UBS global outlook 2009: Proceed with caution UBS Wealth Management Research 5 th EFAC Assembly Technology Conference, Davos
UBS global outlook 2009:Proceed with caution
UBS Wealth Management Research5th EFAC Assembly Technology Conference, Davos
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Table of Contents
SECTION 1 2008: Annus horribilis It happened so fastSECTION 2 2009: The lost year Macroeconomic Outlook SECTION 3 Outlook for Industries No one is safeSECTION 4 Currencies Dislocations to reverseSECTION 5 Some advice Take (only) calculated risks
Q&A
SECTION 1 – 2008: Annus horribilis
It happened so fast or borrowing Queen Elisabeth II words: "(It) is not a year on which I shall look back with undiluted pleasure."
3
It started with the housing marketThe long way of housing market corrections
Source: Reuters EcoWin, UBS WMR
USA, 6/2006 UK, 10/2007 Spain, 4/2007 Ireland, 2/2007-24 -12 0 12 24
75.0
77.5
80.0
82.5
85.0
87.5
90.0
92.5
95.0
97.5
100.0
Months after peak
Index = 100 at peak, number of months before/after peak
4
Now pessimism is everywhereConsumer confidence dropped
Source: Reuters EcoWin, UBS WMR
5
Saving more and spending lessSavings rate must rise in the US
Source: Reuters EcoWin, UBS WMR
Savings as percent of GDP
6
Now pessimism is everywhereBusiness confidence too
Source: Reuters EcoWin, UBS WMR
7
Earnings recessionEarnings per share versus leading economic indicator
Source: Thomson Financial, UBS WMR
35
40
45
50
55
60
65
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
-20
-15
-10
-5
0
5
10
15
20
25
ISM mfg (shifted 6 mo. forward) 12 mo. trailing EPS, 6 mo. change in % (rhs)
Index Percent
8
The credit market stopped working properly
Source: Reuters EcoWin, UBS WMR
LIBOR EURO 3 month and ECB target
9
Credit where credit is (still) dueBaa corporate credit spreads over US 10y treasuries (%)
Source: Robert Shiller, Moody's, Federal Reserve, UBS WMRPre1953: interpolated observations from annual data
10
Corporate default rates to go up firstUS high yield default rate
Source: Moody's, Bloomberg, UBS WMR
11
Central banks at workMonetary policy
Source: Reuters EcoWin, UBS WMR
Central bank rates (%)
1212
Governments at work (1)
Source: The Economist
Rescue plans
13
Governments at work (2)Debt-to-GDP to go up
Source: IMF, Eurostat, UBS WMR
0
50
100
150
200
250
US Japan Eurozone Switzerland UK Canada
Debt-to-GDP (%)
14
Stimulus packages, who to benefit?China 6% of GDP, Europe 0.5-1.5% of GDP, US 1.5% of GDP
Source: UBS IB, UBS WMR
MAIN BENEFICIARIES
Mass transit transportation (rail, road, airports)
Power grids
Environmental: Water, Energy efficiency
Building construction and renovation
SECONDARY BENEFICIARIES
Engineering & construction companies
Communication equipment
Software (CAD, Healthcare)
Laboratories
Tax preparation
Note: different stimulus packages in different countries have different beneficiaries -> case by case analysis needed
15
Inflation or Deflation?Inflation rates
Source: Reuters EcoWin, UBS WMR
SECTION 2 – MACROECONOMIC OUTLOOK
2009: The lost year
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0
2
4
6
8
10
12
China EMU India Japan Switz. UK US World
2007A 2008E 2009E
Economic outlook
♦ Recession in US, Europe and Japan, weak recovery in late 2009
♦ Sharp slowdown in emerging markets, but most to avoid recession
♦ Deflation risks have risen, inflation to retreat further
♦ Governments are back – expect loose fiscal and monetary policy
♦ Sharply higher savings rate is a large risk to global economy
♦ Uncertainty remains high
Sources: Thomson Financial, UBS WMR
-4-202468
101214
China EMU India Japan Switz. UK US World
2007A 2008E 2009E
Real GDP growth in percent
Inflation in percent
18
USA in recession, World is notWMR economic forecasts
Sources: Thomson Financial, UBS WMR
19
USA in recession, World is notFirst to dive, first to return again
♦ US recession is old news
– First to return to (moderate) growth again in H2 of 2009
– But no sharp positive turnaround to be expected
♦ Canada and Brazil depend on commodities
– Expect some rebound in 2010
♦ World is "saved" by Emerging Markets
– Strong contribution to world growth mainly from China and India (leaves some concentration risk)
20
Developed Europe in recessionWMR economic forecasts
Sources: Thomson Financial, UBS WMR
21
Developed Europe in recessionBroad but uneven recession
♦ Most at risk for prolonged recession are UK and Spain
– Pay-back for exuberance in real estate and financials
♦ Switzerland and Germany might see signs of turnaround in H1 already
– Biggest risk from export destinations
♦ Italy from a low base
– There was no boom in the first place
22
Emerging Europe affectedWMR economic forecasts
Sources: Thomson Financial, UBS WMR
23
Emerging Europe affectedParty is over for a while
♦ New EU members among the weakest countries
