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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

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

Brigette Leckie

May 2009

agenda
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
three steps to recovery
Three steps to recovery
  • Step 1 – Rebuild a functioning banking system
three steps to recovery1
Three steps to recovery
  • Step 1 – Rebuild a functioning banking system

Step 2 – Appropriate monetary policy

three steps to recovery2
Three steps to recovery
  • Step 1 – Rebuild a functioning banking system

Step 2 – Appropriate monetary policy

Step 3 – Fiscal stimulus

three steps to recovery3
Three steps to recovery
  • Step 1 – Rebuild a functioning banking system

Step 2 – Appropriate monetary policy

Step 3 – Fiscal stimulus

credit conditions have improved markedly
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

credit markets are functioning again
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

economic recovery what shape v or u
Economic recovery – what shape V or U?
  • Leading growth indicators are turning up
leading indicators are improving

US ISM

47.2

23.1

24.1

Leading indicators are improving

Indicator

Last

3mth ago

Change

  • Improving

Source: Datastream

signs of improvement are evident
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

leading indicators are improving1

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

no further deterioration for us jobs
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

leading indicators are improving2

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

early signs of recovery in us housing
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

leading indicators are unambiguously improving

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

economic recovery what shape v or u1
Economic recovery – what shape V or U?
  • Leading growth indicators are turning up
  • Restocking is required as global inventories have been run down
restocking first demand recovery next
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

adjustment has been fast
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

economic recovery what shape v or u2
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
bank lending standards are starting to ease
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

economic recovery what shape v or u3
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

inflation will remain subdued in the foreseeable future

% 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

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

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

sizing up the recent equity market rally1
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

the major equity markets are cheap
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

the twilight zone
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

australia has underbuilt the housing sector

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

australia is now feeling the pain
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

us and australian equity markets move in sync
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

equities are cheap but how cheap
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

plenty of money on the sidelines
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

key points
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