stanford brown investor insight series november 13
TRANSCRIPT
Welcome AddressHamish Harvey - Partner
WHERE IS THE PRODIGAL SON?Presented by Matt Sherwood
Head of Investment Markets Research
November 2013
Perpetual Investments
Source: UBS Australia Limited as at 22 October 2013.
ONLY US SHARES HAVE RISEN FROM THEIR 2011 LEVEL US, AUSTRALIA AND WORLD (INDEXED TO 100 AT END-FEB 2009)
3
100
120
140
160
180
200
220
240
260
Feb-09 Feb-10 Feb-11 Feb-12 Feb-13
United States
Australia
Rest of World
PRICE RETURN
100
120
140
160
180
200
220
240
260
Feb-09 Feb-10 Feb-11 Feb-12 Feb-13
United States
Australia
Rest of World
TOTAL RETURN
… DUE TO EARNINGS, MORE THAN CENTRAL BANK POLICYEPS AND NOMINAL ECONOMIC GROWTH: US AND WORLD (EX-US)
Source: Minack Advisors as at 27 August 2013. 4
STRONG US PROFITS, DESPITE WEAK RECOVERY
-8
-4
0
4
8
12
16
20
24
-60
-40
-20
0
20
40
60
80
100
2005 2007 2009 2011 2013 2015
US Economic Growth(RHS)
US EPS Growth(LHS)
+15%
2007-2013 EPS Growth
GLOBAL (EX-US) PROFITS ARE BELOW 2007 LEVELS
-8
-4
0
4
8
12
16
20
24
-60
-40
-20
0
20
40
60
80
100
2005 2007 2009 2011 2013 2015
Global (ex-US) Economic Growth
(RHS)
Global (ex-US) EPS Growth
(LHS)
-25%
2007-2013 EPS Growth
THE US RECOVERY IS LOOKING SELF-SUSTAINING
Housing starts
0.4
0.8
1.2
1.6
2.0
2.4
03 04 05 06 07 08 09 10 11 12 13
Mn units
Seas. adj . Trend
House prices
100
125
150
175
200
225
03 04 05 06 07 08 09 10 11 12 13
J an 2000 = 100
Net energy imports
12
16
20
24
28
32
36
03 04 05 06 07 08 09 10 11 12 13
'000 Petajoules (12-month moving total)
Source: Bank of America Merrill Lynch as at 21 May 2013
US budget deficit
-1.6
-1.2
-0.8
-0.4
0.0
03 04 05 06 07 08 09 10 11 12 13
US$ trn(12-mth
moving total)
Household debt
100
110
120
130
140
03 04 05 06 07 08 09 10 11 12 13
% of annual disposable income
Unemployment rate
4
5
6
7
8
9
10
11
03 04 05 06 07 08 09 10 11 12 13
%
… BUT EX-US EARNINGS GROWTH REMAINS ELUSIVEREGIONAL SHAREMARKET PERFORMANCE SINCE JUNE 2012
Source: Original data sourced from UBS Australia Limited as at 22 October 2013.6
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
CzechBrazil
MexicoCanada
Sing.Thailand
ChinaPoland
UKSA
IndiaNorway
PortugalIreland
Aust.HK
USSweden
AustriaItaly
FranceGerm.
HollandSpain
Japan
Change in expected earningsChange in valuationsChange in price
SOFT MACRO AND EARNINGS NEAR RECESSIONARY LEVELSGLOBAL ECONOMIC AND EARNINGS GROWTH (%)
7
-60%
-40%
-20%
0%
20%
40%
60%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013
Source: UBS Limited and the International Monetary Fund as at 24 October 2013.
Global economic and earnings growth (%)
Global economic growth (LHS)
Global earnings growth (RHS)
ForecastGlobal recessions
MANAGING RISKS: 1. BALANCE SHEETS ARE OVER-LEVERAGED A5 TOTAL ECONOMIC DEBT (USD TRILLIONS): REAL 2 YEAR GROWTH (% PA)
8
$20
$33
$46
$59
$72
$85
-7%
0%
7%
14%
21%
28%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Total debt (RHS)
20-year average (5.3%) (LHS)
Global Financial Crisis
BI-ANNUAL CHANGE (LHS)
Source: Credit Suisse as at 4 March 2013.
2. EUROPE’S PROBLEMS ARE UNRESOLVEDGOVERNMENT DEBT AND DEPOSITS (% GDP)
Source: Bank of America Merrill Lynch as at 20 April 2013.
