Investing for a new economic era
Stéphane Monier Chief Investment Officer, Lombard Odier Private Bank

Investing for a new economic era

From September, our portfolios will have greater emerging market, small-cap equities, and corporate debt exposure. We have adjusted our underlying asset allocation to benefit from a number of key new structural trends, and to reflect a world of lower expected growth and investment returns ahead.​

September traditionally sees markets enter a new phase after the summer lull: an appropriate time, we believe, to review our own investment strategy. We pride ourselves on our investment expertise over three distinct time periods: the short-term (tactical investing), medium term (current business/economic cycle) and long-term (secular outlook and trends).

As of this month, we are remodelling our long-term investment strategy. What we call our ‘strategic asset allocation’ now reflects the latest economic thinking, as well as key global trends we have identified. Here we assess the changes, their justification, and what it means for our clients’ wealth.

What is changing in the global economy?

Low growth. As we have long maintained, the post-World War II era is no longer the appropriate yardstick by which to measure global economic growth. Data from the World Bank show that even since the 1960’s, when global gross domestic product (GDP) growth averaged 5.5%, growth has been slowing in recent decades. We expect slow growth to continue in the next ten years.

Ageing populations and low productivity. GDP growth can be seen as a function of population and productivity growth. Our outlook is in part attributable to an ageing global population. The UN estimates that in 2015, one in eight people was aged 60 or over. By 2030, it forecasts that figure will be one in six, and by 2050, one in five1. This trend both reduces the working population of an economy and increases the number of pensioners drawing on its resources.

Global productivity has also slowed sharply since the 1960s, when 4-6% growth was common across many rich countries2. Global research association The Conference Board expects global productivity growth to reach just 1.9% this year, and we believe the recent low level of investment spending across many economies merits a conservative outlook ahead.

Controlled inflation, and more ‘normal’ monetary policy. Inflation is currently under control across much of the developed and emerging world, anchored by increasing central bank credibility and commitment to national inflation targets. In coming years, central banks in Europe and the US will also be reversing ‘extraordinary’ measures taken to prevent an economic collapse in 2007-2009, removing a major stimulus and long-standing prop to the global economy.

How should we invest in this new world?

The changing global economy leads us to expect lower investment returns over the coming decade. We believe that in order to continue generating performance and achieving the best results for our clients, our strategic asset allocation should reflect these structural changes to the investment environment.

This has lead us to assess opportunities across both traditional and less traditional asset classes, and expand our opportunity set. Crucially, we believe that emerging markets and credit (corporate rather than government debt) will be important factors in driving future returns.

As a result of this remodelling, our strategic asset allocation will now incorporate the following:

A new way of investing

Multi-asset investing has traditionally divided a portfolio into asset classes and allocated a certain, fixed amount to each: eg equities, bonds, commodities and alternative investments.

The latest academic thinking focuses instead on ‘factor-based’ investing. This looks beyond asset classes to the underlying drivers of investment returns, or returns generated above the ‘risk-free rate’ (theoretical rate of return for an investment with no risk). These returns, or ‘risk premia’ include primary categories such as interest rate, credit, equity, emerging and liquidity premia, and secondary categories including carry, quality and momentum.

We are now using this ‘factor-based’ investment approach to drive our strategic asset allocation.

