This document is not to be generally distributed

Transcription

Monthly
Target audience
Institutional
This document is only for professional investors and professional financial advisors.
No other person should rely on the information contained in this document.
This document is not to be generally distributed to the public.
Page 1 | CONFIDENTIAL
15461
Navigating the route to profitable investment in a
world of finance flush with artificial liquidity
WATERWORLD
WHY DID IT HAPPEN?
of
AND WHAT HAPPENS NOW IT IS ENDING?
MIGHT IT YET COME BACK?
Michael Power, Strategist, Investec Asset Management,
February, 2014
The first sighting of land in the film “1492: Conquest of
Paradise”
The first
tapering:
December 2013
The first sighting of land in the film “1492: Conquest of
Paradise”
The first
tapering:
December 2013
I: The monetary ice-caps melted
Waterworld:
Made in Japan.
Magnified in the West.
Waterworld: “Made in Japan” after the 1989
crash
Source: Tullett Prebon
Waterworld: “Made in Japan” after the 1989
crash
Crisi
s
Real Japanese GDP Growth
% pa, 7 ½ -year moving average
LOST DECADES
Japan “Japanised” ; BOJ ZIRP-ed; Government undertook high
deficit spending
Source: Tullett Prebon
In 2001, the Fed started turning Japanese
Greenspan’s Put was born: Dial 911
THE FED
Sources: The Economist
Post-2008, the Big Three all joined the
Japanese
Property
bubble
bursts
Sources: McKinsey
Then the Fed added money printing to ZIRP…
The Expansion of the Federal Reserve’s Balance
Sheet
2007-2012 ($bn)
…unleashing massive liquidity, saving banks,
liquefying the mortgage market…
Sources: Federal Reserve, The Economist
…monetizing 50% of new Federal debt since
2009…
Monetar
y
Adrenali
n
Keep interest rates low, inject massive liquidity, jumpstart
economy
Source: Edelweiss Holdings Limited
Flood of money into bonds drenches US real
yields…
US real rates
(%)
Source: US Treasury
What lies beneath? Rising Developed World
debt
International liquidity
(% of global GDP)
Government debt outstanding,
developed markets
(US$bn)
Source: BIS, usdebtclock.org
debt
(% of global GDP)
developed markets
(US$bn)
debt
(% of global GDP)
developed markets
(US$bn)
And what lies beneath rising debt?
Demographics
Japan’s Population
JAPAN’S
POPULATION
GROWTH UP
UNTIL 1990 –
THE END OF
JAPAN’S
GOLDEN AGE
Sources: National Institute of Population, The Guardian, OECD, Goldman Sachs
Demographics
By 2060, 40% of the
population will be over
65
Demographics
Demographics correlate
with real potential growth rate
JAPAN’S
POPULATION
GROWTH UP
UNTIL 1990 –
THE END OF
JAPAN’S
GOLDEN AGE
“I don’t know why anyone even expects the overall Japanese
economy to grow, when its population is shrinking.” PAUL
VOLCKER
Aging demographics are generating debt
Japanese Social security revenues and expenditures
DEBT
Sources: MHLW, Goldman Sachs, UBS, Financial Times, Bloomberg, Trading Economics
Aging demographics are generating debt
Japanese
Government
Debt-to-GDP
Japanese
Social
security revenues
and Ratio
expenditures
DEBT
2013‘s ratio: 237%
Sources: MHLW, Goldman Sachs, UBS, Financial Times, Bloomberg, Trading Economics
Western demographics are turning Japanese
Working age population as % of total population
Sources: MHLW, Goldman Sachs, UBS, Financial Times, Bloomberg, Wall Street Journal
Working age population as % of total population
Working
ageLabour
population
asParticipation
% of total population
US 2012
Force
Rate
1962-2014
January 2014 level 63%,
at a 35-year low
Working
ageLabour
population
asParticipation
US 2012
Force
Rate
1962-2014
at a 35-year low
Working
ageLabour
population
asParticipation
US 2012
Force
Rate
1962-2014
at a 35-year low
Is Japan’s 2013 QQE Asset Bubble Economics
(ABE)?
JGBs held by Bank of Japan
(% of total outstanding)
Sources: Standard Chartered, Bank of Japan, Credit Suisse
Is Japan’s 2013 QQE Asset Bubble Economics
