This week’s UBS investment research is brought to you by the number eight. (That’s eight, as in eight o’clock, or eight-ish)
You see, the global financial crisis cycle can, according to UBS, most easily be conveyed to investors around the world from the point of view of a clock face….
As UBS explain:
The concept is simple: Asset class performance ought to follow a predictable pattern as the economic cycle moves from expansion to recession and back to recovery. Indeed, based on post-war US data, the results are intuitive—an investment clock appears to work.
What time is it?
The trick, of course, is to tell ‘what time it is’ in order to anticipate how the clock
will move in order to time asset allocation decisions. Presently, we believe the
clock is nearing the recovery stage, which is typically when equities perform best.
So where are we now on the clock?
Today, we’re probably somewhere between the ‘depths of recession’ and ‘early recovery’, suggesting asset allocation ought to be more balanced between equities, corporate and government bonds.
So, where are we in the investment cycle? There is little doubt economic growth (in the US and globally) remains far below trend, and is still some way from achieving sustained trend performance. That puts us firmly in the left-hand quadrants of the investment clock, which signify below-trend GDP growth and an ISM index of under 50 (quadrants 1 and 4 in the investment clock).
Meanwhile, here are the actual asset allocation “clocks” provided (not the one on the right, the ones below).
First, some instructions on how to interpret those clock faces (for those unfamiliar with the clock reading principle):
The results are presented as an ‘investment clock’—the economic cycle moves in clockwise fashion around the chart, with each of the four quadrants representing above- or below-trend growth, as well as deepening or recovering growth rates (see Chart 1 and Chart 2, overleaf). The ISM index tends to lead GDP growth, so the results are slightly different in the two cases.
In terms of what all this means for asset allocation children investors, UBS say the clock supports the notion that bond allocations are more favourable than equity allocations when growth prospects and investor sentiment falter.
As they conclude:
Indeed, the range-trading scenario we consider most likely for stocks, bonds and credit over the coming months is predicated on an environment of an unconvincing economic recovery, with investor sentiment oscillating between greater optimism and renewed concern—gyrations, in other words, between the top and bottom left-hand quadrants of our ‘investment clock’.
Which we understand means it’s about 8.15-ish.
Related link:
The bull case shredded – FT Alphaville