Dr. Doom in Davos: Eurozone Health ‘Less Worse’ Than Last Year

Cautious optimism for Europe and the US economies, criticism of US politics, and sparring over financial regulation are themes emerging at the on-going World Economic Forum.

(January 25, 2013) – Economist Nouriel Roubini added to the tone of cautious optimism emerging the World Economic Forum in Davos, calling circumstances “less worse than last summer in the Eurozone.” 

Dubbed “Dr. Doom” for forecasting the financial crisis pre-2008, Roubini remarked in an interview with Bloomberg that tail risk has declined over the last six months. However, he stayed true to his nickname when discussing Europe’s job situation: “Look at the unemployment numbers in Spain today; [they are] rising even further. They are really shocking numbers. The fundamental problems in the Eurozone-the lack of growth, continued recession, debt sustainability, lack of competitiveness-remain.”

Roubini also spoke on a topic that’s been hot among the global elite gathered in the Swiss mountain town: international policy and regulation coordination. “We live in a balance of power,” he said, where conflicting goals and interests thwart agreements on fundamental economic and geopolitical issues.

“It is a more fragile economy because interdependence implies that problems are global, but policies are national. Coordinating among different countries will be increasingly difficult. It leads to political, economic and financial tensions like currency wars that can lead eventually into protectionism,” Roubini concluded.

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This topic sparked debate yesterday during a high-profile session on “The Global Financial Context.”

Tidjane Thiam, Prudential’s group chief executive and former CFO, argued against global regulation initiatives by recounting the struggles over Solvency II.

Thiam said: “Take the example of insurance: we have Solvency II in Europe. It’s been going on for 11 years. Someone said, ‘Let’s come up with one solvency regime for 27 European countries.’ The only problem is, they forget these 27 different countries have 27 different starting points which they reach through their own history. The way insurance is distributed is completely different…If someone thinks that they can come up with one answer, one goal that is going to work for all of those 27 systems, so far it has failed.”

The World Economic Forum wraps up on Saturday, January 26. 

To Rebalance, or Not to Rebalance?

Just because your portfolio allocation is out of kilter, think twice before demanding a shake-up.

(January 25, 2013) — Investors have been warned that paying attention to their asset allocation and general market conditions is as important as maintaining a perfect portfolio split when considering rebalancing activity.

Research from market monitor Factset found there was more to deciding on whether to rebalance a portfolio than merely looking at the the cost in relation to the benefit on the return profile of a portfolio and the frequency with which it was carried out.

Drew J. Cronin, vice president of portfolio analytics at FactSet, said that generally a portfolio will have higher returns without rebalancing during a trending upmarket. This is due to an expanding weighting to an outperforming asset class gathering more good returns.

The reverse is true when markets are oscillating as rebalancing portfolios allows larger allocations to assets that have fallen lower and are more likely to perform, Cronin said.

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However, this concept only functions in practice if an investor is certain on where markets are heading – and this is almost never the case, Cronin said.

“Because we don’t know the future with certainty, a big piece of any asset allocation strategy is hedging against that uncertainty,” Cronin said. “If a portfolio’s long-term strategy calls for a particular asset allocation split, then we should focus less on trying to time the market and more on the observable trends that may justify more frequent rebalancing.”

Cronin mapped out how changes in volatility and the correlation within a portfolio’s assets would affect returns and said that these two factors were essential to consider before starting a rebalancing regime.

“Recent market conditions are unlike any other period in recent history, with high volatility, extremely low correlations, and high domestic equity returns,” Cronin concluded. “The benefit of frequent rebalancing should be weighed against the cost (turnover and trading costs) to determine your own optimal rebalance policy and ensure that you’re prepared for future uncertainty in the market.”

To read the full research note, click here.

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