1 global investment management Investor implications for global deleveraging Glyn Owen 20 th September 2012.

1global investment management

Investor implications for global deleveraging

Glyn Owen

20th September 2012

2 global investment management

Central government debt burden 1900 to 2011 - advanced and emerging economies

Source: Reinhart (2010), Reinhart and Rogoff (2009 and 2011), sources cited therein and the authors

%


Total debt to GDP for developed economies 1990 - 2012

Source: Deutsche Bank, Haver. September 2012.


Debt composition varies widely

Source: Bloomberg, September 2012.

67

98

82

48

45

81

87

60

105

91

99

109

134

111

82

107

72

49

59

53

120

219

76

97

76

93

40

87

91

63

226

81

71

90

111

33

80

83

21

69

0 100 200 300 400 500 600

Japan

United Kingdom

Spain

France

Italy

South Korea

United States

Germany

Australia

Canada

Households Nonf inancial corporations Financial institutions Government


US fiscal deficit as % of GDP 1791 -2011

Source : Deutsche bank, GFD. September 2012.


Budget deficits larger in the US than in peripheral Europe

Source: Deutsche bank. September 2012.

Greece, Ireland, Italy, Portugal and Spain: GDP- weighted fiscal balance

US

Budget deficit as a % of GDP

%


Deleveraging: where are we in the cycle?

Note: Debt refers to external marketable debt and excludes internal debts, e.g. interbank debts

Source: FRB, Haver Analytics, DB Global Markets Research


US real GDP post-war experience: not a normal cycle...

Source: Nedgroup Capital. September 2012.


The UK recovery is weaker than in the great depression

Source: Deutsche Bank. September 2012.

%


Short term interest rates over past 10 years

Source: MGIM, Bloomberg. September 2012

US, UK, Japan and Europe

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Sep 02 Sep 03 Sep 04 Sep 05 Sep 06 Sep 07 Sep 08 Sep 09 Sep 10 Sep 11 Sep 12

USD 1 Month LIBOR GBP 1 Month LIBOR JPY 1 Month LIBOR EUR 1 Month LIBOR

%


The world is not normal:UK base rate 1694 to today

Source: Deutsche Bank, GFD. September 2012.


The world is not normal:Swiss government bond yields

Source: Bloomberg, MGIM. September 2012.

-0.6%

-0.4%

-0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

0 5 10 15 20 25 30

yiel

d (%

)

years to maturity

Swiss government bond yield


The world is not normal:10 year government bond yields

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12

Yie

ld

US Germany UK

Source: Bloomberg, MGIM. September 2012.


The world is not normal:US 10 year yield since 1790

Source: Deutsche Bank, GFD, Bloomberg Finance LLp. September 2012.


Quantitative easing:Bank of England balance sheet as a % of GDP

Source: Deutsche bank. September 2012.,


Tail risk of extreme events are not insignificant

• US fiscal cliff

• Chinese ‘recession’

• Eurozone disintegration

• Journey into the unknown – monetary easing


Fiscal cliff: will need to be tackled after November

Source: Bloomberg, September 2012

US budget deficits

-12

-10

-8

-6

-4

-2

0

2

4

Mar 92 Mar 95 Mar 98 Mar 01 Mar 04 Mar 07 Mar 10 Mar 13

% o

f GD

P

US Budget Balance (% GDP)


US economic momentum is reasonable – but unemployment remains high

US labour market


0.0

2.0

4.0

6.0

8.0

10.0

12.0

0

100

200

300

400

500

600

700

800

Jan 80

Feb 81

Mar 82

Apr 83

May 84

Jun 85

Jul 86

Aug 87

Sep 88

Oct 89

Nov 90

Dec 91

Jan 93

Feb 94

Mar 95

Apr 96

May 97

Jun 98

Jul 99

Aug 00

Sep 01

Oct 02

Nov 03

Dec 04

Jan 06

Feb 07

Mar 08

Apr 09

May 10

Jun 11

Jul 12

(%)

Num

ber o

f cla

ims

(th

ousa

nds)

US Initial Jobless Claims SA US Unemployment Rate (%)


US construction: the only way is up?


