Gavekal-IS

In 2001, George Akerlof, Michael Spence and Joseph Stiglitz earned the Nobel prize in economics for their groundbreaking work on the dangers of information asymmetry, where one party in a transaction knows more than the other. Didier explores this concept in the context of high-risk products now being sold to small retail investors in Europe.

Whether encountering a fever or the Vix volatility index, how high is too high? In both cases, the danger level depends on the overall health of the affected party, whether an individual or a whole economy. The overall impact of market volatility depends on whether the economic climate is favorable, or unfavorable, for equities, contends Didier. Today, a Vix reading just below 25 is nothing to fret about, he says.

Managing private accounts starts with the crucial first step of defining an investor’s risk profile. For decades, a simple rule of thumb sufficed: allocate “100 minus your age” to stocks and “your age” to bonds. But with US treasury bonds no longer behaving like risk-free assets, those days are over, says Didier.

While investing in stocks during a bullish cycle can be highly profitable, leaning on defensive stocks in downturns is far riskier. In a market crash, nearly all stocks sink together, says Didier. For this reason, he suggests comparing equity returns in Sweden and Switzerland, two similarly sized European countries whose stock markets have a very different composition and move to different market impulses.

In 1926, Nikolai Kondratiev pinpointed waves that seemed to last around 50 years and include alternating phases of expansion and depression. Within this broader “Kondratiev wave”, two key harmonic variations were identified by other economists: the Juglar cycle and the Kitchin cycle. Ironically, while such classical economic cycles have faded from mainstream discourse, the same patterns continue to manifest themselves, says Didier. In this report, he draws some direct investment conclusions.

Investors generally don’t give a disproportionate amount of thought to the machine tools sector. But as Didier points out, if anything disrupts the supply of machine tools, the whole manufacturing sector could be in jeopardy. Given the structural shifts in the global machine tools market over recent decades, this could soon become a “live” issue, especially for the US.