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
GLOBAL OFFICES Head Office – Montreal, Canada 1002 Sherbrooke Street West, Suite 1600 Montreal, Quebec, Canada H3A 3L6 TEL 1.800.724.2942 (North America) 514.499.9550 FAX 1.800.843.1763 (North America) 514.843.1763
London, U.K.
San Francisco, U.S.A. 555 California Street, Suite 300 San Francisco, CA 94104 TEL 415 568 2181 FAX 415 568 2104
Hong Kong 18/F, 248 Queen’s Road East Hong Kong TEL +852 2912 8055 FAX +852 2842 7007
Nestor House Playhouse Yard London, U.K. EC4V 5EX TEL +44 (0)207 556 6008 FAX +44 (0)20 7827 6413
New York, U.S.A. 225 Park Avenue South, 6th Floor New York, NY 10003 TEL 212 224 3972 FAX 212 224 3861
Sydney, Australia Level 34, 50 Bridge Street Sydney 2000 Australia TEL +612 8216 0965 TEL +612 8216 0966
Buenos Aires, Argentina El Salvador 6033, 3rd Floor, Room 6 (C1414BQM) Buenos Aires - Argentina TEL (54 11) 2062 0342 TEL (54 11) 2061 9138
Copyright 2013, BCA Research Inc. All rights reserved.
The text, images and other materials contained or displayed on any BCA Research Inc. product, service, report, e-mail or web site are proprietary to BCA Research Inc. and constitute valuable intellectual property. No material from any part of any BCA Research Inc. web site may be downloaded, transmitted, broadcast, transferred, assigned, reproduced or in any other way used or otherwise disseminated in any form to any person or entity, without the explicit written consent of BCA Research Inc. All unauthorized reproduction or other use of material from BCA Research Inc. shall be deemed willful infringement(s) of BCA Research Inc. copyright and other proprietary and intellectual property rights, including but not limited to, rights of privacy. BCA Research Inc. expressly reserves all rights in connection with its intellectual property, including without limitation the right to block the transfer of its products and services and/or to track usage thereof, through electronic tracking technology, and all other lawful means, now known or hereafter devised. BCA Research Inc. reserves the right, without further notice, to pursue to the fullest extent allowed by the law any and all criminal and civil remedies for the violation of its rights. Non-residents of Canada confirm that they do not, and have never had the right to use any of BCA Research Inc.'s materials in Canada, and agree that they have not and never will use any of the materials in Canada unless they acquire this right by paying the applicable Canadian and Quebec sales taxes. All unauthorized use of the materials in Canada shall be deemed willful infringement of BCA Research Inc. copyright and other proprietary and intellectual property rights. While BCA will use its reasonable best efforts to provide accurate and informative Information Services to Subscriber, BCA cannot guarantee the accuracy, relevance and/or completeness of the Information Services, or other information used in connection therewith. BCA, its affiliates, shareholders, directors, officers, and employees shall have no liability, contingent or otherwise, for any claims or damages arising in connection with (i) the use by Subscriber of the Information Services and/or (iii) any errors, omissions or inaccuracies in the Information Services. The Information Services are provided for the benefit of the Subscriber. It is not to be used or otherwise relied on by any other person. Some of the data contained in this publication may have been obtained from Thomson Reuters; Real Capital Analytics, Inc.; Reis Services, LLC; CBRE, Inc.; Barclays or from Standard and Poor’s (“S&P”). Copyright © 2013 The McGraw-Hill Companies, Inc., S&P is a division of The McGraw-Hill Companies, Inc. All rights reserved. As well, some of the data contained in this publication may have been obtained from MSCI Inc. Neither MSCI Inc. nor any other party involved in or related to compiling, computing or creating the MSCI Inc. data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI Inc., any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI Inc. data is permitted without MSCI Inc.’s express written consent.