RMES: Barnes

Investing In A Challenging Environment GIC Rocky Mountain Summit Jackson Hole, July 12, 2013

Martin H. Barnes Chief Economist BCA Research

Five Key Investment Questions

•

Has A Bear Market In Bonds Begun?

•

Are Equities Overvalued?

•

Which Equity Markets Are Most Attractive?

•

Which Currencies Look Best?

•

Commodities: The Early Stages Of A Supercycle Upturn?

2

BCA RESEARCH

It Was Good While It Lasted The Past Is Not A Guide To The Future COMPOUND % RETURNS P.A. THE PAST 1982-2012

THE FUTURE 2012-2022

PORTFOLIO WEIGHT

10.8

5.5

45

9.7

6.0

15

14.5

7.5

5

10-Year Treasuries

8.6

2.5

25

Corporate Bonds

8.7

3.5

10

10.1

4.7

100

Inflation

2.9

2.0

Total Portfolio Real Return

7.0

2.7

U.S. Equities Other Developed Equities EM Equities

Total Portfolio

3

BCA RESEARCH

Where Next For Bond Yields? %

% REAL 10-YEAR GOVERNMENT BOND YIELD

8

8

6

6

4

4

2

2

0

0 © BCA Research 2013

1970

1975

1980

1985

1990

1995

NOTE: 10-YEAR YIELD MINUS BCA ESTIMATE OF INFLATION EXPECTATIONS.

4

2000

2005

2010

BCA RESEARCH

Bond Valuation Rankings Better value

GREECE

SPAIN

Italy

Japan

Switzerland

Norway

AUSTRALIA

FINLAND

MEDIAN

FRANCE

SWEDEN

KOREA

U.S.

U.K.

BELGIUM

CANADA

New Zealand

PORTUGAL

-1

Ireland

-0.5

GERMANY

0

DENMARK

0.5

Austria

1

NETHERLANDS

1.5

-1.5 -2 © BCA Research 2013

RANKING IS BASED ON HOW FAR CURRENT REAL YIELDS ARE FROM THEIR HISTORICAL AVERAGE, EXPRESSED IN NUMBER OF STANDARD DEVIATIONS.

5

BCA RESEARCH

Any Value In Spread Product? %

% U.S. 12-MONTH DEFAULT RATE*

12

12

8

8

4

4

BPs 1000

BPs

DEFAULT-ADJUSTED HIGH-YIELD SPREAD** PRE-CRISIS AVERAGE

1000

500

500

0

0 © BCA Research 2013

1995

2000

*SOURCE: MOODY'S INVESTORS SERVICE. **OPTION-ADJUSTED SPREAD LESS ESTIMATED DEFAULT LOSSES

6

2005

2010

BCA RESEARCH

Drivers Of The Equity Bull Market S&P 500 P/E RATIO

30

30

20

20

10

10 %

10-YEAR TREASURY YIELD

%

15

15

10

10

5

5

% 12 10

10

8

8

6

6

4 % 50

7

1990

4

EQUITIES AS A PERCENT OF HOUSEHOLD FINANCIAL ASSETS

% 50

40

40

30

30

20

20 © BCA Research 2013

© BCA Research 2013

1980

% 12

NON-FINANCIAL PROFIT MARGINS

2000

2010

1980

1990

2000

2010

BCA RESEARCH

Explaining The Rise In Profit Margins % 30

%

NIPA NON-FINANCIAL EBITD (AS A % NON-FINANCIAL CORPORATE GDP)

30

28

28

26

26

24

24

22

22

220

180

NON-FINANCIAL CORPORATE SECTOR: OUTPUT-PER-MAN-HOUR COMPENSATION DEFLATED

BY CORPORATE PRICES COMPENSATION DEFLATED BY CONSUMER PRICES

70

80

90

2000

10

140

100

100 © BCA Research 2013

85

90

95

2000

05

NOTE: SERIES SHOWN SMOOTHED AND REBASED TO Q1 1983 = 100.

8

180

140

© BCA Research 2013

60

220

10

BCA RESEARCH

No More Earnings Tailwinds % PRODUCTIVITY LEVEL* 112

112

60

60

50

50 40 % 20

110

110

108

108

40 % 20

106

106

15

15

10

10

104

104

102

102

100

100 © BCA Research 2013

2006

2008

2010

*SHOWN REBASED TO Q1 2005 = 100.

9

%

NON-FINANCIAL CORPORATE SECTOR: DEPRECIATION

2012

NET INTEREST EXPENSE

TAXES PAID

% 16

% 16

12 8

12 8

© BCA Research 2013

90

95

2000

05

10

NOTE: ALL SERIES SHOWN AS A % OF EBITD.