(ABE)?
JGBs held by Bank of Japan
(% of total outstanding)
Sources: Standard Chartered, Bank of Japan, Credit Suisse
Why Abenomics probably cannot work
Japan’s declining labour force has preceded
declining prices
Sources: Standard Chartered, Bank of Japan, Credit Suisse, UBS, Haver Analytics
Is the Fed fighting the right battle but the wrong
war?
Source: Federal Reserve of St Louis
“Doesn’t happen here…” Are you sure?
Less upward demand pressure from rising
population, less upward pressure on prices
Source: UBS; Haver Analytics, Bloomberg
Deflation:
the Voldemort who
shall not be named
“The Committee would be unlikely to increase rates if
inflation were projected to remain below our 2% objective for
some time…”
“Doesn’t happen here…” Are you sure, sir?
Core European CPI is
0.7%, the lowest on
record;
four Eurozone
countries – Greece,
Spain, Portugal and
Cyprus – have negative
core inflation
0.7%, the lowest on
record;
four Eurozone
Spain, Portugal and
core inflation
0.7%, the lowest on
record;
four Eurozone
Spain, Portugal and
core inflation
0.7%, the lowest on
record;
four Eurozone
Spain, Portugal and
core inflation
0.7%, the lowest on
record;
four Eurozone
Spain, Portugal and
core inflation
Is Dr Bernanke’s worst nightmare looming?
Personal Consumption Expenditure, the Fed’s preferred inflation
measure
Baby
bust?
Baby
boom
?
1962
Source: BEA, US Department of Commerce
2014
US Labour Force Participation Rate
measure
Baby
bust?
Baby
boom
?
1962
2014
measure
Baby
bust?
Baby
boom
?
1962
2014
measure
Baby
bust?
Baby
boom
?
1962
2014
What if money velocity is linked to
demographics?
US Money velocity 1948 to Present Day
Nominal GDP divided by MZM
MV=P
T
Source: Reuters Ecowin; Longview Economics, IMF, Dent Research
demographics?
MV=PT
Do aging societies turn over money supply less
frequently?
demographics?
MV=PT
demographics?
MV=PT
II: Aging “Gentlemen” prefer bonds
Demographic forces
have aided Central
Banks in yield
compression
For retirees, the name is bond…
Ageing Populations shift assets
towards bonds implying lower yields
Cumulative Flows since 2006: out of
equities $600bn; into bonds $800bn
Sources: EPRF Global, Merrill Lynch, Financial Times
Will the West soon echo Japanese asset
allocation?
1949-2013: Japan’s equity weighting falls from 70% to 20%
Sources: OECD, HSBC, Tokyo Stock Exchange, Goldman Sachs 13.12.12
Will the West soon echo Japanese asset
allocation?
Allocation
of Japan’s
household
financial
assets
to from
different
classes
1949-2013:
equity
weighting
falls
70%asset
to 20%
55%
cash!
Sources: OECD, HSBC, Tokyo Stock Exchange, Goldman Sachs 13.12.12
III: Capital is becoming a political
prisoner
What happens
to capital
when
democratic
imperatives
trump profit
When risk is corroded, capital is corrupted
WATERBOARDING CAPITAL:
The hallmark of Waterworld is financial
repression born of negative real interest
rates
Central banks hold capital’s head
underwater
Source: Gavekal, The New York Times
The past, when capital was properly moored
All but cash-in-hand “above
water”
Source: Gavekal, 22.02.2013
Waterworld, where capital’s mooring is
broken
Cash and many bonds “underwater”
Waterworld, where capital’s mooring is
broken
Cash and many bonds “underwater”
Financial repression takes capital prisoner
Annual interest earned on US$10
million
Invested in 2-Year Treasuries
The New Normal:
By replacing an economic
mooring with a political one,
capital has been tethered at
home earning sub-economic
returns.
Source: Things that make you go Hmmm…
IV: Capital hates getting wet
In Waterworld,
initially bonds were
the preferred form
of dry land,
because they were
seen as safe…
Bonds were the main beneficiary of the QE
attack
Cumulative flows into equity and bond funds
04.05.2013
Sources: Bank of England, EPRF Global, Financial Times
But how long can you breathe underwater?