0%
30%
60%
90%
120%
150%
0% 50% 100% 150% 200% 250% 300% 350% 400% 450%
Malta
Greece
EU averagePortgual
Slovakia
IrelandBelgium
Finland
Cyprus
Italy
SpainAustria
FranceGermany
Slovenia
Estonia
Holland
Bank Deposits ( % GDP)
Gov Debt (% GDP)
9
VARIABLE EXPORTS TOCHINA
GROWTH (%) HIGH VALUE ADD
LOW VALUE ADD
ULC (REL. TO E17)
CORE €91 bil 17.5% 50% 29% +6%
PERIPHERY €15 bil 8.3% 35% 50% +83%
BANKS ARE PREVENTING A SUSTAINED EUROPEAN RECOVERYLENDING STANDARDS AND ANNUAL CREDIT GROWTH: US AND EUROPE
-40
-20
0
20
40
60
80
100
2003 2005 2007 2009 2011 2013
European lending standards are tightening
Source: Bank of America Merrill Lynch as at 20th October 2013.
US housing lending
European housing lending
European business lending
US corporate
lending
Tightening lending standards
Easing lending standards -15%
-10%
-5%
0%
5%
10%
15%
2003 2005 2007 2009 2011 2013
US
Europe
… and European credit growth is contracting
3. THE AUSTRALIAN ECONOMY NEEDS A LOT MORE SUPPORT MINING INVESTMENT (AUD BIL), RETAIL SALES AND HH CREDIT (% PA)
11 Source: Perpetual Investments and Macquarie Equities Limited as at 1 July 2013
Dec-93 Dec-97 Dec-01 Dec-05 Dec-09 Dec-130
4
8
12
16
20
24
HOUSEHOLDS CAN’T FILL THE GROWTH VOID AS THEY ARE PAYING FOR PRIOR LEVERAGE SINS
Housing credit growth
Retail sales
OUR ‘MINING CLIFF’ CULMINATES IN AN AUD40 BILLION ‘GROWTH HOLE’
$45.2 billion
$54.5 billion
$73.6 billion
$84.1 billion
$74.8 billion
$61.0 billion
$45.5 billion
$34.6 billion
$23.3 billion
+20%
+35%
+14%
0
10
20
30
40
50
60
70
80
90
100
2010 2011 2012 2013 2014 2015 2016 2017 2018
OtherIron OreLNG
11%
18%
26%
24%
-
-
-
-
-33%
3. HIGHER ASSET PRICES, BUT NO CONSTRUCTION BOOMHOUSING FINANCE AND NEW CONSTRUCTION LOANS (% SHARE)
12
2%
5%
8%
11%
14%
17%
20%
23%
26%
30%
38%
46%
54%
62%
70%
Source: Bank of America Merrill Lynch and UBS Australia Limited as at 20th October 2013.
2001 2003 2005 2007 2009 2011 2013 2002 2004 2006 2008 2010 2012
Owner Occupied Owner
Occupied
Investors
Investors
SHARE OF NEW CONSTRUCTION FINANCESHARE OF HOUSING FINANCE
QE – THE ONLY THING WE HAVE TO FEAR IS LIQUIDITY ITSELF
• History haunted central banks – another Great Depression?
• How can we prevent the global financial system and economy from imploding, while balance sheets are fixed?
• They had to think outside the square – QE,
• Growth held up even though the velocity of money declined.
2013 ONWARDS FINANCIAL STABILITY? SORT OF?
• Central banks are thinking they’ve done more than enough.
• History still haunts them – another destructive asset bubble?
• Have to withdrawal stimulus once the emergency is over and before asset bubbles form.
• But QE has made things easy and politicians only do whatever it takes, when forced to by the markets.
• Governments have to reign in debt and raise productivity.
2008-12 FINANCIAL INSTABILITY
13
YIELD
RBA Cash 2.50%
3-year Term Deposit* 4.05%
Australia (3-year Govt bond) 2.71%
United States (3-year Govt bond) 0.61%
United Kingdom (3-year Govt bond) 0.77%
Japan (3-year Govt bond) 0.12%
UBS Composite Bond Index 3.50%
Barclays Global Aggregate - Yield to Maturity 2.05%
Perpetual DIF (credit duration of 3-years) 4.92%
BREAKEVEN
-
-
+0.90%
+0.20%
+0.26%
+0.04%
+0.86%
+0.33%
+1.64%
DEFENSIVE ASSETS MUST DIVERSIFY EQUITY RISKINDEX PERFORMANCE OF HYBRIDS, 2000-07 AND 2007-11
14*Source: FactSet – as at 26 July 2013.
Nov-07 Nov-08 Nov-09 Nov-10 Nov-1130
40
50
60
70
80
90
100
110
NAB Equity
NAB Hybrid Equity
NAB 2017 Corporate
bond
… AND EQUITIES IN BEAR MARKETSHYBRIDS BEHAVE LIKE BONDS IN BULL MARKETS
60
80
100
120
140
160
180 NAB Equity
2000 20052001 2002 2003 2004 2006 2007
NAB Hybrid Equity
FI STRATEGY - MAXIMISE QUALITY AND REDUCE DURATIONDURATION AND CORRELATION WITH EQUITIES
15*Source: FactSet,– as at 26 July 2013.
