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2010 - a bumpy road ahead?

2010 - a bumpy road ahead?. Investment Presentation Jersey – February 2010. Speakers Tristan Hanson Jonathan Schiessl Craig Farley. Tom Zambon. Climate change. Welcome Jersey Investment presentation July 2010. Today’s Speakers. Tristan Hanson - Ashburton Investment strategist.

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2010 - a bumpy road ahead?

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  1. 2010 - a bumpy road ahead? Investment Presentation Jersey – February 2010 Speakers Tristan Hanson Jonathan Schiessl Craig Farley

  2. Tom Zambon Climate change Welcome Jersey Investment presentation July 2010

  3. Today’s Speakers Tristan Hanson - Ashburton Investment strategist Tristan is the Manager of Asset Allocation and Strategy, having joined in 2008. He has responsibility for Ashburton’s Multi Asset Funds and Cash & Fixed Income Funds, and related research. Tristan holds a Masters in Public Administration in International Development (MPA/ID) from Harvard University's Kennedy School of Government, a BA (Hons) in Economics from Durham University and the Securities Institute Diploma.

  4. 2008Lehmans Bros collapse £ 2005Japan – top performing market 1200 1000 20019/11 1996-1997Strong Pound 800 1994Bond Crisis 2007Global Liquidity Crunch 600 1990Recession 1987Black Monday 1999Technological Bubble 400 1998LTCM Collapse 200 1997Asian Crisis 0 Dec-93 Dec-95 Dec-97 Dec-99 Dec-01 Dec-07 Dec-91 Dec-09 Dec-81 Dec-83 Dec-87 Dec-89 Dec-03 Dec-05 Dec-85 Average Sterling Asset Management Personal Portfolio Replica Sterling Asset Management Fund Ashburton Sterling Asset Management a 28 year track record % Growth Ashburton’s Asset Management Service, which encapsulates our investment philosophy, has experienced the highs and lows of booms and recessions, high and low inflation, high and low interest rates, and its performance over the years speaks for itself. Source: Lipper – As at end May 2010

  5. Investment Performance - as at 30 June 2010 Source: Lipper

  6. 30 20 10 0 MSCI World Hedged GBP -10 -20 -30 -40 -50 Jun-07 Jun-08 Jun-09 Jun-10 Mar-08 Mar-09 Mar-10 Sep-09 Sep-07 Sep-08 Dec-07 Dec-08 Dec-09 Ashburton Sterling Asset Management vs MSCI World Hedged GBP 50 45 40 35 30 Equity Exposure (%) 25 20 15 10 5 0 Source: Lipper as at 30 June 2010

  7. Climate change Tristan Hanson The ‘double dip’ debate July 2010

  8. Introduction • The “double-dip” debate • Implications for asset allocation • Ashburton strategy update

  9. Heightened macro anxiety • Europe: sovereign debt crisis, austerity packages, banking risks • China: deflating a property bubble • US: cyclical concerns amid fading fiscal stimulus

  10. Government Budget Deficits 2010 0 -2 -4 -6 % of GDP -8 -10 -12 -14 UK US Italy Spain Japan France Ireland Greece Portugal Germany From stimulus to austerity: fiscal policy exhausted Source: Barclays Capital

  11. Fears of a double-dip are common • 1992: “The US economy remains almost comatose…“structural” burdens as opposed to familiar “cyclical” problems…will take years to work out. Among them: the job drought, the debt hangover, the banking collapse, the real estate depression, the health-care cost explosion, and the runaway federal deficit” Source: TIME (Sep 1992) via ISI. • Subsequent 12mth GDP growth: 2.7% • Subsequent 12mth US equity return: 12.9%

  12. Fears of a double-dip are common • 2003: “Investors may not have to worry about whether the economy might plunge back into recession for much longer…it looks as though the plunge has already begun” Source: CNN/Money.com (Mar 2003) • Subsequent 12mth GDP growth: 4.1% • Subsequent 12mth US equity return: 35.1%

  13. Although US double-dips rare • Credit Suisse research: three US “double-dips” in last 126 years (1880s, 1913/1914, 1980-1982) • National Bureau of Economic Research (NBER): since 1854, four US recessions within 12 months of exiting prior downturn (1894-1897, 1912-1914, 1919-1921, 1980-82)

  14. Some good news • Strong growth in emerging market countries • V-shaped recovery in corporate profits • China’s tightening measures have been effective and inflation is low • Low interest rates for longer • Indications of financial stress easing • European Stabilisation Mechanism • European divergence: Germany vs Spain

  15. IMF growth forecasts: 2010 12 10 Apr '09 forecast 8 Apr '10 forecast 6 % Jul '10 forecast 4 2 0 -2 EU Japan USA Asian Brazil India China NICs Global growth has surprised positively – led by EM Source: IMF

  16. S&P 500 Earnings Per Share (rolling 12mth) $100 Actual + 2010-11 forecast $90 $80 Actual + no growth assumption $70 $60 $50 $40 $30 $20 $10 Dec-92 Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-88 Dec-90 Dec-10 Corporate profits have rebounded strongly Source: S&P