0

500

1000

1500

2000

2500

3000

Jan 59 Jan 62 Jan 65 Jan 68 Jan 71 Jan 74 Jan 77 Jan 80 Jan 83 Jan 86 Jan 89 Jan 92 Jan 95 Jan 98 Jan 01 Jan 04 Jan 07 Jan 10 Jan 13

Vo

lum

e (t

ho

usan

ds)

US New Privately Owned Housing Starts

0

100

200

300

400

500

600

700

800

900

Jan 59 Jan 62 Jan 65 Jan 68 Jan 71 Jan 74 Jan 77 Jan 80 Jan 83 Jan 86 Jan 89 Jan 92 Jan 95 Jan 98 Jan 01 Jan 04 Jan 07 Jan 10 Jan 13

Bill

ion

(U

SD

)

US Gross Private Domestic Investment


China is landing


GDP and industrial production

0%

5%

10%

15%

20%

25%

0%

2%

4%

6%

8%

10%

12%

14%

Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12

China GDP (LHS) Chinese Industrial Production (RHS)


Major macro indicators continue to disappoint

Source: Bloomberg, September 2012.

0

5

10

15

20

25

30

35

40

45

Jan 98

Aug 98

Mar 99

Oct 99

May 00

Dec 00

Jul 01

Feb 02

Sep 02

Apr 03

Nov 03

Jun 04

Jan 05

Aug 05

Mar 06

Oct 06

May 07

Dec 07

Jul 08

Feb 09

Sep 09

Apr 10

Nov 10

Jun 11

Jan 12

Aug 12

Mo

ney

Sup

ply

Gro

wth

%

M1 YoY M2 YoY

Chinese money supply (% yoy)

20

25

30

35

40

45

50

55

60

65

Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12

China New Orders PMI SA China New Export Orders PMI SA

Chinese PMI: new orders

Leve

l


China’s slowing growth: structural or cyclical?

Source: Factset. September 2012.

China Real GDP y/y % change

0

2

4

6

8

10

12

14

16

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

%


The European crisis is not simply debt

Source: IMF, 2012 estimates.

Budget deficit to GDP

Current account balance

-2.2%

-2.4%

5.2%

-0.8%

-1.9%

-4.6%

-1.7%

-8.0%

1.0%

-8.5%

-4.2%

-4.5%

-2.1%

-6.0%

-7.4%

-7.2%


Unit labour costs since the launch of the euro


80

90

100

110

120

130

140

Dec 99

Jul 00

Feb 01

Sep 01

Apr 02

Nov 02

Jun 03

Jan 04

Aug 04

Mar 05

Oct 05

May 06

Dec 06

Jul 07

Feb 08

Sep 08

Apr 09

Nov 09

Jun 10

Jan 11

Ind

ex le

vel r

ebas

ed to

100

Spain

Italy

Greece

Portugal

France

Ireland

Germany


Currencies vs. the Deutschemark


0

200

400

600

800

1,000

1,200

1,400

0

20

40

60

80

100

120

140

160

180

20073 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07

ITL p

er DE

M

GR

D, E

SP

, PT

E p

er D

EM

Spanish peseta Greek drachma Italian lira


German Labour reform accelerated growth- can Italy?


80

90

100

110

120

130

140

150

Dec 94

Aug 95

Apr 96

Dec 96

Aug 97

Apr 98

Dec 98

Aug 99

Apr 00

Dec 00

Aug 01

Apr 02

Dec 02

Aug 03

Apr 04

Dec 04

Aug 05

Apr 06

Dec 06

Aug 07

Apr 08

Dec 08

Aug 09

Apr 10

Dec 10

Aug 11

Apr 12

Dec 12

Ind

ustr

ial P

rodu

ctio

n (r

ebas

ed to

100

Jan

uary

199

5)

US Germany Italy


The European stress / intervention cycle

• Don’t underestimate the political will to preserve the Eurozone

• Inflate, stagnate or default

• Austerity / growth

• European bail out of banks

• Issue of Eurobonds

• ECB – LTRO / OMT / rate cut

• Fiscal union


Source: JPMorgan, September 2012

Clear slowdown in global growth


Equity market valuations

Source: Bloomberg, Statistics to 06/09/2012. September 2012

*current year estimate

Price/Earnings* Dividend yield10-year Government

bond yields

United States 13.8 2.1% 1.7%

Eurozone 10.8 4.2% 1.6%

United Kingdom 11.2 4.1% 1.7%

Germany 10.9 3.7% 1.6%

Switzerland 13.4 3.6% 0.5%

Japan 13.8 2.4% 0.8%

Hong Kong 10.2 3.8% 0.7%

Australia 12.6 5.0% 3.1%


MSCI World P/E ratio since 1995


0

5

10

15

20

25

30

35

40

Aug 95

Aug 96

Aug 97

Aug 98

Aug 99

Aug 00

Aug 01

Aug 02

Aug 03

Aug 04

Aug 05

Aug 06

Aug 07

Aug 08

Aug 09

Aug 10

Aug 11

Aug 12

P/E

Rat

ios

MSCI WORLD


Investment conclusion

• ‘New normal’ is now the consensus

• Deleveraging and rebalancing set to continue for years

• US – growth risk in 2013China – structural slowdown underwayEurope – stress / intervention cycle to continue

