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Asset Management White Papers

  • Ahead of the Curve, August 2010: The Eurozone’s Misery

    Neil Williams, Hermes Fund Managers, London, UK

    We offer here a more reasonable alternative—to previous “misery indices” and more conventional economic data such as GDP, which are produced with a lag, and usually revised. Used with our competitiveness analysis they: quantify the degree of economic convergence before and since the euro; suggest that convergence may now be centring more on the weakest, not strongest, credits; and thus warn that tensions in Greece, Spain et al will continue holding back the countries trying to support them, predominantly Germany.

  • Ahead of the Curve, July 2010: The UK’s Fiscal Gamble

    Neil Williams, Hermes Fund Managers, London, UK

    With disparate fiscal positions globally, a three-way split will emerge on deficit control. While the US, Japan, and possibly China try to loosen further, it’s Europe that’s pedaling hardest to get deficits down. The eurozone has to, but the UK is choosing to gamble with what growth there is. It has gone further than most are prepared to go to arrest ballooning debt, and undoubtedly improves the short-term outlook for UK gilts. But, it is a strategy not without risk. The economy could double-dip, though gilts, again in the short term, might still see some benefit. Either way—with the UK already running the G7’s widest output gap—Keynes would have been worried!

  • Ahead of the Curve, May 2010: Will Central Banks Fall Behind the Curve?

    Neil Williams, Hermes Fund Managers, London, UK

    With economic and political uncertainty building again, this note meshes together our “policy-looseness” and output-gap analyses to map how G5 policy positions (fiscal and monetary) will change, and get a handle on how far from “neutral” they’ll lie. With real rates likely to turn positive next year, economies recovering, and supply and sovereign risk building, bond yields should eventually head up. And, especially if the impression builds—as our analysis suggests—that central banks, even the ones tightening rates, are falling “behind the curve.”

  • Economic Outlook, Q3 2010: Avoiding “a Japan”

    Neil Williams, Hermes Fund Managers, London, UK

    We have long been in the “looser for longer” camp on interest rates, based on the nearness of recessions, tame demand-led inflation, and the need to avoid “a Japan.” But, even we’ve been impressed by the ferocity of the past month’s bond rally. Bonds seem to be assuming that the US, eurozone, and UK economies are already as close to outright deflation as Japan was in 1995. But there are sufficient differences between the two episodes to avoid becoming too carried away on bonds in the medium term.

  • Economic Outlook, Q4 2010: There’s No Quick Fix

    Neil Williams, Hermes Fund Managers, London, UK

    Bonds should remain supported for as long as disinflationary forces persist, economies turn down, and the door remains open for the Fed and others to reactivate full-blown quantitative easing (QE)—each of which seems increasingly likely. But, while disinflationary trades should continue to prevail in the short term, valuations will look increasingly stretched in a world where an outright “Japan-style” deflation can still be avoided, and where sovereign risk is building. With deficits high, and most governments not ready to pass the parcel back, bonds should no longer be considered the “low-risk” asset they were during the meltdown of 2007 and 2008.

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