  17. German Industrial Production (%, YoY) 15 10 5 0 % -5 -10 -15 -20 -25 Jan-95 Jan-98 Jan-01 Jan-04 Jan-07 Jan-92 Jan-10 Europe’s largest economy is performing well Source: Bloomberg

  18. US labour market: the key economic indicator 150 US consumer spending Household wages & salaries 140 Government transfers 130 Dec 2005 = 100 120 110 100 90 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Source: Bloomberg

  19. Conclusion • Fears of a “double-dip” recession have intensified • Economic risks exist: structural & cyclical • But “double-dip” a possibility rather than probability

  20. Climate change II. Asset Allocation implications

  21. Asset Allocation philosophy • Financial markets are not a ‘random walk’ – exploitable opportunities exist • Behavioural biases typically create such opportunities • “Be fearful when others are greedy; begreedy when others are fearful” (Buffett) • Patience will be rewarded

  22. Asset Allocation process Sentiment Valuation Investment opportunities Technical Macro Analysis Inter-market • Starting point of analysis: seek valuations that are at odds with objective view of fundamentals Source: Ashburton

  23. S&P 500 Implied Equity Risk Premium using Trend EPS (growth ~6%) 12 10 8 6 % 4 2 0 -2 Dec-69 Dec-74 Dec-79 Dec-84 Dec-89 Dec-94 Dec-64 Dec-99 Dec-04 Dec-09 Equity risk premium is elevated Source: Ashburton, S&P

  24. US Equities vs Treasuries: excess real returns by decade (per annum) 10 1990s 8 1960s 6 4 1980s 2 1970s Excess Return (% pa) 0 -4 -2 0 2 4 6 8 10 -2 -4 -6 2000s -8 -10 Equity Risk Premium (%) - start of decade Equities: odds favour outperformance vs bonds y=x Source: Ashburton, Barclays Capital

  25. Equities: Shiller valuations suggest moderate returns Source: Ashburton, Shiller data

  26. US P/E ratio (on 12m forecast EPS) 28 26 24 22 20 x 18 16 14 12 10 Jul-90 Jul-93 Jul-96 Jul-99 Jul-02 Jul-05 Jul-08 Equities: valuations cheaper on forecast earnings P/E: 12.7x E/P: 7.8% Source: Factset

  27. US AA Individual Investors Survey: % bullish on equities 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-00 Jan-01 Jan-02 Sentiment is extremely negative 6 mth avg return when first crosses 30%: 7.5% Success Ratio: 9/11 Source: Bloomberg Source: Bloomberg

  28. VIX Index - US implied equity volatility 80 70 60 50 40 30 20 10 0 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-94 Dec-95 Dec-07 Dec-08 Dec-09 Volatility has spiked Source: Bloomberg

  29. US Bond Yields 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% US High Yield US Investment US Investment US 30yr US 10yr US 2yr (BB-B) Grade Grade: Non- Treasury Treasury Treasury Financial US High Yield bonds: attractive spreads Corporate Government Source: Barclays Capital, Bloomberg

  30. Are there any attractive hedges out there? • Given fear levels, attractive hedges are hard to come by currently • Possible contenders: • Short Euro vs USD • US & UK 30yr government bonds • Canadian government bonds • O/W Asian equities versus developed

  31. Conclusion • Macro-related fears have driven up the price of safe-haven assets and driven down the price of risky assets • Expected medium-term relative returns from risky assets are therefore high…although absolute returns may be low relative to long-term averages • Sentiment indicators confirm pessimism implicit in valuations • Markets likely to display short-term volatility • Catalyst for higher equity prices: greater earnings certainty underpins valuation case

  32. Climate change III. Ashburton strategy update

  33. Replica Asset Management: performance YTD 108 106 3.7% 104 102 0.6% 100 98 96 RAM£ 94 Global Bonds (hedged) Global Equities (hedged) 92 -8.2% 90 Jan-10 Jun-10 Apr-10 Feb-10 Mar-10 Dec-09 May-10 Source: Bloomberg

  34. Major changes since prior investment briefing • Equities: • Purchased put options (Apr); closed out in early May • Some Japan exposure shifted towards Europe, Korea (May) • Overall equity exposure increased modestly in mid/late May • Bonds: • Duration increased in early April; reduced early May • US TIPS: increased Feb-Apr; closed out early May • Added Canadian bonds (Apr, May) • FX: • GBP & USD funds: reduced Asian FX exposure (Mar/Apr) • EUR funds: large FX exposures outside base scaled back in May; added exposure to USD, GBP, SEK (mid-June)

  35. Replica Asset Management Asset Allocation (12/07/10) Equities - US 16 Equities - EU 18 Equities - Japan Equities - Asia ex-Jap Corporate Bonds 11 DM - Government Bonds 11 EM - Government Bonds Cash/Equivalents 7 20 7 10 Asset Allocation Source: Ashburton

  36. Q&A

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