SHARES – CAN DEFENSIVE ‘YIELD’ PLAYS OUTPERFORM?SECTOR PERFORMANCE DURING RECOVERIES OF 1974, 2003 & 2009
• The global economy remainssubdued
• Earnings growth is trapped byde-leveraging
• Payout ratios are low
• Demographics
THE SEARCH FOR YIELD IS EXPENSIVE AND WILL EVOLVE
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
EnergyCD
MaterialsIndust.
HCUtil.
CSFinancials
Telcos
Performance after ‘74 and ‘03Performance after ‘09
16
OVERLY-OPTIMISTIC EARNINGS AREN’T A PROBLEMUS SHAREMARKET PERFORMANCE AROUND AUSTERITY PROGRAMS
17
-30%
-20%
-10%
0%
10%
20%
30%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Source: UBS Australia Limited as at 11 September 2013
Change in share prices
Change in expected earnings
Average(-6.8%)
Average (+5.2%)
… BUT RISKS ARE ABOUND AND NEED TO BE MANAGEDRELATIVE VALUATION MEASURES AND RETURN ON EQUITY
18
AUSTRALIAN BANKS ARE TRADING AT HISTORICALLY HIGH PREMIUMS
CYCLICALS ARE LOW AND DEFENSIVE VALUATIONS ARE HIGH
Price earnings ratio(LHS)
0.4x
0.7x
1.0x
1.3x
1.6x
1.9x
2.2x
2.5x
0.3x
0.5x
0.7x
0.9x
1.1x
1.3x
1.5x
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Source: UBS Australia as at 3 October 2013.
Price-Book value(RHS)
60%
70%
80%
90%
100%
110%
120%
2010 2011 2012 2013
Buy cyclical earnings when they are low.
Relative earnings: cyclical vs. defensives
Sell defensive valuations when they are high
Relative valuations: cyclical vs. defensives
WHERE DOES THIS LEAVE THE MARKET RECOVERY?AUSTRALIAN BEAR MARKETS (INDICES REBASED TO 100 AT PEAK)
Source: Australian Stock Exchange as at 26 July 2013.
19
20
40
60
80
100
120
1973
19871929
Now
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
NEVER UNDER-ESTIMATE THE POWER OF INCOMEINCOME, VALUE & TOTAL RETURN FROM AUD1,000 INVESTED AT END-1974
TOTAL INCOME (1975-2012)
CAPITAL VALUE (1975-2012)
ACCUMULATED RETURN (1975-2012)
Source: REIA, Reserve Bank of Australia, IRESS and UBS Australia Limited, as at 31 December 2012. Net income is determined by deducting all expenses from investment returns. Property is calculated using the REIA time series on rents and values for 2-bedroom units and then deducting costs such as strata, insurance and maintenance. Before 1980, the series uses the average change in Sydney and Melbourne prices each period.
$0
$5,000
$10,000
$15,000
$20,000
$25,000
GOLDCASH PROP. SHARESLPTS$1,000
$6,000
$11,000
$16,000
$21,000
$25,000
GOLDCASH PROP. SHARESLPTS$0
$30,000
$60,000
$90,000
$120,000
$150,000
$180,000
GOLDCASHPROP. SHARES
14x28x
48x
180x
LPTS
102x
20
‘I am for the death penalty. He who commits terrible acts must get a fitting punishment.
Then he learns the lesson for the next time.’
Jessica Simpson 1981-
‘All progress in based upon a universal innate desire on the part of every organism to live
beyond its income.’
Samuel Butler 1835 - 1902
MANKIND - A FASCINATION WITH INCOME
21
‘A large income is the best recipe for
happiness I ever heard of.’
Jane Austen 1775 - 1817
‘A broken heart is a very pleasant complaint for a man in London if he has a comfortable
income.’
George Bernard Shaw 1856 - 1950
‘First secure an independent income, then practice virtue.’
Greek proverb 300 BC
IF INCOME’S SO IMPORTANT, WHY INVEST IN CASH? ANNUAL INCOME: AUST. SHARES & CASH (AUD1,000 INVESTED AT END-1974)
22Source: DataStream as at 31 December 2012.
0
150
300
450
600
750
900
1050
1200
1350
75 78 81 84 87 90 93 96 99 02 05 08 11
Cash Income
AUD
All Ords Dividend IncomeFranking Credits
IF INCOME’S SO IMPORTANT, WHY INVEST IN CASH? ANNUAL INCOME: AUST. SHARES & CASH (AUD1,000 INVESTED AT END-1974)
23Source: DataStream as at 31 December 2012.
