Assets RouteMap: Fair Value Line

Profit from divergences between actual prices and fair value

Sample of our chart technical algorithm. The red up + down arrows show our track record. The orange line is our econometric forecast.

This strategy is intended to show the index level that can be explained by economic factors based on past relationships over very many years. The formula varies by asset class as analysed further in the Bonds, Forex and Shares RouteMaps. Divergence between actual levels and predicted levels show the extent of over- or under-valuation based on investor euphoria or fear prevalent at any point in time.

It is designed not only to show the historic relationship but also to provide a Best Guess as to the future trend, based on our econometric models.
 
For comparability, indices have been rebased to set year-end 1994 at 100. Please note the differences between charts in the Assets RouteMap and those for other RouteMaps. Since income is a major consideration for investment in some asset classes but not others, all indices are shown as total return and not in terms of price only, so as to make them compatible. 
 
The index is shown as the thick white line on the right hand axis. The explanatory variable, the economic formula, shown as the thin yellow line, uses the left hand axis as does the Best Guess for its future development, shown as the thin orange line.
 
Best Guesses suggest what would happen to future performance for each asset class based on our econometric model, tested over 15-25 years of historic data, which utilises consensus estimates for GDP, interest rates, wages and prices.
 
Both historic data and Best Guesses should be treated as general indications of trend only. Even though these are the best relationships that can be consistently applied across all markets, correlations may be poor for some asset classes in some regions. In other cases correlations of past performance may be good, but the modelling is subject to a high degree of uncertainty in its ability to predict future developments.
 
Irrespective of forecasts, back-tested past performance of this strategy for each asset class shows that even the data already reported can be an effective way both to raise returns and to reduce risks.