Saxo Bank (Saxo Bank)
Markets  |  March 08, 2013 10:52:07

They should copy the stock markets development of the real economy?

2012 finally showed up in a completely different light than most of us thought. I personally have had enough at the beginning of a negative attitude, especially in European economies concerned. Afterwards, I then had more or less right. But on the other hand, I was skeptical as well as growth of equity markets, which, unlike Please complete the development of the economy. But stock markets should not copy or at least to behave in accordance with the real economy?

More than 25 years living as a trader, market maker and the fund manager, so now I could know. Of course, the stock markets and the economy are linked, but rarely on a daily or even monthly basis. Mostly the mismatch between expectations and the current reality.All of this is underscored by the critical role of monetary policy, which is responsible for determining the sentiment and the market price, which is different from the real economy. It is now apparent, especially in Europe, where there are seemingly illogical combination of historical highs in both unemployment and the stock market. Markets have had soared to pre-crisis records from 2007 to 2008.

History shows us that a similar discrepancy has its limits and expiration date. Either they dramatically improve the condition of the economy, or on the contrary, markets will have to be compared with a fall. To this disparity between their developing understanding of the historical context, we can look at the difference between the broader equity indices such as the MSCI World Index and the German IFO business climate. The discrepancy between the poor performance of the economy, which tracks the index, and stock markets this year reached extreme values.Similarly, we could see the markets before the crash in 2000. This is not exactly a good sign, but it is necessary to think that this diversity can mitigate two ways: either drop stocks or the economy zmátoří.

In terms of stock market fundamentals are just a subfolder of the economy, or to GDP. Thus shares must correspond to some extent with the development of the economy and at the same time adhering to other areas of the economy, such as inflation and productivity. The long-term bull market usually goes hand in hand with not only economic growth, but also with increased production and risk premia. And even more important is that the real bull market earn all as rich and poor. All this through a lower unemployment rate, higher production and investment. At the current price growth but unfortunately all these advantages do not apply.

So how do investors have to deal with the investment puzzle? For experienced investors, the above economic relations actually useless. Investor who would want to risk illiquid assets, is ultimately added risk premium. It varies depending on inflation, current interest rates and average income from dividends of the shares. Logic of the shares must have a higher yield than bonds in order to compensate for their lower liquidity.

Last July, when the European Central Bank chief Mario Draghi assuring the world that will do anything to save the eurozone, caused a shift to less liquid assets. He had managed to eliminate potential negative tinge bonds, and thus indirectly also supported stocks. But again, I must reiterate that as investors do not understand it either.If, in fact we keep simple rules for investing, we do analysis of the state of the real economy to confront the valuation of shares. Nothing to prevent us to be an economic agnostic.

American investor Harry Browne created in the 70 the last century, the permanent portfolio. Its principle is very simple. Invest 25 percent in each of the four asset classes, ie. in equities, government bonds, metals, and let rest in cash. Do you find it too boring? So take a look at the statistics: The annual income from this allocation was from 1972 to 2011 averaged 9.5 percent. In real terms, while annual profit has not fallen below 4.9 percent. This is a much more profitable investment than giving stock markets, however, covers a much smaller risk! If you would like this in 1972 invested $ 10,000, then you would by 2012 to assess $ 377,193.

That does not mean that active trading does not pay. It helps us to understand that it is wise to have some stupid model as a safety brake or frame of reference. Greater risk or changes in the allocation then change only when one of the components has significantly or there is convincing upper hand signals, you're right. This idea then improved famous hedge manager Ray Dalia from investment firm Bridgewater and termed it as a model for all seasons. As the name suggests this strategy is able to cope with any economic situation. The results of this model are yet very convincing. Its annual return since 1996 is around 12 percent.Thanks to this, Bridgewater became the largest fund in the world, currently manages about $ 141 billion.

The main difference between these models is that the one from Harry Brown helps distribute the assets, while Ray Dali and his Bridgewater advice on how to spread the risk. Common, however, to the fact that even at one regardless of the evolution of the market. Count is the basis of dealing with important: we do not know what will happen tomorrow, we do not know where we're going, but we take profit in the first row of the risk premium. The beauty of such an investment is that they do not understand the relationship between the economy and stock markets are to invest efficiently. Moreover, when we take into account the current unpredictable interventions in macroeconomics, we could relieve this approach in trying to understand everything around. And it also gives an advantage to each investor who can not see the head powerful politicians and central bankers.

An investor should abandon this strategy only if it has a very obsessive feeling or belief that something will happen. I personally allocates its investments from 70 percent in the model in any weather. In 2012, I managed to make a decent profit, even when I'm almost 100 percent of their market very conservative predictions wrong. The remaining 30 percent I used as an insurance policy against the so-called black swan or the occasional investment. Right now I begin to enjoy long-term investment in sub-Saharan Africa. And what is the answer to the main question of this article? Equity markets may differ from the real economy for a limited time, but rational investors it just has no effect. Investments are on logical reasoning and rationality, and not a genius. And that's good news for all of us.

Steen Jakobsen, chief economist at Saxo Bank .

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