Going global in fixed income
January 2013
Agenda
Going global in fixed income
China – another debt bubble in the making?
The US – a comeback story
M&G Global Macro Bond Fund
Going global in fixed income
Going global with M&G in fixed income…
… and exploiting investment opportunities in a £33 trillion market
35000
Face value of global vs. domestic debt
30000
25000
£bn
20000
15000
£33 trillion
market
10000
5000
0
UK bonds
Sovereign debt
Corporate debt
Global bonds
High yield and emerging markets
Source: M&G , as at 22 November 2012.
A fully flexible global bond fund has a more than 20 times bigger
opportunity set than any pure UK fixed income fund
Source : Bloomberg, as at 31 December 2012. The face value of global bonds outstanding is calculated on the basis of the Merrill Lynch Global Sovereign Broad Market Plus Index, Merrill Lynch Global High Yield and Emerging Markets Index and Merrill
Lynch Global Broad Market Corporate Plus Index. The face value of UK bonds outstanding is calculated on the basis of the Merrill Lynch Sterling Corporate & Collateralized Index, Merrill Lynch Sterling High Yield Index and the Merrill Lynch UK Gilts Index.
Sterling is up over 16% since 2009
Hurting our exports, while we remain addicted to imported goods
UK current account balance
4
1975-76 sterling
-28% vs US dollar,
-29% vs Deutsche mark
% of GDP
2
1990-91 sterling
-20% vs US dollar,
-15% vs Deutsche mark
0
-2
-4
-6
A current account deficit this large has historically
preceded a sterling crash
Source: ONS, Bloomberg, as at December 2012.
2008-09 sterling
-19% vs US dollar,
-17% vs euro
China – another debt bubble in the making?
China – the world’s biggest credit bubble since 2009
55
Annual change in private credit as % of GDP, 2009-11
55
2011
45
35
2010
2009
45
35
25
25
15
15
5
5
-5
-5
Chinese GDP growth will have to slow down
Source : IMF Global Financial Stability Report, April 2012
A China slowdown has a significant impact on its trading partners
180
CDS spread in bps
170
Which one do you want
to be long or short of?
160
150
140
130
120
110
100
90
Brazil, 5y CDS, BBB
Emerging markets are not a safe haven
Source: Bloomberg, as at 31 December 2012
Berkshire Hathaway, 5y CDS, AA-
A China slowdown has a significant impact on its trading partners
3.8
3.6
3.4
Yield in %
3.2
130 bps
3.0
2.8
2.6
20 bps
2.4
2.2
2.0
1.8
Philippines, 2021, BB+, USD
Emerging markets are not a safe haven
Source: Bloomberg, as at 31 December 2012
Wal-Mart, 2021, AA, USD
The US – a comeback story
US is likely to become energy self-sufficient
Gas
imports
100%
Net oil & gas import dependency
Japan
2010
80%
2035
European
Union
60%
40%
China
20%
India
United States
0%
-20%
Gas
exports
20%
40%
60%
Heading for energy independence in the next 20 years
Source: International Energy Agency, World Energy Outlook 2012, November 2012
80%
100%
Oil Imports
US housing market indicates a solid economic recovery
2
US new one family homes months’ supply (3m average) vs US GDP yoy
10
8
short supply
strong growth
4
6
4
2
6
0
8
-2
-4
10
12
-6
large supply
weak growth
14
The US economy looks in much better shape than the UK and the
Eurozone – so how can this be reflected in the portfolio?
Source : Bloomberg, as at 30 September 2012
-8
-10
US GDP YoY (%)
Housing inventory – months’ supply
(inverted scale)
0
Mortgages will be refinanced and new houses built
The building materials and construction sector looks attractive to us
Source: M&G, Bloomberg, as at 31 December 2012
•
Global construction materials
•
Cyclical business, volatile cash flow
•
Unsecured, NA/B-; M&G Rating: B
•
Current yield = 5.6%
•
Performance in 2012 = +40%
•
Improving credit, favoured play on US housing
market
EUR 9.625% 2017
M&G Global Macro Bond Fund
M&G Global Macro Bond Fund
A flexible and focused global bond fund
A ‘go-anywhere’ total return global bond fund
Can Invest in all global fixed income asset classes and currencies
Designed to outperform the IMA Global bond sector with lower volatility
Fund size: £349 million
Source: M&G as at 31 December 2012. Ratings as at 30 November and should not be taken as recommendations
Fund positioning summary
M&G Global Macro Bond Fund
Geographic breakdown
Key portfolio themes
35
Duration
Low duration of around 2.4 years
30
Inflation
Central banks no longer care about inflation, so
we have 24% in linkers
Government
bonds
Quality dominates. Generally we prefer credit over
government bonds.
25
20
% 15
Investment
grade
We prefer corporate issuers – but have added
financials recently, particularly US banks.
High yield
Still overcompensates for default, but valuations
have come closer to fair value
5
Emerging
markets
We are very selective – some corporate exposure,
but short positions in Brazil, Indonesia, Russia,
South Africa & Turkey
0
Currencies
We like the USD and have short positions in
sterling, the Japanese yen, the Aussie dollar and
Kiwi dollar as well as the SA rand
Source: M&G, as at 31 December 2012
10
Fund positioning summary
M&G Global Macro Bond Fund
Currency breakdown
Key portfolio themes
Duration
Low duration of around 2.4 years
65
Inflation
Central banks no longer care about inflation, so
we have 24% in linkers
55
Government
bonds
Quality dominates. Generally we prefer credit over
government bonds.
45
% 35
Investment
grade
We prefer corporate issuers – but have added
financials recently, particularly US banks.
High yield
Still overcompensates for default, but valuations
have come closer to fair value
Emerging
markets
We are very selective – some corporate exposure,
but short positions in Brazil, Indonesia, Russia,
South Africa & Turkey
Currencies
We like the USD and have short positions in
sterling, the Japanese yen, the Aussie dollar and
Kiwi dollar as well as the SA rand
Source: M&G, as at 31 December 2012
25
15
Short positions
5
-5
Global opportunity set and designed to achieve lower volatility
M&G Global Macro Bond Fund
71.5%
Total return, indexed to 100
170
57.1%
150
Credit crisis
44.6%
41.6%
33.5%
32.8%
130
110
90
70
M&G Global Macro Bond Fund
IMA £ High Yield sector average
IMA £ Corporate Bond sector average
IMA Global Bond sector average
IMA UK Gilts sector average
IMA £ Strategic Bond sector average
Our most flexible bond fund
Source: M&G, Morningstar as at 31 December 2012. Sterling X Inc class shares, UK database, net income reinvested, price to price.
Prices may fluctuate and you may not get back your original investment.
For financial advisers only. Not for onward distribution. No other persons should rely on any information contained within. This Financial Promotion is
issued by M&G Securities Limited which is authorised and regulated by the Financial Services Authority and provides investment products. The registered office
is Laurence Pountney Hill, London EC4R 0HH. Registered in England No. 90776