Investment Strategy
27th January 2012 ABM Breakfast Briefing, Cork
2
2011 - the year that was
• Bad year for “risk assets”: Eurozone crisis & lack of solutions outweighed low interest rates
• Economic growth disappointed.
• Eurozone debt crisis spread to „core‟ & deleveraging continued
• Bonds: flight to „relative‟ safety = ultra-low US, German & UK govt. bond yields
• Equities: negative returns but defensive & dividends beat higher-risk
– Pharma and tobacco best performers (+ oil & gas, food & beverage, mobile telecoms, utilities)
– Banks & mining worst sectors
– EM, Europe, Asia-Pacific worst markets (and smaller companies)
• Volatility well above average
3
Economic growth – weaker manufacturing activity ahead
Source: Reuters, 3 January 2012
Eurozone Manufacturing PMI
25
30
35
40
45
50
55
60
65
Jan-0
8
May
-08
Sep
-08
Jan-0
9
May
-09
Sep
-09
Jan-1
0
May
-10
Sep
-10
Jan-1
1
May
-11
Sep
-11
Jan-1
2
Germany Ireland Spain Greece
Global Manufacturing PMI
25
30
35
40
45
50
55
60
65
Jan-0
8
May
-08
Sep
-08
Jan-0
9
May
-09
Sep
-09
Jan-1
0
May
-10
Sep
-10
Jan-1
1
May
-11
Sep
-11
Jan-1
2
US ISM UK PMI Euro PMIJapan PMI China PMI
4
Deleveraging - US (and others) face years of debt reduction
Source: Federal Reserve, Morgan Stanley Research 1 Dec 2009
5
Deleveraging – the Scandinavian/Japanese experience
Source: Morgan Stanley, Bank of England, Financial Stability Report, Thompson Datastream and Bank Calculations. Finland and Japan represent bank lending and all other series represent lending by financial institutions
-15
-10
-5
0
5
10
15
20
25
30
35
-3 -2 -1 0 1 2 3 4 5 6 7 8 9 10
Japan
Sweden US
UK
Spain
Finland
Years from Start of Crises
Real Lending growth rates Percentage changes on year earlier
Norway
6
Bonds
Eurozone 10-Year government bond yields
8
Sovereign debt - AAA alternatives but with currency risk
Source: Standard & Poors, Local Currency Rating, 16 January 2012
10 year government bond yields, selected countries
AAA AA- AAA AAA AAA AA+ AA+ AAA AAA AA+ AAA
0.74%0.96%
1.59% 1.66%1.85% 1.92% 1.94% 1.97% 2.05%
3.14%
3.78%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
Switzerla
nd
Japan
Singap
ore
Sweden
Ger
many
Norw
ay
Unite
d Sta
tes
Canad
aU
K
France
Austr
alia
Corporate bonds - investment grade
UK Corporate Spreads
Source: Bloomberg, Merrill Lynch, 12 Jan 2012
Euro Corporate spreads bps bps
0
200
400
600
800
1000
1200
Jan-0
8
May-0
8
Sep-0
8
Jan-0
9
May-0
9
Sep-0
9
Jan-1
0
May-1
0
Sep-1
0
Jan-1
1
May-1
1
Sep-1
1
Jan-1
2
Non-banks
Banks
0
100
200
300
400
500
600
700
Jan
-08
Jul-
08
Jan
-09
Jul-
09
Jan
-10
Jul-
10
Jan
-11
Jul-
11
Jan
-12
Banks
Non-banks
10
Economic growth - stall speed
• GDP forecasts revised down – predominantly for developed world - but above 2% „stall speed‟
• Policy errors in Europe (& US) may eventually require even further austerity, eroding business confidence
• Marked contrast between DW and EM remains, EM to generate approx. 80% of global GDP growth
• Multi-year deleveraging = modest growth and low inflation for DW
• Asia ex Japan main driver global growth next 5 yrs
Source: Citi Global Economic Outlook and Strategy 18 January, Reuters 19 January 2012
2011 2012E 2013E 2011 2012E 2013E 3 mnth 6 mnth 12 mnth 2011 2012E 2013E
