Investor implications for global deleveraging
Glyn Owen
20th September 2012
1
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
2
global investment management
Total debt to GDP for developed economies 1990 - 2012
Source: Deutsche Bank, Haver. September 2012.
3
global investment management
Debt composition varies widely
Canada
91
Australia
53
105
Germany
60
87
South Korea
81
45
France
48
Spain
72
82
40
80
93
76
111
33
111
97
134
90
76
109
67
100
71
219
99
0
Households
21
83
107
98
Japan
91
87
82
United
Kingdom
69
59
49
United States
Italy
63
120
200
Nonf inancial corporations
81
226
300
400
Financial institutions
500
600
Government
Source: Bloomberg, September 2012.
4
global investment management
US fiscal deficit as % of GDP 1791 -2011
Source : Deutsche bank, GFD. September 2012.
5
global investment management
Budget deficits larger in the US than in peripheral
Europe
Budget deficit as a % of GDP
%
Greece, Ireland, Italy, Portugal and
Spain: GDP- weighted fiscal balance
US
Source: Deutsche bank. September 2012.
6
global investment management
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
7
global investment management
US real GDP post-war experience: not a normal cycle...
Source: Nedgroup Capital. September 2012.
8
global investment management
The UK recovery is weaker than in the great depression
%
Source: Deutsche Bank. September 2012.
9
global investment management
Short term interest rates over past 10 years
US, UK, Japan and Europe
8.0
7.0
6.0
%
5.0
4.0
3.0
2.0
1.0
0.0
Sep 02
Sep 03
Sep 04
Sep 05
USD 1 Month LIBOR
Sep 06
Sep 07
GBP 1 Month LIBOR
Sep 08
Sep 09
JPY 1 Month LIBOR
Sep 10
Sep 11
Sep 12
EUR 1 Month LIBOR
Source: MGIM, Bloomberg. September 2012
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global investment management
The world is not normal:
UK base rate 1694 to today
Source: Deutsche Bank, GFD. September 2012.
11
global investment management
The world is not normal:
Swiss government bond yields
1.2%
1.0%
0.8%
yield (%)
0.6%
0.4%
0.2%
0.0%
-0.2%
-0.4%
-0.6%
0
5
10
15
20
25
30
years to maturity
Swiss government bond yield
Source: Bloomberg, MGIM. September 2012.
12
global investment management
The world is not normal:
10 year government bond yields
8.0%
7.0%
6.0%
Yield
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
Jan 00
Jan 01
Jan 02
Jan 03
Jan 04
Jan 05
US
Jan 06
Jan 07
Germany
Jan 08
Jan 09
Jan 10
Jan 11
Jan 12
UK
Source: Bloomberg, MGIM. September 2012.
13
global investment management
The world is not normal:
US 10 year yield since 1790
Source: Deutsche Bank, GFD, Bloomberg Finance LLp. September 2012.
14
global investment management
Quantitative easing:
Bank of England balance sheet as a % of GDP
Source: Deutsche bank. September 2012.,
15
global investment management
Tail risk of extreme events are not insignificant
• US fiscal cliff
• Chinese ‘recession’
• Eurozone disintegration
• Journey into the unknown – monetary easing
16
global investment management
Fiscal cliff: will need to be tackled after November
US budget deficits
4
% of GDP
2
0
Mar 92
Mar 95
Mar 98
Mar 01
Mar 04
Mar 07
Mar 10
Mar 13
-2
-4
-6
-8
-10
-12
US Budget Balance (% GDP)
Source: Bloomberg, September 2012
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global investment management
US economic momentum is reasonable – but
unemployment remains high
US labour market
800
12.0
700
10.0
600
400
6.0
(%)
Number of claims (thousands)
8.0
500
300
4.0
200
2.0
100
0
0.0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul
80 81 82 83 84 85 86 87 88 89 90 91 93 94 95 96 97 98 99 00 01 02 03 04 06 07 08 09 10 11 12
US Initial Jobless Claims SA
US Unemployment Rate (%)
Source: Bloomberg, September 2012
18
global investment management
US construction: the only way is up?
3000
900
800
2500
700
600
Billion (USD)
Volume (thousands)
2000
1500
1000
500
400
300
200
500
100
0
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
US New Privately Owned Housing Starts
0
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
US Gross Private Domestic Investment
Source: Bloomberg, September 2012
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global investment management
China is landing
GDP and industrial production
14%
25%
12%
20%
10%
15%
8%
6%
10%
4%
5%
2%
0%
Dec 02
0%
Dec 03
Dec 04
Dec 05
Dec 06
China GDP (LHS)
Dec 07
Dec 08
Dec 09
Dec 10
Dec 11
Dec 12
Chinese Industrial Production (RHS)
Source: Bloomberg, September 2012
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global investment management
Major macro indicators continue to disappoint
Chinese money supply (% yoy)
65
45
60
40
55
35
50
30
Money Supply Growth %
Level
Chinese PMI: new orders
45
40
35
30
25
20
15
10
5
25
0
20
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
Jan Aug Mar Oct May Dec Jul Feb Sep Apr Nov Jun Jan Aug Mar Oct May Dec Jul Feb Sep Apr Nov Jun Jan Aug
98 98 99 99 00 00 01 02 02 03 03 04 05 05 06 06 07 07 08 09 09 10 10 11 12 12
M1 YoY
M2 YoY
Source: Bloomberg, September 2012.
