in the eurozone, the level of growth or the output gap varies hugely,
depending whether you are Spanish or German, Portuguese
or Swiss. In such circumstances it is very difficult to have
a common view.
This decoupling is also obvious in monetary policy,
with widely diverging trends in central assets and liabilities.
Country risk affects not only sovereign debt, but also equity
performance. Historically, country risk in emerging markets
has been a big factor, and the divergence in stock performance considerable–for instance in 2010, China rose only 5 per
cent while Thailand was up more than 50 per cent. But this
kind of diversity was abnormal in developed markets until
the sovereign debt crisis struck; it has hit equity and debt
markets equally hard. So the Greek equity market was
down 45 per cent last year, while Spain fell 22 per cent.
All these risks are becoming bigger. It is therefore even
more critical to pay attention to the valuation case. Looking
at credit and equity risk premiums, there are again strong
similarities with 2004–5. Initially the best bet was credit,
but now the advantage is moving to equities.
Equities and bonds generally do not perform well at the
same time in the business cycle, or at least have not done so
recently. But today interest rates are simply too low at a time
when the equity market is already very largely discounting
the recovery. In the end, one market will be right, and one
market will be wrong. We think the equity market is probably right, and the bond market is the risky side. Today
the traditionally safer investment may be one of the riskier
places to invest.
8
part one
the big picture
In the US, we do not expect a miracle. The overhang in the
housing market is so huge that it will take years to eliminate. We do not expect a rebound simply because of the
recovery of the housing cycle. The US jobs market has a
similar overhang. Eight million jobs have disappeared
during the crisis. Even if 200,000 jobs a month are created,
it will take more than four years to restore these lost jobs.
US consumption has been much quicker to recover.
It is surprising to find retail sales so high when consumer
confidence, at least until recently, has been at record lows.
This is the direct result of the wealth effect. This has been
the Fed’s main challenge–to maintain consumption in the
US while causing consumers to repay debt–and it seems to
have been successful. From now on, however, consumption
is more at risk because of rising oil prices, tax changes
and the ending of QE.
Until US capacity utilisation
is restored, the injection of money
is inflation-free
The other driver of growth is investment. The chart (see
opposite) on capacity utilisation explains why QE is inflation-free for the time being: there is so much overcapacity
in the US. The lowest level of capacity utilisation in 40 years
was reached during the crisis. You can throw all the money
you want into the system–but if there are 50 empty plants
on the other side of the road, and credit money is essentially
free, why should you build a new plant? So until empty
pictet report | june 2011
two years on
US INVESTMENT: OVERCAPACITY HAS BEEN A DRAG
Private domestic fixed investment % GDP
Capacity utilisation (all industry) %
22
100
20
90
18
85
16
80
14
75
12
70
10
the mood is very bad, it’s usually a good time to invest,
so long as the valuation case is strong. Once again it has
worked: the optimism indicator recently reached the lowest
level possible. Of course this is only a short term indicator,
a timing indicator.
In fact we do not need to be extremely optimistic for
the market to perform. We need to disconnect from the
incessant news flow, resist the animal spirits, and focus on
valuation and liquidity. These are the factors that matter
in the longer term.
65
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
Source: Thomson Reuters Datastream / Pictet Asset Management
capacity is absorbed, the injection of money is inflation-free.
Once a utilisation level of around 80 per cent is reached,
probably early next year, every dollar of money injection
will, mechanically, produce inflation. This will be dangerous
but we probably have another six months of risk-free liquidity injection.
Low rates of capital investment have helped restore
margins. The immense growth in earnings in the equity
market was the result of the expansion of margins. But now
margins are reaching historic highs of around 8 per cent.
As in 2004–5, the capex cycle is lagging and this is why we
expect the capex to perform better than consumption.
Even if margins are at an historic high, sales growth will
be in line with nominal GDP. So we can reasonably expect
10–15 per cent growth in earnings.
Our policy—if nothing else happens
in between—is to neutralise the portfolio
during the summer, and then look
for buying opportunities
There is no room for complacency. The path will not be
smooth in the next 12 months. The inventory destocking
cycle will end rapidly now, but it will take a little more time
for the capex cycle to take off. Taking account of the end
of QE as well, the summer looks likely to be difficult for the
markets. Our policy–if nothing else happens in between–
is to neutralise the portfolio during the summer, and then
look for buying opportunities in September and October.
Sentiment, the balance between optimism and pessimism,
is a contrarian indicator. At the beginning of this year we
were all very optimistic. Usually this is a bad sign. When
pictet report | june 2011
two years on
pictet’s positioning for the next
12 months (AS AT END MARCH 2011)
We are positive on equities, because the
valuation cycle is very strong and the business
cycle is improving. And we are entering into
a self-sustaining period in the US.
We are also positive on gold, simply because
everyone is more or less printing money. In
these circumstances gold remains the strongest
currency in the world.
Regarding regions, because of the capex story,
we think it time to move from consumptionled markets to industrial and investment-led
markets in the US and Japan. We established
this position for Japan before the earthquake.
We will maintain it.
As for stocks, we favour capex stocks such
as energy, industrial, and IT–though there is
a possibility of a permanent disruption of the
supply network for IT because of the Japanese
earthquake. Utilities also– because if you are
scared about borrowing rates rising, then it is
good to have some high earners such as utilities. The valuation case for utilities is strong.
Regarding fixed income, if we are positive on
the business cycle, we prefer to look at lower
valuation and riskier assets, which can also be
investment grade. That said, on investment
grade paper the spreads are relatively thin.
part one
the big picture
9
Panel one
Mixing the
structural and
the cyclical
In a panel discussion, the
first morning’s three plenary
speakers went on to share
many of their views on the end
of QE, financial repression,
default, the oil price, the
eurozone, but distinctly
differed on Japan’s prospects
Moderator
Nicholas Johnson
Senior Investment Adviser
Pictet Asset management
Panel
Kenneth Rogoff
Thomas D. Cabot Professor
of Public Policy and
Professor of Economics
Harvard University
Gideon Rachman
chief foreign affairs columnist
Financial Times
Olivier Ginguené
Head of Balanced and
Quantitative Investment
Pictet Asset Management
10
part one
the big picture
What is the impact on financial
markets of the imminent end
to quantitative easing?
Ken Rogoff noted that the Federal
Reserve had rather blunt policy
instruments with which to perform
the tricky task of tightening, that, if
left too long, would let inflation take
hold. He suggested that the ending of
QE might have less impact generally
than next year’s likely resumption
of interest rate rises, partly because
of QE’s unpopularity. ‘The Fed got
so much pushback on QE, so much
anger from the rest of the world,
Brazil, China, Germany, France’ and
last but not least (in domestic political
terms) ‘from Sarah Palin and the Tea
Party Republicans’. Gideon Rachman recalled the way China had been
able to use QE to turn the economic
argument against the US, accusing it
of ‘exporting inflation to the world’,
while Olivier Ginguené said QE was
viewed as ‘perhaps a mistake and we
do not expect it to be repeated’.
How would governments deal
with debt-inflation, financial
repression such as creeping
capital controls or default?
Mr Ginguené combined two of these
options to note that ‘the most elegant
way to default is to inflate’ and to say
that ‘perhaps central banks should
target higher inflation rates’. A dose of
‘five per cent inflation for two or three
years’ might not be terrible, agreed
Professor Rogoff, but doubted that
central banks, the Fed, would let their
independence be so compromised as
to allow this deliberately. Nor, even if
it were a deliberate US policy, would
it make sense, given the current very
short maturity structure of US debt.
