investment outlook bob doll global equity cio the opinions presented are those of bob doll,...
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Investment Outlook
Bob DollGlobal Equity CIO
The opinions presented are those of Bob Doll, BlackRock Vice Chairman and Global CIO of Equities as of February 2009 and may change as subsequent conditions vary. Individual portfolio managers for BlackRock may have opinions and/or make investment decisions that may, in certain respects, not be consistent with the information contained in this presentation. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all inclusive and are not guaranteed as to accuracy. Past performance does not guarantee future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.
2
2008: A Year to be Both Forgotten and Remembered
1) Beginning of year consensus – global decoupling would “save the world” (and markets)
2) The U.S. and global economy sputtered along, but collapsed late in the year
3) Credit market “froze” and nearly brought the system down
4) Risk asset prices collapsed (including stocks, low quality bonds, and commodities)
5) U.S. Treasury instruments soared in price and collapsed in yields
6) Global monetary authorities engaged with record and unconventional force
7) Financial stocks were crushed as defensive sectors outperformed
8) Oil prices soared, then collapsed
9) Growth outperformed value, and small outperformed large
10)U.S. dollar fell initially, but then had a significant rally
3
2009 Main Theme
Deflation vs. Reflation
Debt induced Deflation vs. Policy induced Reflation
4
The U.S. economy faces its first nominal GDP decline in 50 years.1
Source: ISI Group
U.S. Nominal GDP
-4-202468
101214161820
1948 1958 1968 1978 1988 1998 2008
Real GDP
GDP Deflator
Nominal GDP
20081.2 2.2 3.4
2009-
2.0 1.0-
1.0
20101.8 1.4 3.2
5
The U.S. economy faces its first nominal GDP decline in 50 years.1
Source: FRB, Dresdner Kleinwort
Household Net Worth
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
53 56 59 62 65 68 71 74 77 80 83 86 89 92 95 98 01 04 07
Year-
over-
Year
Chan
ge
6
Global growth falls below 2% for the first time since 1991.2
Source: Brown Brothers Harriman
35
40
45
50
55
60
65
Mar
-06
Jun-
06
Sep-
06
Dec-
06
Mar
-07
Jun-
07
Sep-
07
Dec-
07
Mar
-08
Jun-
08
Sep-
08
Dec-
08
Eurozone Manufacturing PMI China Manufacturing PMI
(values greater than 50 indicate expansion)
US Manufacturing PMI
Decoupling has been proven false
7
Global growth falls below 2% for the first time since 1991.
GDP
2
2008 2009 2010
Global 2.8% 1.6% 3.0%
U.S. 1.2 -2.0 1.8
Euro Area 1.0 -1.5 1.0
Japan 0.2 -1.5 0.8
Emerging Markets
5.6 3.5 5.0
Source: Citigroup, Deutsche Bank, Goldman Sachs, BlackRock
8
Inflation falls close to zero in many developed countries, but widespread deflation is avoided.
3
Source:Source: Citigroup, Deutsche Bank, Goldman Sachs, BlackRock
2008 2009 2010
Global 5.4% 2.2% 2.6%
U.S. 3.8 0.0 0.8
Japan 1.4 -0.2 -0.2
Euro Area 3.3 1.0 1.5
Emerging Markets
8.6 5.0 5.5
CPI Inflation
9
Inflation falls close to zero in many developed countries, but widespread deflation is avoided.
Source: ISI
Deflation / Inflation?
US Monetary Base Y/Y%Money MultiplierMZM divided by Monetary Base
0
20
40
60
80
100
120
Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08
4.5
5.5
6.5
7.5
8.5
9.5
10.5
11.5
'89 '92 '95 '98 '01 '04 '07
3
10
The U.S. Treasury curve ends 2009 higher and steeper than where it began.
Reasons why treasury rates will move up in 2009
• Fear will lessen/confidence will pick up
• Monetary and fiscal policy will begin to reflate the economy
• Risk of dollar depreciation
• “Helicopter Ben” will print money as necessary
Fed release — December 16• “Stimulate the economy through open market operations
and other measures”
• “Use its balance sheet to further support economic activity”
4
11
Earnings fall by a double-digit percentage again in 2009, the first back-to-back years since the 1930s.
5
Source: Sanford Bernstein, Goldman Sachs, JPMorgan, BlackRock
Reported Earnings
2007 $66.18 -
2008 $52.00 -21%
2009 $46.00 -12%
2010
Operating Earnings
Bottom-Up Consensus
$82.54 - - -
$68.00 -18% $72 -13%
$55 – 60 -15% $82 +14%
$70 - 75 +26% $96 +17%
12
High yield, municipal, and investment grade corporate bond spreads narrow in 2009.
