perspectives d’investissement

    December – New Year’s resolutions, tapering and hackathons

    December – New Year’s resolutions, tapering and hackathons
    Stéphane Monier - Chief Investment Officer<br/> Lombard Odier Private Bank

    Stéphane Monier

    Chief Investment Officer
    Lombard Odier Private Bank

    And just like that, we are in December again.

    Every year around this time, I like to look back on the last 12 months in an attempt to learn lessons and make resolutions for the year ahead. This has been a rather casual exercise for me to date, with mixed results. This year, with this new monthly commentary, I intend to apply a more professional framework to the process of resolution making, with the aim of crossing more off my list at the end of 2022.

    At Lombard Odier, we review the data before coming to any decisions. More often than not, we come across interesting facts in the process, and this time is no exception. If you have been disappointed with your ability to keep your resolutions over the last few years, you are not alone. Research shows that only 10% of resolutions actually materialise within the year they were formed. Moreover, 50% of respondents cannot even remember the promises they made to themselves at the start of the year. This means that if you so much as remember your resolutions, you are in the better half.

    Research shows that only 10% of resolutions actually materialise within the year they were formed

    Another interesting characteristic of resolutions is their cyclicality. As illustrated in the chart below, weight-loss-related searches, for example, peak every year in the first week of January, and decline with a remarkably similar yearly pattern towards a low in December. While losing weight consistently appears among the most popular resolutions in the US year after year since 2006, motivation to actually deliver on it lacks, with the average adult weight in America climbing from 175 to 181 pounds in the last 15 years.

    Good intentions (1200x627px).svg

    These facts are perhaps consoling but not actually helpful towards doing better in 2022. According to the Washington Post, several concrete techniques can increase the chances of one’s resolutions materialising:

    • The first is to make the objective specific and measurable. For example, the vague intent to lose weight is less likely to succeed than a quantified plan to trim your waistline by 6cm.
    • The second critical feature of resolution making is to break down the objective into small time-framed steps as opposed to making one big commitment. Going back to weight loss, a plan to lose 0.5cm of waistline every month is more likely to stick than the broad objective of 6cm.
    • A third effective trick is ‘bundling’ or tying a tedious commitment to a pleasurable prospect. For instance, one is more likely to go running on the treadmill if it is linked to the reward of relaxing in the steam bath afterwards.

    I hope these three features will help us stick to our resolutions for 2022. If you are not sure what to wish for, here is a list of the most popular resolutions made in the US in 2021:

    Most popular resolutions (1200x627px).svg

    Turning now to macroeconomics, it appears that central bank governors are widely uneven in their understanding of the science behind resolution making.

    Starting with the most diligent performer, US Federal Reserve Chair Jerome Powell has already made his resolutions for 2022, clearly outlining his intent to embark on a journey towards policy normalisation before the Senate Banking Committee. You may recall from our November edition that we anticipated any Fed policy shift to be gradual and well telegraphed to markets. Mr Powell actually over delivered on our forecast with this syntactically impressive statement: “It is a good time to retire that word [transitory – as used to describe inflation] and try to explain more clearly what we mean.” In addition to making a clear commitment, Mr Powell did a very good job of breaking it down into gradual steps within a defined timeframe. As communicated in the December meeting, the Fed intends to double the pace of reduction of its monthly asset purchases and is now set to complete its taper by next March, while leaving the optionality of a rate hike in the spring on the table. Mr Powell also made sure to bundle the rather painful prospect of rising rates with positive developments on the job front.

    Mr Powell’s diligence in shifting towards more hawkish policies may complicate the task of his counterparts around the world

    Mr Powell’s diligence in shifting towards more hawkish policies may complicate the task of his counterparts around the world. European Central Bank President Christine Lagarde, for example, has so far remained vague on her resolutions and timeline for 2022. In addition, bundling is not an option for her as unemployment in the euro area remains high (and the ECB has no mandate to support employment). This vastly dovish stance may prove difficult to maintain as the contrast with the Fed’s policy widens. One distinctive feature of the Covid crisis so far has been that central banks have been remarkably coordinated, thereby keeping currencies range-bound despite unprecedented liquidity injections. Should the Fed deliver on its hawkish ambitions, this may morph into a strong appreciation of the dollar against other developed currencies, including the euro.

    With regards to emerging markets, I wonder what President Recep Tayyip Erdogan’s resolutions may be for 2022 as de facto Bank of Turkey Governor. The New Year may represent a good opportunity to operate a shift in policy, as the multiple rate cuts since 21 August have had dire results so far. The Turkish lira has lost around 40% of its value against the dollar for the quarter to date, inflation reached an annualised rate of 21% in November, and Standard & Poor’s downgraded their outlook on their B+ credit rating of Turkey to negative last week. While such results call for a change in strategy, it is unclear whether Mr Erdogan will conclude that he has cut rates too much or too little at this stage. The 100 bps cut which took place as I wrote these lines allowed Turkey to undertake the US as holding the lowest real policy rates among major inflation-targeting central banks. Investors should not exclude seeing more unorthodox policies from Turkey next year. Recent rate cuts represent 500 bps cumulatively in less than four months. At this rate, the Bank of Turkey could offer lower policy rates that the Swiss National Bank by the end of 2022.

    Turkey has undertaken the US to hold the lowest real policy rates among major inflation-targeting central banks

    I would like to conclude this last commentary of the year with some reflections on my own New Year’s resolutions.

    As CIO of a private bank, I see my primary role as preserving and growing our clients’ assets by delivering the best risk-adjusted returns. In the pursuit of attractive investment opportunities, at Lombard Odier, we believe the ability of companies to fully embrace sustainability-related trends will become key in assessing their future prospects, as our economies transition from a WILD™ (Wasteful, Idle, Lopsided and Dirty) to a CLIC™ (Circular, Lean, Inclusive and Clean) model.

    One specifically measurable aspect of the sustainability transition is CO2 emissions and their impact on climate change. The Paris Agreement has established an objective for 2050 to limit global warming to no more than 1.5 degrees C, which implies that economic actors will be required to transition to a net zero-carbon-emission economy. In this context, investors that identify and invest early in companies that align with this transformation will bear results. At Lombard Odier, we have made significant investments into building sustainability teams, frameworks and processes to source and partner with corporate solution providers to accelerate the climate transition and meet the resolutions of the Paris Agreement. Much like New Year’s resolutions, corporate commitments to carbon neutrality will have a much higher success rate if they are broken down into measurable and time-specific landmarks.

    My second role as head of our investment function is to seek out and train the next generation of professionals, ensuring that we continue to develop talent both internally and through industry-wide initiatives. In this spirit, in early December I attended the Building Bridges Summit, an event dedicated to promoting sustainable finance. Our Senior Managing Partner Patrick Odier presided over the summit, where Lombard Odier also participated in a Hackathon with the following challenge: “Breeding a new generation of sustainable finance analysts”. In remarkable alignment with our corporate motto, “Rethink Everything”, a diverse team of students, academics and Lombard Odier experts worked continuously for 24 hours to find innovative ways to train young finance professionals in matters of sustainability.

    Lombard Odier experts worked continuously for 24 hours to find innovative ways to train young finance professionals in matters of sustainability

    I met a number of hugely talented young people at the Hackathon, which was organised in collaboration with the University of Geneva’s School of Economics and Management. Lombard Odier already partners with the University of Oxford in sustainable finance, and this event inspired me to investigate further collaborations, perhaps with a view to conceiving a more structured curriculum and bringing on more interns in the field of sustainable investment management.

    I shall now lay out a plan with measurable and time-specific objectives along these lines for 2022.


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