‘The US would need to lock lenders
in for longer for inflation to work’, he
added. Therefore panellists did not
rule out financial repression, which,
Professor Rogoff said, could take the
form of ‘ways of obliging pension and
insurance funds to take government
debt at sub-market rates’. The moderator noted that such ‘directed flows are
in a sense stealing money from savers’.
pictet report | june 2011
two years on
What if oil continued to rise?
What about Japan?
Mr Ginguené was relatively relaxed
at the sector level—because Pictet was
‘more focused on gas, clean tech, clean
energy’ whose prospects improve with
a rising oil price—and at the global
level. He recalled the rule of thumb
that every US$10 increase knocked
one fifth of a per centage point off
world GDP. So even if the annual
average rose from US$85 a barrel in
2010 to US$125–130 in 2011, the impact
would still be less than one per cent of
global GDP. The effect was more one
of re-distributing income to countries
that, frustratingly, did not need the
extra money. In the short term, Professor Rogoff was equally sanguine about
the impact of the oil price rise—which
he estimated had reduced growth by
perhaps a third of one per cent and
if the price went up another US$20
then by a third to half a per centage
point. But he cautioned that at some
point the effect could be ‘non-linear’
on some heavily-indebted countries,
whose growth would be slowed by
oil price rises to ‘stall speed’.
Asked for ‘a country that could go
really wrong’, Professor Rogoff chose
Japan, essentially due to extra debt
from its latest crises. Mr Ginguené
said Japanese investments in the past
‘had often been picked by people
who had got burned and had not
recommended them for the next 20
years’. But he was confident about
Japan rebounding with four per cent
growth in Q3 and Q4 this year, and
said ‘the next move for the yen will
be down, which will be good for the
Japanese economy and exporters’.
pictet report | june 2011
two years on
rogoff and the pay-off
Will the US reimburse all its external debt?
The short answer is yes. It is very costly to default
if you are the world’s financial centre. The financial
sector is extremely important to US growth. The
US gets this incredible advantage from being the
centre currency. Our interest rates are probably
half a per cent below what they would otherwise
be, not just on government debt but on everything
across the board, mortgages, corporate debt.
So if you do the cost/benefit analysis, a default is
hard to see. We can do financial repression [see
p7]. We have done it before as has everyone else,
forcing pension funds, insurance companies and
banks to hold debt.
The reimbursement might be in inflated dollars.
We can inflate and I think we will a bit. You don’t
have to be inside the Fed to see that they are much
more inclined to do that than other central banks.
The US has defaulted before. We did it after our
revolutionary war in 1792, we also did it during the
great depression–we were on the gold standard
and if you had a bond you could either be paid in
dollars or in gold at $20 an ounce. FDR said we’ll
still pay you in gold, but it’s $35 an ounce now.
That felt like a default if you were not living in the
US. So default has happened, and under enough
duress it would again. But it would take a really
profound recession to get us to do something like
that, because it is shooting ourselves in the foot.
part one
the big picture
11
Edward Burtynsky, Highway #5 2009, Los Angeles, California, USA.
From Prix Pictet 2011 exhibition ‘Growth’.
12
pictet report | june 2011
two years on
pictet report | june 2011
two years on
13
Interlude
Nuclear matters
Stephen Barber of Pictet questions the theoretical
physicist, Professor Sir Chris Llewellyn-Smith,
about the Fukushima accident and its aftermath
What are the advantages and
disadvantages of nuclear power?
I’m often asked whether I’m an advocate for nuclear power, and I say no, I
am an advocate for arithmetic. I look at
the numbers and I look at the facts, and
I conclude the alternatives to nuclear
power are either worse or inadequate
in the amount of energy they can give
us. So I conclude we should expand
nuclear power.
First of all, how much energy
do we get from nuclear? Worldwide,
nuclear provides 14 per cent of our
electricity, the highest per centage is
in France with 75 per cent, the UK
18 per cent and in Europe 25 per cent
on average.
What’s in favour of nuclear?
Compare it to sources that generate
more electricity—hydropower provides
16 per cent of electricity, and fossil fuels
68 per cent. Nuclear is less environmentally damaging than burning fossil
fuels, and while it is not safe, it is safer
than burning fossil fuels and hydro.
Of the minor providers of electricity,
biofuels provide 1 per cent of power,
wind less than 1 per cent and solar is
minute, though with huge potential—
they mostly do not do the same jobs
as nuclear. Wind and solar are intermittent, they cannot run around the
clock. They are also more expensive
than nuclear.
What are the arguments against
nuclear power? There is a perception that it is not safe, and it is more
expensive than burning coal and gas,
if we exclude their environmental and
health costs.
14
part two
interlude
So what is the most dangerous
energy source per kilowatt hour
of electricity?
Perhaps surprisingly, it is hydropower.
Breaking dams, mainly in developing countries, kills more people than
coal mining, though coal mining kills
around 7,000 people a year. In terms of
direct deaths, hydro kills about three
times as many as coal, per kilowatt
hour, and very much more than nuclear.
Then there are deaths from very low
levels of radiation, and from particles in
the air from coal power stations which
you breathe in and which give you lung
disease. The figures show that a single
large coal power station in Europe kills,
in its 40-year lifetime, twice as many
people as Chernobyl. I’m not saying
nuclear is safe, but I’m saying the air we
breathe in from one coal power station
killed more than Chernobyl—and
there’s only been one Chernobyl.
What exactly happened
at Fukushima?
There are 11 reactors at Fukushima, of
which eight were operating, and they
all closed down satisfactorily. But when
you stop a nuclear reactor, you stop the
primary process, but you have to go on
cooling it. The earthquake interrupted
the primary electricity system, and so
they went to the back-up diesel pumps.
When the tsunami struck, the back-up
pumps went down. And at that point a
number of things happened. These are
boiling water reactors: the steam pressure went up, and to relieve the steam
pressure, they vented them a bit. When
they did that, the high temperature
induced a chemical reaction inside the
reactor, and the hydrogen exploded
and took the lid off.
How does Fukushima compare
with previous nuclear accidents?
If you look at the two accidents that
everyone knows about, it is important
to realise that Three Mile Island killed
nobody. It destroyed that reactor, did a
lot of economic damage and brought
the nuclear industry in the US to a halt,
but killed no one. With Chernobyl
the only deaths we are sure about are
50—workers killed directly by very high
doses of radiation and about a dozen
cases of thyroid cancer. According to the
World Health organisation, the worst
health damage was done by what they
called ‘paralysing fatalism’ of people
in neighbouring countries who got
very depressed.
Where do the big numbers come
from for deaths from Chernobyl?
That comes from the analysis done after
Hiroshima. At Hiroshima they figured
out the dose that will kill one person—
let’s assume that if you spread that dose
over 1m people, 1 millionth of that dose
will kill one person, and if spread over
10m people it would kill 10 people.
Straight line extrapolation?
Yes, that’s a little like saying if you take
5 litres of my blood I will die, and if I
take 5 millilitres from 1,000 people, one
of them will die from loss of blood. And
if I take 5 millilitres from 1m people,
1,000 will die from loss of blood, even
though these are pin-pricks. Maybe
pictet report | june 2011
two years on
radiation is like that—but the data
we have suggests it is not. Luckily the
data we have on humans is very scarce.
But the data from Chernobyl suggests
that below a certain level, radiation
does not do any harm to you. So now
those big casualty numbers from
Chernobyl—like 4,000—are disowned
even by the International Atomic
Energy Authority.
Nonetheless, what you describe
as irrational fears from Fukushima are going to have longrunning consequences for the
energy industry.
On a technical level, governments
are introducing reviews—and I think
that’s right. Politically, it’s unclear
pictet report | june 2011
two years on
because it will depend how politicians
respond to the public. Probably the
reaction will be negative. In Germany,
it looks as though the programme
may be stopped. The UK said it won’t
stop its programme. China is having
a review. I don’t think this is going to
stop the French, who are the really big
players, the Russians or the Chinese.