6
Source: Federal Reserve Bank of St. Louis, JP Morgan
Corporate High Grade Spreads to Ten-Year Treasuries
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
'19 '24 '29 '34 '39 '44 '49 '54 '59 '64 '69 '74 '79 '84 '89 '94 '99 '04 '09
Moody's BAA less Treasuries
13
U.S. stocks record a double-digit percentage gainin 2009.
The case for an equity market bottomFundamental• Record monetary stimulus• Record fiscal stimulus• Massive impact of ⅔ decline in price of oil
Valuation• Stocks selling at 60% of GDP• ⅔ of stocks with P/E ratios <10x• Stocks yielding more than Treasury bonds (first time in 50 years)
Technical/Sentiment• October 10/November 21 bottoming sequence• Record cash as a percentage of equity market value on sidelines• Insider buy/sell ratio
7
14Source: Morgan Stanley
7
Valuations – Back to Recession LevelsS&P 500 Close to 60-year Trough P/E Valuations
5
10
15
20
25
30
35
40
45
1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006
Graham-Dodd P/ E (10yr rolling
earnings)
U.S. stocks record a double-digit percentage gainin 2009.
15
U.S. stocks record a double-digit percentage gainin 2009.
0
2
4
6
8
10
12
14
16
18
20
Avera
ge L
TM
P/E
P/E multiples fluctuate with inflation
14.7x 14.9x13.7x
17.0x17.8x
16.6x
14.9x
13.3x
11.1x
9.5x
Headline CPI Band
-2% &below
-2% -to -1%
-1% toto 0%
0% to1%
1% to 2%
2% to3%
3% to4%
4% to5%
5% to6%
6% &above
Data 1927-2008Source: Robert Shiller, Standard & Poor’s, Goldman Sachs Research
(x)
7
16
U.S. stocks record a double-digit percentage gainin 2009.
7
Source: Merrill Lynch
-4%-3%-2%-1%0%1%2%3%4%5%6%7%
2/ 76 5/ 78 8/ 80 11/ 82 2/ 85 5/ 87 8/ 89 11/ 91 2/ 94 5/ 96 8/ 98 11/ 00 2/ 03 5/ 05 8/ 07
US Stocks Look Attractive Relative to BondsFed Model - S&P 500 Earnings Yield Minus 10-Year Treasury Yield
17
U.S. stocks record a double-digit percentage gainin 2009.
7
Source: JP Morgan, AMG and Federal Reserve
Money Market Funds as % Wilshire 5000
0%5%
10%15%20%25%30%35%40%45%50%
3/ 74 3/ 79 3/ 84 3/ 89 3/ 94 3/ 99 3/ 04 3/ 09
18
U.S. stocks record a double-digit percentage gainin 2009.
7
0.0x
0.5x
1.0x
1.5x
2.0x
2.5x
Feb-03 Sep-03 Apr-04 Nov-04 J un-05 J an-06 Aug-06 Mar-07 Oct-07 May-08 Dec-08
Data: 8-week moving average
Source: Argus Vickers, Credit Suisse
Insider Buy/Sell ratio
19
U.S. stocks record a double-digit percentage gainin 2009.
7
Source: Bloomberg, Compustat and Goldman Sachs Research
S & P 500 Bear Markets Returns AFTER the Trough
Peak Trough
Lengthin
MonthsTotal
Decline
1 month after
Trough
3 months
afterTrough
6 months after
Trough
12 months
afterTrough
Years toRecover
7-Sept-29
1-June-32 33 (86)% 5% 93% 53% 121% 22.3
10-Mar-37
28-Apr-42 62 (60)% 10% 15% 25% 54% 3.8
29-May-46
13-Jun-49 37 (30)% 9% 16% 23% 42% 1.0
2-Aug-56 22-Oct-57 15 (22)% 5% 6% 10% 31% 0.9
12-Dec-61
26-Jun-62 6 (28)% 9% 7% 20% 33% 1.2
9-Feb-66 7-Oct-66 8 (22)% 10% 12% 22% 33% 0.6
29-Nov-68
26-May-70
18 (36)% 6% 17% 23% 44% 1.8
11-Jan-73
3-Oct-74 21 (48)% 19% 14% 31% 38% 5.8
28-Nov-80
12-Aug-82
20 (27)% 18% 36% 44% 58% 0.2
25-Aug-87
4-Dec-87 3 (34)% 14% 19% 19% 21% 1.6
16-Jul-90 11-Oct-90 3 (20)% 6% 7% 28% 29% 0.3
24-Mar-00
9-Oct-02 31 (49)% 15% 19% 11% 34% 4.6
9-Oct-0720-Nov-08
13 (52)% 7%
HistoricalAverage
21 (38)% 10% 22% 26% 45% 1.4
After a bear market, the S&P 500 has typically rebounded quickly
Median
Past performance is no guarantee of future results
20
U.S. stocks record a double-digit percentage gainin 2009.
