Economic Review IX – Inflation Turns Risk Upside Down


This series is reviewing ideas gained at the Jyske Bank Global Economic Seminar in Copenhagen .

The third speaker on day one of the seminar was Per Hansen the equity strategist for Jyske Bank. He is one of the most cited Danish strategists and has extensive experience with media and investor communication.

Per’s message was about the benefits of risk and he looked at realities of risk and how inflation turns risk upside down.

He began with this note:

  • Returns in equity markets have been phenomenal in the past four years…due to high GDP Growth and falling interest rates.
  • Earnings growth has explained more than 100% of global equity returns in the past and unusual bull market.
  • We have not seen a general expansion of P/E multiples so far…which leaves the equity markets less vulnerable than normal. Equities are not expensive.
  • Yet there are some hurdles.

He then outlined how global P/E ratios are about the same now at 15 times earnings, about the same as 1987 before the rose all the way to 24 in 1999. Yet he showed the hurdles of declining US savings rates and productivity gains that have slumped badly.

His three fundamental investment ideals that form the core of his strategy include:

  • We should expect 7% to 10% annual return in the stock market as a function of global nominal GDP growth and long term earnings growth plus risk premium.
  • To attain higher growth you must either increase risk or trust luck.
  • Invest in inexpensive equities that are paying a reasonable return.

Then Per talked about market noise. He asked, “why bother during crisis’s”? “Investors worry too much about short term noise. A lot of noise is being created by a lack of filters and investors should ignore this noise,” he said.

Per listed four important facts affect most investors:

  • They care too much about day to day volatility.
  • They care too little about strategy.
  • The short term process of buying and selling takes too much time.
  • This short term process leaves too little time to analyze and forecast.

He gave a suggestion of what to do when there is a market crisis.

  • Turn on the auto pilot and normally add to your position.
  • Do not panic.
  • Do not let feelings influence you too much.
  • Ask your wife!
  • Do not count on extra ordinary returns. Be realistic.
  • Add some restructuring stories to your portfolio
  • Know that a period of high returns will be followed by a period of low returns.
  • Do not underexpose yourself for the long term
  • Risk is your friend or alibi for expecting higher returns.

Per also shared a market outlook.

  • Expect moderately higher stock markets at the end of 2007.
  • The majority of 2007 market correction is probably complete in terms of value but maybe not in time.
  • Earnings growth will slow further.
  • Watch out for core inflation and GDP growth. Dramatically lower growth with high inflation is the signal to watch for. This could create a recession, the worst enemy for equities.

That’s it, the message from the first three speakers (me, Jakob Greisen and Per Hansen) at this course. We agreed on a number of vital points…equities are still good value now – the so called sub prime loan crisis will create buying opportunities – invest long term – ignore day to day market fluctuations and look for good value shares – buy and sell based on value not on market trends and finally – the future is positive from a long term, global economic view .

This is advice I follow and hope you will gain doing the same as we share this wonderful global future that has been given to us to enjoy.

Until next message, good investing!

Gary

 


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