UK 0.9% 0.2% 1.0% 4.5% 2.6% 2.3% 0.7% 1.4% 1.8% 3.7% 1.7% 1.5%
US 1.7% 1.9% 1.9% 3.2% 1.7% 1.7% 0.3% 0.7% 1.2% 2.8% 2.2% 2.7%
EMU 1.5% -1.5% -0.4% 2.7% 2.2% 1.4% 1.0% 1.4% 1.7% 2.7% 1.5% 1.7%
Japan -1.0% 1.0% 1.3% -0.3% -0.4% -0.2% 0.1% 0.3% 0.5% 1.1% 1.2% 1.5%
Asia 7.3% 6.9% 7.3% 5.8% 4.2% 4.3%
Industrial World 1.3% 0.6% 1.1% 2.6% 1.6% 1.4%
Emerging World 6.0% 5.2% 5.9% 6.2% 5.2% 5.1%
Global 3.0% 2.3% 3.0% 3.8% 2.9% 2.8%
10-Year Bond YieldsGrowth (GDP) Inflation (CPI) Reuters Deposit Rates
11
Financial stress - getting back on track, unit labour costs
Source: Bank of England Financial Stability Report Dec 2011, Eurostat
12
Equities
13
Equities - global market outlook
• Global policy actions and negative real interest rates supportive
• Strong balance sheets, access to funding and EM exposure key drivers,
• Slowing GDP growth unlikely to lead to profit recession, but
• Reduced business confidence can become self-fulfilling
• Equities attractive on most valuation measures
Source: Citi GES, FactSet Consensus Estimates, MSCI, 18 January 2012, Reuters
MSCI AW MSCI MSCI ROE 10 yr Eq Risk
BMK WGT 2011E 2012E 2011E 2012E P/B Yield 2011E 2011E 2010E Yield Premium
UK 8.4% 14% 8% 10.3x 9.5x 1.5x 4.3% 15% 9.7% 10.5% 1.9% 7.8%
US 50.9% 16% 11% 13.4x 12.1x 1.8x 2.3% 15% 7.5% 8.3% 1.7% 5.8%
Europe 14.8% -5% 11% 11.0x 10.0x 1.2x 4.7% 12% 9.1% 10.0% 1.7% 7.4%
Japan 7.9% 6% 23% 13.8x 11.6x 0.9x 2.8% 7% 7.2% 8.6% 1.0% 6.3%
Asia Pac ex J 12.6% 8% 10% 11.7x 10.8x 1.5x 3.7% 14% 8.5% 9.3% 2.3% 6.3%
Emerging 5.4% 13% 9% 10.5x 9.7x 1.4x 3.3% 15% 9.5% 10.3% 5.8% 3.7%
World 100.0% 10% 11% 12.2x 11.1x 1.5x 3.1% 13% 8.2% 9.0%
EPS YoY% Price/Earnings Earnings Yield
14
Equities - 10-year periods of weak GDP „Lost Decades‟
Source: Citi Research Global Equity Strategist, 16 November 2011
Compound Average Real GDP Growth Over 'Lost Decades'
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
UK 1
974
Italy
199
0
Sw
eden 1
988
Ger
man
y 19
93
Euro
Zone
2001
US 1
929
Japan
199
0
US 2
011-1
5E
Euro
zone
2011-
15E
UK 2
011-
15E
Co
mp
ou
nd
Avera
ge R
eal G
DP
Gro
wth
Over
10 Y
ears
15
Equities - 10-year periods of weak GDP „Lost Decades‟
Source: Citi Research Global Equity Strategist, 16 November 2011
Compound Annual Average Total Equity Return
Over 'Lost Decades'
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
UK 1
974
Italy
199
0
Sw
eden 1
988
Ger
man
y 19
93
Euro
Zone
2001
US 1
929
Japan
199
0
US 2
011-1
5E
Euro
zone
2011-
15E
UK 2
011-
15E
An
nu
al T
ota
l E
qu
ity R
etu
rn
16
Equities - buy cheap = potentially good returns
Source: Oriel Securities UK Equity Briefing, 7 October 2011
17
Equities – 2012 investment themes
• Defensive companies with attractive dividend yields: Well-covered & growing – versus low bond yields
• Other lower-risk companies: i.e. higher-quality, stable growth with strong balance sheets
• Emerging market exposure:
– Via specialist funds
– Via Developed World companies with significant emerging market exposure
• Hedge against risk of euro break-up:
– Via big, defensive, non-Euro with Emerging Markets exposure
18
Summary: 2012 – slowing and uneven growth
• Global economic growth to slow but to avoid recession (except for Eurozone).
