Man FRM Early View

When does an increase in the price of an asset reflect a change in value, and when is it simply borrowing the return from the future? Did we really earn it or will we have to give it all back later? When are we assessing our reaction to profits rationally and when are we suffering from hubris? These are increasingly queasy questions. If the USD 70trn of global equities are up 15% this year, then in equities alone we have seen a repricing of asset values by around USD 10trn, or around three years’ worth of real global GDP growth. Was this earned or borrowed?

Of course, we know our colleagues in the asset management industry are mostly heroic, but the idea that we have somehow unearthed an extra three years of global GDP growth is something the pusillanimous world outside is struggling to appreciate. Last month, one highly credible asset management research group showed their ten year forecast for a ‘balanced portfolio’ to be lower than any they had ever previously seen. This may suggest that at least some of the gain is ‘borrowed’.

Returns have come fairly easy to most long-only investors this year. The S&P 500 has gained 17% or so with a couple of c3% drawdowns. Compare that with 2016 when a 13% drawdown was rewarded with a 9% return, or 2015 when you had a worst loss of 10% and a loss on the year. Meanwhile, the Barclays Capital Global Aggregate Bond Index has returned +7% YTD, the best year since 2007. That can’t all be coupon payments, so given USD 40trn-odd worth of global bond assets, perhaps we found something closer to four years’ worth of real global GDP growth in long-only asset revaluation this year. This is exhilarating stuff.