US real 10 year TIPS (%)
Sources: Bloomberg, Larsen
But how long can you breathe underwater?
US real 10 year TIPS (%)
Ask a lemming!
Sources: Bloomberg, Larsen
The path fixed income liquidity takes in theory
DM Corporate
EM Corporate
“High risk/ High Land”
Well above water
“Low risk/ Low Land”
Still above water
DM Sovereign
EM
Sovereign
The path fixed income liquidity takes in
practice
Equity Overflow
DM Corporate
…some EM
Incs are
trading
inside DM
Incs
…some DM
Incs are
trading
inside DM
Sovs
Because of home bias,
this is the “normal”
route taken by liquidity,
picking off “value” at
home before flowing
abroad…
“Low risk”
underwater
DM
Sovereign
EM
Corporate
“High risk”
above water
…some EM
Incs are
trading
inside EM
Sovs
…some
EMs are
trading
inside
DMs
EM
Sovereign
US and Euro Incs trading through their
sovereigns
Sources: Bloomberg, 10.05.2013, list not exhaustive, comparison between 5yr CDS spreads
Are we moving from safe bonds to safe
brands?
Jonathan Davis in FTfm:
In the words of Terry Smith, founder of Fundsmith , whose global
equity funds by choice only invest in this kind of stock, Nestlé has
become the nearest thing to a risk-free asset we have in the brave
new post-crisis world.
Secure cash flows from private sector vs.
insecure cash flows from public sector
Source: Financial Times, 29.04.2013
Does QE facilitate blowing of serial bubbles?
Median US home prices vs. median incomes
Rebased at 100 in 2000
Commodities?
Gold per se?
Emerging market
assets?
Certainly bonds!
Source: Gavekal
V: Mid 2013 result? Too many
bonds…
Sheer weight of
numbers sank
bonds beneath
the waves
Goodbye, Mr Bond…
QE forced capital along the risk spectrum
Cumulative flows into higher risk assets post QE announcements
‘Higher-risk assets’
include emerging
market equities,
emerging market
and US high-yield
bonds
.
…reducing “value” pockets in some higher beta
assets
Source: Bank of England, EPRF Global
Water-flattened yields drove investors to
equities
?
Sources: Merrill Lynch, Bloomberg, the Washington Post
equities
WATERWORLD
?
Mature bond markets were drowning.
Some investors chose equities first.
equities
WATERWORLD
?
Mature bond markets were drowning.
Some investors chose equities first.
VI: How equity capital has stayed dry
Equities have
become the
main lifeboats
of capital
De-Equitisation: The US’s capital base has
shrunk
USA: Corporate Net Equity Issuance
(US$ bn)
As the Fed bought back
bonds,
US Inc bought back equities!
Many companies are bailing out the ‘salt-water’ of cash
from
their capital structure and instead taking on the ballast of
debt
Source: Longview Economics
Turning Japanese II: US Inc. has embraced
Zaitech
Reducing equity, raising debt, funding financial engineering, not CAPEX
(%GDP)
Since 2009, US Inc. has ‘retired’ 10 % of average market capitalization
Sources: Longview Economics, Financial Times, The Times
Much lower rates prompted greater bond
issuance…
Global corporate bonds
Global corporate bond issuance
Yield (%)
Deal value ($bn)
Virtually all of the 2013 S&P500 EPS growth
from
Q3 11 to Q1 13 was
due to share buybacks
Sources: Dealogic, Barclays, Haver Analytics, Zero Hedge
…as equities yield more than debt…
Global Dividend yield and U.S. 10-year Treasury yield (%)
…meaning debt is
cheaper than
equity even before
tax
Zaitech: the active management of balance sheets
is the order of the day for finance directors in
Waterworld
Sources: Citibank, MSCI
VII: Adapting to a Brave New World
We must navigate
our vessels of
capital across
Mare Incognita
towards the
emerging safe
havens of the New
World
Submerging Old versus Emerging New?
Commodity-rich Old World plus Northern Europe are still on Terra
Firma
Sources: MRB Partners, IMF
Like humanity, capital prospers more on DRY
LAND
Capital prefers to invest in countries and companies
benefitting from:





Younger population pyramids
Rising urbanization
Growing middle classes
Real interest rate regimes
USD GDP growth ahead of US
inflation
 Governments spending more on
production (e.g. infrastructure) than
consumption
 Consumers with an established
savings culture getting growing
access to credit
Source: Larsen
The driest and highest land is the
“Sinosphere”
Emerging Market Private Capital Inflows
Net, US Dollars Million
Sources: HSBC, IMF, McKinsey, UNCTAD
The driest and highest land is the
“Sinosphere”
Emerging Market Private Capital Inflows
Net, US Dollars Million
Sources: HSBC, IMF, McKinsey, UNCTAD
Capital migrates towards demographic high
ground
THE
SINOSPHERE
At 58%, China is
now the heart of
Asia’s GDP
World Population: 7.1bn; inside the Sinosphere
3.7bn
Sources: Nationmaster, CLSA
The essence of dryness is middle classes
Change in Middle Classes by region, 2009 to 2030
-16m
+132m
+16m
+204m
“North” : zero
“South”: +3043m
Source: Commonwealth of Australia, Prime Minister’s Office
Asia Pacific is 89%
of
World
Growth of
Middle Classes
+2707
m
The magnetic attraction of a middle class Asia
Evolution of the
world’s economic
centre of gravity
AD1-2025
Source: McKinsey
GDP growth is concentrating on the
Sinosphere
Source: The Financial Times
GDP growth is concentrating on the
Sinosphere
India +
Russia +
Indonesia
exceed the
US at
14.3%
Source: The Financial Times
Core
Asia
51%
VIII: The Storm has broken,
the bond bubble has burst…
What lies ahead? Renewed risks…
May 2013: There she blows! Taper tantrum…
Brasilian Real
South African Rand
Nikkei volatility
10Y TIPS
Smart money mutinied early on the USS
Treasury…
Source: Financial Times
Some central banks also saw the writing on
the wall
Some fixed income investors are taking refuge in equities
For example PIMCO and Central Banks
In Jim Grant’s world of RETURN-FREE RISK, scant rewards
for some fixed income investments do not justify the still
not insignificant risks.
Sources: RBS Reserve Management Trends 2013, Central Banking Publications
The high tide of liquidity lifted equity ships…
Sources: Agora Financial, Financial Times, SLJ Macro Partners
WATERWORLD
From the low in 2009, to 31.10.2013,
astonishingly, 100% of the market’s rise
has taken place on days when the Fed
is buying assets.... On all of the other
days the market has fallen. MORGAN
STANLEY
WATERWORLD
Global equities have risen 40% in the
past two years. Over the same period,
global EPS have gone nowhere. This
means that the MSCI ACWI benchmark
has rerated from a 12x to 17x PE based
on trailing EPS
WATERWORLD
Global
equities
risen
40% in the
From the
low inhave
2009,
to 31.10.2013,
past
two years. Over
same
period,
astonishingly,
100%the
of the
market’s
global
EPS
haveplace
goneon
nowhere.
This
rise has
taken
days when
means
that the
MSCI ACWI
the Fed
is buying
assets....
On all of
benchmark
hasthe
rerated
from
a 12x
to
the other days
market
has
fallen.
17x PE
based on
trailing EPS
MORGAN
STANLEY
…and capital flooded into Emerging Markets…
Global capital to Emerging Markets by region
(US$ trillion, 2011 constant exchange rate)
…causing FX appreciation to stall GDP
growth…
Source: The Telegraph
Old World QEasy made the New World queasy
The New Normal for Central
Banks:
How low can your currency go?
Source: Financial Times, Bloomberg
Old World QEasy made the New World queasy
The New Normal for Central
Banks:
How low can your currency go?
Source: Financial Times, Bloomberg
CAN the Fed win?
Source: BCA, Financial Times
Tapering: Perfect Storm to Perfect
Drought?
Drought?
Does the US Fed care?