But it may slow down programmes in
some countries, and put up costs for
two reasons. One is that additional
safety measures are going to cost more,
even if such measures are not necessary. Think of cars in the 1960s—no seat
belts, no airbags, no crumple zones. You
wouldn’t want to drive in them today.
Fukushima is the equivalent of a 1960s
car. In modern reactors, this could
not have happened; the cooling keeps
working just because of the laws
of physics.
The cost of borrowing may also rise.
If you look at the cost of nuclear power
you find there are different numbers,
which stem from different discount
rate assumptions. Nuclear power is very
sensitive to the discount rate, because
you put a lot of money up front and get
it back over 40 years. If people think
there are going to be more uncertainties in the planning procedure—I
produce my money today but maybe
they can’t start construction for five
years, or maybe there will be more
safety restrictions later that will have
to be retrofitted – that may put up the
price of borrowing.
part two
interlude
15
What are our biggest
energy challenges?
The main challenge is providing
sufficient food, water and energy for
a rising population. I think energy
is key here. Maybe 150 years ago we
could have imagined going back to
human and animal muscle power,
but that is not possible with 7 billion
people rising to 9 billion, 50 per cent
living in cities rising to 80 per cent.
Without energy, sanitation and food
supplies would collapse.
The first thing we have got to do
is use energy more efficiently and
reduce demand. Reducing demand
is designing buildings that need less
artificial lighting, and efficiency is
designing better light bulbs. And
lighting accounts for 19 per cent
of total energy consumption.
On the supply side, I am not
advocating anything in particular—
it has got to be a portfolio approach.
If we come to a day when we renounce fossil fuels, and you add
up all the bio-energy, the wind, the
marine, the geothermal energy, you
cannot get to more than half what
we use in fossil fuels. So it has got to
come from solar, whose potential is
colossal but it is not everywhere you
want it and needs transporting–
and nuclear, which means fission
or fusion energy.
It’s a cliché that fusion is
always 40 years in the future?
Yes. When I got into fusion in 2003,
I looked very carefully at whether this
is true. First of all, fusion works—it
powers the sun—if fusion didn’t work,
we wouldn’t be here. Today’s biggest
fusion project is the European Joint
Torus in the UK. It has produced 16
million watts of fusion power. The
question is when can we make it work
reliably and competitively. It is very
difficult, partly because fusion power—
getting more power out than in—can
only be demonstrated on a scale costing you billions. We are building a
world fusion project at Cadarache in
Provence, which is a genuine global
collaboration between the world’s
16
part two
interlude
seven biggest economies. That will
take ten years to build, ten years to
operate, and then we can build a real
prototype. If enough money goes into
it, in about 30 years from now we will
have a prototype. I can’t promise you
it will work, but I can promise you
we have to try.
Would you personally invest
in a clean energy fund?
I would be happy to invest in clean
energy, but I would be quite selective.
Thank you very much, Sir Chris.
Thank you.
Two related questions from the
audience: how clean is nuclear?
Obviously in terms of green house
gases, nuclear is much better, and
about the same level as wind.
What about nuclear waste
and its duration?
After being used in a reactor, it is
put in ponds for three years to cool
it down, then you can take it out
and store it dry, and then eventually probably vitrify it and put it
underground. The problem again
is perception. I don’t think waste is
dangerous. Unlike carbon capture
and CO2—which if it escapes you are
dead—if nuclear waste began to leak
your Geiger counter will tell you,
and you can get in your car and go.
While I don’t think there is a problem
of safety with nuclear waste, there
is a problem with the volume of it.
This means that the next generation
of reactors will have to burn up
more waste or to recycle it.
How do you explain the
perception that nuclear power
is so dangerous compared
to alternatives?
This is partly due to its origins—if
the atomic bomb had never been
dropped, people would think differently about it. Also radiation is invisible, and people fear what they cannot
see. Perception of risk is very difficult
to deal with. The public is much more
concerned about rail accidents which
tend to kill 10 or 20 people at a time
even though this is fewer than killed
in the UK on a typical weekend on the
roads. And in my country the government will invest three times as much
money to save one life on the railway
than they will on the roads.
Professor Sir Chris Llewellyn Smith FRS is a
theoretical physicist. He is currently Director of Energy Research, Oxford University,
and President of the Council of SESAME
(Synchrotron-light for Experimental Science
and its Applications in the Middle East). Among
other positions, he was Director General of
CERN (1994–1998), and Chairman of Oxford
Physics (1987–1992). During his mandate
at CERN the Large Hadron Collider (LHC)
was approved and construction started. After
completing his Doctorate in Oxford in 1967,
he worked briefly in the Physical Institute of
the Academy of Sciences in Moscow, before
spending periods at CERN and the Stanford
Linear Accelerator Center, after which he
returned to Oxford in 1984. His scientific contributions and leadership have been recognised
by awards and honours in seven countries
on three continents.
pictet report | june 2011
two years on
EMERGING MARKETS
Trends, risks, uncertainties
and opportunities
Poor countries can grow very fast until they
reach the technological frontier—after which they
grow at the same speed as the rich countries
Ilian Mihov
Dean of research and professor
of economics, INSEAD
In 2009 the world produced GDP worth US$72 trillion. At purchasing power parity values, China is already not marginally bigger than
Japan, but twice as big. By 2020 it may become the largest economy
in the world.
But China still scores low on income per capita, and the rich
countries remain the US, Europe and Japan.Differentials
between, say, Tanzania at US$720 per capita and Luxembourg at US$70,000, are unfair, but in fact these disparities
present a rather optimistic view of the world. For instance,
Japan in 1945 had an income per capita that was 15 per cent
of the US level. Then in the following 40 years Japan became
one of the richest countries in the world. So all the poorer
countries have the potential to become rich.
I would argue that there is something called the ‘technological frontier’ that moves at a constant speed. If a
country is rich, it is at the frontier. It cannot grow beyond
this frontier. Poor countries, by contrast, can grow very fast
until they reach the frontier, after which they grow at the
same speed as the rich countries. Why should this happen?
Poor countries have low wages, so they attract investment,
create more output and gain more income.
If there is a convergence on, say, the US$50,000 per
capita level, then the differences between economies will
be driven by population. This means that the US and
Europe would, each, become less than five per cent of the
world economy. This trend is already underway. In 1980
the advanced economies accounted for 62 per cent of world
output, but by 2010 this has shrunk to less than 50 per cent,
or to 47 per cent by 2015.
On the chart (above right) of real US GDP per capita
growth since 1870, which shows US$3,300 per head in 1870
rising to US$46,000 in 2011, there is a trend line, despite
the variations especially around the Great Depression. This
trend line is a constant growth in GDP per capita of 1.85 per
pictet report | june 2011
two years on
CHARACTERISING GROWTH OVER 140 YEARS
US real GDP per capita (USD ’000)
60
compound annual average = 1.85%
20
8
3
1870 78
86 94 1902 10 18 26 34 42 50 58 66
74 82 90 98 2006
Source: Ilian Mihov
cent a year. This is startling, given all that has happened
over this period: industrialisation, invention of electricity,
railways, internal combustion engine, electronics, internet, space travel. Why is it 1.85 per cent? I don’t know—no
one knows. It seems that however far the deviation, there
is always a return to the trend. This is a puzzle. Nothing in
economic theory predicts that it should be a constant. But
every time the frontier is being pushed by a new revolution,
there is a return to the frontier.
