Tao Xiang International Finance Lectures (No. 11): Indication of the Long Term Financial Data to the Domestic and International Markets

2017-12-15 IMI

On December 15, Tao Xiang International Finance Lectures (No. 11) was held in Renmin University of China. Mr. Liu Zhuoshi, Chief Analyst of Fixed Income and Deputy Head of Asset Allocation at Ping An Annuity, gave a speech on the topic of “Indication of the Long Term Financial Data to the Domestic and International Markets”. The lecture was hosted by Gang Jianhua, Associate Professor of the School of Finance at RUC. Mr. Liu first highlighted the importance of data, as he pointed out that the data is as essential to the models as the grain is to the army; the models are unreliable if provided insufficient data. He started his lecture with the history of interest rates in Europe and the United States, analyzing the historical cycle of short-term interest rates, long-term interest rates, inflation, short-term real interest rates as well as long-term ones. He found out that overall, the economic growth is positively related to the real interest rate; and compared to short-term one, long-term interest rate has a higher correlation. High-speed economic growth indicates a high real interest rate while the low-speed means a lower real interest rate. However, the economic growth is often not too bad when the real interest rate is below a certain level (e.g. below zero). When the economy hits its worst the long-term real interest rate is usually above zero (not at its lowest) while the short-term one might be negative but often at not its lowest. Besides, the economic growth rate is on average higher than the real interest rate, the fact indicating the real return of bond investment is lower than the GDP growth. Mr. Liu then made the comparison between the U.S. bonds and shares investments. The difference among the returns on equity under various macroeconomic conditions is minor with regard to return volatility. However, the relatively high correlation between the return in bonds and macro-environment as well as monetary policy structure cannot be ignored. The long-term return on bonds has a downward trend and almost has reached the very low point while the volatility is still high, indicating the value of long-term allocation might be relatively low. Compared to bonds in terms of returns, the long-term return on equity is rather impressive especially in the environment of low inflation. However, the tail risk must be highlighted. Furthermore, the inflation has a great impact on the correlation between returns on bonds and equity. Under the condition of low inflation rate since 2000, the negative correlation between the former two has been seen, which could offer a smoother return path through the portfolio of bonds and equity. The returns on bonds can still be relatively volatile and negatively correlated with returns in stock markets if the Federal Reserve continues to control the inflation at around 2%. However, the return on bonds will go up and be positively related to that in equity market if the future inflation has an upward trend and can consistently break through the 2% inflation rate threshold. Moreover, Mr. Liu compared the inflation rate, economic growth, short-term interest rate and long-term interest rate in China with those in America. The relative high correlation is discovered in terms of the long-term and nominal long-term interest rate as well as the inflation. Based on the above relation, one can predict the macro-cycle in China using the long-term data in America. He also pointed out that it is of pivotal importance to understand the current phase of real interest rate and inflation in overseas advanced markets in order to give insights into our own economy and finance. Finally, Mr. Liu gave a prediction on the global economy next year and its possible influence on China. He indicated that the returns on long-term bonds in advanced countries have been collaboratively increasing since the November last year, which reflects the influences of the continuous recovery of global economy, rising inflation, monetary policy tightening-up and the expectation of tax reform policy in America. It’s also predicted that overseas long-term bonds returns will continuously increase; and there will be an aggravated volatility in inflation rate. When mentioning about the possible influence the global economy might have on China, Mr. Liu believed that the current real interest rate in China is recovering; however, if the future real interest rate in America is trending up, there will be limited room for Chinese real interest rate to fall, which might hinder the economy growth within; the rapid move-up of future inflation in America has not only a direct transmission impact but also an indirect influence on our inflation rate. In other words, high inflation might speed up efforts of the Federal Reserve to increase the interest rate, triggering the large-scale adjustment in U.S. stocks, which might finally generate spillover effects on A-shares.

DOWNLOAD

Tao Xiang International Finance Lectures (No. 11): Indication of the Long Term Financial Data to the Domestic and International Markets

related articles

tags