Strategic Allocation to Premiums in the Equity Market
David Blitz (Robeco Asset Management) | Oct 2011
When making strategic investment decisions, investors typically prioritize capturing the risk premiums linked to traditional asset classes. However, some recent studies suggest that various other market premiums should also be taken into account for strategic asset allocation. Documented examples in the equity market include size, value, momentum, and low-volatility effects. This paper illustrates that the theoretically optimal strategic exposure to these premiums is significant, even when applying very conservative expectations for their future returns. We also evaluate the advantages and disadvantages of two practical approaches for achieving these exposures: passively managed index funds and actively managed quantitative funds.
● Beyond the Keynesian Endpoint: Crushed by Credit and Deceived by Debt — How to Revive the Global Economy
By Tony Crescenzi
Summary via publisher, FT Press
Since the 1930s, governments have rekindled economic activity during recessions by borrowing and spending to compensate for lost consumer and business expenditure. What happens when this approach is no longer feasible? In *Beyond the Keynesian Endpoint*, PIMCO’s Executive Vice President Tony Crescenzi provides a critical examination of the current, unprecedented global sovereign debt crisis. He illustrates how diminished national balance sheets have limited policymakers’ capacity to stimulate growth, complicating investors’ navigation through debt-laden markets. Additionally, he explores how attempts to enhance spending during the financial crisis have often aggravated the situation. Crescenzi evaluates potential future scenarios and dissects the profound, long-term repercussions for governments, investors, and the global economy.
In the latest employment report, there’s a mix of good and bad news. The positive aspect, albeit modest, is that private sector job growth continues at a mediocre pace. Last month, private nonfarm payrolls recorded a net gain of 104,000, according to the Department of Labor report. While this figure isn’t particularly exciting, it does provide confidence that the economy may not be on the brink of a new recession. Moreover, recent revisions to prior payroll reports offer a glimmer of hope. For instance, the initial figure for September of 137,000 net jobs added has been revised significantly upward to 191,000. Even August’s originally disappointing numbers have been adjusted to a somewhat less discouraging gain of 42,000, compared to the previous 30,000.
The newly appointed head of the European Central Bank, Mario Draghi, diverged from his predecessor by lowering the benchmark interest rate from 1.5% to 1.25%. This decisive move signifies the end of Jean-Claude Trichet’s flawed austerity approach. Given the current indications of increasing recession risk in Europe, this adjustment is both timely and necessary. However, the implications of this rate cut extend beyond mere numbers.
Nate Silver, a pioneering statistician in political analysis, distills President Obama’s economic challenges in an article featured in this weekend’s New York Times Magazine. With a proven track record in election forecasting, Silver has become essential reading in political analysis circles, and his latest work offers intriguing insights into the national political sentiment. He approaches politics through a Moneyball
Initial jobless claims recently fell below the 400,000 mark, indicating that the likelihood of a new recession is diminishing. Last week, new claims for unemployment benefits reached a seasonally adjusted total of 397,000, the lowest level since the week ending September 24 when it dipped to 395,000. While we have encountered optimism before only to face disappointment, any positive news is welcomed in the current climate, offering glimmers of hope wherever possible.
Yesterday, the Federal Reserve reiterated what many expected: economic growth will remain sluggish. According to the Fed’s updated projections, real GDP growth for 2011 is forecasted to be between 1.6% and 1.7%, a decrease from their June estimate of 2.7% to 2.9%. Next year, real GDP is anticipated to improve slightly, yielding a growth rate between 2.5% and 2.9%. However, this forecast also reflects a downward revision from June’s expectations of 3.3% to 3.7%.
Each monthly employment report carries significant weight, but the upcoming update may be particularly critical. The last examination of the nation’s payroll data revealed a sense of relief as private-sector job creation steered clear of a decline in August. A similar outcome is vital to forestall a potential new recession.
The Kauffman Foundation’s latest quarterly survey of 200 economics bloggers reveals a stark outlook. According to the results, 96% of those surveyed believe that overall economic conditions are “mixed, facing recession, or in recession.” This pessimism characterizes the current sentiment among economics bloggers regarding the U.S. economy in 2011.
October brought a wave of renewal following the sharp declines seen in September. However, the final day of October witnessed a significant sell-off in risk assets as concerns over the ongoing crisis in Europe resurfaced. The market’s downturn is regrettably continuing as I write. Yet for a brief moment, it seemed as if there was hope on the horizon. Sadly, what once appeared promising now feels like a distant memory.
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