19 Oct 2016 3 min read

Can bicycle lessons offer investment clues?

By Emiel van den Heiligenberg

In his recent post, James concludes that central bankers, like his bicycle lessons for his son Michael, appear to have stabilised the cycle. If this is right, what could it mean for markets?


As mentioned in Stabilising the Cycle, getting the economic cycle right is the key call for asset allocators. So how do we aim to do that? In a nutshell, we divide the cycle into phases, based on what we call our ‘Macro Mapping’.

This proprietary research maps asset class risks and potential returns in different parts of the economic cycle. For instance, the research shows that equity returns have historically been sensitive to growth, but relatively insensitive to inflation.

We have been firmly mid-cycle from 2010 until mid-2015. With economic growth not too hot and not too cold, it’s been what most investors call a ‘Goldilocks scenario’, with the chances of a recession-induced bear market generally low.

Late-cycle economies, meanwhile, can be characterised by tight capacity, unbalanced growth, excessive credit expansion, tight monetary policy and worrying inflation pressures. So far we see none of that. This has been a good environment to take equity risk. And the fact that the cycle is somehow stabilising is – all else equal – good news, as it prolongs the length of the cycle.

Getting the economic cycle right is the key call for asset allocators

Our Head of Economics, Tim Drayson, recently updated our recession scorecard and it shows a stable picture, with only limited warning signs. The most worrying signs of overheating are in the labour market and corporate profit margins. However, to paraphrase Yellen in her recent press conference, "the economy has room to run", especially in housing, investments, inventories and inflation. 

Yet despite the stabilising cycle and the limited warning signs, we remain somewhat cautious on equities for four principal reasons:

  1. We are gradually approaching late cycle dynamics
  2. The earnings upside for equities appears limited
  3. Systemic risk is elevated
  4. The prospect of rate hikes is hanging over markets

The rise in yields has been particularly notable recently. Higher nominal yields have been accompanied by an uptick in inflation expectations, which have kept real yields reasonably stable. This is probably the best form of yield pick-up for equity markets, yet so far equity markets have gone sideways. A rise in real yields, when nominal yields rise faster than inflation expectations, might be more difficult for market to swallow.

So it turns out Michael’s bike lessons can teach us a lot about markets. They show us that cycles can either move forward or crash to the ground. When it comes to asset allocation, it’s important to maintain the right balance between the two, and trust someone with experience.

 For Michael, at least, with decades of cycle experience, that someone is James.


Emiel van den Heiligenberg

Head of Asset Allocation

Emiel is responsible for the overall strategic direction of the team’s investment and business strategy. He claims to have been a promising lightweight rower at university until French fries got the better of him. Reflecting his love for rowing in a team, he firmly believes that excellence can only be achieved by a great team made up of motivated individuals that are also eager to work together. To this end he is the self-proclaimed inventor of the verb 'teaming' to acknowledge that shaping a top team and culture of excellence is an ongoing process. Outside of work-family obligations, Emiel’s spare time is filled by a passion for shark diving and skiing. Prior to dedicating his career to portfolio management in 1996, Emiel worked as a policy adviser in the Dutch Ministry of Finance and he graduated from Tilburg University in the Netherlands ages ago. When not glued to his Bloomberg screens, this Dutch man is hooked on computer games, peanut butter and his favourite dark beer made by Belgian monks.

Emiel van den Heiligenberg