Guide to the Clock


The concept of using a Clock to illustrate the cyclical nature of the economy with various investments positioned where they are most attractive can be traced back many decades. However, Trevor Greetham, Head of Multi Asset at RLAM, started the research that led the comprehensive Investment Clock model we use today in the 1990s.

The premise of the Clock is that the economy follows periods of expansion and contraction, overheating then cooling off, with inflation picking up and then falling away after growth slows. Each of the four phases of the cycle favours a particular asset class. Its current readings are based on past trends and the momentum of lead indicators.

The Clock’s horizontal axis, left to right measures inflation while its vertical axis indicates economic growth. In simple terms, the economic cycle moves through waves; from prosperity to decline, with central banks inflating or deflating monetary policy  as a means of stabilising activity within the economy.

Investment Clock

Investment clock

Source: RLAM, for illustrative purposes only

Tracking the movement through each of the Clock’s quadrants: Reflation, Recovery, Overheat and Stagflation, can guide rotation across assets and sectors.

In order to use the Investment Clock, you need a way to tell the time. This can be easier said than done, and is dependent on an accurate reading and interpretation of the indicator data.

At RLAM, our asset allocation team are responsible for ‘telling the time’ on the Investment Clock. Head of Multi Asset, Trevor Greetham and Economist, Ian Kernohan work closely together to undertake a rigorous analysis of the data used to ‘set’ the Clock.

The Investment Clock diagram sums up which asset classes and sectors tend to do best at each stage of the global economic cycle. The positioning of each type of investment is based on more than four decades of historical data.

As well as asset performance, global economic growth trends and inflation figures, their research encompasses many different indicators; including earnings, housing, money supply, survey, employment and wage data among others.

Historic analysis: growth and inflation cycles

Historic analysis

In addition to their fundamental analysis, the team regularly engage with RLAM’s asset class specialists as well as policymakers and external strategists to formulate their views. From these multiple sources, the team have a high degree of conviction around their reading of the Clock.

Once the team have set the Clock, they will use its reading in conjunction with other quantitative models to guide tactical asset allocation across RLAM’s multi asset portfolios.

They use a systematic framework for implementing this across asset class, region and sector.

Implementation templates

Asset class   Region
 

Source: RLAM. For illustrative purposes only. 

This framework provides a scientific basis for the team’s decision making process while also allowing room for good judgement and experience. The team adopt a fundamental approach to investing and use the Clock as just one facet of their robust process.

The Investment Clock is an important part of RLAM thinking but it is only one of a multitude of intuitive factors included in the Multi Asset team's models. Quantitative analysis provides a firm foundation for making an investment decision but our pragmatic investment process leaves room for experience and good judgement to play their part as well. History often repeats itself in broad terms but there are unique aspects to every economic cycle.