Take Japan—in 1870 it was 27 per cent of US output,
in 1939 it was also 27 per cent of US output. But after 1945
it began to grow at rates of seven, 10, 14 per cent a year, like
China today. In the 1970s people believed Japan would
be the richest country in the world. Japan grew by imitation, replication and above all by investment growth rates
of 35–40 per cent. But as it approached the frontier it has
grown slower.
part three
issues in emerging markets
17
The pattern is diverse. Korea and Ireland, like Japan,
converged early on, and reached the frontier. Countries
like China and India started late and are converging on
the frontier, but still far from it. Chile and Brazil have been
inconsistent performers. A few countries like Argentina are
‘growth disasters’. In 1900 Argentina was one of the richest
countries in the world on a par with France, Germany,
Italy and Spain, but from the 1950s it has flat-lined.
The big gap between rich and
poor countries is not capital and labour,
but productivity and the business
environment
In a league of annual average GDP per capita growth
rates, after China and Korea comes, surprisingly, Botswana.
Botswana began very poor in 1965 and then grew faster
than anyone else. Botswana increased its average income
from US$700 to US$14,000. Why? The answer cannot be
diamonds, because many poor African countries also have
diamonds. Indeed on average natural resources is a curse.
The drivers of growth are input into production (capital,
labour) and productivity (utilisation of capital and labour).
These involve sacrifice today in order to set aside income for
future factories or research. Education, another investment
in the future, correlates with growth, but not very strongly.
There are many countries that have improved their education, and seen negative growth. If a government improves
education but nothing else, its citizens tend to emigrate.
18
part three
issues in emerging markets
Why are poor countries poor? Are they poor because they
do not have machines or education? No, according to a
US academic comparison between Niger and the US. In
1988 Niger had income of US$860 per capita and America
US$31,000. The study showed that provision of US machines
to Niger would have raised the latter’s average income
to $1,292. Providing Niger with US workers to operate
US machines would have further raised Niger’s average
income, but only to $4,006. The big gap between rich and
poor countries is not capital and labour, but productivity
and the business environment. This should be remembered
when governments offer, say, tax credits, but do nothing
to improve the business environment.
The two determinants of growth are productivity,
which determines technical progress (the frontier) and
investment (catching up with the frontier). Institutional
factors such as property rights, absence of corruption and
good governance drive investment. This is illustrated in
the following chart (see opposite) on the role of institutions, which incorporates the average of six governance
indicators used by the World Bank. There are four important points here:
There is not a single poor country with good quality
institutions. It is not a stable place for a country to be–
if it improves its institutions it moves forward, if not it
drops back.
There is no strict correlation (in the lower left quadrant) between the quality of institutions and income per
capita. Countries can be rich or poor, with the same quality
of institutions. A country can grow if it has a government
that organises production efficiently. Policies can be
a substitute for institutions.
pictet report | june 2011
two years on
But there is a wall, around US$10–14,000, where countries have a choice—they improve their institutions and
become rich, or they do not improve their institutions
and begin circling around at the bottom of the wall. Two
examples of this stagnation are Venezuela and Argentina
(depending on the price of oil and beef they go forward
or back, but never go through the wall). Saudi Arabia is
on the other side of this wall, but only due to its oil.
China is heading towards this wall, and in another
five or six years will reach a point when it needs to change
institutions. The big question is whether it can go through
the wall without changing its institutions. Is China different? This is doubtful. Look at what happened to the Soviet Union—once it reached the wall it collapsed. Likewise
China will have to change its institutions, and if it does,
there is nothing to stop it becoming a rich country.
contributing to this inflation; in 2010 net private flows to
emerging markets was US$800bn, well below the 2007 peak
of US$1,200bn. There is a perfectly good reason for these
flows—these countries are growing and have commodities.
The problem for emerging markets is they need to deal
with the pressure—from growth and commodity prices—
on their currency to appreciate. Brazil, for one, is feeling
threatened by the Dutch disease (see below), the currency
appreciation from a commodity boom that hurts manufacturing. This sort of pressure is deeper and more important
than that of QE, which tomorrow will be gone.
THE GREAT WALL: INSTITUTIONS & INCOME PER CAPITA (2007)
Voice and accountability
Political stability
Government effectiveness
Regulatory quality
Rule of law
Control of corruption
Institutional quality
2
USA
1
0
Saudi Arabia
-1
China
-2
800
1,600
3,200
Oil producing countries
6,400
12,800
25,600
51,200
Real income per capita USD (2007)
Source: Ilian Mihov
In sum, there is very high potential for convergence in
the Asia-Pacific region, Latin America, even Africa these
days. But the longer term risk or uncertainty, over the next
five or 10 years, is over regulatory, institutional reform
in these countries.
In the shorter term, policy-induced slowdown is likely
in emerging markets because of inflation. Tightening will
continue. But will it be through currency appreciation, or
interest rate rises? Indonesia has gone for appreciation, but
most countries will raise interest rates. In India, monetary
policy is too loose, with interest rates lagging behind
inflation. The biggest question is what is happening in
China, and whether there is a bubble there. In some Chinese
cities there has been a sharp rise in house prices relative to
income. The money supply has declined, but it is unclear
whether this will be sufficient to weed out inflation.
In dealing with inflation, every country faces the predicament of how to avoid tightening monetary policy to the
point of precipitating recession. Quantitative easing is not
pictet report | june 2011
two years on
The Dutch disease This is the de-industrialisation of an economy that can occur when a
natural resource raises the value of the currency,
making manufactured goods less competitive
internationally. The phenomenon was first identified in the Netherlands after its discovery and
development of North Sea gas.
Mihov’s Great Wall Ilian Mihov takes six key
good governance indicators defined by the World
Bank and plots them against GDP per capita
for over 100 countries (shown on the chart left).
Each country is scored for each indicator, giving
a total ‘good governance’ score. Immediately it
becomes clear that–with the sole exception of
Saudi Arabia–there is no country with GDP per
capita above US$14,000 that has a score below
zero, i.e., has good governance. Mihov argues that
all countries hit this Wall, somewhere between
US$10,000 and US$14,000, beyond which they
cannot grow unless they improve their institutions.
Ilian Mihov is Dean of Research and Professor
of Economics, INSEAD. He holds a PhD degree
from Princeton University. He has taught in
the MBA, EMBA, PhD and many executive
education programs as well as at the Global
Leadership Fellows Program of the World
Economic Forum. His papers have appeared in
many academic journals such as American Economic Review, Quarterly Journal of Economics,
Journal of International Economics, Journal of
Money, Credit and Banking, etc. Mihov’s work
has been presented and discussed at many
policy-making institutions such as the Fed,
ECB, the World Bank and the IMF. He is also
a research professor at the German Institute
for Economic Research (DIW Berlin) and a
research fellow at the Center for Economic
Policy Research (London, UK).
part three
issues in emerging markets
19
Panel two
Testing
opinion on
emerging
markets
Moderator Richard Heelis
put five questions to
the audience and asked
the panel to comment on
the electronic answers
Moderator
Richard Heelis
CIO EQUITIES
PICTET ASSET MANAGEMENT
Panel
Simon Lue-Fong
Head of Emerging Debt
Klaus Bockstaller
Head of Emerging Equities
Ilian Mihov
Dean of research and
professor of economics
INSEAD
EM Debt –
exposure in three years
As a proportion of assets for which
you have an allocation/advisory
role, what do you expect will be
your exposure to EM debt in three
years time?
0.25%
2%
5%
10%+
Zero
What investment activity do
you plan for EM equities in the
5% next year?
9%
42%
34%
10%
Simon Lue-Fong These answers are
what I would have expected, but they
are still very interesting. The allocation to EM fixed income has been low
but we find interest in this asset class
is picking up, primarily as a result of a
very clear and understandable story for
emerging markets. So we will see more
portfolio flow into EM and that will
have an influence on exchange rates,
and probably reduce the risk premia,
though the prospect for higher inflation is unsettling for bond investors.
What is your EM equity position
relative to your benchmark?
