economic and market perspectives simon doyle – head of fixed income and multi-asset a world of...
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Economic and Market PerspectivesSimon Doyle – Head of Fixed Income and Multi-Asset
A world of uncertainty or a world of opportunity?
Why? Seeds sown early this decade
US monetary
policy
Leverage
Sub-prime
Financial engineering
Financial market failures Bring out your dead!
Re-incarnatedWoundedDead!
Risky assets have suffered
Balanced Assets Defensive Assets
Gross 12 month returns by asset class as at 31 October 2008
Source: Schroders/Datastream. 1. S&P ASX 200; 2. MSCI World; 3. S&P ASX300 Property Trusts; 4. Merrill Lynch Global High Yield Index; 5. Schroder Hybrid Securities Fund; 6. UBS Credit Index; 7. UBS Bank Bill Index 8. UBS Treasury Index
Big losses in equities, REITs and higher yielding credit
Growth Assets
1 2 3 4 5 6 7 8
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
AustralianEquities
InternationalEquities
PropertyTrusts
Global HighYield
Hybrids Credit Cash Government
The pointy end…
0
20
40
60
80
100
120
Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08
Cen
ts
Source: CBA, Schroders
Indicative market CDO
Indicative market US residential mortgage backed
2007 AAA structured product and mortgage backed security prices
0
1000
2000
3000
4000
5000
6000
7000
95 97 99 01 03 05 07
Ind
ex
Shanghai SE Composite Index
Chinese stock market
Excesses coming home to roost
US recession is inevitable
Source: Datastream
US GDP and Conference Board Leading Index
It will be an extended slump
-4
-2
0
2
4
6
8
10
82 84 86 88 90 92 94 96 98 00 02 04 06 08
%
-10
-5
0
5
10
15
20US GDP - yoy% Leading indicator - yoy% - lead 6 months (RHS)
Recession is also likely in Europe and Japan
-1
0
1
2
3
4
5
98 99 00 01 02 03 04 05 06 07 08
%
45
49
53
57
61
Ind
ex
Eurozone GDP and Whole Economy PM
-3
-2
-1
0
1
2
3
4
5
00 01 02 03 04 05 06 07 08
%
25
35
45
55
65
Ind
ex
Japanese GDP and Econ Watchers Outlook
Eurozone GDP – yoy%
Weighted ISM (RHS)
Japanese GDP – yoy%
Eco Watchers Outlook – Lead 2 months (RHS)
Surveys indicate sharp slowdown
Inflation is no longer an issue
Source: Datastream
-6
-4
-2
0
2
4
6
8
73 76 79 82 85 88 91 94 97 00 03 06
%
-2
0
2
4
6
8
%
G7 economic activity and change in inflation
G7 annual change in inflation
G7 GDP – yoy% change, lead 2q (RHS)
Inflation follows economic growth down
0.5
0.6
0.7
0.8
0.9
1
1.1
1.2
1.3
84 87 90 93 96 99 02 05 08
Ra
tio
0
100
200
300
400
500
Ind
ex
Terms of Trade are reversing
Source: UBS, Datastream
Terms of Trade and Base Metal Prices
Australian terms of trade
MG Base Metal Index (RHS)
Tailwind to headwind
Australia will flirt with recession
Source: Datastream
Weak sentiment is flowing through to activity
Australian non-farm product and leading index
-4
-2
0
2
4
6
8
10
82 84 86 88 90 92 94 96 98 00 02 04 06 08
%
-50
-40
-30
-20
-10
0
10
20
30
40
50Non-Farm Product - yoy% Leading Indicator - lead 6 months (RHS)
%
40
50
60
70
80
90
100
110
120
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
%
We have high household debt levels like the US
Source: GSJBW Research Estimates, Goldman Sachs Research Estimates
Household sector debt as % of GDP
Aggressive household credit build up across most western economies
Australia
UK
USA
Global Equities are looking attractive
Source: Schroders, Datastream
0
10
20
30
40
83 86 89 92 95 98 01 04 07
Ra
tio
P/E ratio
average
+1 std deviation
-1 std deviation
Trailing PE MSCI World vs 25 year historical average
Global market is cheap
Underlying EBIT analysis: FY08 vs FY02
-2,068
-3,7274,159-2,5042,015
4,096
1,7712,752
5,157
1,3682,164
6,767
3,615
3,102
24,282
-2,834-499
-873 -179
0
10,000
20,000
30,000
40,000
FY02
Nick
el p
rice
Copp
er p
rice
Alum
iniu
m/a
lum
ina
price
Oth
er B
ase
Met
als p
rices
Iron
Ore
pric
e
Oth
er p
rices
Ther
mal
coal
pric
e
Petro
leum
pric
es
Met
Coa
l pric
e
Price
linke
d co
sts
Volu
me
Costs
(inc
. non
-cas
h)
Infla
tion
Exch
ange
Asse
ts so
ld
Expl
orat
ion
Oth
er
FY08
US$
m
BHP BillitonCommodity prices have driven profits
Source: Merrill Lynch 31 August 2008
This is illustrative only and does not represent Schroders’ recommendation on these stocks
Earnings driven by increased prices - volume increase offset by higher costs
