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Investment Markets Outlook – “Is the Economic Tide Turning?”

Investment Markets Outlook – “Is the Economic Tide Turning?”. Brigette Leckie May 2009. Agenda. The worst has passed. Global growth is basing and a fledging recovery is now underway . A V shaped growth outcome is most likely (data in coming months to confirm this).

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Investment Markets Outlook – “Is the Economic Tide Turning?”

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  1. Investment Markets Outlook – “Is the Economic Tide Turning?” Brigette Leckie May 2009

  2. Agenda • The worst has passed • Global growth is basing and a fledging recovery is now underway • A V shaped growth outcome is most likely (data in coming months to confirm this) • Equity market rally to date justified but near-term some speed bumps possible • A durable equity market rally should unfold over 2009 as economic and corporate fundamentals improve • Portfolio considerations: • Add “quality” risk to clients portfolios ahead of improving investment foundations • Underweight cash and “safe” assets

  3. Three steps to recovery • Step 1 – Rebuild a functioning banking system • 

  4. Three steps to recovery •  • Step 1 – Rebuild a functioning banking system Step 2 – Appropriate monetary policy • 

  5. Three steps to recovery •  • Step 1 – Rebuild a functioning banking system •  Step 2 – Appropriate monetary policy Step 3 – Fiscal stimulus • 

  6. Three steps to recovery •  • Step 1 – Rebuild a functioning banking system •  Step 2 – Appropriate monetary policy •  Step 3 – Fiscal stimulus

  7. Credit conditions have improved markedly US 5 year swap spread Basis points over 5 yr Treasuries 140 120 100 80 long run average 60 40 20 0 09 88 90 92 94 96 98 00 02 04 06 08 Source: Datastream

  8. Credit Markets are functioning again Peak level Peak date Current level • Change (bps) TED spread 464 10 Oct 08 92 -372 3m Libor spread 364 10 Oct 08 95 -270 30yr mortgage rate 6.7% 24 Jul 08 4.9% -180 US high grade spread 558 4 Dec 08 478 -80 US high yield spread 1929 16 Dec 08 1481 -449 US credit cards 575 17 Dec 08 280 -295 US auto (prime) 625 1 Dec 08 270 -355 Source: Datastream, Bloomberg

  9. Economic recovery – what shape V or U? • Leading growth indicators are turning up

  10. US ISM 47.2 23.1 24.1  Leading indicators are improving Indicator Last 3mth ago Change • Improving Source: Datastream

  11. Signs of improvement are evident Purchasing Managers Index Index 70 Expansionary Europe China 60 50 40 Contractionary US 30 20 2005 2006 2007 2008 2009 Source: Bloomberg

  12. US ISM 47.2 23.1 24.1  US Jobless Claims 631 547 84  Leading indicators are improving Indicator Last 3mth ago Change • Improving Source: Datastream

  13. No further deterioration for US jobs? US - Jobless Claims Number, 000 700 650 600 Contracting labour market 550 Jobless claims 500 450 400 350 300 Expanding labour market 250 200 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 Source: Datastream, US Census Bureau

  14. US ISM 47.2 23.1 24.1  US Jobless Claims 631 547 84  US Consumer Confidence 39.2 25.3 13.9  US NAHB Housing Index 14 8 6  Leading indicators are improving Indicator Last 3mth ago Change • Improving Source: Datastream

  15. Early signs of recovery in US housing US Home Builders Survey (NAHB) Index 90 80 70 60 50 40 30 20 10 0 85 87 89 91 93 95 97 99 01 03 05 07 09 Source: Datastream

  16. US ISM 47.2 23.1 24.1  US Jobless Claims 631 547 84  US Consumer Confidence 39.2 25.3 13.9  US NAHB Housing Index 14 8 6  US Existing Home Months' Supply 9.1 10.6 -1.5  China M2 Growth 25.4 17.8 7.8  China Loan Growth 27.1 15.9 11.2  Baltic Freight Index 1786 911 875  CRB Industrial Commodities 309 248 61  VIX 35 45 -10  US BAA Corporate Spread 5.08 5.78 -0.70  US Net Earnings Upgrades -9.51 -14.41 4.91  Leading indicators are unambiguously improving Indicator Last 3mth ago Change • Improving Average 92% Source: Datastream

  17. Economic recovery – what shape V or U? • Leading growth indicators are turning up • Restocking is required as global inventories have been run down