♦ Currencies lose ground again
– Strength from 2000 to early 2008 vs. USD thanks to better monetary and financial policy and growth ended in a sharp sell-off
– Many economies now face current account deficit
– Impaired ability to attract foreign investments
– For those exporting commodities it's a double whammy
– Eg. Hungary was already in fiscal and account deficit and weak currency, hence, has little defense left
– Fight for capital
♦ Russia and CIS depend on commodities
– Expect some rebound in 2010
24
Larger Asian economies expected to fare betterWMR economic forecasts
Sources: Thomson Financial, UBS WMR
25
Larger Asian economies expected to fare betterStill high growth possible
♦ Some countries better able to withstand global slowdown
– China, India, Indonesia seem positioned for some internal strength
♦ Japan affected by currency and exports
– Japan industrial production -16.2% in November
26
Domestic demand runs out of steam Domestic demand versus GDP growth
Source: CEIC, UBS WMR
0
2
4
6
8
10
12C
hina
Hon
gK
ong
Indi
a
Indo
nesi
a
Japa
n
Kor
ea
Mal
aysi
a
Phili
ppin
es
Sing
apor
e
Taiw
an
Thai
land
Domestic Demandreal GDP growth
%-contribution to real GDP growth (average over past 4 quarters)
SECTION 3 – OUTLOOK FOR DIFFERENT INDUSTRIES
No one is (really) safe in parallel downturn
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ConsumersSome anecdotal evidence
♦ US holiday season sales -4%, worst in modern times
♦ US weak players exitingCircuit City, Linen'n Things, Sharper Image in Chapter 11 (moratorium of debt enforcement)
♦ UK weak players exitingMFI Furniture and Woolworth bankruptcy(Woolworth UK is different from Woolworth US, South Africa or Australia)
♦ BUT Germany, Switzerland and France seem relatively OK
29
Non-financial corporate capex in EuropeIn the last two downturns -30% over 3 years
Source: Worldscope, Morgan Stanley
30
Automation industrySome anecdotal evidence
♦ Invensys (6th November, First half results 1.4.-30.9.08)
– Revenue at Process Systems unit at +12%
– Orders at 10% organic growth, but capex spend of clients may begin to slow
– Margins down due to higher investment spend
– Co. suggest that client may change focus from capacity expansion to more efficient operations
– meanwhile controls (for household appliances) continues to be in negative growth territory (-5.1% in sales, -9.1% in orders)
♦ Rockwell Automation (12th November, 4th quarter 1.7.-30.9.08)
– Revenue at Control Products & Solutions unit at +6%, Process +20%
– Oil & Gas very strong; Global Auto in-line; Food & Beverage, Consumer Products, Home and Personal Care slightly weak; US Auto, Life Sciences weak
– Margins down due to higher investment spend and more lower margin solutions
– Reducing 3% of workforce in anticipation of falling demand
– Guidance for -3 to +1% organic growth for 2009
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Car industrySome anecdotal evidence
♦ Europe 1993 Car demand was -16% yoy (from 13.4m) only back to 1992 level by 1997 (2007 at 14.7m, +9.7% since 1997)
♦ Toyota opened an assembly plant every six month, has now delayed three
♦ US car sales down > -30% for most manufacturers in November, across the product range not just SUV but as well sub-compacts and even Toyota Prius down
♦ Risk of supplier bankruptcyleading to systemic risk and increasing working capital (inventory, financial help)
32
Mining capexCut estimates could go even lower
Source: Morgan Stanley
33
Oil & gas upstream capexLarge companies still investing (USDm)
Source: Credit Suisse
Abbreviations:HES Hess CorpBG BG GroupCVX ChevronCOP ConocoPhillipsXOM ExxonMobilMRO Marathon OilRDS Royal Dutch ShellSTO StatoilHydroTOT Total
34
Commodities should pick up modestly in late 2009Commodity prices versus leading indicators
Source: Bloomberg, CRB, OECD, UBS WMR
SECTION 4 – CURRENCIES
Dislocations to partially reverse
36
Corrections have taken place…Deviations from purchasing power parity in percent versus USD
Source: Thomson Financial, UBS WMR
37
EUR USD: Supported by US twin deficits
Source: Reuters EcoWin, UBS WMR
EURUSD spot rate and purchasing power parity rate
38
Exchange rate EUR USDPrice performance, forecast and implicit volatility
Source: Thomson Reuters, UBS WMR
--- Forward
--- Volatility Range
--- Forecast
39
Exchange rate EUR GBPPrice performance, forecast and implicit volatility
Source: Thomson Reuters, UBS WMR
--- Forward
--- Volatility Range
--- Forecast
40
Exchange rate EUR CHFPrice performance, forecast and implicit volatility
Source: Thomson Reuters, UBS WMR
--- Forward
--- Volatility Range
--- Forecast
41
Exchange rate EUR JPYPrice performance, forecast and implicit volatility
Source: Thomson Reuters, UBS WMR
--- Forward
--- Volatility Range
--- Forecast
SECTION 5 – SOME ADVICE
Time to take (only) calculated risks
