MAKING A JUDGMENT CALL ABOUT THE MACRO OUTLOOK GIC Conference Paris, June 17-18, 2010
The Global Investment Outlook: Back To Basics Presentation by:
Martin Barnes
Managing Editor Bank Credit Analyst
1
MAKING A JUDGMENT CALL ABOUT THE MACRO OUTLOOK
Doomsday. The global economy falls back into recession, financial strains escalate and markets collapse. Avoid risk assets and focus on cash and perhaps some gold. Limbo. The developed economies are trapped in a Japan-style environment of disappointing growth and chronic mild deflation. Long-term government bond yields fall to 2% or below, and it is a trading range for risk assets.
Revival. A self-sustaining economic recovery takes hold and corporate earnings trend higher. Stocks and bonds are the preferred asset.
2
KEY EQUITY DRIVERS ARE MAINLY POSITIVE
3
U.S.
Europe
Japan
Emerging Markets
Valuations
Neutral
Positive
Negative
Neutral
Liquidity
Positive
Positive
Neutral
Negative
Earnings
Neutral
Neutral
Positive
Positive
Sentiment
Positive
Positive
Positive
Negative
Financial Stress
Positive
Negative
Positive
Positive
EQUITY VALUATIONS ARE REASONABLE
25
20
WORLD:
25
FORWARD PRICE EARNINGS RATIO*
20
15
15
10
10 PRICE-TO-BOOK RATIO**
3.5
3.5
2.5
2.5
1.5
1990 4
1.5
© BCA Research 2010
1994
1998
*SOURCE: THOMSON REUTERS/IBES **SOURCE: MSCI
2002
2006
2010
LIQUIDITY: INTEREST RATES ARE LOW, BUT... %
%
REAL G7*:
3
3
SHORT RATES**
2
2
1
1
0
0
Ann% Chg
Ann% Chg
MONEY GROWTH
10
10
8
8
6
6 4
4
2
© BCA Research 2010
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 5
*DEFLATED BY THE CONSUMER PRICE INDEX **3-MONTH EUROCURRENCY RATE
2
CORPORATE EARNINGS IN AN UPTREND 70
WORLD MSCI:
70
60 50
60 TRAILING EARNINGS
50
40
40
30
30
80
80
70
70 FORWARD EARNINGS
60 50
60
2006 6
50
© BCA Research 2010
2007
2008
2009
2010
AN IMPRESSIVE CORPORATE PERFORMANCE %
% U.S.: NON-FINANCIAL EBITD* MARGINS (LS) REAL GDP GROWTH (RS)
28
6
27 4
26 25
2
24
0
23 -2
22 © BCA Research 2010
1982 7
1986
1990
1994
1998
2002
*EARNINGS BEFORE INTEREST, TAXES AND DEPRECIATION NOTE: BOTH SERIES SHOWN AS A 4-QUARTER MOVING AVERAGE
2006
2010
NO EUPHORIA HERE 1500 1300
1500 1300
S&P 500
1100
1100
900
900
700
700 COMPOSITE SENTIMENT INDEX
60
60
50
50
40
40
30 2002 8
30
© BCA Research 2010
2004
2006
2008
2010
DISINFLATION: PILLAR ONE OF THE GREAT BULL MARKET %
% CORE INFLATION RATE
12 10 8 6 4 2
12 10 8 6 4 2
10-YR TREASURY YIELD
%
%
14
14
10
10
6
6 © BCA Research 2010
1970 9
1975
1980
1985
1990
1995
2000
2005
2010
PROFITABILITY REVIVAL: PILLAR TWO OF THE GREAT BULL MARKET %
12
% TOTAL PROFIT MARGINS
12
10
10
8
8
© BCA Research 2010
1970 10
1980
1990
2000
2010
IN STOCKS WE TRUST: PILLAR THREE OF THE GREAT BULL MARKET %
60
%
EQUITIES AS % OF PORTFOLIOS:
60
HOUSEHOLDS
50
50
40
40
30
30
%
%
60
PENSION FUNDS
60
50
50
40
40 © BCA Research 2010
1970 1975 1980 1985 1990 1995 2000 2005 2010 11
DECOMPOSING GLOBAL EQUITY RETURNS
Historical Average 1970-2007
Optimistic Status Quo Pessimistic Scenario* Scenario** Scenario*** 2010- 20 2010-20 2010-20
Nominal GDP
7.6
8.0
6.0
4.0
Earnings
7.3
9.0
6.0
3.0
+ Valuation Change
0.1
-0.5
-1.0
-2.5
= Growth in MSCI index
7.4
8.5
5.0
0.5
+ Reinvested dividends
3.2
2.3
2.3
2.3
10.6
10.8
7.3
2.8
= Total equity returns
* Assumes the trailing price-earnings ratio rises to 20 over the period ** Assumes that the price-earnings ratio ends the period at its 25-year median of 17.5 *** Assumes that the price-earnings ratio falls to 15 over the period
12
THE FINANCIAL ERA %
% TOTAL FINANCIAL ASSETS AS A % OF GDP
1000
1000
900
900
800
800
700
700
600
600
500
500 © BCA Research 2010
1960 13
1970
1980
1990
2000
2010
THE FINANCIAL SECTOR’S GLORY DAYS ARE OVER %
25
FINANCIAL SECTOR’S SHARE OF EQUITY MARKET CAPITALIZATION:
25
WORLD
20
20
15
15
%
%
U.S.
20
20
15
15
10
10
5
© BCA Research 2010
1975
1980
1985
1990
*DERIVED USING DATASTREAM MARKET INDEXES
14
%
1995
2000
2005
2010
5