20%
30%
41%
9%
Klaus Bockstaller It’s about what
I would have expected. Many of you
are overweight, but I am not sure this
is representative. Let me give some
general figures. 87 per cent of world
population produce 50 per cent of
world GDP. But EM equities represent
only 16 per cent of the MSCI World,
and institutional investors have only
six per cent of their equity exposure
20
part three
issues in emerging markets
Increase exposure
Decrease exposure
No change
50%
7%
43%
Klaus Bockstaller This result is very
interesting in the light of recent flows.
In 2009 there was a net inflow of
US$80bn into emerging markets,
and US$90bn last year. But so far this
year there has been a quite substantial
outflow. So I find this result encouraging. It suggests flows are turning again.
Currencies –
EM vs developed
By what annualised magnitude
do you believe an equally-weighted
basket of EM currencies will
outperform G3 currencies over
the next 3 years?
EM Equities –
position and plans
Underweight
Neutral
Overweight
Not part of my benchmark
in EM markets. So there is an enormous potential for catch-up not only
in terms of economic development
but also in terms of market capitalisation, and in terms of weighting of
emerging market equities in institutional portfolios.
2%
5%
10%
15%+
They won’t
14%
53%
18%
8%
7%
Simon Lue-Fong I would have
thought people would have put EM
currencies a touch higher, especially
with G3 currencies facing problems.
Money, like water, follows the tilt, and
the tilt is clearly in favour of emerging markets. Capital will still flow
to emerging markets because that
is where you can get a return. There
is inflation, but among the tools to
control inflation is currency appreciation. And we are starting to see that.
pictet report | june 2011
two years on
Ilian Mihov I hesitate to make
currency predictions, having been
taught that the current rate is the
best predictor of future rates. There
is pressure for emerging market
currencies to appreciate. But different countries will react differently.
I am surprised that countries are
willing to bet on inflation rather
than let their currency appreciate. Once you let inflation go to
higher levels, to 5, 6, 7, 8 per cent,
it becomes very volatile. It is not
the level, but the unpredictability,
of inflation that stops investment.
So it is much better to let your
currency appreciate. If you inflate
it makes your goods more expensive, for everyone including your
own people.
pictet report | june 2011
two years on
Resources –
possible concerns
The following resources could
see periods of structural under
supply. Bottlenecks in which of
the following natural resources
would harm growth in EM most?
Oil/gas
Base metals
Corn, rice, suger
None of them
26%
23%
39%
13%
hectares or four times the size of
Germany. 50 per cent of that is
irrigated, but 70 per cent of the water
is wasted. On energy, if there is a
consensus on high long term prices,
there will be massive investment in
tar sands and alternative energies.
Optimism for base metals is least
convincing. Take the example of
copper. Demand for it is growing 3
per cent a year, which is the equivalent of one mega-find. Finding a
mega-deposit of copper every year
will be very difficult.
Klaus Bockstaller I do not believe
we are running out of food. It is more
a question of mismanagement. India
and China have had no proper land
reform. India’s farming sector is 120m
part three
issues in emerging markets
21
INVESTMENT THEORY AND PRACTICE
Standard asset allocation
is no panacea
The obsessive devotion to arbitrarily
chosen benchmarks is limiting and potentially
costly in terms of missed opportunities
Rolf Banz
chief investment architect
Pictet Asset Management
In our industry, one of the few aspects on which everyone agrees is the
importance of asset allocation, ever since the ground-breaking 1986
study by Brinson and others that showed that over 90 per cent of the
‘variation’ of portfolio returns (not the returns themselves) can be
statistically explained by asset allocation decisions.
When we choose a strategy or carry out a strategic allocation,
this is always an active decision. It tends to be a one-time
decision, or at least one that is infrequently revised.
Among continuing decisions, market timing and security selection are also significant; many of us are compared
to our peers, and it is market timing and security selection
that determine where we fit in the peer group.
Of the two tables (right) of results for US university
endowment funds, the upper one shows the contribution
of factors over time, while the lower shows a cross-section
of the factor influences at a single point in time. There
are two interesting results—above, asset allocation is the
dominant factor over time, while below, at any given point
in time what differentiates one fund from another is security selection.
What should we conclude? The conclusion is rather
wonderful. The 90 per cent is not a universal constant. We,
the investors, determine the importance of the allocation
through our choice of approach. In an extreme case, if I
pursue a purely passive approach inside asset classes, then
by definition 100 per cent of the variation of my portfolio
is explained by allocation.
Taking the other extreme and investing exclusively
in market-neutral products, zero per cent of the variation
would be explained by allocation. Most investors are somewhere in between, and the results that were quoted were
22
part four
investment theory & practice
Results for US university endowment funds
Time-series R-squared return variation
Mean
Median
25th
percentile
75th
percentile
Standard deviation
Asset allocation 74.4%
81.9%
67.8%
91.2%
26.1%
Market timing
14.6%
10.5%
-7.0%
34.9%
29.8%
Cross-sectional R-squared return variation
Mean
Median
25th
percentile
Asset allocation 11.1%
4.7%
2.8%
Market timing
3.3%
2.4%
0.8%
Security selection 74.7%
77.2%
61.2%
75th
percentile
Standard deviation
11.1%
4.3%
87.3%
14.4%
4.1%
15.8%
Note: R-squared expresses the percentage of variance in one variable (the dependent
variable) that can be explained by another variable (the independent variable),
based on regression analysis.
for the typical investors who pursued an active—but not
very active—strategy. So most of the variation came from
asset allocation. But it is not a straitjacket into which we
are forced. It is under our control.
This would not matter were it not for the fact that
this misunderstanding or misinterpretation has certain
unfortunate consequences. A leading Swiss pension fund
consultant who favours passive investment uses a twopronged justification for his view. He argues that first, 90
odd per cent of results are determined by asset allocation,
and so the rest is very unimportant. Second, because active
asset management is very difficult, a zero sum game, why
bother doing something that is difficult and at the same
time unimportant?
pictet report | june 2011
two years on
I am not saying we should move away from the standard
index, just that it might be interesting to consider other
alternative benchmarks. Blue chip stocks in developed
markets might outperform everything, but equally the
next ten years might look completely different. The same
applies to investment styles.
Alternatives to cap weighted benchmarks
Benchmarks subject to strategic biases
Fundamental indices
GDP weighting
Minimum variance
Equal weighting (1/N)
Value/momentum focus
Megatrend focus
Other…
But there are alternative approaches to asset allocation.
Dogmatic asset allocation is suitable for geniuses, because
if you are a great forecaster of expected returns and risk
then of course you want to focus on the best asset classes.
But for the rest of us it does not work too well. As the
experience of 2008 demonstrated rather convincingly,
within-horizon risk is probably more important than
at-the-horizon risk. Most of us who work for institutions
always push that horizon forward, and we never really get
to the horizon. And of course we still have to survive the
intermediate time. I would argue for diversification rather
than precision.
Absolute/total return
Abandon short-term benchmark altogether
Introduces its own set of problems
I should issue a health warning. If I am going to encourage
you to move away from the beaten track, I should point out
the dangers. Over 110 years equities comfortably outperform everything in sight. So why not just invest in equities?
This may be very attractive in the very long run, but with
too aggressive a strategy we may not get there. We have to
ensure that if we are going to pursue a very different strategy, it will be sustainable in periods of crisis.
Pictet has been interested for some time in having our
clients move towards well-diversified positions. So, to avoid
the negative consequences of an excessive belief in the
importance of asset allocation, you should:
Recognise there are no fully passive strategies.
Consider alternatives to market cap weighted benchmarks.