BCA RESEARCH

Is The U.S. Equity Market Expensive?

40

CYCLICALLY-ADJUSTED P/E RATIO*

40

30

30

20

20

10 %

10 %

0

REAL CORPORATE BOND YIELD LESS S&P 500 EARNINGS YIELD*

0

-5

-5

-10

-10 BCA VALUATION INDICATOR

2

OVERVALUED

0 -2

0

UNDERVALUED EXTREMELY UNDERVALED

© BCA Research 2013

1960

1970

1980

*HORIZONTAL LINES DENOTE SERIES MEDIAN.

10

2

EXTREMELY OVERVALUED

1990

2000

-2 2010

BCA RESEARCH

Relative Market Performance STOCK PRICES*: U.S. / WORLD

1.1

1.1

1.1

1.0

1.0

.9

.9

1.0

.9

.9

.8

.8

.7

.7

2.5 1.2

1.0

1.0

.8

.8

© BCA Research 2013

2000

2005

2010

*SHOWN IN COMMON-CURRENCY TERMS. REBASED TO JAN. 1998 = 1; SOURCE: MSCI INC

11

1.1

1.0

EURO AREA / WORLD 1.2

STOCK PRICES*: JAPAN / WORLD

EMERGING MARKETS / WORLD

2.5

2.0

2.0

1.5

1.5

1.0

1.0 © BCA Research 2013

2000

2005

2010

*SHOWN IN COMMON-CURRENCY TERMS. REBASED TO JAN. 1998 = 1; SOURCE: MSCI INC

BCA RESEARCH

Valuation Ranking Of Developed Markets 1.6

Value Ranking Of Developed Equity Markets Better value

1.4

1.2

1

12

Ireland

U.S.

Switzerland

France

Sweden

Canada

Finland

Median

Portugal

Norway

Austria

Australia

U.K.

Š BCA Research 2013

Italy

0

Spain

0.2

Japan

0.4

New Zealand

0.6

Germany

Netherlands

0.8

* Ranking is based on how far current cyclically-adjusted price-earnings ratio is from the historical average, expressed in number of standard deviations.

BCA RESEARCH

Valuation And Growth Developed Equities: Valuation And Economic Growth Improving Growth

Slowing Growth 1.40 Improving Value

Valuation

1.20

1.00

.80

Worsening Value

.40

.20

Spain

Above median value and growth

U.K.

Australia Austria

norway

Italy Portugal

New Zealand

Median

Finland

Sweden

.60

Japan

Above median value, below median growth

Canada France

Switzerland

Netherlands

Germany Below median value and growth

Below median value, above median growth

U.S. Š BCA Research 2013

Ireland

0 -1.5

-1

-0.5

0

0.5

1

1.5

Economic Growth Gap* * Average GDP growth 2013-2014 minus average growth 2011-2012, IMF data

13

BCA RESEARCH

It’s Hard To Like Any Of the Major Currencies Currency Drivers Commodity CURRENCIES

Emerging CURRENCIES

U.S. DOLLAR

Euro

Yen

ECONOMY

Negative

Negative

Negative

Neutral

Neutral

POLICY

Negative

Negative

Negative

Neutral

Positive

TRADE/CAPITAL FLOWS

NeUTRAL

Positive

Positive

Positive

Positive

POLITICS

Negative

Negative

Negative

Neutral

Neutral

14

BCA RESEARCH

A Long-Run Perspective On Real Commodity Prices REAL* RAW INDUSTRIALS PRICES (In US$ Terms) TREND** TREND +/- TWO STANDARD DEVIATIONS

5.0

5.0

4.5

4.5

4.0

4.0

3.5

3.5

3.0

3.0 © BCA Research 2013

1800

25

50

* ADJUSTED BY U.S. GDP DEFLATOR. ** TIME TREND FROM 1800 TO PRESENT.

15

75

1900

25

50

75

2000

BCA RESEARCH

Commodity Prices Are Still Elevated 200

200

REAL OIL PRICES

160 120

160 120

80 40

80 40 REAL CRB* METALS INDEX

120 100 80 60 40

REAL GOLD PRICES

100 80 60 40 20

© BCA Research 2013

70

75

80

85

* SOURCE: COMMODITY RESEARCH BUREAU, INC. NOTE: SERIES REBASED TO JANUARY 1980 = 100.

16

120 100 80 60 40

90

95

2000

05

100 80 60 40 20

10

BCA RESEARCH

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