Drought?
John Connally, Secretary to the Treasury, 1971
“The Dollar is our currency, but it’s your
problem.”
Dennis Lockhart, Atlanta Federal Reserve
President
at Jackson Hole, 2013
“QE is our policy, but it’s your problem”.
Drought?
John Connally, Secretary to the Treasury, 1971
“The Dollar is our currency, but it’s your
problem.”
Dennis Lockhart, Atlanta Federal Reserve
President
at Jackson Hole, 2013
“QE is our policy, but it’s your problem”.
IX: Conclusion
When money is artificially and abundantly
created, under-priced investment capital is
tempted to go on strike…
…to go sailing in uncharted waters…
…or to go in search of terra firma
Detroitus
Demographics + Debt x Time= Detroit’s Default
‘
Sources: NBC, The Motley Fool, Financial Times, CSO, US Census Bureau, Philip Coggan, Moody’s
Detroitus
Detroit's demise is driven by the fact
that the city's population declined
65% in 60 years, from 1.9 million in
1950 to 700,000 today…or 2.2
people
‘ every hour, every day, for 63
years.
“The massive debts accumulated over the
last forty years can’t be paid in full, and
they won’t be paid.”
Philip Coggan, Paper Promises
Detroitus
65% in 60 years, from 1.9 million in
1950 to 700,000 today…or 2.2
people
‘ every hour, every day, for 63
years.
last forty years can’t be paid in full, and
Detroitus
Total Pension Assets and Liabilities of the 50 states of the U
Shortfall $4.1 trillion
6.7 trillion
2.6 trillion
65% inActuarial
60 years, from 1.9 million in
1950 to 700,000 today…or 2.2
assets
people
hour, every day, for 63
‘ every
years.
3.6 trillion
Actuarial
Market-valued
last forty years can’t be
paid in full, and
liabilities
liabilities
Source: Maudlin Economics, State Budget Solutions
Detroitus
Demographics + Debt
x Time= Detroit’s Default
Chicago
6.7 trillion
2.6 trillion
3.6 trillion
65% inActuarial
Actuarial
Market-valued
paid in full, and
1950 to 700,000
today…or
2.2
Illinois's
unfunded
pension
liabilities
(Moody’s):
assets
liabilities
liabilities
people
hour, every day, for 63
‘ every
Philip
Coggan,
Paper
Promises
$280 years.
billion or $20,000 for every
man, woman and
child
Detroitus
Demographics + Debt
Chicago
6.7 trillion
2.6 trillion
3.6 trillion
65% inActuarial
Actuarial
Market-valued
paid in full, and
1950 to 700,000
today…or
2.2
Illinois's
unfunded
pension
liabilities
(Moody’s):
assets
liabilities
liabilities
people
every
hour,
every day, for 63
‘ nine
One
in
Irish
pubs
Philip
Coggan,
Paper
Promises
$280 years.
man, woman and
child
has closed since 2007
Detroitus
Demographics + Debt
Chicago
WATERWORLD
IS THE WEST’S RESPONSE TO
3.6 trillion
DETERIORATING
DEMOGRAPHICS
2.6 trillion
6.7 trillion
65% inActuarial
Actuarial
Market-valued
paid in full, and
1950 to 700,000
today…or
2.2
Illinois's
unfunded
pension
liabilities
(Moody’s):
assets
liabilities
liabilities
people
every
hour,
every day, for 63
‘ nine
One
in
Irish
pubs
Philip
Coggan,
Paper
Promises
$280 years.
man, woman and
child
has closed since 2007
All aboard! But Caveat Navigator!
There is a tide in the affairs of men
Which, taken at the flood, leads on to
fortune;
Omitted, all the voyage of their life
Is bound in shallows and in miseries.
ON SUCH A FULL SEA ARE WE NOW
AFLOAT
And we must take the current when it
serves,
Or lose our ventures.
Julius Caesar, William Shakespeare
Source: Deutsche Bank
Reassess the nature of risk in Waterworld
Q: Is volatility all there is to risk?
A: No, not in Waterworld…
Q: So what else is there to risk?
A: Avoiding going underwater ,
by ensuring return OF investment
beats desire to achieve return ON
investment
