UK, March 25, 2009 - The traditional links between economics and financial markets may no longer apply in the new financial landscape and as a consequence investment thinking must change according to an article in Watson Wyatt's Global Investment Matters publication. In the article, entitled The economic world has changed, the firm asserts that in the new regime, which has undergone significant structural change, it is highly unlikely that normal asset price reversion can be expected. On this analysis and the uncertainly of forward-looking returns from most asset classes, the firm concludes that credit is likely to produce the most attractive risk-adjusted investment opportunities in future.
Carl Hess, global head of investment consulting at Watson Wyatt said: "Capital and leverage for investment are constrained and have been re-priced and much now depends on the timeliness and aggressiveness of the policy responses of governments around the world. In this very changed environment, caused by fundamental structural shifts, we believe 'regime-change' thinking is more important than 'mean-reversion' thinking."
In the article, the firm suggests that the usual rules of capital markets have been suspended and, with government intervention and elevated political risks now having a large potential influence on different investments, unfavourable risk/reward trade-offs in most asset classes are the result. However given that market participants are reducing leverage, which is creating different market prices of cash and synthetic economic exposure, there is a premium for buying physical exposures in bond markets. This premium is especially high at the moment because of global economy-wide de-leveraging which offers investors attractive risk-adjusted opportunities in credit markets.
Carl Hess said: "Forward-looking returns from all asset classes carry significant uncertainty so it is hard to know which assets will be the main beneficiaries of such an acute dislocation in financial markets. However pension funds should benefit from their advantage of having genuinely long time horizons which will certainly be required in view of elevated risk premia."
Global Investment Matters is an annual publication covering topical investment issues, and this year includes articles on:
Global Investment Matters is available at:
www.watsonwyatt.com/europe/pubs/gim/default.asp
Paul Deane-Williams
Head of Public Relations - Investment
Watson Wyatt Limited
+44 (0)1737 274397
paul.deane-williams@watsonwyatt.com
Gay Collins, Lauren Stewart
Penrose Financial
+44 (0)207 786 4888
watsonwyatt@penrose.co.uk
Visit Watson Wyatt's online press office: www.watsonwyatt.com/europe/news/journalists
Watson Wyatt Investment Consulting, a division of Watson Wyatt, is focused on creating financial value for institutional investors through independent, best-in-class investment advice. We are specialist investment professionals who provide co-ordinated investment strategy advice based on expertise in risk assessment, strategic asset allocation, and investment manager selection. Watson Wyatt Investment Consulting provides investment advice to some of the world's largest pension funds and institutional investors, and has more than 550 associates in Europe, the Americas and Asia.
In the US investment advisory and investment consulting services are provided by Watson Wyatt Investment Consulting, Inc., which is a subsidiary of Watson Wyatt Worldwide Inc. Watson Wyatt Investment Consulting, Inc., is a registered investment adviser with the Securities and Exchange Commission.
Watson Wyatt (NYSE, NASDAQ: WW) is the trusted business partner to the world's leading organisations on people and financial issues. The firm's global services include: managing the cost and effectiveness of employee benefit programs; developing attraction, retention and reward strategies; advising pension plan sponsors and other institutions on optimal investment strategies; providing strategic and financial advice to insurance and financial services companies; and delivering related technology, outsourcing and data services. Watson Wyatt has 7,700 associates in 32 countries and is located on the Web at www.watsonwyatt.com
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