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Climate change

Climate change. Climate Change. 19 th Annual Investment Conference. Chair – Ian Ling Speakers Peter Bourne Ian Ling Tristan Hanson Anatole Kaletsky. Climate change. Peter Bourne. Managing Director. Global market performance. April 08 – April 09. 120. Bonds. 100. Ashburton £

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Climate change

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  1. Climate change Climate Change 19th Annual Investment Conference Chair – Ian Ling Speakers Peter Bourne Ian Ling Tristan Hanson Anatole Kaletsky

  2. Climate change Peter Bourne Managing Director

  3. Global market performance April 08 – April 09 120 Bonds 100 Ashburton £ Asset Management 80 Ashburton $ Asset Management 60 Equities Real Estate 30 0 Apr-09 Oct-08 Apr-08 Jun-08 Aug-08 Feb-09 Dec-08 Source: Lipper

  4. Investment Performance - as at 30 April 2009 Source: Lipper

  5. A world upside down

  6. Anatole Kaletsky Editor-at-large for ‘The Times’ Tristan Hanson Ashburton strategist Ian Ling Ashburton Director Today’s Speakers

  7. Climate change Ian Ling Five stages of grief

  8. Loads of grief • Equity markets have fallen sharply

  9. World Equity Markets (USD) 30 April 2008 to 30 April2009

  10. Liquidity crunch MSCI World 1600 1200 800 400 0 Mar-94 Mar-82 Mar-85 Mar-88 Mar-91 Mar-97 Mar-00 Mar-09 Mar-70 Mar-06 Mar-73 Mar-76 Mar-79 Mar-03

  11. Loads of grief • Equity markets have fallen sharply • Property market collapse • Commodity prices collapse • Corporate bonds tank • Interest rates fall to zero • …….worries over another depression • … are we following Japan??

  12. Nikkei Index Since 1970 40000 30000 20000 10000 0 Jan-70 Jan-86 Jan-06 Jan-74 Jan-78 Jan-82 Jan-90 Jan-94 Jan-98 Jan-02

  13. What can we expect? Look at the thoughts of two analysts who have assessed the link between grief and market behaviour • Edwin Coppock– 1960’s • Technique to determine long term investment opportunities • Investors need time to mourn the death of a bull market • 10-14 months according to Church Bishops

  14. Australia's All Ordinaries Index Buy signal 1999 2006 2000 2002 2003 2004 2005 2001 The Coppock Indicator The indicator is trend-following, and based on monthly averages, so by its nature it doesn't pick a market bottom, but rather shows when a rally has become established.

  15. The Coppock Indicator • Very close to a buy signal for the S&P • Interestingly almost exactly 9 months after Lehmans collapse and Fannie Mae and Freddie Mac rescue

  16. What can we expect? • Elisabeth Kübler-Ross • Developed a behavioural pattern of people suffering from terminal illness, and later to any form of catastrophic personal loss (job, income, freedom)… loss of capital!! • Identified five stages of grief

  17. Five stages of grief Elisabeth Kübler-Ross 1. DENIAL 2. ANGER 3. BARGAINING 4. DEPRESSION 5. ACCEPTANCE

  18. Kübler-Ross Model – 5 stages of grief • Denial -"This can't be happening, not to me." • Anger- “It's not fair!"; "Who is to blame?"

  19. Fury at $2.5bn Lehman bonus - The Times 21 Sep 08 Former RBS chief's house attacked amid pay outrage The Financial Times 26 Mar 09 Eleven AIG executives quit despite bonuses up to $4.6 million The Times – 17 Mar 2009 Protestors smash into RBS branch The Financial Times 02 Apr 09 The people v The banker: The payouts party is over The independent 15 Feb 09 Merrill Lynch’s CEO spent over $1 million to redecorate his office—even as the firm faced a financial crisis. Goodwin defiant over pension as investors heckle RBS Board The independent 04 Apr 09 AIG chief urges staff to return bonuses

  20. Kübler-Ross Model – 5 stages of grief • Denial - "I feel fine."; "This can't be happening, not to me." • Anger- Why me? It's not fair!"; "How can this happen to me?"; "Who is to blame?" • Bargaining - “how can we sort this out?” – G20? G2?

  21. Sorting it out – director/shareholder relationship • Pre 2009 – companies not run for the benefit of shareholders • run for benefit of directors • Options…Exactly that…not a long-term commitment • Borrowing to buy back shares. • Increased share price – make options more valuable • Increased gearing • Excessive pay – Oligarchic. Justify paying in comparison to peers. • Shareholders passive – stock going up so no concern.

  22. Sorting it out – director/shareholder relationship • Post 2009 - Change of sentiment • Companies will be run for the shareholders again (e.g. Japan) • In some cases CEOs have to buy a number of shares determined in relation to their overall remuneration. • Proposal for average wage to appear in report and accounts and the difference between the highest and lowest salaries and male and female wage differential. • Shareholders becoming more activist

  23. Kübler-Ross Model – 5 stages of grief • Denial - "I feel fine."; "This can't be happening, not to me." • Anger- Why me? It's not fair!"; "How can this happen to me?"; "Who is to blame?" • Bargaining - “how can we sort this out?” – G20? G2? • Depression – “why bother with anything?"; What's the point in saving?“ • Acceptance - "It's going to be okay."; "I’ve taken the pain and can start again”

  24. Ian Ling Fear and Greed Model – (patent pending!!) GREED Caution Certainty Concern Belief Capitulation Disbelief FEAR FEAR

  25. Trading range MSCI World GREED GREED 1600 1200 800 FEAR FEAR 400 0 Mar-94 Mar-82 Mar-85 Mar-88 Mar-91 Mar-97 Mar-00 Mar-09 Mar-70 Mar-06 Mar-73 Mar-76 Mar-79 Mar-03

