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Why Global Macro? Jan Szilagyi co-Chief Investment Officer Global Macro Strategies April 2016 FOR PROFESSIONAL INVESTOR USE ONLY © All rights reserved. Lombard Odier Investment Managers. Lombard Odier – independent and privately owned Strategic diversification across three business lines PRIVATE CLIENTS USD 120 billion Wealth management solutions for high net worth individuals and their families TECHNOLOGY AND BANKING SERVICES USD 53 billion IT services and global custody for both internal and external clients LOMBARD ODIER INVESTMENT MANAGERS: ASSET MANAGEMENT1 USD 47 billion Asset management services for institutional clients, third-party distributors and financial intermediaries Focused solely on asset management for institutional and private clients The oldest private bank in Geneva and one of the largest in Europe The bank’s partners are responsible for the day-to-day management of the firm; this management structure brings tangible benefits for our clients – Independent ownership brings an entrepreneurial approach to our business strategy and the ability to take a longer-term outlook – Our focus is 100% on our clients rather than shareholders – We are able to respond with agility to market events AUM in USD billion1 Equity Convertibles Fixed income Multi-asset 2 Less liquid Others3 10.5 8.7 16.9 7.8 2.1 1.0 FITCH RATINGS AND TIER 1 RATIO AAOur firm is rated AA- by Fitch – this is the best possible rating for a firm of our size 22.7% Fully-loaded Basel III CET1 ratio AUM as at 30 June 2015. CET1 fully loaded Basel III capital ratio figures are correct as at 30 June 2015. 1 Lombard Odier Group annual results includes USD 3.0 billion of non-managed assets for LOIM which is excluded from the LOIM AUM shown here. 2 Multi-asset portfolios includes both risk-based and traditional as well as fiduciary assets. 3 Alternative Risk Premia and commodities. Lombard Odier Investment Managers. Please see important information at the end of the document. 1 Global Financial Crisis elicited extraordinary policy response Central Bank policy rates reached historic lows in response to the Global Financial Crisis Major central bank balance sheets saw unprecedented (and coordinated) expansion: ECB, Fed, BOE, BOJ CENTRAL BANK RATES CENTRAL BANK BALANCE SHEETS Source: Bloomberg Lombard Odier Investment Managers. Please see important information at the end of the document. Source: Bloomberg 2 The unorthodox policy stance is fueling new imbalances Chinese Credit/GDP ratio expanded to 280% of GDP from 158% before the crisis, mostly driven by corporate credit and encouraged by the government eager to offset headwinds from the Global Financial Crisis. Source: McKinsey Global Institute Lombard Odier Investment Managers. Please see important information at the end of the document. 3 The unorthodox policy stance is fueling new imbalances Enormous Chinese Fixed Asset Investment program fueled a fast recovery in commodity prices that had collapsed in the wake of the GFC. As the policy ended, prices dropped again. The drop in crude oil prices alone equates to a $2-3 trillion transfer annually from producers to consumers. Oil (green) and Copper (white) Source: Bloomberg Lombard Odier Investment Managers. Please see important information at the end of the document. 4 The unorthodox policy stance is fueling new imbalances To counter ECB’s balance sheet expansion and its impact on their currencies, Sweden and the Czech Republic are forced to keep their own monetary policy on the emergency setting in the face of economic growth in excess of 4%. SWEDEN: GDP & RIKSBANK RATE Source: Bloomberg Lombard Odier Investment Managers. Please see important information at the end of the document. CZECH: GDP & CNB RATES Source: Bloomberg 5 The unorthodox policy stance is fueling new imbalances A massive proportion of Developed Market government debt is now offering negative yields. Source: JPMorgan Lombard Odier Investment Managers. Please see important information at the end of the document. 6 The unorthodox policy stance is fueling new imbalances While US households have delevered after the housing bubble (white line), US corporates took advantage of low rates and relevered to near record highs (yellow line). Most of the debt taken on has gone into share repurchases. US equity markets dwarf the rest of the world in importance of equity buybacks. HOUSEHOLD DEBT/GDP AND CORP DEBT/GDP Source: Bloomberg, JPMorgan Lombard Odier Investment Managers. Please see important information at the end of the document. 7 The world after the debt bubble … Global economy is now significantly more indebted than it was prior to the Global Financial Crisis. Source: Mckinsey Global Institute Lombard Odier Investment Managers. Please see important information at the end of the document. 8 Why Global Macro? Every asset price is determined by a combination of its own idiosyncratic factors as well as a systemic Macro factor that reflects the underlying macroeconomic landscape A commodity analyst’s estimate of the supply-demand balance is contingent on an implicit macroeconomic view. Similarly, a financial analyst’s earnings estimate embeds an expectation for the underlying macro variables such as inflation or growth A realignment of global imbalances – housing bubbles, credit dislocations, monetary policy divergences - results in a reassessment of market expectations regarding the near term macroeconomic landscape. This reassessment then drives prices across different asset classes simultaneously, with the Macro factor overwhelming the idiosyncratic ones Lombard Odier Investment Managers. Please see important information at the end of the document. 9 Cross-asset Correlation The greater the importance of the macro dislocation, the larger the resulting correlation with other asset classes. Correlation with other assets 1.0 Idiosyncratic Market regime: Macro 0.5 Drivers of Asset Prices: • 0 Individual market Supply & Demand Low • Combination of S&D and Macro factor Importance of the Macro factor • Macro factor driven asset pricing High Source: Mckinsey Global Institute Lombard Odier Investment Managers. Please see important information at the end of the document. 10 How to monetize big trends in global macro? Relying on powerful data analytics and cross-country analysis increases the probability of trades that are not driven by the same Macro factor Testing top down themes/hypotheses using both top down and bottom up, micro-level data such as commodity supply/demand dynamics or company activity and sales reports allows a higher frequency detection of significant inflection points Focus on trade structure and instrument selection. Complementary use of derivatives ensures a high degree of convexity Emphasis on Portfolio architecture that anticipates the degree of correlation across trades in the portfolio and adjusts the risk profile accordingly. This allows each individual portfolio theme more time and risk space Lombard Odier Investment Managers. Please see important information at the end of the document. 11 Portfolio architecture Lombard Odier Investment Managers. Please see important information at the end of the document. 12 Disciplined Cross-Country analysis Lombard Odier Investment Managers. Please see important information at the end of the document. 13 Macro Indicator Snapshot Lombard Odier Investment Managers. Please see important information at the end of the document. 14