For Lord Rothschild, preserving wealth has "become increasingly difficult," recently, as he warns, rather ominously, "we are faced with a geopolitical situation as dangerous as any we have faced since World War II." Furthermore Lord Rothschild summarizes his thoughts briefly, eloquently, and ominously... as he touches on the global debasement of fiat currencies, disappointing growth (in light of massive monetary stimulus), and extreme stock market valuations. As Rothschild Wealth Management noted last year, equities are not well supported by current valuations, while monetary policy is limited by high debt levels and interest rates that are already close to zero... exposing equities to a potentially sharp correction.
Lord Rothschild summarizes his thoughts briefly, eloquently, and ominously...
Our policy has been clearly expressed over the years. Simply put, it is to deliver long-term capital growthwhile preserving shareholders’ capital; the realisation of this policy comes at a time of heightened risk, complexity and uncertainty. The economic and geopolitical environment therefore becomes increasingly difficult to predict.
The world economy grew at a disappointing and uneven rate in 2014 after six years of monetary stimulus and extraordinarily low interest rates.
Stock market valuations however, are near an all-time high with equities benefiting from quantitative easing.
Not surprisingly, the value of paper money has been debased as countries have sought to compete and generate growth by lowering the value of their currencies – the Euro and the Yen depreciated by over 12% against the US Dollar during the course of the year and Sterling by 5.9%.
In addition to this difficult economic background, we are confronted by a geopolitical situation perhaps as dangerous as any we have faced since World War II: chaos and extremism in the Middle East, Russian aggression and expansion, and a weakened Europe threatened by horrendous unemployment, in no small measure caused by a failure to tackle structural reforms in many of the countries which form part of the European Union.
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Lord Rothschild's comments appear to confirm the concerns that Rothschild Wealth Management noted last year, that more muddle through was most probable but depression possible:
Notably, equities are not well supported by current valuations, while monetary policy is limited by high debt levels and interest rates that are already close to zero...exposing equities to a potentially sharp correction."
Four main scenarios
We have identified four different scenarios that, in our view, are the most likely to occur.
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For each scenario, the position of the bubble shows the combination of growth and inflation that we expect to see in the next one to three years.
The size of the bubble illustrates our view on the likelihood of this scenario occurring – this is subjective, and is intended just to illustrate our thinking.
Growth is expressed in relation to the potential for each country. For example, a growth rate of 4% would be low for China but very high for Europe. Similarly, inflation relates to a country’s individual inflation target.
We have adjusted the size of the bubbles to reflect our view that conditions in the global economy should continue to improve in 2014. We believe the world could begin to move away from our core “muddling through” scenario towards “economic renaissance” and that the “new monetary world” situation has become less likely.
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Implications for returns from asset classes
The table summarises the expected returns of the major asset classes under each of our four main scenarios.
The circles in the boxes show the expected return over the next three years, relative to the long-term expected returns*. Light green means higher than long-term expected returns*, while light red means lower.
These figures are an illustration of our thinking. They are based on an informed interpretation of our fundamental valuation models.
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Maintain portfolio hedges
Although we believe the “depression” scenario is the least likely, its impact would be so disruptive that it must be considered within our investment strategy. Notably, equities are not well supported by current valuations, while monetary policy is limited by high debt levels and interest rates that are already close to zero.
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Back to Lord Rothschild to conclude:
The unintended consequences of monetary experiments on such a scale are impossible to predict.
And yet it appears every talking-head on mainstream media knows better.
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Full RITCapital Partners Fund Report below:
