Investment Research

Academic in nature, our Investment Research showcases the work of Lazard’s thought leaders from around the world.

A Look under the Hood of US Consumer Price Inflation

US consumer price inflation has been relatively low and stable for two decades. In recent years, investors have worried that already low inflation could fall further. We now believe that the US economy has reached the point where the risk for inflation is to the upside. Building cyclical pressures were partially concealed by the steep fall in oil prices, an effect which is now fading. Similarly, major policy change could add structural inflationary pressures. In our view, these risks have critical implications for investors’ portfolios. In this paper, we review longer-term trends in consumer prices, discuss key drivers of inflation, as well as analyze recent developments and their potential to contribute to future inflation. Our medium-term expectation is for core inflation to continue to grind higher, but significant government policy changes could change this outlook. (January 2017)

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Don't Blame Central Banks for Negative Rates

The European Central Bank (ECB) became the first major central bank to lower its nominal policy rate below zero more than two years ago. Since then, negative interest rate policies (NIRPs) have remained highly contentious. In our view, criticism of central banks is misdirected and should instead be leveled at elected officials, who have failed to deliver appropriate fiscal responses to the financial crisis. First, NIRPs have largely worked as expected and adverse consequences have not yet materialized. Second, NIRPs are a symptom of the problems facing the global economy, not the cause. Third, fiscal policy has worked at cross purposes with monetary policy. Continued economic weakness, a variety of factors contributing to structurally higher demand for savings and lower demand for investment, and very low current rates on government debt all argue for expansionary fiscal policy and economic reforms aimed at increasing long-term potential growth. (October 2016)

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Emerging Asia: An Update on Reforms

We believe it is crucial for emerging markets investors to monitor reform agendas. Most emerging nations have established world-class companies and deepened their capital markets, but many still have institutional frameworks and principles that lag significantly when compared to the developed world. Reforms that effectively address this can be an important driver of future progress. In this paper, we focus on India, Indonesia, and China and examine the range of reforms in those countries. More importantly, we evaluate the challenges their governments may face in ultimately bringing about a long-term, fundamental improvement to the business environment. (September 2016)

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A Performance Analysis of Risk Parity

A risk parity model is used to construct portfolios that seek to equalize the contributing risk of each asset class under consideration. Risk parity portfolios typically have lower volatilities and higher Sharpe ratios as a result of effective risk-based diversification. As a result, they have become a popular tool for investors seeking to minimize downturns and preserve capital. In this paper, we examine whether or not risk parity can outperform a buy and hold, asset-based, equal-weighted allocation and seek to identify the key factors that drive the performance of risk parity. We show that risk parity has had better risk-adjusted results when compared to an equal-weighted allocation. Furthermore, we find that rebalancing based on short-term changes in asset class correlation and volatility only minimally influences the risk parity model’s asset allocation decisions and results. Instead, long-term (i.e., structural) risk characteristics of the underlying asset classes are the primary determinants of risk parity-derived allocations. (September 2016)

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Fixed Income Investments in a Carbon-Conscious World

In recent years, institutional investors have become increasingly focused on environmental, social, and governance (ESG) factors in their portfolios. In large part, this heightened awareness has resulted in efforts to evaluate companies and countries within an ESG framework encompassing both qualitative and quantitative attributes. For fixed income investors, the emergence of green bonds has opened the possibility of owning specific securities aimed at funding renewable energy, sustainable infrastructure, or other projects with positive environmental characteristics and goals. In this paper, we provide an introduction to green bonds. We define these securities, explain the underlying principles, as well as outline the market and issuance. In our view, these bonds represent a compelling (and growing) opportunity as issuers and investors seek to reduce the carbon footprint of their activities and portfolios. (August 2016)

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