1、Highlights of this IssueThe Investment ClockMLs Investment Clock is an intuitive way of relating asset rotation and sectorstrategy to the economic cycle. In this report we back-test the theory usingmore than thirty years of data. We find that, while every cycle has uniqueaspects, there are clear sim
2、ilarities that can help investors to make money.Methodology and ResultsThe Investment Clock model splits the economic cycle into four phasesdepending on the direction of growth relative to trend and the direction ofinflation (Table 1). We use OECD “output gap” estimates and CPI inflationdata to iden
3、tify the historic phases in the U.S. since 1973. Then we calculatethe average asset and sector returns for each phase, testing our results forstatistical significance. We confirm that Bonds, Stocks, Commodities andCash outperform in turn as the cycle progresses. We also find a very usefulread-across
4、 to equity sector strategy and to the shape of the yield curve. Seethe diagram on the next page for a summary of the main results.Economic Cycle Analysis is KeyWe are not testing a real-time, quantitative trading rule. Rather, we areshowing that a correct macro view ought to pay off in a particular
5、way. It isstriking how consistent the results are given that we pay no explicit attentionto valuation, a factor often held to be of utmost importance. Economic cycleanalysis, including an assessment of the aims and effectiveness of policy-makers, will form the core of our tactical asset allocation w
6、ork.Based on this methodology, we still favour global “Overheat” plays:commodities, industrial stocks, Asian currencies, Japan and the emergingmarkets. We would underweight Government bonds, financials, consumerdiscretionary stocks and the U.S. dollar. See pages 17-20 for details.Table 1: The Four P
7、hases of the Investment ClockPhase Growth* InflationBest AssetClassBest EquitySectorsYield CurveSlopeI “Reflation”c207c207Bonds Defensive Growth Bull SteepeningII “Recovery”c206 c207Stocks Cyclical Growth -III “Overheat”c206c206Commodities Cyclical Value Bear FlatteningIV “Stagflation”c207 c206Cash
8、Defensive Value -Source: ML Global Asset Allocation * Growth relative to trend (i.e. “output gap”)GLOBALContributorsTrevor GreethamDirector of Global Asset Allocation,Institutional Client Group(44) 20 7996 1535Michael HartnettDeputy Director of the RIC,Global Private Client Group(1) 212 449 582710 N
9、ovember 2004The Investment ClockSpecial Report #1: Making Money from MacroMerrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be awarethat the firm may have a conflict of interest that could affect the objectivity of this report.I
10、nvestors should consider this report as only a single factor in making their investment decision.Refer to important disclosures on page 28. Global Securities Research someintriguing patterns for foreign exchange and equity country strategy10Using the Investment Clock inPractice5. Top-down cycle anal
11、ysis should be the starting point for tactical assetallocation; we continue to favour global “Overheat” plays17Statistical Appendix I. Which results are robust and which arent 21The authors would like to thank Magatte Wade for his help with the numericalwork in this report.The Investment Clock 10 No
12、vember 20044 Refer to important disclosures on page 28.2. How The Investment Clock WorksMLs Investment Clock is a way of relating the economic cycle to asset andsector rotation. In the first section of this report, we outline the thinkingbehind the model.G110 Long Run Growth and The Economic CycleTh
13、e long run rate of growth of an economy depends on the availability of thefactors of production, labour and capital, and on improvements in productivity. Inthe short run, economies often deviate from their sustainable growth path and it isthe job of policy-makers to get them back onto it. An economy
14、 operating belowpotential will suffer deflationary pressure and ultimately outright deflation. On theother hand, an economy consistently above its sustainable growth path willgenerate disruptive inflation.Recognising Turning Points Pays OffFinancial markets consistently mistake these short-term devi
15、ations for changes inthe long run trend rate of growth. As a result, assets become mispriced at theextremes of the cycle, just when corrective policy shifts are about to take effect.Investors correctly recognising the turning points can make money by switchinginto a different asset. Those extrapolat
16、ing recent history lose out. For example,many investors bought expensive technology stocks in late 1999 on the groundsthat the trend growth rate of the U.S. economy was increasing and thesecompanies stood to gain most from this “New Era”. However, Fed tightening tocounter a modest rise in inflation
17、was already well advanced. The cycle peaked inearly 2000 and the dot com bubble burst. The ensuing downturn promptedaggressive Fed ease to the enormous benefit of bonds and residential real estate.The Four Phases of the CycleThe Investment Clock framework helps investors to recognise the importanttu
18、rning points in the economy and identifies investments to take best advantage ofa change. We split the economic cycle into four phases Reflation, Recovery,Overheat and Stagflation. Each is uniquely defined by the direction of growthrelative to trend, i.e. the “output gap”, and the direction of infla
19、tion. We believethat each of these phases is linked to the outperformance of a specific asset class:Bonds, Stocks, Commodities and then Cash (Chart 2).Chart 2: The Theoretical Economic Cycle Output Gap and Inflation-1.1-0.10.91G53G68G87G72G75G76G78G72G86c37c50c49c39c54 c54c55c50c38c46c54c38c50c48c48
20、c50c39c44c55c44c40c54 c38c36c54c43G53G68G87G72G70G88G87G86c180c53c72c73c79c68c87c76c82c81 c181c180c53c72c70c82c89c72c85c92c181c180c50c89c72c85c75c72c68c87c181 c180c54c87c68c74c73c79c68c87c76c82c81c181G42G85G82G90G87G75G11G89G86G17G3G55G85G72G81G71G12G44G81G73G79G68G87G76G82G81Source: ML Global Asset
21、 Allocation Team. The horizontal line represents the “sustainable growth path”. Inflation lagsgrowth, starting to rise only once spare capacity has been used up.It is very hard to identifychanges in the long run trendand even harder to exploit themsafelyWe divide the economic cycleinto four phases,
22、depending onthe direction of the output gapand the direction of inflationThe Investment Clock 10 November 2004Refer to important disclosures on page 28. 5I. In Reflation, GDP growth is sluggish. Excess capacity and fallingcommodity prices drive inflation lower. Profits are weak and real yieldsdrop.