Y/E 2009 Target
2010 Earnings Estimate $70 – 75
Target Multiple 14x
S&P 500 Target 1000 - 1050
7
21
U.S. stocks outperform European stocks while emerging markets outperform developed ones.
Percent of Markets Outperforming the U.S. Market(%
)
5
5245
17
71
50 5260 62
74
93
7671
20
0
10
20
30
40
50
60
70
80
90
100
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Merrill Lynch Investment Strategy, MSCI
8
Past performance is no guarantee of future results
22
U.S. stocks outperform European stocks while emerging markets outperform developed ones.
Europe in worse shape than U.S• Later to experience economic weakness
• Much later to lower rates
• Household indebtedness high
• Banks slower to clean up balance sheets
• Disunity in fiscal policy plans
U.S. has better growth prospects• Population/work force growth
• Better capital allocation
• Easier fluidity of capital
• More transparent capital markets
8
23
U.S. stocks outperform European stocks while emerging markets outperform developed ones.
Emerging Markets to Outperform• Downturn more cyclical inventory related, less secular
credit related
• The long-term story
— Growing population, growing middle class/consumer class, improving productivity, rising education levels/standards of living, faster economic growth, net savers/not net spenders
• Stock markets down by ½ to ⅔ (compared to approximately 50% for developed world)
8
24
Energy, Healthcare, and Information Technology to outperform Utilities, Financials, and Materials.
9
OVERWEIGHTS UNDERWEIGHTS
Energy Utilities
• Valuations cheap• Geopolitical insurance• Long-term supply/demand problem
• Cash flow deteriorating, no dividend growth
• Expensive relative to market• Diversification questions marks
Healthcare Financials
• Defensive characteristics/predictability
• Earnings growth/attractive valuations• Political risks to back burner
• Ongoing credit market turmoil• Excess capacity/consolidation• Structural
uncertainties/regulatory changes
Information Technology Materials
• Conservative management (cash, cash flow, earnings)
• Fewer cutbacks than usual• Relatively inexpensive
• Too leveraged to global growth• Earnings risk high• Deteriorating balance sheets
25
Stock market volatility remains elevated as periodic double-digit percentage rallies and declines occur.
10
Source: The Leuthold Group
Annual Occurrence of 3% or Greater Moves
0%
5%
10%
15%
20%
25%
30%
35%
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
1900 To Date
Note: 1900-1925 DJIA, 1926 to present S&P 500
26
Stock market volatility remains elevated as periodic double-digit percentage rallies and declines occur.
Diversification Failed in 2008!
Source: Strategas Research Partners
Rolling 12-Month Correlations to S&P 500
S&PSmall-
Cap
S&PMid-Cap
MSCIEAFE
MSCIEmergin
gMarkets
CrudeOil
12/31/2003 85.3% 86.3% 87.6% 74.2% -21.5%
12/31/2004 83.3% 93.8% 72.1% 61.9% -55.5%
12/31/2005 92.6% 95.9% 71.0% 77.1% 3.3%
12/31/2006 74.6% 81.2% 80.7% 83.8% -2.6%
12/31/2007 89.3% 89.6% 87.7% 51.4% -8.0%
Current 96.0% 98.1% 92.5% 83.5% 68.4%
10
Past performance is no guarantee of future results
27
Oil and other commodities bottom and move higher by year end as emerging market economies begin to recover.
Commodities to bottom and go up• Commodity bubble has been deflated with prices back to
cash production costs
• Exploration/development will be curtailed at current prices (supply curtailed) while demand will be re-stimulated (demand is renewed)
• Commodity markets generally in contango
11
28
The U.S. Federal budget deficit soars past$1 trillion as the government continues to grow.
12
Source: Office of Management and Budget, Merrill Lynch
-12
-10
-8
-6
-4
-2
0
2
4
'73 '75 '77 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09
Federal Budget Deficit to SoarFederal budget deficit / surplus as a share of GDP
29
The U.S. Federal budget deficit soars past$1 trillion as the government continues to grow.