0
150
300
450
600
750
900
1050
1200
1350
75 78 81 84 87 90 93 96 99 02 05 08 11
All Ords Dividend IncomeCash Income
Years of income decline (with franking credits)
Cash Shares
>0%
>15%
>30%
16
11
5
12
2
0
Franking Credits
AUD
INCOME IS THE BASIS OF SUCCESSFUL WEALTH CREATIONCAPITAL GAINS, DIVIDENDS & TOTAL RETURN SINCE 1882 (LOCAL CURRENCY)
AUSTRALIA US UK JAPAN GERMANY FRANCE
Capital gains (% pa) 5.3% 4.4% 3.8% 4.8% 2.7% 5.9%
Value (in local currency) $84,719 $27,486 $13,132 $46,331 $3,293 $165,771
24
Dividends (% pa) 6.1% 4.2% 5.9% 5.5% 4.2% 3.9%
Total return (% pa) 11.8% 8.8% 10.1% 10.6% 7.0% 10.0%
Value (millions inlocal currency terms) $216 mil $6 mil $28 mil $49 mil $1 mil $25 mil
KEY MESSAGES
FY2013/14
• The US recovery is continuing, but improvements are marginal.
• Europe's existential crisis has abated, but the growth crisis remains
• Chinese growth target of 7.5% looks achievable, but will decline into the ‘6%s’ through time.
• Japan’s recovery is likely to cease in 2014.
LONGER TERM
• Sub-3% growth in most advanced economies(de-leveraging, debt and demographics).
• Asia will be characterised by lower growth rates – less infrastructure, more consumption.
INVESTMENTSTRATEGY• A lot of our perceptions
about investing are unhelpful:
- returns & capital gains
- the laws of finance
- investment timeframes
- focus on fees, instead of after-fee returns
• Fixed interest – keep it short duration and ensure it is high quality.
• Shares – need to navigate through the distortions that QE created.
25
This presentation has been prepared by Perpetual Investment Management Limited (PIML) ABN 18 000 866 535, AFSL 234426 for the use of financial advisers only, it is general information and is not intended to provide you with financial advice. The views expressed in the article are the opinions of the author at the time of writing and do not constitute a recommendation to act. Any information referenced in the presentation is believed to be accurate at the time of compilation and is provided by Perpetual in good faith. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. No company in the Perpetual Group guarantees the performance of any fund or the return of an investor’s capital (Perpetual Group means Perpetual Limited ABN 86 000 431 827 and its subsidiaries). Total returns shown in the presentation/slides have been calculated using exit prices after taking into account all of Perpetual’s ongoing fees and assuming reinvestment of distributions. No allowance has been made for taxation. Past performance is not indicative of future performance.
IMPORTANT NOTE
26
DAVID BROWNCEO
TRIVIA QUESTIONS
29
30
31
JONATHAN HOYLECHIEF INVESTMENT OFFICER
How much risk to take?
33
Interest rates are extremely low…
34
35
…and they will stay low for a long time
36
Conservative portfolios have performed very well over the past 40 years
37
But in the future… they won’t
38
Key PointsRates are lowThey are staying lowConservative portfolios have been winners in
the pastThey won’t be in the futureWe need to do things differently and buy
different assets
39
40
‘
41
Keep calm and buy bonds!
42
43
44
This time it’s not different
45
Key PointsBonds are not necessarily risklessShares are not necessarily riskyIt depends on their price
46
Progressive asset allocation
Harvard Endowment Fund
48
Does it work?
49
What else can we invest in?CommoditiesCreditAbsolute Return fundsCommercial PropertyMacro Funds and CTAsPrivate EquityEsoterics – Catastrophe Bonds, Water Rights,
Patents50
Is a Conservative portfolio safer than a Balanced one?
51
In summary
Interest rates are very low and staying lowConservative portfolios have done well in the past; but
those same portfolios will fare poorly in the futureWe need to reconsider risk; bonds may not be risk-free
and shares may be less risky than we thinkWe will have to buy different assetsWe must evaluate future returns, not gaze longingly at
past onesIs your attitude to loss condemning you to penury?
52
53
DISCLAIMERAny advice contained in this presentation is general advice only and does not
take into consideration personal circumstances. Any reference to personal
circumstances is coincidental. To avoid making a decision not appropriate to
you, the content should not be relied upon or act as a substitute for receiving
financial advice suitable to your circumstances. When considering a financial
product please consider the Product Disclosure Statement. Genesys and its
representatives receive fees and brokerage from the provision of financial
advice or placement of financial products. Genesys Wealth Advisers Limited
ABN 20 060 778 216 AFSL No.232686
QUESTION & ANSWER TIME
MATT SHERWOOD&
JONATHAN HOYLE