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global investment management
China’s slowing growth: structural or cyclical?
China Real GDP y/y % change
16
14
12
10
8
6
4
2
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
0
2000
%
Source: Factset. September 2012.
22
global investment management
The European crisis is not simply debt
1.0%
-8.0%
Current account
balance
-8.5%
Budget deficit to
GDP
5.2%
-1.7%
-4.6%
-0.8%
-7.2%
-4.5%
-6.0%
-1.9%
-2.4%
-4.2%
-2.1%
-2.2%
-7.4%
Source: IMF, 2012 estimates.
23
global investment management
Unit labour costs since the launch of the euro
140
Spain
Italy
Index level rebased to 100
130
Greece
Portugal
France
Ireland
120
Germany
110
100
90
80
Dec Jul Feb Sep Apr Nov Jun Jan Aug Mar Oct May Dec Jul Feb Sep Apr Nov Jun Jan
99 00 01 01 02 02 03 04 04 05 05 06 06 07 08 08 09 09 10 11
Source: Bloomberg, September 2012
24
global investment management
Currencies vs. the Deutschemark
0
0
20
200
400
60
80
600
100
800
120
140
ITL per DEM
GRD, ESP, PTE per DEM
40
1,000
160
1,200
180
200
1,400
73
75
77
79
81
Spanish peseta
83
85
87
89
91
93
Greek drachma
95
97
99
01
03
05
07
Italian lira
Source: Bloomberg, September 2012
25
global investment management
German Labour reform accelerated growth- can Italy?
Industrial Production (rebased to 100 January 1995)
150
140
130
120
110
100
90
80
Dec Aug Apr Dec Aug Apr Dec Aug Apr Dec Aug Apr Dec Aug Apr Dec Aug Apr Dec Aug Apr Dec Aug Apr Dec Aug Apr Dec
94 95 96 96 97 98 98 99 00 00 01 02 02 03 04 04 05 06 06 07 08 08 09 10 10 11 12 12
US
Germany
Italy
Source: Bloomberg, September 2012
26
global investment management
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
27
global investment management
Clear slowdown in global growth
Source: JPMorgan, September 2012
28
global investment management
Equity market valuations
Price/Earnings*
Dividend yield
10-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%
*current year estimate
Source: Bloomberg, Statistics to 06/09/2012. September 2012
29
global investment management
MSCI World P/E ratio since 1995
40
35
P/E Ratios
30
25
20
15
10
5
0
Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug Aug
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
MSCI WORLD
Source: Bloomberg, September 2012
30
global investment management
Investment conclusion
• ‘New normal’ is now the consensus
• Deleveraging and rebalancing set to continue for years
• US – growth risk in 2013
China – structural slowdown underway
Europe – stress / intervention cycle to continue
• Policy risks are high
• Further monetary loosening is certain
• Crisis presents an extraordinary valuation opportunity
31
global investment management
Implications for portfolio construction
• Subdued growth
low return expectations
• Continued deleveraging and tight credit
• High tail risks
financial strength is critical
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 class
Quality defensive equities
Inflation not today’s problem – but might be the end game
Exploit tactical opportunities
32
global investment management
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
33
global investment management
Harmony Balanced Fund strategic allocation
Cash
10.0%
Global Equity
10.0%
Global Property
10.0%
Local Equity
30.0%
Local Bonds
30.0%
Global Bonds
10.0%
Source: MGIM, September 2012
34
global investment management
Harmony Growth Fund strategic allocation
Cash
5.0%
Global Property
10.0%
Global Equity
15.0%
Local Bonds
15.0%
Global Bonds
5.0%
Local Equity
50.0%
Source: MGIM, September 2012
35
global investment management
Harmony US Dollar Balanced
100%
80%
60%
40%
20%
0%
3 months
YTD
2011
2010
2009
2008
2007
2006
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%
September 2012. Past performance is not indicative of future returns. . *30/06/2005 to 30/12/2005
36
global investment management
Harmony US Dollar Growth
100%
80%
60%
40%
20%
0%
3 months
YTD
2011
2010
2009
2008
2007
2006
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%
September 2012. Past performance is not indicative of future returns. . *30/06/2005 to 30/12/2005
37
global investment management
Harmony performance vs. cash, bonds and equities
105
Rebased to 100 (Jun-11)
100
95
90
85
80
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Citigroup WorldBIG TR USD
Nov-11
Dec-11
LIBOR USD 7 Day
Jan-12
Feb-12
Mar-12
MSCI World TR USD
Apr-12
May-12
US Dollar Growth
Jun-12
Jul-12
Aug-12
US Dollar Balanced
Source: MGIM, Lipper, September 2012. Past performance is not indicative of future returns..
38
global investment management
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40
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