There are really two things which need to be in place for any investment: price and value. Price is what you pay, and value is what you get. Sounds simple, yet it is so complicated when we are in the world of future returns for investors. When trying to create a portfolio, most managers look up historic performance and then correct their future expectations into this average.
Let’s start with the chart alongside this article, from the CFA Institute, which has averaged out the long-term forecasts of JPMorgan, Northern Trust and BNY Mellon.
The expected return then needs to be adjusted. For example, US inflation is nowhere close to the 2 to 5 per cent range which will lower nominal return. Furthermore, two additional changes need to be made: The outperformance in the past seven years under low interest rates – in real buying terms borrowed money has been almost costless – needs to mean-revert to its long-term mean and growth top-line is also lower than norm. Doing all these corrections, Boston-based GMO, one of the world’s largest fund managers, have produced forecasts for their returns for the next seven years – clearly the fat seven years seems to have been replaced with seven lean years.
If GMO is right, the traditional portfolio is under attack – whether it’s equal weighting for stocks and bonds or a 70 per cent weighting for stocks and 30 per cent for bonds, the expected return is pretty much zero. However what few people seem to realise is that over time the next return is correlated more to the “illiquidity” premium of the asset than any other determining factor. This means the less liquid the product trades the higher the expected return – hence treasury bills have zero risks and zero returns. Now government bonds have zero risks and zero returns as well, which means you need to access less liquid markets so as to achieve returns higher than zero over the medium term.
Here, the emerging-markets fourth-quarter theme of Saxo Bank, where I am the chief economist, plays in. Emerging markets is the only asset class in stocks where both price and value are deeply cheap. A study by Kyle Caldwell of the Daily Telegraph found the cheapest nine markets to be: China, Russia, Pakistan, Turkey, Hong Kong, Greece, Poland, Spain and Japan – all markets that we agree offer unique price and value. The reason for our newfound optimism is kind of "negative"; the failure of the US Federal Reserve to start a normalisation cycle will create another leg of pretend-and-extend, which means doing nothing for longer. But it most importantly also delays any potential Fed hike into the second quarter or third quarter of next year, hence creating a cheaper US dollar and time to pass.
Emerging markets are “hated” by most managers because of China and Asia overall: big built-in debt (China’s debt quadrupled from US$7 trillion in 2007 to $28 trillion by the middle of last year, according to the McKinsey Global Institute) and lack of exports combined with low energy prices. But Asia and emerging markets are now priced to imperfection, failure even, and with a monetary policy of stimulus from the European Central Bank and the Bank of Japan, plus a hesitant Federal Reserve, will create carry trades. And here not only the above markets, but also emerging markets overall comes to mind. To short emerging markets is very expensive – the 12-month yield is +233 basis points in iShares MSCI Emerging Markets, a big exchange-traded fund (ETF). ETFs are passively managed investment funds traded publicly on stock exchanges in the same manner as traditional stocks.
How do we combine all of the above: price, value, future expectations and economic outlook?
I believe the rest of this year is fair sailing but that by the first quarter next year, the non-change, lack of reform and no mandate for change will have Europe but also the United States close to recession, which means lower overall interest rates levels. This, combined with stubborn inflation expectations and expected returns profile, creates my choice of portfolio: Thirty per cent in gold, silver exchange-traded funds (tickers: GLD, SLV), 15 per cent in broad emerging markets (ticker: EEM), 10 per cent in Japan (Fidelity funds), 35 per cent in US bonds with maturity tenor of between seven and 10 years. (ticker: IEF) and 10 per cent in emerging markets bonds (ticker: EMB).
My choice of portfolio is overweight on metals due to lower real interest rates, and the stabilising of the US dollar and commodities. My investments in emerging markets are due to carry trades and also because they are cheap or of good value. Meanwhile, Japan-Fidelity is a play on the initial public offering of Japan’s postal system, which I believe will change the landscape and allocation to stocks in Japan. The IEF bonds I expect to be lower for longer due to the actions of the major global central banks. Finally, my investment in the iShares JPMorgan Emerging Markets Bond fund is because I expect countries will see less pressure from inflation as the currency stabilises.
This is my portfolio for the year end and past the new year. When things have normalised in emerging markets and Japan, I will rotate to neutral.
Steen Jakobsen is the chief economist of Saxo Bank.
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UAE currency: the story behind the money in your pockets
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2) Alisson, Roma to Liverpool (£67m)
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5) Angelo Peruzzi, Inter Milan to Lazio (£15.7m
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THE SPECS
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The specs
Engine: Four electric motors, one at each wheel
Power: 579hp
Torque: 859Nm
Transmission: Single-speed automatic
Price: From Dh825,900
On sale: Now
At a glance
Global events: Much of the UK’s economic woes were blamed on “increased global uncertainty”, which can be interpreted as the economic impact of the Ukraine war and the uncertainty over Donald Trump’s tariffs.
Growth forecasts: Cut for 2025 from 2 per cent to 1 per cent. The OBR watchdog also estimated inflation will average 3.2 per cent this year
Welfare: Universal credit health element cut by 50 per cent and frozen for new claimants, building on cuts to the disability and incapacity bill set out earlier this month
Spending cuts: Overall day-to day-spending across government cut by £6.1bn in 2029-30
Tax evasion: Steps to crack down on tax evasion to raise “£6.5bn per year” for the public purse
Defence: New high-tech weaponry, upgrading HM Naval Base in Portsmouth
Housing: Housebuilding to reach its highest in 40 years, with planning reforms helping generate an extra £3.4bn for public finances
The Pope's itinerary
Sunday, February 3, 2019 - Rome to Abu Dhabi
1pm: departure by plane from Rome / Fiumicino to Abu Dhabi
10pm: arrival at Abu Dhabi Presidential Airport
Monday, February 4
12pm: welcome ceremony at the main entrance of the Presidential Palace
12.20pm: visit Abu Dhabi Crown Prince at Presidential Palace
5pm: private meeting with Muslim Council of Elders at Sheikh Zayed Grand Mosque
6.10pm: Inter-religious in the Founder's Memorial
Tuesday, February 5 - Abu Dhabi to Rome
9.15am: private visit to undisclosed cathedral
10.30am: public mass at Zayed Sports City – with a homily by Pope Francis
12.40pm: farewell at Abu Dhabi Presidential Airport
1pm: departure by plane to Rome
5pm: arrival at the Rome / Ciampino International Airport
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Key facilities
- Olympic-size swimming pool with a split bulkhead for multi-use configurations, including water polo and 50m/25m training lanes
- Premier League-standard football pitch
- 400m Olympic running track
- NBA-spec basketball court with auditorium
- 600-seat auditorium
- Spaces for historical and cultural exploration
- An elevated football field that doubles as a helipad
- Specialist robotics and science laboratories
- AR and VR-enabled learning centres
- Disruption Lab and Research Centre for developing entrepreneurial skills
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
COMPANY PROFILE
Initial investment: Undisclosed
Investment stage: Series A
Investors: Core42
Current number of staff: 47
The specs
Engine: 3.0-litre six-cylinder turbo
Power: 398hp from 5,250rpm
Torque: 580Nm at 1,900-4,800rpm
Transmission: Eight-speed auto
Fuel economy, combined: 6.5L/100km
On sale: December
Price: From Dh330,000 (estimate)