Important information
This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier. Accordingly, it has not been in accordance with the Swiss Bankers Association Directives on the Independence of Financial Research or any other legal requirements designed to promote the independence of investment research. Any information contained in this document is not and should not be regarded as financial research for the purposes of the Swiss Bankers Association or any relevant regulatory body. Consequently, this document is not subject to any restriction on dealing head of the dissemination of investment research. Furthermore it is duly stressed that opinions expressed in this document may differ from the opinions expressed by other divisions of Lombard Odier, including its Financial Research Department. This document is provided for information purposes only. It does not constitute an offer or a recommendation to subscribe to, purchase, sell or hold any security or financial instrument.
It contains the opinions of Lombard Odier, as at the date of issue. These opinions and the information contained herein do not take into account an individual’s specific circumstances, objectives, or needs. No representation is made that any investment or strategy is suitable or appropriate to individual circumstances or that any investment or strategy constitutes a personal recommendation to any investor. Each investor must make his/her own independent decisions regarding any securities or financial instruments mentioned herein. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Lombard Odier does not provide tax advice. Therefore you must verify the above and all other information provided in the document or otherwise review it with your external tax advisors.
Investments are subject to a variety of risks. Before entering into any transaction, an investor should consult his/her investment advisor and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. The information and analysis contained herein are based on sources considered to be reliable. However, Lombard Odier does not guarantee the timeliness, accuracy, or completeness of the information contained in this document, nor does it accept any liability for any loss or damage resulting from its use. All information and opinions as well as the prices, market valuations and calculations indicated herein may change without notice.
Past performance is no guarantee of current or future returns, and the investor may receive back less than he/she invested. The investments mentioned in this document may carry risks that are difficult to quantify and integrate into an investment assessment. In general, products such as equities, bonds, securities lending, forex, or money market instruments bear risks, which are higher in the case of derivative, structured, and private equity products; these are aimed solely at investors who are able to understand their nature and characteristics and to bear their associated risks. On request, Lombard Odier will be pleased to provide investors with more detailed information concerning risks associated with given instruments.
The value of any investment in a currency other than the base currency of a portfolio is subject to the foreign exchange rates. These rates may fluctuate and adversely affect the value of the investment when it is realised and converted back into the investor’s base currency. The liquidity of an investment is subject to supply and demand. Some products may not have a well-established secondary market or in extreme market conditions may be difficult to value, resulting in price volatility and making it difficult to obtain a price to dispose of the asset.
If opinions from financial analysts are contained herein, such analysts attest that all of the opinions expressed accurately reflect their personal views about any given instruments. In order to ensure their independence, financial analysts are expressly prohibited from owning any securities that belong to the research universe they cover. Lombard Odier may hold positions in securities as referred to in this document for and on behalf of its clients and/or such securities may be included in the portfolios of investment funds as managed by Lombard Odier or affiliated Group companies.
European Union Members: This document has been approved for use by Lombard Odier (Europe) S.A., a credit institution authorised and regulated by the Commission de Surveillance du Secteur Financier (CSSF) in Luxembourg and by each of its branches operating in the following territories: Belgium: Lombard Odier (Europe) S.A. Luxembourg • Belgium branch, a credit institution supervised in Belgium by the Banque nationale de Belgique (BNB) and the Financial Services and Markets Authority (FSMA); France: Lombard Odier (Europe) S.A.• Succursale en France, a credit institution supervised in France by the Autorité de contrôle prudentiel et de résolution (ACPR) and by the Autorité des marchés financiers (AMF) in respect of its investment services activities; Italy: Lombard Odier (Europe) S.A. • Italian Branch, credit institution governed in Italy by the Italian stock market regulator (Commissione Nazionale per la Società e la Borsa , or CONSOB) and the Bank of Italy; Netherlands: Lombard Odier (Europe) S.A. • Netherlands Branch, a credit institution supervised in the Netherlands by De Nederlandsche Bank (DNB) and by Autoriteit Financiële Markten (AFM); Spain: Lombard Odier (Europe) S.A. • Sucursal en España, a credit institution supervised in Spain by the Banco de España and the Comisión Nacional del Mercado de Valores (CNMV); and United Kingdom: Lombard Odier (Europe) S.A. • UK Branch, a credit institution in the UKsubject to limited regulation in the UK by the Financial Conduct Authority (‘FCA’) and the Prudential Regulation Authority (‘PRA’). Details of the extent of our authorisation and regulation by the PRA and regulation by the FCA are available from us on request. UK regulation for the protection of retail clients in the UK and the compensation available under the UK Financial Services Compensation Scheme does not apply in respect of any investment or services provided by an overseas person.
In addition, this document has also been approved for use by the following entities domiciled within the European Union: Gibraltar: Lombard Odier & Cie (Gibraltar) Limited, a firm which is authorised and regulated by the Financial Services Commission, Gibraltar (FSC) to conduct banking and investment services business; Spain: Lombard Odier Gestión (España) S.G.I.I.C., S.A.U., an investment management Company authorised and regulated by the Comisión Nacional del Mercado de Valores (CNMV).
Switzerland: This document has been approved for issue in Switzerland by Bank Lombard Odier & Co Ltd Geneva, a bank and securities dealer authorized and regulated by the Swiss Financial Market Supervisory Authority (FINMA).
United States: Neither this document nor any copy thereof may be sent, taken into, or distributed in the United States of America, any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States Person. For this purpose, the term “United States Person” shall mean any citizen, national or resident of the United States of America, partnership organized or existing in any state, territory or possession of the United States of America, a corporation organized under the laws of the United States or of any state, territory or possession thereof, or any estate or trust that is subject to United States Federal income tax regardless of the source of its income.
This document may not be reproduced (in whole or in part), transmitted, modified, or used for any public or commercial purpose without the prior written permission of Lombard Odier. 

