In 2020, the capital performance of the domestic market went through a process of full-fledged debt-bonding commodity asset rotation, and the merrillian clock theory returned. Specifically, in the first half of 2020, the global economy was affected by the epidemic, with rapid economic downturns, falling prices and rapid easing of domestic and foreign monetary and fiscal policies. Bonds take the lead, driven by a combination of fundamentals and monetary policy. After may, the economy began to recover, monetary policy returned to normality, bonds weakened and the stock market clearly won major asset classes, while commodity prices rose slowly from the bottom. After the tightening of liquidity margins after august, the market-wide boom in equities was replaced by structural patterns, and market styles began to shift; in november, tensions over supply and demand for black commodities, represented by coal and iron ore, became more pronounced and prices were high. In terms of asset performance, the merlin clock theory has once again worked in our practice。
Four phases of the economic cycle and broad asset class performance
The merrill lynch divides the economic cycle into four phases with two dimensions: economic growth and inflation:
“the economy goes down, inflation goes down” to “the recession”
“economically well, lower inflation” corresponds to “recovery phase”
“economically well, inflation upwards” corresponds to the “overheating phase” of the country
The term “lower economy, higher inflation” corresponds to the term “stagnating phase”。
As we each have suitable clothing for the four seasons of spring, summer, autumn and winter, the merrill lynch believes that the four main categories of assets -- stocks, bonds, commodities, cash -- correspond to different expected gains at different stages of the economic cycle。
In the recession phase, bonds prevailed: at a time of slow or stagnant economic growth, a pessimistic economic situation reduced consumer appetite, resulting in excess capacity and falling commodity prices. As a result, business profits will be significantly reduced during the recession and equity performance will be significantly suppressed. In contrast to bonds, the stagnation of economic growth has led to lower market-wide returns on investment, while the central bank has been able to stimulate the economy through loose monetary policies and active fiscal policies, leading to a further decline in bond maturities, so that bond performance was most prominent during the recession。
During the recovery phase, equities dominated: investment and consumption began to rise from the bottom with a liberal and proactive policy effect. Prices remain low at this stage, the production costs of enterprises are low and the purchasing power of the market is beginning to increase, leading to an increase in business profitability and a recovery from the bottom. At the same time, since firms tend to contract capacity in the recession phase, resulting in enterprises not fully utilizing their capacity in the recovery phase, inflation continues to decline, central banks will remain liberal and active, and business profits will continue to rise, so equities are the strongest asset in the recovery phase。
In the overheating phase, commodities dominate: when the economy is operating at an overheating stage, when market demand thrives and the capacity of enterprises is running at almost full capacity, when the production of commodities is not keeping pace with the growth of demand, when supply is running out of demand, with rising prices and rising inflation, commodity assets are the best option. Although rising prices have led to higher production costs, the increase in profits has been greater at this stage than the increase in costs, and business profits have remained relatively high. On the other hand, central banks tighten fiscal and monetary policies and raise interest rates in order to discourage inflation from continuing. The performance of bonds over interest rates has been considerably suppressed。
In the stagnating phase, cash is paramount: as inflation rises, the rising cost of production in enterprises erodes the growth of corporate profitability. In relatively rare cases, inflation will continue upwards (e. G. Oil price shocks, weather effects, etc.). Faced with rising production costs, firms tend to take measures to raise product prices in order to maintain profitability, leading to spiralling prices, wages, costs and, ultimately, a decline in business profits and poor equity performance. In the face of high inflation, central banks are reluctant to relax monetary policy and bonds are similarly suppressed. Cash is therefore the best asset at this stage。
The limitations of the merlin clock
Knowing the patterns of the merlin clock, is it equal to saying that if you follow its rhythm, you can make a good profit? The theory is good, but the reality is complex and variable and elusive。
The first limitation of the merlin clock is that it has lags。
It is well known that economic indicators are generally lagging behind the actual economic situation, and when there is consensus that the economy is at a certain stage, the corresponding asset prices have actually risen in part, and then the allocation of assets has clearly passed the golden period. Buffett once said that when you heard about the spring of the spring, spring was almost over。
Second, the merrillian clock is somewhat watery in china, and the impact of national policy regulation on the economy cannot be underestimated. For example, during the economic downturn, “draining” will lead to a surge in large quantities of commodities, which used to be a 10-year cycle, with slow changes, but with little failure at the domestic level, which predicts the future of the crystal ball。
The correct use of the merlin clock
Since markets and policies are unpredictable, it is better not to make conclusive projections of markets, but rather to sense the temperature of the markets, using the “merrill lynch” as a thermometer。
While it is difficult to judge how long overheating lasts, it is feasible to gradually reduce the share of such assets as equities and bulk commodities。
As markets enter the interest-rate cycle, the economy enters the recession, and it is feasible to start increasing offensive assets and collecting chips。
So the merrillian clock can help fine-tune asset allocation, but it also needs to be noted that, regardless of the economic cycle, different asset types hold a certain proportion, and any extreme ratio of allocation is undesirable, whether it is too radical or too conservative。
During the wait-and-see period, what investors need to do is to observe the strength of policies and keep abreast of the “format” of the domestic “merrillian clock” — indicators that are more effective also need to be tailored and time-sensitive。
Concluding remarks
Trends in the performance of various asset classes are not judged on a day-to-day basis, and once a real trend takes place, it often takes longer to operate, and the economic cycles are often behind it. By judging the operational phase of the economic cycle, we can help us to grasp the real trends and deploy assets that are truly adapted to the environment. The merrill lynch, after all, is a theoretical model that is applied in a rigid manner, the key to which is the judgement of trends in economic growth and inflation. In the classic merrill lynch theory, merrill lynch uses leading indicators such as output gaps and business confidence indices to judge trends in economic growth and inflation. Although these indicators are not effectively available in the country, the current stage of the economy can still be judged by alternative indicators, combined with consistent expectations by analysts。
Investment does not exist as a universal key, and the merrillian clock has its limitations, but it provides us with a methodological analysis of economic cycles and asset performance that deserves our learning and learning。