Increased prices
Increased volume offset by increased costs
Underlying EBIT analysis: FY08 vs FY02
-6
60
26
11
3
10
2
-26
-40
-20
0
20
40
60
80
100
2000 2001 2002 2003 2004 2005 2006 2007 2008
-10
-5
0
5
10
15
20
Return Spread (RHS)
% %
Something positive from the credit crisis…
Source: Schroders, Datastream
US high yield
Return
Spread (RHS)
Credit markets will provide attractive returns
%
Source: Morgan Stanley, * Includes public sector
Corporate gearing is low
0
50
100
150
200
250
300
350
1920 1928 1936 1944 1952 1960 1968 1976 1984 1992 2000 2008
% o
f GD
P
Corporates
Households
Financials
Total*
US debt as a percentage of GDP
4
6
8
10
12
14
02 03 04 05 06 07 08
%
Yields from Hybrids are looking attractive
Source: Schroders, Datastream
Australian hybrid yield and cash rate
Cash rate
Hybrid option adjusted yield
Hybrids are cheap now!
0
2
4
6
8
1998 2000 2002 2004 2006 2008
%
Cash looks good now…
Source: Schroders/Datastream
Australian cash rate vs US federal funds rate: 1997 - 2008
US federal funds rate
Australian cash rate
?
…but look what happened in the US
Source: Schroders/Datastream
Returns of Australian Cash, Government Bond
Too much cash – too little bonds
High cash rates + fear = poor long term portfolio construction decisions
7%
12.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
YTD October 2008
AUS Cash Return AUS Bond Return
Source: Schroders
Cycle vs. asset class performance
Slow down Recession Recovery Expansion
Cash
Govt bonds
High Yields Bonds
EquitiesHigh Yields Bonds
Equities
Equities
Commodities
Property
Australia
Preferred asset class and the economic cycle
US
Europe Japan
Asia
Our approach hasn’t changed
We like;
• Transparency
• Liquidity
• Value for money
• True economic diversification
• Appropriate leverage
Unlisted assets and hedge funds do not provide this!
-10%
-6%
-2%
2%
6%
10%
14%
Equities Property trusts HigherYieldingassets
Alternatives Cash & FixedIncome
June 2007
What have we been doing?
Remove risk in 2007
-10%
-6%
-2%
2%
6%
10%
14%
Equities Propertytrusts
HigherYieldingassets
Alternatives Cash &Fixed
Income
December 2007
What have we been doing?
Remove risk in 2007
What are we doing?
Selectively adding risk
-10%
-6%
-2%
2%
6%
10%
14%
Equities Propertytrusts
HigherYieldingassets
Alternatives Cash &Fixed
Income
October 2008
Conclusions
• Economic concerns warrant caution
• “Risky” assets now have a risk premium
• Its not the time to sell risk
• Like higher yielding assets - hybrids
• Cash was king – but being too defensive could be costly
A world of uncertainty…but with selective opportunity
Important
General Disclaimer
This presentation is intended solely for the information of the person to whom it was provided by Schroder Investment Management Australia Limited (ABN 22 000 443 274, AFSL 226473) (Schroders). Investment in the [Insert Fund Name] may be made on an application form in the Product Disclosure Statement (PDS) dated 1 July 2008 which is available from Schroders. The information contained in this Presentation is general information only and does not take into account your objectives, financial situation or needs. Before acting on the information contained in this Presentation you should obtain a copy of the PDS and consider the appropriateness of the information in regard to your objective, financial situation and needs before making any decision about whether to invest, or continue to hold.
Schroders does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this presentation. Except insofar as liability under any statute cannot be excluded, Schroders and its directors, employees, consultants or any company in the Schroders Group do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this presentation or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this presentation or any other person. Returns shown are before tax and fees and all income is reinvested.
You should note that past performance is not a reliable indicator of future performance. Investment guidelines represented are internal only and are subject to change without notice. Opinions constitute our judgement at the time of issue and are subject to change. For security reasons telephone calls may be taped.
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