  26. Climate change Tristan Hanson Ashburton outlook May 2009

  27. Introduction • Depression will be avoided:theworst of the economic news is behind us • Debate will now be about the sustainability of a global recovery • Risk assets – equities, emerging markets, corporate bonds – likely to provide the strongest returns over the next 12 months • But risks remain and volatility is likely to remain high Active asset allocation and portfolio diversification

  28. Economic outlook

  29. A very severe global recession Annualised rates of economic contraction:

  30. Why has the global economy contracted so sharply? • Developed nations were in recession by mid-2008 • Synchronised bursting of Anglo-Saxon housing bubbles • Oil shock comparable to 1970s • Chinese domestic slowdown • September 2008: Lehman collapse • Credit markets freeze up • Wealth destruction (housing, stocks, pensions) • Collapse in business and consumer confidence – sharp declines in spending

  31. US Japan Germany Comparison with the Great Depression Industrial Production: 1929-33 vs 2008- 110 100 90 US: Aug 1929 - Mar 1933 80 70 60 50 40 6 12 18 24 30 36 42 Months 7

  32. Why another Great Depression will be avoided: • Monetary Policy • Fiscal Policy • Institutional Differences • China – a source of external growth

  33. US (Dec 2007- ) Why another Great Depression will be avoided: US Money Supply: The Great Depression Compared 220 200 Lehman/AIG collapse 180 US (Aug 1929 - Aug1932) 160 Index 140 120 100 80 3 7 11 15 17 19 21 23 25 27 29 31 33 35 37 Months Source: St. Louis Fed, Bernanke (2000)

  34. Why another Great Depression will be avoided: US Treasury Secretary Mellon (1921-32): President Obama (2009): “I will do whatever it takesto put this economy back on track” “…purge the rottenness out of the system.”

  35. Why another Great Depression will be avoided: • Institutional differences with the early 1930s • No Gold Standard • Deposit insurance • Welfare states • Less risk of protectionism (cf. Smoot Hawley tariff, 1930) • globally integrated supply chains

  36. China – a source of growth: Share of World Growth (volume) % 40% 30% 20% 10% 0% 1981-1990 1991-2000 2001-2008 2009-2014 Source: IMF

  37. Reasons to be cheerful - 1 Credit markets easing US$ 3-mth Interbank Lending Rates - normalising 4.0 3.5 3.0 2.5 % 2.0 1.5 1.0 0.5 0.0 01/2007 07/2007 01/2008 07/2008 01/2009 Source: Bloomberg

  38. Dec-99 Dec-01 Dec-95 Dec-97 Dec-03 Dec-93 Dec-05 Dec-07 Reasons to be cheerful - 2 US personal consumption growth (QoQ) 8 6 4 2 % annual rate 0 -2 -4 -6 Source: Bloomberg

  39. Reasons to be cheerful - 3 China - Bank Lending Growth 35 30 25 20 % (YoY) 15 10 5 0 Nov-03 Nov-04 Nov-05 Nov-06 Nov-01 Nov-02 Nov-99 Nov-07 Nov-08 Nov-00 Source: Bloomberg

  40. Reasons to be cheerful - 4 Collapse in global trade over ? Korea: Exports (US$ mln) 45,000 35,000 25,000 15,000 Feb-03 Feb-04 Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Source: Bloomberg

  41. MSCI World Equity Index ($) Copper Price ($) 400 1600 350 1400 300 1200 250 1000 200 800 150 600 100 Nov-08 Aug-08 Feb-09 Feb-09 Nov-08 May-08 Aug-08 May-08 Reasons to be cheerful - 5 Sentiment improving Source: Bloomberg

  42. Steps to sustainability • Stabilisation of US consumption & housing • Easing credit market conditions • Chinese domestic recovery sustained • Protectionist threat must be contained • Governments must outline long-term plans to reduce deficits

  43. Don’t worry…the authorities are on top of things “We saved the world…” - Gordon Brown 7

  44. Ashburton Investment Strategy 7

  45. Investment Strategy Replica Asset Management • Positive 12-month view towards equities • Overweight Asia relative to US/Europe • We have increased exposure to credit • Bond exposure concentrated in Europe Focused on delivering cash-plus returns over the cycle and containing portfolio risk Source: Ashburton - as at 12 May 2009

  46. Investment StrategyReplica Asset Management – currency overlay • Exposure to undervalued Asian currencies through Korea and Taiwan. • Sterling preferred currency of the four majors. • Norway – attractive fundamentals Source: Ashburton

  47. Dividends per share $32 $28 $24 $20 $16 $12 $8 Equities for the long-run? More relevant now… S&P Index 1600 1400 1200 1000 800 600 400 200 1993 1996 1999 2002 2005 2008 Source: Bloomberg

  48. US: cyclically-adjusted PE ratio 45 40 35 30 25 20 15 10 5 0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Equities – low P/E ratio by historical standards Source: Bloomberg, Ashburton calculations

  49. US: Implied Equity Risk Premium (%) 14 12 10 8 6 4 2 0 -2 -4 1969 1979 1984 1994 1999 2004 1974 1989 Equities – highest equity risk premium since 1970s Source: Bloomberg, Ashburton calculations

  50. Corporate Bonds – spreads narrowing but remain high Euro investment grade corporate bond spread 800 700 600 Financials 500 400 300 Industrials 200 100 0 Jul-08 Jul-07 Jan-07 Jan-08 Jan-09 Apr-07 Apr-08 Apr-09 Oct-08 Oct-07 Source: Cazenove, iBoxx

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