• Policy risks are high

• Further monetary loosening is certain

• Crisis presents an extraordinary valuation opportunity


Implications for portfolio construction

• Subdued growth low return expectations

• Continued deleveraging and tight credit financial strength is critical

• High tail risks high volatility

• Cyclical move down in commodities has further to run

• Deflation protection in safe haven bonds

• Income generating assets important• safe dividend equities• corporate bonds• emerging market bonds

Focus on:Diversification by asset classQuality defensive equitiesInflation not today’s problem – but might be the end gameExploit tactical opportunities

Focus on:Diversification by asset classQuality defensive equitiesInflation not today’s problem – but might be the end gameExploit tactical opportunities


Introduction to Harmony portfolios

• Risk profiled core solutions: Balanced and Growth

• Multi-asset, multi-manager, multi-currency

• Diversified between local and global investments, asset class, currency, manager and style

• Dynamic tactical asset allocation

• Available in five currency / regional bases: USD, GBP, EUR, AUD and Asian

• The Harmony range uses no derivatives, structured products or CDOs

• Managed by Momentum Global Investment Management in London


Harmony Balanced Fund strategic allocation

Source: MGIM, September 2012

Global Equity10.0%

Local Equity30.0%

Global Bonds10.0%

Local Bonds30.0%

Global Property10.0%

Cash10.0%


Harmony Growth Fund strategic allocation

Source: MGIM, September 2012

Global Equity15.0%

Local Equity50.0%

Global Bonds5.0%

Local Bonds15.0%

Global Property10.0%

Cash5.0%


Harmony US Dollar Balanced

September 2012. Past performance is not indicative of future returns. . *30/06/2005 to 30/12/2005

3 months YTD 2011 2010 2009 2008 2007 2006 2005*

Harmony US Dollar Balanced Peer Rank 7/16 6/16 6/16 7/14 4/14 7/11 3/10 2/10 4/10

Fund Performance 4.0% 5.6% -1.5% 5.6% 20.0% -27.2% 6.7% 13.2% 4.7%

Peer Max 5.5% 7.6% 1.6% 12.2% 25.2% -6.7% 7.8% 13.5% 14.2%

Peer Min -2.1% 0.5% -9.2% -0.9% -0.7% -36.2% 2.1% 5.0% 0.8%

Peer Median 3.5% 5.1% -4.1% 5.4% 15.6% -23.4% 4.7% 8.5% 3.4%

0%

20%

40%

60%

80%

100%

3 months YTD 2011 2010 2009 2008 2007 2006 2005*


Harmony US Dollar Growth

September 2012. Past performance is not indicative of future returns. . *30/06/2005 to 30/12/2005

3 months YTD 2011 2010 2009 2008 2007 2006 2005*

Harmony US Dollar Growth Peer Rank 3/16 2/16 3/16 6/14 3/14 9/11 3/10 1/10 4/10

Fund Performance 5.4% 7.4% -0.1% 7.8% 23.0% -30.1% 6.5% 15.2% 6.3%

Peer Max 5.5% 7.6% 1.6% 12.2% 25.2% -6.7% 7.8% 13.5% 14.2%

Peer Min -2.1% 0.5% -9.2% -0.9% -0.7% -36.2% 2.1% 5.0% 0.8%

Peer Median 3.5% 5.1% -4.1% 5.4% 15.6% -23.4% 4.7% 8.5% 3.4%

0%

20%

40%

60%

80%

100%

3 months YTD 2011 2010 2009 2008 2007 2006 2005*


Harmony performance vs. cash, bonds and equities

Source: MGIM, Lipper, September 2012. Past performance is not indicative of future returns..

80

85

90

95

100

105

Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12

Reb

ased

to 1

00 (

Jun-

11)

Citigroup WorldBIG TR USD LIBOR USD 7 Day MSCI World TR USD US Dollar Growth US Dollar Balanced


Disclaimer

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1 global investment management Investor implications for global deleveraging Glyn Owen 20 th September 2012.

Documents

global growth slide

gdp source

debt source

years source

deutschemark source

euro source

fiscal union slide

us budget deficits slide