Extras RouteMap: Valuation versus Other Assets

Buy when the yellow line turns upwards, sell when it turns down

Sample of chart showing correlation between bond prices and inflation (left scale inverted). Forecast year on year changes shown in orange.

This strategy shows how the valuation of alternative assets is affected by their closest comparable rivals for investment funds. As a result of the great diversity shown by alternative asset classes, the relevant comparison differs from one type of alternative to another.

The chosen comparable rival assets are Inflation-Linked versus conventional Long-Term Government Bonds, Long-Dated AAA-Rated Corporate Bonds versus Long-Term Government Bonds, BAA-AAA Yield for Bond Hedge Funds, Real Cyclically-Adjusted PE ratios for Equity and Event-Driven Hedge Funds, Volatility of Global Equities for Global Macro Hedge Fund, SmallCap -Large Cap Earnings Yield for Private Equity, Real Interest Rates for Precious Metals and Business Confidence for other Commodities.

For comparability, indices of alternative assets have been rebased to set year-end 1994 at 100. The asset price index is shown as the thick white line on the right hand axis. The explanatory variable uses the left hand axis, shown as the thin yellow line.  Except for commodities the left hand axis is inverted for consistency so low means cheap and high means expensive. Please note the differences between charts in the Extras RouteMap and those for other RouteMaps. Since income is a major consideration for investment, alternative asset indices are shown as total return and not in terms of price only.

Owing to the conversion of legacy currencies into Euros, analysis of corporate bonds is based on Germany and index-linked bonds is based on France. For Private Equity our proprietary index is a capitalisation-weighted average of leading quoted private equity holding companies and asset managers.