23、Yield curves shift downwards and steepen as central banks cut shortrates in an attempt to get the economy back onto its sustainable growth path.Bonds are the best asset class.II. In Recovery, policy ease takes effect and GDP growth accelerates to anabove trend rate. However, inflation continues to f
24、all because spare capacityhas not yet been used up and cyclical productivity growth is strong. Profitsrecover sharply but central banks keep policy loose and bond yields staylow. This is the “sweet spot” of the cycle for equity investors. Stocks are thebest asset class.III. In Overheat, productivity
25、 growth slows, capacity constraints come to thefore and inflation rises. Central banks hike rates to bring the economy backdown to its sustainable growth path, but GDP growth remains stubbornlyabove trend. Bonds do badly as yield curves shift upwards and flatten. Stockreturns depend on a trade-off b
26、etween strong profits growth and thevaluation de-rating that often accompanies a sell-off in bonds. Commoditiesare the best asset class.IV. In Stagflation, GDP growth slows below trend but inflation keeps rising,often due in part to oil shocks. Productivity slumps and a wage-price spiraldevelops as
27、companies raise prices to protect their margins. Only a sharp risein unemployment can break the vicious circle. Central banks are reluctant toease until inflation peaks, limiting the scope for bonds to rally. Stocks dovery badly as profits implode. Cash is the best asset class.G110 The Investment Cl
28、ockThe Investment Clock diagram is the same economic cycle re-drawn as a circle(Chart 3). A classic boom-bust cycle would start at the bottom left and movearound clockwise. Transitions from one phase to the next are marked by the peaksand troughs in the output gap and inflation cycles.Chart 3: The I
29、nvestment Clockc38c60c38c47c44c38c36c47c57c36c47c56c40c38c50c48c48c50c39c44c55c44c40c54c38c60c38c47c44c38c36c47c42c53c50c58c55c43c54c55c50c38c46c54c39c40c41c40c49c54c44c57c40c42c53c50c58c55c43c37c50c49c39c54c39c40c41c40c49c54c44c57c40c57c36c47c56c40c38c36c54c43G42G85G82G90G87G75G3G85G72G70G82G89G72G
30、85G86G44G81G73G79G68G87G76G82G81G3G85G76G86G72G86c180c50c89c72c85c75c72c68c87 c181c180c53c72c70c82c89c72c85c92c181c180c54c87c68c74c73c79c68c87c76c82c81 c181c180c53c72c73c79c68c87c76c82c81 c181InflationTroughsInflationPeaksOutput GapPeaksOutput GapTroughsG44G81G73G79G68G87G76G82G81G3G73G68G79G79G86G4
31、2G85G82G90G87G75G3G90G72G68G78G72G81G86Source: ML Global Asset Allocation Team. Arrows denote the sequence of phases in a classic boom-bust cycle.Each phase of the economiccycle is associated with aspecific asset classThe Investment Clock diagramis the same economic cycle, re-drawn as a circleThe In
32、vestment Clock 10 November 20046 Refer to important disclosures on page 28.Growth and inflation drive the ClockOne advantage of drawing the cycle like this is that we can think about growth andinflation separately. Growth becomes North-South and inflation East-West. Thishelps us to understand market
33、 moves when overseas influences or shocks like“9/11” mean the cycle does not progress clockwise according to plan.The Clock helps with Equity Sector StrategyA second advantage is that it helps us think about sector strategy: Cyclicality: When growth is accelerating (North), Stocks and Commoditiesdo
34、well. Cyclical sectors like Tech or Steel out-perform. When growth isslowing (South), Bonds, Cash and defensives outperform. Duration: When inflation is falling (West), discount rates drop and financialassets do well. Investors pay up for long duration Growth stocks. Wheninflation is rising (East),
35、real assets like Commodities and Cash do best.Pricing power is plentiful and short-duration Value stocks outperform. Interest Rate-Sensitives: Banks and Consumer Discretionary stocks areinterest-rate sensitive “early cycle” performers, doing best in Reflation andRecovery when central banks are easin
36、g and growth is starting to recover. Asset Plays: Some sectors are linked to the performance of an underlyingasset. Insurance stocks and Investment Banks are often bond or equity price-sensitive, doing well in the Reflation or Recovery phases. Mining stocks aremetal price-sensitive, doing well durin