There is no such thing as
passive management, because
selection of the benchmark
is a highly active decision
One of the consequences of believing in asset allocation is
an obsession with the benchmark within an asset class,
usually a cap weighted index. Investment in proportion to
the components of the benchmark is described as ‘passive
management’. In reality there is no such thing as passive
management, because selection of the benchmark is a
highly active decision. In most markets benchmarks tend to
be arbitrary, and there is no obvious reason why one set of
benchmarks should be preferred to other. Also, the choice
of a standard benchmark encourages herding behaviour
and means that we share a lot of bets with other people.
There are plenty of alternatives to cap-weighted benchmarks. A look at the returns of different types of global
benchmarks over the past ten years—from small cap to GDP
weighted—shows that historically the worst choice would
have been the standard index, the MSCI World.
pictet report | june 2011
two years on
L ook at anomalies and strategic biases as an integral
part of an investor’s attempt to gain an edge, just as
with market timing and stock selection.
In sum, asset allocation is not an exact science, and because
many people believe it is, they are often poorly diversified.
The obsessive devotion to arbitrarily chosen benchmarks
is limiting and potentially costly in terms of opportunities
missed. When we think of active management, we should
spend more time choosing benchmarks rather than tweaking a quantitative model for asset allocation for the thirtyseventh time.
part four
investment theory & practice
23
INVESTMENT THEORY AND PRACTICE
Overcoming fundamental
flaws in bond indices
Traditional benchmarks are sub-optimal
and fundamental factors provide a better alternative
Sébastien Eisinger
head of fixed income, Pictet Asset Management
The ideal benchmark is simple, transparent and covers a wide
area of risk. But is it a fair representation of the investment
universe? How easy is replication? Are investors able to identify
their optimal benchmark?
The distribution and relative weight of risk premia inside
the benchmark is actually decided by the issuers. And it is
unlikely that the issuer has the same aims as the investor.
The supposed benefit of diversification is offset by the fact
that illiquidity tends to rise as the number of constituents
rises, even if the illiquidity premium is low. Moreover,
the cost of investing in a neutral portfolio and keeping
it neutral—though it is never measured—can be very high.
Among the factors to be considered by an institution
using a fixed income benchmark are the following:
Currencies A very volatile element of a portfolio, and
currency exposure in a benchmark can change radically
over time.
RISING DURATION RAISES INTEREST RATE RISK
Duration (years)
10
9
UK
US
Japan
The duration fluctuates excessively over time…
8
7
6
5
4
Jan 89 Jan 91 Jan 93 Jan 95 Jan 97 Jan 99 Jan 01 Jan 03 Jan 05 Jan 07 Jan 09 Jan 11
Source: Bloomberg, JP Morgan Chase, 31.12.92 to 28.02.11
Debt Big issuers of debt will end up over-represented in
a size-weighted benchmark, and therefore in a portfolio.
Interest rate risk The duration of bonds—as shown in
the chart (see above right) of UK, US and Japanese bond
maturities—fluctuates very significantly over time, irrespective of the investor’s specific preference of duration/maturity. Why should duration be decided by the issuer? For
instance, the Japanese government has sharply increased
the duration of its debt at a time when interest rates
are low. This is good for Japan, but not necessarily good
for the investor.
Adverse credit exposure Greece, for example, had a
weighting of as little as 3 per cent in the European benchmark in the early 2000s. As Greece began to increase its
borrowing, and at a faster rate than other European countries, its weighting rose to nearly 6 per cent by beginning
of 2009 (though its weight has since dropped as bond
values have fallen). Each time an issuer gets into trouble,
24
part four
investment theory & practice
pictet report | june 2011
two years on
the pattern is the same. By investing in cap-weighted indices, an investor will be over-exposed to each and every issuer
that gets into trouble. Moreover, the obligation to track a
benchmark creates a perverse incentive to buy riskier bonds.
So it is important to go back to fundamentals. The ability
and willingness of the borrower to pay back the principal
is critical in this respect. In rating sovereign risk, we must
assess the affordability, financing ability, and reversibility
of debt.
Our approach is to create a Pictet Debt Sustainability
Score for advanced countries (see chart below). This scoring
approach explains, among other things, why Pictet was
concerned about Greece and Ireland at an early stage,
but not so much about Spain.
However, the Pictet scoring system only expresses relativities and still does not give a fundamental framework
how to invest for the long term. To create such a framework, it would be better to factor in population, land mass
and capital, and back-testing shows that this fundamental
approach gives an effective indication of absolute sustainability (see page 31).
To summarise, institutions setting benchmarks for their
fixed income managers should:
Assert control over, and probably fix, maturity rather than
passively allow the issuer to decide the duration.
Assess the fundamental strengths and weaknesses of
countries to estimate better their ability and willingness to pay.
Watch the benchmark currency allocation carefully for
changes in exposure arising from volatility.
DEBT SUSTAINABILITY SCORE FOR ADVANCED ECONOMIES
2.0
1.6
0.4
0.4
New Zealand
Germany
-0.2
0.4
Netherlands
-0.4
0.2
Spain
-0.6
0
United Kingdom
±1 standard deviation
Duration vs maturity Duration is properly used to
refer to the change in a bond’s price for a small
parallel shift in the yield curve, also known as
the bond delta. It is therefore equivalent to the
weighted average term to maturity of all a bond’s
cash flows expressed as a single payment. Duration, in years, is mathematically a more precise
risk (i.e., volatility) measure than simple term
to maturity. Because maturity refers only to the
remaining term to repayment of a bond, it is only
loosely correlated with the sensitivity of a bond
to changes in interest rates.
-0.1
Pictet Debt Sustainability Score Pictet’s
scoring system analyses the structural quality
and risk of sovereign debt. It is based on multiple
economic and financial factors for each of three
key measures: affordability of debt, financing
ability and reversibility of debt. Debt affordability
is related to its actual cost, the debt/GDP ratio
and interest payments relative to fiscal revenues.
Financing ability is related to private savings and
fiscal revenue, while reversibility assesses the
capacity of an country to grow its way out of the
debt trap. Pictet’s system is similar to the rating
agencies’ approach, but the assessment is
more timely.
-1.0
-1.9
Switzerland
Australia
United States
France
Japan
Portugal
Italy
Greece
-2.5
Ireland
2.0
1.5
1.0
0.5
0
-0.5
-1.0
-1.5
-2.0
-2.5
-3.0
Illiquidity premium Liquidity is the property of
tradeability and is defined in terms of the spread
between the buying and the selling price, and the
size and frequency with which a security can be
traded. Less liquid instruments generally offer a
higher yield to compensate for lower liquidity – this
is the illiquidity premium. Keynes remarked, ‘Of
all the maxims of orthodox finance none, surely,
is more anti-social than the fetish of liquidity…’,
meaning that investors desire that very quality
when it is least available.
Cap-weighted index A cap-weighted index is
an index in which the weight of an individual
security or issue is directly proportional to its
market capitalisation. But in the case of bonds,
which represent debt, size gives no assurance
of safety. Indeed the more indebted an issuer
is, the riskier its bonds may be, after a point.
Give fund managers more leeway to search for value outside
the benchmark universe, and then let them exercise judgement
in a transparent way.
Standard deviation
x
2010 sustainability score
2.5
Risk premia In the context of a fixed income
benchmark, there are three principle sources of
risk: duration (a function of interest payments
and time, which is affected by changes in interest
rates – or payment terms), credit and currency.
Each bond or instrument in a benchmark is
explicitly or implicitly priced by the market for
each of these risk factors. The degree to which
the implied or actual price for any one of factors
exceeds the risk-free rate is known as the risk
premium. Thus, fixed income managers tend to
see a benchmark as a collection of ‘risk premia’,
much as one might view a group of people as
a pool of genes.