Risks to financing the spending!• Dollar
• Interest Rates
• Inflation (running the printing press)
Note• Aside from short-term crisis in spending, ……….
— Social Security, Medicare, and Medicaid now comprise almost half of non-interest spending (and are all growing faster than tax revenues)
— National debt will pass 100% of GDP within 25 years (now less than 40%) if structural changes are not made
— This limits Obama administration’s plans to increase health insurance coverage, build infrastructure, increase energy research, add to education spending, etc, etc, etc
— Tax rates
12
30
Economic recovery and subsequent growth is muted as consumer spending shrinks as a percentage of the U.S. economy.
Anemic Recovery and Below-Trend Growth• Residential real estate losses reduce borrowing capability by
consumer
• Consumption will come more from income and less from asset appreciation
• Savings rate will rise
• Corporations reluctant to raise capital to invest at higher costs/lower prices
• Reluctant banking system/additional regulation
• Leveraging took years/de-leveraging will too
LT-1
31
U.S. Today U.S. 1930s
Money Supply • Being raised significantly
• Contracted by one-third
Fiscal Stimulus • Record stimulus coming next year
• WPA not established until 1935
Trade Barriers • Reasonably low (hopefully to stay)
• Tariff War (Smoot-Hawley)
Bank Failures • So far, only several hundred failures
• Nearly 10,000 failed banks
Unemployment • Worst forecasts ≈10% • Peaked at 25% in 1933
Evidence accumulates that the U.S. is not following the script for the 1930s or the Japan one of the 1990s.
LT-2
U.S. Today Japan 1990s
Monetary Policy • Accommodative/Reflationary
• Tight/Deflationary
Fiscal Policy • Significant stimulus coming
• Taxes were raised
Corporate Adjustment Process
• Significant cost cutting • Little change made
Bad Debt Problems • Massive write-offs • Little action taken
Residential Real Estate Price Declines
• 20% (to date) • More than 50%
32
5 Year Periods of Negative Returns
Returns Next 5 Years
1927-31 -5.1% 22.5%
1928-32 -12.5% 14.3%
1929-33 -11.2% 10.7%
1930-34 -9.9% 10.9%
1937-41 -7.5% 17.9%
1970-74 -2.4% 14.8%
1973-77 -0.2% 14.1%
1998-02 -0.6% 12.8%
Average 14.8%
Worst 10.7%
S&P 500 History
LT-3After ten years of stock market stagnation, equities begin a stronger ten-year period.
Past performance is no guarantee of future results
33
Worst Ten Year S&P 500 Periods
Prior 10 Year Next 10 Years
-3.65% Q2 1939 to Q2 1949 8.62%-2.79 Q1 1939 to Q1 1949 9.12-2.74 Q3 1939 to Q3 1949 7.74-2.54 Q1 1938 to Q1 1948 11.76-1.42 Q1 1940 to Q1 1950 9.65-1.42 Q2 1940 to Q2 1950 12.19-0.65 Q4 1938 to Q4 1948 7.21-0.10 Q3 1938 to Q3 1948 8.120.18 Q3 1940 to Q3 1950 12.570.20 Q4 1937 to Q4 1947 9.610.23 Q4 1939 to Q4 1949 9.090.44 Q2 1938 to Q2 1948 9.520.49 Q3 1974 to Q3 1984 15.580.71 Q1 1941 to Q1 1951 14.471.24 Q4 1974 to Q4 1984 14.76
Average 10.67Worst 7.21
S&P 500 History
Source: The Leuthold Group
LT-3After ten years of stock market stagnation, equities begin a stronger ten-year period.
Past performance is no guarantee of future results
34
2009 Investment Outlook
Probability
RecoveryEvident
Y/E 09Fed Funds
2009S&P 500
EPSY/ES&P
Normal Recession 10% Mid-Year 09
50 - 100 b.p.
$70 – 751150 - 1250
Nasty Recession 70% 2H 09 0 - 50 b.p. $55 – 601000 - 1050
Deflation/Depression
20% 2010+ 0 $40 - 50500 - 700
Scenario Forecasting
Normal Recession• Monetary and fiscal policy stimulus work well• Credit markets thaw quickly• Residential real estate prices stop falling 1H09
Nasty Recession• Policy impacts help irregularly and with a lag• Credit markets improve slowly• Systemic deflation is avoided
Deflation/Depression• Deflation permeates• Credit markets do not improve• Real and nominal growth stays negative
Prepared by BlackRock Investments, Inc., member FINRA.©2009 BlackRock, Inc. All Rights reserved.BlackRock is a registered trademark of BlackRock, Inc.