37、g an Overheat. Oil Bonds werebadly hurt in the 1970s oilshocksThe Investment Clock 10 November 200412 Refer to important disclosures on page 28.Equity SectorsG110 What we are testingWe use the same approach for U.S. equity sectors, calculating performancerelative to the overall market in each of the
38、 historic Investment Clock phases.G110 Key ResultsPatterns of sector out- and under-performance across the cycle (Table 6) allow usto identify the following pair trades, each reflecting diametrically opposed macroviews. These pairs are summarised in the Investment Clock diagram on page 2.1. Consumer
39、 Discretionary vs. Energy: Consumer Discretionary stocks likeRetailers do well when inflation and interest rates are falling (West). Oil the slope lessso. Only Bull Steepening in Reflation survives the t-test with 95% confidence. SeeAppendix for full details.G110 Other Fixed IncomeWe do not have dat
40、a for other classes of fixed income back to 1973. Investigationsover a shorter time period suggest that emerging market sovereign debt and highyield corporates behave like cyclical equity sectors, outperforming Treasuries inthe Recovery and Overheat phases when growth is above trend. Inflation-prote
41、ctedbonds outperform conventional bonds during Overheat and Stagflation.G110 ConclusionThe Investment Clock helps us to decide a fixed income strategy. The level ofthe yield curve reflects inflation pressures. The slope is most predictablewhen the Fed is in play. The model can be extended to include
42、 other classeswithin fixed income, including emerging market debt and TIPs.Chart 9: Bond Yield Curve ShiftsBear FlatteningBull SteepeningBear SteepeningBull Flatteningc180c50c89c72c85c75c72c68c87c181c180c53c72c70c82c89c72c85c92c181c180c54c87c68c74c73c79c68c87c76c82c81c181c180c53c72c73c79c68c87c76c82
43、c81c181InflationTroughsInflationPeaksOutputGapPeaksOutputGapTroughsSource: ML Global StrategyWe see Bull Steepening inReflation, Bear Flattening inOverheatThe Investment Clock helps usto decide a fixed incomestrategyThe Investment Clock 10 November 2004Refer to important disclosures on page 28. 15Fo
44、reign ExchangeG110 What we are testingWe look at the movement in bilateral exchange rates in each historic phase of theU.S. Investment Clock.G110 Key ResultsThere is one clear and, at first, counter-intuitive pattern: The U.S. dollar has been strongest during the Reflation and Recovery phasesof its
45、cycle, periods of falling U.S. inflation and a falling Fed Funds rate.Interest rates overseas may well be falling faster and international investorsoften see the dollar as a safe haven in times of stress. We see significant strength in the Japanese yen and the Australian dollarduring U.S. Overheat p
46、hases. Again, it is interesting that the U.S. dollar isweak in the phase of the cycle that sees the most aggressive Fed rate hikes.Table 9: Bilateral Exchange Rates (annualised change)RECOVERY OVERHEATStrong StrongUSD per JPY +6.7 JPY USD per JPY +9.9 JPYUSD per EUR -1.6 USD USD per AUD +7.0 AUDUSD
47、per CAD -2.7 USD USD per GBP +5.8 GBPUSD per GBP -4.6 USD USD per EUR +1.7 EURUSD per AUD -7.0 USD USD per CAD 0.0 -USD per ZAR -10.5 USD USD per ZAR -3.7 USDEUR per JPY +8.5 JPY CHF per AUD +0.4 AUDCHF per AUD -9.4 CHF EUR per JPY +8.1 JPYREFLATION STAGFLATIONStrong StrongUSD per CAD -0.8 USD USD p
48、er EUR +2.0 EURUSD per JPY -1.3 USD USD per GBP +1.2 GBPUSD per AUD -1.4 USD USD per CAD +0.3 CADUSD per GBP -6.3 USD USD per ZAR 0.0 -USD per EUR -8.9 USD USD per AUD -5.7 USDUSD per ZAR -13.7 USD USD per JPY -7.4 USDEUR per JPY +8.3 JPY EUR per JPY -9.3 EURCHF per AUD +3.3 AUD CHF per AUD -10.4 CH
49、FSource: Datastream. Data from April 1973 to July 2004.G110 Statistical testsStatistical tests indicate that most exchange rate pairs are not strongly associatedwith the U.S. economic cycle. Notable exceptions are the yen/U.S. dollar andAustralian dollar/U.S. dollar crosses. See Appendix for full details.G110 ConclusionForeign exchange depends on the difference between two economies so weought not expect strong results when classifying returns using the U.S. cyclealone. None-the-less, we can say that Asian currencies tend to do well duringa U.S. Overheat and the U