Source: Pictet Asset Management : 2011
pictet report | june 2011
two years on
part four
investment theory & practice
25
26
part five
summing up & postscript
pictet report | june 2011
two years on
SUMMING UP
Closing remarks from
‘the paranoids’ paranoid’
Markets reflect risks but we remain vigilant;
meanwhile, must we be slaves to the benchmarks?
Renaud de Planta
managing partner, Pictet & Cie
If you remain confused after reading this report, then I hope at least
that you are confused at a much higher level.
In the first part, we covered the macro-issues and risks and
gave you our outlook. The aftershocks of the financial crisis
are still occurring as we speak, and therefore it is difficult
to see the consequences with much clarity. The risks
perceived by the market and the valuations reflect fairly
high risk premia that make us believe we should remain
pro-risk, we should remain overweight in equities, equities
in developed markets, large cap equities, value equities,
corporate credit.
Having said that, we want to remain very vigilant on
numerous risks. One of them is the geo-political situation,
the social unrest which is unfolding in one country after
another, in particular in the Arab world. We must keep
the eurozone crisis very much on our radar screen. As Ken
Rogoff said, we are nowhere near the end game, a rather
frightening statement but one to which we subscribe.
Central bank tightening is also a big risk factor, as well
as in the more mid to long term perspective the enormous
debt in the developed world, particularly in the UK, the
US and Japan.
We should draw lessons from the crisis. Without
belabouring my reputation internally as the paranoids’
paranoid, it seems to me, with a bit of schadenfreude, that
paranoids appear to outlive the vast majority of optimists.
So just to remind you with a few examples, in April 2007
UBS was upgraded to Triple A only to need rescuing a few
months later.
for instance, we hear a senior European official saying the
crisis is over, let us take this with a pinch of salt.
Another lesson from this seminar is that there are a lot
more ‘moving parts’ than the macro-risk and the forecast.
There are fundamental methodological issues that we need
to think about. Rolf’s presentation highlighted that a lot
of what we consider a given today in asset allocation is illconceived and relies on a simplistic paradigm—and I suspect
history will judge these assumptions mercilessly.
Let me now try to link up Ilan Mihov’s and my colleague’s
presentations. First of all, the production factors that seem to
intrigue some of you. Output is basically a function of input.
The simplest factors are land mass, population and fixed
capital. On the chart below, land mass is a proxy for natural
resources and arable land, population is a proxy for working
age population and fixed capital can be estimated. How do
we measure today’s production? The classic measure is GDP,
but to exclude the public sector we could look at corporate
FUNDAMENTALS VS INDICES
%
100
4%
90
80
70
60
50
In April 2008 Lehman’s CEO declared,
‘the worst is behind us’, a few months
before the bank collapsed
0
9%
7%
GDP
Corporate
profits
8%
9%
31%
76%
20
10
39%
14%
57%
5%
40
30
37%
15%
1%
86%
Land mass Population Estimated
capital
stock1
PLC
profits
Canada
Emerging markets
Europe
Rest of developed countries
Global
Equity
index2
Global
Bond
index3
Japan
US
extrapolated from PPP-adjusted GDP, assuming flat ROA;
2
MSCI ACWI 3 derived from JPM Government indices,
EM weight can be between 0 and 13% depending on assumptions
1
More recently, we had the Greek and Irish prime ministers
declaring their countries needed no bail-out. So next time,
pictet report | june 2011
two years on
Source: Pictet Asset Management estimates, 31/12/2010
part five
summing up & postscript
27
profits from listed and unlisted companies, or just listed
companies. How linked is all this with investment?
The scale of divergence is impressive. Take Japan. It’s counterintuitive for a country with 0.4 per cent of world landmass,
2 per cent of population and 5 per cent of capital stock—yes it
is a highly productive society—to be 31 per cent of your global
bond portfolio. Although recently central banks have been
intervening to stop the ascent of the Japanese yen, it could be
the last time they do so, and the next time they intervene it
could be to stop the decline of the yen.
COUNTRY WEIGHTS PEAK AT CYCLICAL VALUATION POINTS
%
100
GEM Peak: 13.9%
Dec 2010
90
80
Japan Peak: 44.2%
Dec 1988
70
60
50
US Peak: 67.5%
Aug 1971
40
30
20
Europe Peak: 35.3%
Aug 1998
10
It’s counter-intuitive
for Japan to be 31 per cent
of your bond portfolio
0
69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09
Europe
US
Canada
Japan
Rest of developed countries
Emerging markets
Source: MSCI All Country World Index, to 28 Feb 2011
The reverse could be said of the emerging world with about
85 per cent of the population, three-quarters of the land mass
and maybe 50 per cent of the worldwide capital stock. The
emerging world’s share of GDP and corporate profits is far
lower, and even more striking is its share in equity and bond
indices. In the All-Country equity index which only a minority of investors use it is 14 per cent, and in many of the benchmarks which some of you are using it is zero. In bonds it is
even worse; we had to construct an all-country index to get
to 4 per cent. The truth is that for most investors the benchmark has zero in emerging country debt. I find it reassuring
that in the poll we took earlier, 76 per cent of you are going
to invest 5 per cent or more in emerging market debt, which
I suspect sets you apart. I suspect that if we meet again in 10
years’ time the 4 per cent of emerging dept in our all-country
index would be 10 per cent.
The question then is, more investment in emerging debt
takes place at the expense of which countries? I agree with
Professor Mihov that institutions are important— because
entrepreneurs want to operate in a framework of rule of law—
but when your debt/GDP ratio is 100 per cent and you have
to make drastic cuts in public spending, it could be that what
we now consider high quality institutions in the western
world will change in the coming years.
For equities, the weight of a region in a global index tends
to peak at its valuation peak, as shown in the chart ‘cap peaks’
(see above right). In the US, it peaked at 67.5 per cent in 1971,
two years before the collapse of the dollar. In Japan, the peak
was 44 per cent in 1988, just a few months before the collapse
of the bubble on the Tokyo stock exchange. Europe peaked
at 35 per cent in 1998, four months before the introduction
of the euro. And emerging markets had an interim peak at 14
per cent in December 2010. So we should question whether
we want to follow the herd, and be slaves to the benchmarks,
or think for ourselves.
28
part five
summing up & postscript
famous last words
Moody’s upgrades UBS long-term
debt rating to AAA
April 2007
‘The worst is behind us’
Dick Fuld, ex-CEO, Lehman Brothers –April 2008
‘The worst is most likely behind us’
Hank Paulson, ex-US Treasury Secretary–May 2008
No need for bailout, says Greek
prime minister
Financial Times—22 February 2010
Irish prime minister refuses
to talk of bailout
Financial Times—17 November 2010
pictet report | june 2011
two years on
postscript
How to
live better
for longer
Advances in biotechnology
and information technology
are transforming our ability
to live better
Joël de Rosnay
FUTURIST
In my view, recent scientific developments
and discoveries in the field of human health
and biology will not only allow us to live
longer but also stay healthy well into old age.
Biotech and infotech
Biotech nano is the application of infinitely small drugs targeted at specific
parts of the body. Until recently, the
treatment of diseases through drugs
was a crude, dangerous process that, in
the old saying, often ‘cured the disease
but killed the patient’. Today, there
are three major nano technologies:
first, DNA chips, which can quickly
and cheaply analyse a patient’s DNA;
second, nano labs, which are diagnostic
chips like phone chips; and third, intelligent pills, or tiny nano chips embedded under the skin that release small
quantities of a treatment drug, targeted
at a specific time or place.