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Advice on riding the stormFrom a Financial Analysts perspective
♦ Cash is king save cash not to be starved of breathing air
♦ Time long-term financingrisk premium of capital (equity and debt) is very high currently
♦ Cut down where possibleIf you have been weak yesterday, you might be out of business tomorrow
♦ Check again who you are dealing withWhat if your main supplier disappears; what if one of your suppliers of critical parts disappears; what if your patent holder/taker is taken-over; what if your main customer cannot pay; and don't take backlog for granted-> think about contingency plans
♦ Avoid non-business risks where possiblecurrency and commodity exposure, financial investments need extra scrutiny
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Performance of main asset classesTotal return in percent
Source: MSCI, JP Morgan, Merrill Lynch, Bloomberg, Thomson Financial, HFR, GPR, UBS WMR
45
Financial markets felt the consequences Long-term equity returns (S&P 500)
Source: Reuters EcoWin, UBS WMR
-100%
0%
100%
200%
300%
400%
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
5year rolling returns 10year rolling returns
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Outlook for 2009Proceed with caution
♦ Corporate bonds offer deep value despite rising default rates
♦ Remain defensive within equities
♦ Too early to increase exposure to emerging market assets
♦ Efforts to reflate the economy pose risks to the US dollar
♦ Listed real estate market likely to weaken further
♦ Rotation within nontraditional asset classes
♦ Diversification benefits to reemerge in 2009
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Time to take calculated risksHistorical and expected returns (%)
Source: JP Morgan, Merrill Lynch, MSCI, GPR, Bloomberg, Thomson Financial, UBS WMR
* Composite of 75% investment grade and 25% high yield corporate bondsNote: Return range shows +/– one annualized standard deviation from the expected 2009 return, based on the past
10-years of monthly returns. Historical average return is the compounded average annual return over the past 10 years.
48
Equities offer long-term valuePrice-to-earnings ratios based on cyclically adjusted earnings
Source: Thomson Financial, UBS WMR
0
10
20
30
40
50
60
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
World US UK Switzerland
49
US GDP growth versus change in the S&P 500In percent, annual change
Source: Thomson Financial, UBS WMR
-4
-3
-2
-1
0
1
2
3
4
5
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
-45
-30
-15
0
15
30
45
GDP GDP forecast S&P 500
50
-300
-200
-100
0
100
200
300
400
500
600
700
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
IG spread Estimated spread Residual
Corporate bonds offer attractive investment opportunitiesUS corporate spreads versus fair value model results (bps)
Explanatory indicators: US high yield default rate, VIX index, US term structure and 10-year Treasury yield
Source: UBS WMR
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Q&A
? !
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Disclosure (as of 30.12.2008)
Circuit City Stores Inc. 1, 2, 3. Invensys 1. Linens 'N Things 4. Rockwell Automation Inc. 1, 4, 5, 6.
Toyota Motor 1, 2, 3, 4, 6, 7, 8. Woolworths Group plc 5, 6, 7, 9, 10.
1. UBS Securities LLC makes a market in the securities and/or ADRs of this company.
2. This company/entity is, or within the past 12 months has been, a client of UBS Financial Services Inc, and non-investment banking securities-related services are being, or have been, provided.
3. Within the past 12 months, UBS Financial Services Inc has received compensation for products and services other than investment banking services from this company.
4. UBS AG, its affiliates or subsidiaries has acted as manager/co-manager in the underwriting or placement of securities of this company/entity or one of its affiliates within the past three years.
5. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and investment banking services are being, or have been, provided.
6. Within the past 12 months, UBS AG, its affiliates or subsidiaries has received compensation for investment banking services from this company/entity.
7. UBS AG, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services from this company/entity within the next three months.
8. UBS AG, its affiliates or subsidiaries held other significant financial interests in this company/entity as of last month`s end (or the prior month`s end if this report is dated less than 10 working days after the most recent month`s end).
9. UBS Limited acts as broker to this company.
10. UBS Limited is acting as advisor to Woolworths in relation to its stake in 2Entertain.
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