Just In Time For the Rise of Passive Investing: "Correlations to Break Down in 2015"
From MoneyBeat:
If there’s one overarching idea for global investing in 2015, it’s that overarching strategies aren’t a good idea.
In 2014, global markets started breaking a multiyear pattern in which
different asset classes and geographic markets mostly moved in unison.
Correlations are set to break down further in 2015.
Accelerating this breakdown is fact that central banks are going
their separate ways – the Federal Reserve is preparing for a rate
increase, the European Central Bank for more monetary easing – while
energy producers and consumers are experiencing starkly different
effects from falling oil prices.
The upshot: Global investors must do their homework. across-the-board
bets on risk-sensitive assets such as equities or junk bonds won’t do;
they will need to be more selective. The fundamental circumstances for
each country, company or commodity must be assessed and differentiated.
Investment positions will need frequent adjusting. Simplicity is ceding
ground to the realities of a complex world.
“In a year when economic fortunes and central bank policies will
diverge, it will be important to be positioned in a way that recognizes
the challenges and identifies where the potential opportunities lie,”
says Rick Lacaille, chief investment officer for State Street Global
Advisors, which has $2.4 trillion under management. State Street is
hoping that 2015 will better suit its bottom-up value-investing model
rather than the top-down macro approaches that were favored during the
highly correlated market movements of recent years.
Correlations became especially strong after the 2008-2009 financial
crisis. During “risk on” periods, when central-bank monetary stimulus
measures boosted confidence in the global financial system’s recovery,
investors poured into all manner of “risk sensitive” assets, raising
prices for emerging-market currencies, high-yield bonds, industrial
commodities and equities indiscriminately. Then, during “risk off”
panics such as those of the eurozone crisis, those flows would abruptly
reverse and head to safe-havens denominated in dollars or yen.
However, herd investing has roots that precede the crisis. Its habits could be hard to break.
As Financial Times columnist John Authers noted in his 2010 book,
“The Fearful Rise of Markets,” blame for the “global bubbles” and
“synchronized meltdowns” of recent years lies with both official
policymakers and with the professional investment industry. Former Fed
Chairman Alan Greenspan gave rise to the “Greenspan Put,” which after it morphed into the “Bernanke Put” during Ben Bernanke’s
chairmanship continued to signify the expectation that the Fed would
always minimize investors’ losses in falling markets by flooding them
with monetary liquidity. Meanwhile, government bailouts led Wall Street
investment banks to believe they were too big to fail. At the same time,
monthly assessments of portfolio performances led competing
professional money managers to stick closely to their benchmarks, which
meant they invested as a group. The same industry devised
classifications that put disparate assets and markets under broad
umbrellas, each tailored-made for the herd: “junk bonds,” for one, and,
most significantly, “emerging markets.” All of this meant that nuanced
insights were less valuable.
Meanwhile, economists were describing a world that seemed to be
converging into homogeneity. The idea that globalization, information
technology and improved policies were driving developing nations to
catch up to the advanced economies became an article of faith that in
turn encouraged parallel investment strategies. Its baseline assumption –
that America was slowing and emerging markets were the future —
couldn’t anticipate the late-2014 scenario where the U.S. is again the
world’s engine of growth while developing nations such as Russia
confront crises....MORE