 

 

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  • Reduced cash holdings – to increase the possibility of generating investment returns
  • Reduced government bond exposure and increased high-yield bond exposure – as we believe high-yield corporate debt can offer better risk-adjusted returns within the fixed income space
  • Increased emerging market (EM) exposure – both EM equities and local/hard currency debt – to benefit from years of underperformance, relatively low valuations, higher structural growth rates and undervalued currencies
  • Introduction of small-cap equities – tapping into a new source of equity returns and an ‘illiquidity premium,’ or compensation for investing in more thinly traded equity markets
  • Introduction of convertible bonds – tapping into new sources of equity and credit-like returns driving future returns.
  • Introduction of Swiss listed real estate in Swiss franc portfolios – to benefit from the ‘illiquidity premium’, or compensation for investing money over long periods of time

Important information

This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier. Accordingly, it has not been in accordance with the Swiss Bankers Association Directives on the Independence of Financial Research or any other legal requirements designed to promote the independence of investment research. Any information contained in this document is not and should not be regarded as financial research for the purposes of the Swiss Bankers Association or any relevant regulatory body. Consequently, this document is not subject to any restriction on dealing head of the dissemination of investment research. Furthermore it is duly stressed that opinions expressed in this document may differ from the opinions expressed by other divisions of Lombard Odier, including its Financial Research Department. This document is provided for information purposes only. It does not constitute an offer or a recommendation to subscribe to, purchase, sell or hold any security or financial instrument.

It contains the opinions of Lombard Odier, as at the date of issue. These opinions and the information contained herein do not take into account an individual’s specific circumstances, objectives, or needs. No representation is made that any investment or strategy is suitable or appropriate to individual circumstances or that any investment or strategy constitutes a personal recommendation to any investor. Each investor must make his/her own independent decisions regarding any securities or financial instruments mentioned herein. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Lombard Odier does not provide tax advice. Therefore you must verify the above and all other information provided in the document or otherwise review it with your external tax advisors.

Investments are subject to a variety of risks. Before entering into any transaction, an investor should consult his/her investment advisor and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. The information and analysis contained herein are based on sources considered to be reliable. However, Lombard Odier does not guarantee the timeliness, accuracy, or completeness of the information contained in this document, nor does it accept any liability for any loss or damage resulting from its use. All information and opinions as well as the prices, market valuations and calculations indicated herein may change without notice.

Past performance is no guarantee of current or future returns, and the investor may receive back less than he/she invested. The investments mentioned in this document may carry risks that are difficult to quantify and integrate into an investment assessment. In general, products such as equities, bonds, securities lending, forex, or money market instruments bear risks, which are higher in the case of derivative, structured, and private equity products; these are aimed solely at investors who are able to understand their nature and characteristics and to bear their associated risks. On request, Lombard Odier will be pleased to provide investors with more detailed information concerning risks associated with given instruments.