• Inflation pressures (from commodity prices etc.) should ease
• Interest rates to remain low until at least 2013
• Market valuations
– Bonds: Governments fully priced (negative “real” yields), Corporates look better
– Equities: Reasonably priced & investors very risk averse
– Commercial Property: fair value
– (Include Absolute Return Funds to reduce portfolio volatility)
Lessons for investors from the “Great Recession”
• Risk matters: (risk= potential for financial loss)
• Danger of leverage: - compounds risk
• Asset Allocation / Diversification matters
• Price matters (Performance = fn{Price paid})
• Liquidity matters
• Other: - Beware of the “crowd” at extremes
- Beware of investing in what you don‟t understand
19
20
Appendix: Equity theme - exposure to growth by sector
Source: MS European Strategy, 3 October 2011
Revenue Exposure to EM & DM2011 estimates, % of Total
0
20
40
60
80
100
120
Techn
olog
y
Energ
y
Semicon
ductor
s
Food
beve
rage
& to
bacc
o
Con
sumer
dur
ables
Mater
ials
Autom
obile
s
Hou
seho
ld &
per
sona
l pro
ducts
Cap
ital g
oods
Pharm
aceu
ticals
Telec
omm
unicat
ions
Trans
porta
tion
Banks
Food
& sta
ples
reta
iling
Com
mer
cial ser
vice
s
Insu
ranc
e
Med
ia
Softw
are & ser
vice
s
Ret
ailin
g
Utilities
Hea
lthca
re e
quipm
ent &
ser
vice
s
Diver
sifie
d fin
ancials
Con
sumer
ser
vice
s
Rea
l estat
e
% o
f to
tal re
ve
nu
e
Emerging Markets
Developed Markets
21
Appendix: Equities - dividends important even in growth markets
Source: DataStream indices, 17 November 2011
Equity Returns: Capital Price vs. Dividend Income
Developed Market, UK and Asia ex Japan
4.7% 4.6%
6.0%
2.2%
3.7%
2.4%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
DM UK Asia ex Japan
20 Years
An
nu
alis
ed
Retu
rn
Dividend Return
Price Return
22
Appendix: Deleveraging - debt/GDP ratio‟s are unsustainable everywhere
Source: Morgan Stanley GEOS 28/11/2011
Forecasts for Budget Deficit
v General Government Debt in 2012
Sweden
Germany
ItalyEuro Area
France
United StatesIndia
Portugal
Greece
Spain
United Kingdom
Japan
-2%
0%
2%
4%
6%
8%
10%
12%
30% 80% 130% 180% 230%
General Government Debt, % GDP
Bu
dg
et
Defi
cit
, %
GD
P
23
Appendix: Govt. Bonds: Large refinancing of Euro debt in 2012
Source: Bloomberg. IMF and Citi Research, 7 November 2011
Sovereign Total Financing Needs
0
200
400
600
800
1000
1200
1400
1600
2012 2013 2014
Bil
lio
n €
Portugal
Ireland
Greece
Belgium
Spain
Germany
Italy
France
24
Appendix: Asset Returns 2011 – (Euro terms)
Asset Returns 31/12/10 - 28/12/11
-20.0
-17.3
-15.5
-14.3
-12.4
-10.7
-7.5
-7.0
-3.5
-3.3
1.9
2.4
2.5
4.7
7.8
9.2
15.2
15.0
20.0
20.5
-25.00 -20.00 -15.00 -10.00 -5.00 0.00 5.00 10.00 15.00 20.00 25.00
Copper (€)
MSCI Frontier Markets
MSCI Emerging Markets (€)
FTSE W Europe ex UK (€)
FTSE W Japan (€)
FTSE W Asia Pacific ex Japan (€)
CRB commodities Index (€)
FTSE W ex UK (€)
US $ to Euro €
FTSE 100
FTSE Corp (€)
Euro € to UK £
Euro € to CHF
FTSE W US (€)
FTSE Ireland (€)
Bunds (€)
FTSE All Gilts
Gold (€)
FTSE Index-Linked Gilts
Brent crude oil (€)
Percent (%)
25
Appendix: Quilter estimated return - secure v variable
Notes
Estimated returns source: Quilter. These represent our estimate of long-term investment returns over a full cycle of seven years or more.
Any data shown is for illustrative purposes only. It does not and cannot constitute a projection of the future which is unknown.
Past performance is no guarantee of future performance and the value of investments and income from them can fall as well as rise.
UK
Equ
itie
s
Inte
rnation
al E
qu
itie
sS
overe
ign
Debt
Corp
ora
te B
on
ds
Ind
ex-L
inked G
ilts
UK
Cash
UK
Pro
pert
y
Hedg
e F
und
s
UK
Pri
vate
Equ
ity
Return Decomposition
Income
Yield
Capital
Appr
Total
Return
Estimated total return 6.0% 6.0% 2.0% 3.0% 2.5% 0.1% 5.0% 4.0% 6.5%
Est. yield 3.8% 2.9% 2.0% 3.0% 0.5% 0.1% 5.0% 0.0% 0.0%
Est. capital appreciation 2.2% 3.1% 0.0% 0.0% 2.0% 0.0% 4.0% 6.5%
Quilter Apcims Growth 48% 33% 8% 3% 3% 8% 100%3.0% 2.4% 5.4%
Quilter Apcims Balanced 43% 25% 20% 5% 3% 5% 100%2.9% 1.9% 4.8%
Quilter Multi Asset Classs 30% 22% 28% 1% 8% 12% 100%2.3% 2.4% 4.7%
Quilter Apcims Income 40% 15% 35% 5% 3% 3% 100%2.8% 1.4% 4.2%
Quilter Apcims Conservative 22% 11% 53% 5% 3% 8% 100%2.3% 1.1% 3.4%
Quilter Apcims Distribution 18% 8% 70% 5% 100%2.3% 0.6% 2.9%
26
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