Capital markets after a tumultuous decade

1. Capital markets after a tumultuous decade Kevin Gardiner, Global Head of Investment Strategy, Barclays Wealth

2. Outline of presentation • How we got here: “A richness of embarrassments” • Where next? Investment outlook 2010 – a half-time talk

3. A Richness of Embarrassments

4. The Panic of 2008/9? • Financial complexity, opacity, interdependence • Leverage – whose? • US consumer behaviour beforehand • Historic parallel: 1907, not 1929

5. “A richness of embarrassments” • LTCM (1998) – “picking up nickels in front of bulldozers” • Y2K, TMT and the “new economy” • MBS, CDO, CDS, house prices – the credit episode • Oil, metals, food, some GEMs – the commodities episode • Banks, brokers, insurers • Asset returns and volatility • Accounting & regulation: good intentions, bad results • Financial analysis – spurious precision

6. Financial crisis: volatile volatility Source: Bloomberg

7. Equity/bond total return indices (to end-2009) Source: Datastream, Barclays Wealth Strategy

8. Accounting & regulation • Good intentions • Accountant’s “fair value” vs PM’s “investment opportunity” • Design problems • Practical impact

9. Financial analysis: precisely wrong? • How useful are those decimal points? • MPT: you may not get “paid” for taking risk • P&L small relative to BS; many assets are intangible • “Beta” shouldn’t be correlative • Correlation is not causation • Historical financial data – it’s all we’ve got “Prediction is very difficult, especially if it’s about the future” (Niels Bohr)

10. Conclusions? • Deregulation fostered seemingly-arbitrary gyrations in asset markets, volatility and (eventually) the economy • Unintentionally, parts of the regulatory and accounting framework likely added to market instability • Financial knowledge is not what we thought it was • Future savings products: simplicity and liquidity • But… the wider economy can recover

11. Investment Outlook 2010: A Half-Time Talk

12. Recap: the Panic of 2008/9 • Since 1998, deregulated capital markets have experienced a “Richness of Embarrassments” • The financial sector and financial analysts face some deep-seated questions… • … But global business can grow again – and it is

13. Investing in 2010: asset allocation at mid-year • Obvious risks: debt, euro, taxes, geopolitics, oil, mood… • Less obvious opportunities: profits, cashflow, valuations • Equities preferred to bonds, and bonds to cash • Companies look more attractive than governments • Developed markets (tactically) preferred to GEMs • Portfolio insurance: options, VIX, high-quality bonds • Conclusion: no rush, but a good long-term entry point

14. Selected ideas • Commodities: portfolio diversification, tactical appeal too • Sell gold (carefully); sell oil volatility • Property: still early (in China, late) – UK CRE preferred • F/X majors: sterling & dollar preferred to euro & yen • Cash management: money rates on hold • For G7 bond bears: emerging Asian sovereign bonds • M&A wave; unhedged Korean equities

15. Money market tension: LIBOR-OIS spreads Source: Bloomberg, Barclays Wealth Strategy

16. Eurozone: 2-year Government bond yields Source: Bloomberg

17. Government deficits & debt (2011, OECD) Source: OECD

18. Real world: global order books look solid Source: Datastream, Barclays Wealth Strategy Source: Datastream, Barclays Wealth Strategy

19. US cashflow: public and private sectors Source: Datastream, Barclays Wealth Strategy

20. US housing: what’s the next big move? Source: Datastream, Barclays Wealth Strategy

21. The “new normal” in context: trend US growth Source: Datastream, Barclays Wealth Strategy

22. Real S&P profits Source: Datastream, Barclays Wealth Strategy

23. Valuing US stocks: let’s call the whole thing off? Source: Datastream, Robert Shiller, Barclays Wealth Strategy

24. Valuing US stocks: (yet) another view Source: Datastream, Barclays Wealth Strategy

25. Treasury yields – flight to safety Source: Barclays Capital

26. UK focus: never worse - deficit & debt (% GDP) Source: 2009 Pre-Budget Report, Barclays Wealth Strategy

27. UK focus: the “misery index” Source: Datastream, Barclays Wealth Strategy

28. UK focus: return on equity Source: Datastream, Barclays Wealth Strategy

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