At the biotech meso level, there
are three leading fields: first, genetic
engineering, in which synthetic drugs
are created to treat disease through
enzymes; second, epigenetics, which is
the study of the 85% of our DNA—what
used to be called ‘junk DNA’—that does
not form part of our genetic code. It
used to be thought that just 15% of our
DNA held the key to life, completely
pictet report | june 2011
two years on
defining our characteristics, and that
random mutations in these genes
caused our diseases. Now we are
discovering that this 85% is critical
in modulating the expression of the
15%, and that our behaviour modifies that expression. Third, stem cells,
which can now be produced from any
other cell of the body, not just from
embryos, and can be reprogrammed
to produce any other cell in the body.
Today, through the internet,
we live in a digital civilisation.
Through infotech, we are much
better informed as patients when we
visit a doctor; we know what questions to ask, we know the risks and
the range of treatment (though it
also might lead to ‘auto-medication’).
For example, we can now use a smart
phone for continuous health management, sending body data back to a
central electronic lab, getting advice
on eating, losing weight, eye tests,
even blood tests. I recommend reading
the recent Unicef/Unesco report, The
Future of Health, for more on this topic.
Social networks, too, are a powerful tool for organising and exchanging
information among common sufferers
from a disease, and even talking
to governments.
part five
summing up & postscript
29
Ageing factors
It is sometimes said that ageing is the
greatest disease of all and technology
can do little to change that fact. But we
now know that there is nothing called
‘old age’ that kills us. So why do we age?
There are two key processes: inflammation and oxidation.
Oxidation is a kind of bodily rusting, which comes from the atmosphere,
from other causes. This process creates
‘free radicals’ which destroy the tissues
of the heart and other major organs.
The body fights this process and there
are three ways we can influence the
body’s ability to do so: first, through
our behaviour—how and what we eat,
exercise, etc; second, by acting on the
bacteria and viruses inside and outside
the body that weaken the body’s
immune system; third, by being aware
of the effects of medication. An adult
human contains about 9.5kg of microbiota and microflora, together known
as gut flora, in the throat, the stomach,
the bowel, etc. This is ‘good bacteria’
and it can be killed for example by antibiotics. We need to look after it.
Each cell in our body contains
mitochondria. These ‘organelles’
produce the energy that allows us to
walk, to talk and so on. If they get sick,
then we get very sick indeed. Every
day the body creates between 1000 and
30
part five
summing up & postscript
2000 cancer cells that the body either
kills or causes to kill themselves (‘cell
suicide’ or ‘apoptosis’) through the
agency of mitochondria. We have to
protect our mitochondria.
What can we do to protect our
bodies and live well into old age?
We used to think that our bodies
were pre-programmed, as it were,
with particular genetic diseases—
Parkinson’s, prostate cancer, Alzheimer’s—and there was nothing we
could do to avert our fate. But we
can be responsible for our own good
health. My book, La Malbouffe, which
I wrote with my wife Stella in 1981,
explained how to eat in order to live
better. Together with proper exercise,
I call my approach ‘bionomy’ or ‘the
art of managing your future life’.
There are five key factors in maintaining good health and slowing the
ageing process:
proper nutrition
moderate exercise
stress management
pleasure
family, friends and
social network
Nutrition
We should avoid fats, sugars, and
other empty calorie foods, and eat
mostly fruit, vegetables cereals and
fish. We should exercise, but not
excessively. All these five factors are
interdependent. Natural products are
particularly important and can have a
direct influence on our genes. Just one
example will suffice: all bee larvae are
similar, but if one larva is fed on royal
jelly, it becomes a queen bee. Calorie
restriction has also been shown to have
a directly positive correlation with
longer life.
Among specific items, I recommend one or two glasses daily of red
wine, which contains resveratol, a
polyphenol with anti-cancer properties and other beneficial compounds;
kokum, found in the curries of southern India, has anti-inflammatory
properties; green tea has powerful
anti-oxidant properties; while
pomegranate juice combats hypertension; the pectin in apples reduce
cholesterol; 70% dark chocolate has
cardiovascular benefits; while coloured
vegetables contain flavonoids that
kill free radicals.
Longevity
Life expectancy in Europe is rising
by one trimester a year, so by almost
four years in the past ten. The natural
human span, if we manage our lives
well, can be between 120 and 140 years.
The rapidly increasing life span has
major implications for the pharmaceutical, cosmetics and nutrition industries. In general these industries will
concentrate not on treatment, but
on prevention.
Joël de Rosnay PhD is a futurist, science writer,
molecular biologist and former research associate at MIT. He was Director of Research
Applications at the Institut Pasteur in Paris. He
is currently President of Biotics International.
He has a special interest in cutting-edge technologies and applications of systems theory.
He is the author of many works including: Les
origines de la vie (1965) The Macroscope (1975);
L'aventure du vivant (1988); Les rendez-vous
du futur (1991); Comprendre le monde qui
vient (2007). Joël de Rosnay was awarded
the 1990 Prix de l'Information Scientifique
by the Académie des Sciences.
pictet report | june 2011
two years on
REACHING HIGHER GROUND 2011
Pictet & Cie
Pictet held its eleventh Reaching Higher
Ground symposium in The Hague
between 30th March and 1st April 2011.
This event was made possible by the
strong relationships built over many
years between Pictet and leading fund
distributors and investing institutions
and we thank all participants.
Founded in 1805 in Geneva, Pictet &
Cie is today one of Switzerland’s largest
private banks, and one of the premier
independent asset management
specialists in Europe, with EUR294.6
billion in assets under management
and custody at 31st March 2011.
Pictet & Cie is a partnership owned
and managed by eight general partners
with unlimited liability for the bank’s
commitments.
The Pictet Group, which is based in
Geneva, employs more than 3,100 staff.
The group has offices in the following financial centres: Barcelona, Basel,
Dubai, Florence, Frankfurt, Hong
Kong, Lausanne, London, Luxembourg,
Madrid, Milan, Montreal, Nassau,
Paris, Rome, Singapore, Turin, Tokyo
and Zurich.
The preceding articles are an edited version of
addresses and remarks made by the speakers
and panellists contributing to the symposium
in The Hague on 30th March to 1st April 2011.
Pictet & Cie takes full responsibility for any
errors or omissions that may have occurred
in the process of compilation.
The Pictet Report
The Pictet Report is published by Pictet
& Cie between three and five times a
year. Its contents are based either on
the proceedings of a Pictet conference,
or on a series of specially commissioned
interviews and discussions on particular investment and business themes
of topical interest.
Disclaimer
This report is issued and distributed by Pictet & Cie,
based in Geneva, Switzerland. It is not aimed at or
intended for distribution to or use by retail clients, or
any person or entity who is a citizen or resident of, or
located in, any locality, state, country or other jurisdiction
where such distribution, publication, availability or use
would be contrary to law or regulation. The information
and material presented in this report are provided for
information purposes only and are not to be used or
considered as an offer or invitation to buy, sell or subscribe
to any securities or other financial instruments.
Furthermore, the information, opinions and
estimates expressed herein reflect a judgment at the
original date of publication of the attributed speaker
which could be sourced by a third party and are believed
reliable, but no representation or warranty, express or
implied, is made for their accuracy or completeness
and are subject to change without notice. The value
of and income from any of the securities or financial
instruments mentioned in this document can go up
as well as down. The market value may be affected by
changes in economic, financial or political factors, time
to maturity, market conditions and volatility, or the
credit quality of any issuer or reference issuer. Moreover,
currency exchange rates may have a positive or adverse
effect on the value or price of, or income from, any
security or related investment mentioned in this report.
Past performance should not be taken as an indication or
guarantee of future performance, and no representation
or warranty, expressed or implied, is made by Pictet
& Cie regarding future performance. Instructions
stipulated by the client as regards trading, transactions
and investment constraints shall take precedence over,
and may diverge from, the Bank’s overall investment
strategy and recommendations.
This publication has also been issued by Pictet
Asset Management SA in Switzerland, a Swiss
corporation registered with the Swiss Financial Market
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