Reassess the nature of risk in Waterworld
Q: Is volatility all there is to risk?
A: No, not in Waterworld…
Q: So what else is there to risk?
A: Avoiding going underwater ,
by ensuring return OF investment
beats desire to achieve return ON
investment
All asset classes
– even equities –
can get overloaded
What to expect now tapering is
happening
1.
2.
3.
4.
5.
6.
7.
8.
Re-pricing of risk
Return of volatility
Breakdown of asset class correlations
Default US dollar strength, but watch for the
RMB
Sharp currency moves, up and down
Central bank fallibility doubted, even the Fed
Re-affirmation that all EMs are not born equal
Intense inflation vs. deflation argument
Long as I remember the rain been comin' down.
Clouds of mystery pourin' confusion on the ground.
Good men through the ages tryin' to find the sun.
And I wonder, still I wonder, who'll stop the rain?
Who’ll stop the rain?
Creedence Clearwater Revival
I swear I’ll try…
I swear I’ll try…
Thank you
Thank you
Important information
This document is not for general public distribution. If you are a private investor and receive it as part of a general circulation,
please contact us at +44 (0)20 7597 1900.
The information discusses general market activity or industry trends and should not be construed as investment advice. The
economic and market forecasts presented herein reflect our judgment as at the date shown and are subject to change without
notice. These forecasts will be affected by changes in interest rates, general market conditions and other political, social and
economic developments. There can be no assurance that these forecasts will be achieved. Past performance should not be
taken as a guide to the future, losses may be made. Data is not audited. Investors are not certain to make profits; losses may
be made.
The information contained in this document is believed to be reliable but may be inaccurate or incomplete. Any opinions stated
are honestly held but are not guaranteed and should not be relied upon.
This communication is provided for general information only. It is not an invitation to make an investment nor does it constitute
an offer for sale and is not a buy, sell or hold recommendation for any particular investment.
In the U.S., this communication should only be read by institutional investors, professional financial advisers and, at their
exclusive discretion, their eligible clients, but must not be distributed to U.S. persons.
In Australia, this document is provided for general information only to wholesale clients (as defined in the Corporations Act
2001).
In Hong Kong, this document is intended solely for the use of the person to whom it has been delivered and is not to be
reproduced or distributed to any other persons; this document shall be delivered to professional investors only. Investec Asset
Management Asia Limited is licensed by the Securities and Futures Commission in Hong Kong.
Outside the U.S., telephone calls may be recorded for training and quality assurance purposes. Issued by Investec Asset
Management, February 2014.
Page 123 | CONFIDENTIAL
16138

This document is not to be generally distributed

Transcription

Similar documents

to see the full size map

Debt Service - Rocky Point High School

contract packaging association 2010 annual meeting "riding out the

Mark Machlis Monte Zwang

CHOICEPAY

registration form 002 copy

DISPATCH - CAHP Credit Union

Financial Counseling at NYLAG - New York Legal Assistance Group

here - Guild of Independent Currencies

74th Annual Meeting - Concho Educators Federal Credit Union