  18. Restocking first, demand recovery next World Production and US Retail Sales % ch yr 12 World Industrial Production 8 4 0 -4 US Retail Sales (Led 2Q) -8 -12 -16 1970 1975 1980 1985 1990 1995 2000 2005 2010 Source: Datastream, OECD, IMF

  19. Adjustment has been fast Global Car Sales and Production % ch yr Forecast 15 10 Production 5 0 -5 Sales -10 -15 -20 -25 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 Source: Datastream, UBS

  20. Economic recovery – what shape V or U? • Leading growth indicators are turning up • Restocking is required as global inventories have been run down • Bank lending conditions have started to ease

  21. Bank lending standards are starting to ease Lending Standards - US and Europe Net tightening of credit, inverted -40 US Credit easing -20 0 20 Europe 40 Credit tightened 60 80 100 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 Source: US Federal Reserve, ECB

  22. Economic recovery – what shape V or U? • Leading growth indicators are turning up • Restocking is required as global inventories have been run down • China is unambiguously recovering • Bank lending conditions have started to ease A V shaped recovery looms, with the risk of upside strength

  23. % ch yr 12 8 4 0 -4 -8 -12 Inflation will remain subdued in the foreseeable future World inflation and capacity % ch yr 7.5 World Inflation (LHS) 5.0 2.5 0.0 -2.5 World Output Gap (RHS) -5.0 -7.5 1970 1975 1980 1985 1990 1995 2000 2005 2010 Source: Datastream, OECD, IMF

  24. Equity Market Outlook - The Bull Is Back!!

  25. Sizing up the recent equity market rally • Key drivers have been:- • improved sentiment to global financials • better than expected economic data • reduced earnings downgrades

  26. Australia - Earnings Per Share Index 500 400 300 200 100 2002 2003 2004 2005 2006 2007 2008 2009 Earnings downgrades are abating US - Earnings Per Share Index 110 100 90 80 70 60 50 99 00 01 02 03 04 05 06 07 08 09 Source: IBES

  27. Sizing up the recent equity market rally • Key drivers have been:- • improved sentiment to global financials • better than expected economic data • reduced earnings downgrades • high levels of short positioning and high cash levels Too far too soon - possibly - but fundamentals are supportive

  28. The major equity markets are cheap PE - MSCI World Forward PE 30 25 20 Long run average = 17.4 15 10 5 0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 Source: Factset

  29. The Twilight Zone • Path of a typical earnings recession De-rating Twilight Zone Re-coupling Prices Prices Prices Earnings Earnings Earnings Prices Earnings Prices bottom Earnings bottom

  30. Australia

  31. 000's pa 80 60 40 20 0 -20 -40 -60 -80 Australia has underbuilt the housing sector Australia - Housing Supply and Demand 000's pa 200 Commencements (LHS) Underlying demand (LHS) 180 160 140 120 Under-building 100 Pent-up supply (RHS) 80 85 87 89 91 93 95 97 99 01 03 05 07 09 Source: ABS, UBS

  32. Australia is now feeling the pain Australia - Trading Partners Growth % ch yr Forecast 7 Major trading partners 6 5 World 4 3 2 1 0 -1 -2 -3 -4 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 Source: Datastream, IMF, World Bank, Consensus

  33. US and Australian equity markets move in sync Equities - US and Australia Index 120 S&P500 index 100 80 60 ASX200 index 40 20 0 04 05 06 07 08 09 Source: Datastream

  34. Equities are cheap, but how cheap? Australia - PE ratio Ratio 25 20 15 Long run average = 14.3 10 5 0 95 99 71 73 75 77 79 81 83 85 87 91 93 01 03 05 07 89 97 09 Source: Datastream

  35. Plenty of money on the sidelines Australian Superannuation Funds - Cash Weightings % 20 18 16 14 12 10 8 6 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 Source: Australian Bureau of Statistics

  36. Key points • The worst has passed • Global growth is basing and a fledging recovery is now underway • A V shaped growth outcome is most likely (data in coming months to confirm this) • Equity market rally to date justified but near-term some speed bumps possible • A durable equity market rally should unfold over 2009 as economic and corporate fundamentals improve • Portfolio considerations: • Add “quality” risk to clients portfolios ahead of improving investment foundations • Underweight cash and “safe” assets

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