The value of any investment in a currency other than the base currency of a portfolio is subject to the foreign exchange rates. These rates may fluctuate and adversely affect the value of the investment when it is realised and converted back into the investor’s base currency. The liquidity of an investment is subject to supply and demand. Some products may not have a well-established secondary market or in extreme market conditions may be difficult to value, resulting in price volatility and making it difficult to obtain a price to dispose of the asset.

If opinions from financial analysts are contained herein, such analysts attest that all of the opinions expressed accurately reflect their personal views about any given instruments. In order to ensure their independence, financial analysts are expressly prohibited from owning any securities that belong to the research universe they cover. Lombard Odier may hold positions in securities as referred to in this document for and on behalf of its clients and/or such securities may be included in the portfolios of investment funds as managed by Lombard Odier or affiliated Group companies.

European Union Members: This document has been approved for use by Lombard Odier (Europe) S.A., a credit institution authorised and regulated by the Commission de Surveillance du Secteur Financier (CSSF) in Luxembourg and by each of its branches operating in the following territories: Belgium: Lombard Odier (Europe) S.A. Luxembourg • Belgium branch, a credit institution supervised in Belgium by the Banque nationale de Belgique (BNB) and the Financial Services and Markets Authority (FSMA); France: Lombard Odier (Europe) S.A.• Succursale en France, a credit institution supervised in France by the Autorité de contrôle prudentiel et de résolution (ACPR) and by the Autorité des marchés financiers (AMF) in respect of its investment services activities; Italy: Lombard Odier (Europe) S.A. • Italian Branch, credit institution governed in Italy by the Italian stock market regulator (Commissione Nazionale per la Società e la Borsa , or CONSOB) and the Bank of Italy; Netherlands: Lombard Odier (Europe) S.A. • Netherlands Branch, a credit institution supervised in the Netherlands by De Nederlandsche Bank (DNB) and by Autoriteit Financiële Markten (AFM); Spain: Lombard Odier (Europe) S.A. • Sucursal en España, a credit institution supervised in Spain by the Banco de España and the Comisión Nacional del Mercado de Valores (CNMV); and United Kingdom: Lombard Odier (Europe) S.A. • UK Branch, a credit institution in the UKsubject to limited regulation in the UK by the Financial Conduct Authority (‘FCA’) and the Prudential Regulation Authority (‘PRA’). Details of the extent of our authorisation and regulation by the PRA and regulation by the FCA are available from us on request. UK regulation for the protection of retail clients in the UK and the compensation available under the UK Financial Services Compensation Scheme does not apply in respect of any investment or services provided by an overseas person.

In addition, this document has also been approved for use by the following entities domiciled within the European Union: Gibraltar: Lombard Odier & Cie (Gibraltar) Limited, a firm which is authorised and regulated by the Financial Services Commission, Gibraltar (FSC) to conduct banking and investment services business; Spain: Lombard Odier Gestión (España) S.G.I.I.C., S.A.U., an investment management Company authorised and regulated by the Comisión Nacional del Mercado de Valores (CNMV).

Switzerland: This document has been approved for issue in Switzerland by Bank Lombard Odier & Co Ltd Geneva, a bank and securities dealer authorized and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

United States: Neither this document nor any copy thereof may be sent, taken into, or distributed in the United States of America, any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States Person. For this purpose, the term “United States Person” shall mean any citizen, national or resident of the United States of America, partnership organized or existing in any state, territory or possession of the United States of America, a corporation organized under the laws of the United States or of any state, territory or possession thereof, or any estate or trust that is subject to United States Federal income tax regardless of the source of its income.

This document may not be reproduced (in whole or in part), transmitted, modified, or used for any public or commercial purpose without the prior written permission of Lombard Odier.