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CONFIDENTIAL/ NOT FOR REDISTRIBUTION
1
Robert Parker – Vice Chairman, Asset Management
9th September, 2009
The Outlook for Global Capital Markets & Investment Themes for the remainder of 2009 & 2010
2
Key questions for global capital markets, investment strategy and asset allocation Assuming the credit crunch is over, how will credit conditions now evolve?
Is the economic recovery in the developed G20 countries durable and how will the pattern of growth evolve?
Have emerging economies decoupled from the developed economies and will emerging economies be the key driver in global growth?
Has the risk of deflation passed and what is the risk of a rapid return to inflation?
Will currency markets become unstable particularly with the major US fiscal deficit and central bank reserve diversification leading to a US dollar sell-off?
Will emerging market demand lead to a further commodity boom?
After the significant decline in equity markets from mid-2007 to early 2009, have equities now formed a base for a durable recovery and if so, which markets and sectors will outperform?
What signs are there of recovery in alternative asset classes such as real estate, private equity and hedge funds?
3
Source: PMI Premium, Bloomberg, Credit Suisse
There are clear signs of recovery
Last data point: June 2009
10
20
30
40
50
60
70
J an-03 Oct-03 J ul-04 Apr-05 J an-06 Oct-06 J ul-07 Apr-08 J an-09
Index
US
Eurozone
Japan
PMI New Orders
4
Recovery has been pronounced in Asia
25
30
35
40
45
50
55
60
65
70
J an-03 Oct-03 J ul-04 Apr-05 J an-06 Oct-06 J ul-07 Apr-08 J an-09
Index
Russia
China
India
PMI New Orders
Brazil
Source: PMI Premium, Bloomberg, Credit Suisse
Last data point: June 2009
5
Recovery is reflected in global trade and commodity indices
Source: IDC, Bloomberg
Price index 2000 = 100
0
100
200
300
400
500
600
700
800
900
01/200001/200101/2002 01/200301/200401/200501/200601/200701/200801/2009
Baltic Dry Index Brent oil Copper
6
1'500
2'000
2'500
3'000
3'500
4'000
4'500
J an 89 J an 93 J an 97 J an 01 J an 05 J an 09
US existing + new homes inventory
units on sale
US home inventories (new +existing homes)
0
10
20
30
40
50
60
70
80
J un 93 J un 97 J un 01 J un 05 J un 09
0
500
1'000
1'500
2'000
2'500
US NAHB Housing Index US Housing starts (rhs)
NAHB Index versus US housing starts (yoy, %)
2.6
2.8
3.0
3.2
3.4
3.6
3.8
4.0
4.2
J an 81 J an 85 J an 89 J an 93 J an 97 J an 01 J an 05 J an 09
US existing house price/median income Pre-bubble average
House price to wage ratio
NAHB sentiment index leads housing starts by 2 months
Trough in NAHB sentiment index
Trough in housing starts
No months that housing starts troughs
after NAHB troughJan 1991 Feb 1991 1Jan 1995 Apr 1995 3Oct 2001 Dec 2001 2
One source of the economic crisis, i.e. the US housing market is now forming a base
7
Recovery has been boosted by public expenditure but deficits are unsustainable
Source: IMF, Credit Suisse
-10
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
2000 2002 2004 2006 2008 2010 2012 2014
60
65
70
75
80
85
90
95
100
105
110
% %
Fiscal balance (lhs)
Government debt (rhs)
Forecasts
8
Credit conditions have improved but remain tight on trend
-60
-50
-40
-30
-20
-10
0
10
20
Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09
Secured Lending-Credit To Households,Past 3M Next 3 months
UK bank lending conditions
-1%
1%
3%
5%
7%
9%
11%
13%
2003 2004 2005 2006 2007 2008 2009 2010
-20
-10
0
10
20
30
40
50
60
70
Private sector loan growth
ECB survey: net ch in expected lending standards, rhs, inv
Tightening credit standards
Euro-area bank lending standards
Source: Bank of England , © Datastream International Limited ALL RIGHTS RESERVED, Credit Suisse research
US bank lending conditions
-10
-5
0
5
10
15
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
-20
-10
0
10
20
30
40
50
60
70
80
Total loans, y/y%
Banks tightening credit - average of firms, mortgages, creditcard, rhs, inverted, lead 12m
9
0
2
4
6
8
10
12
14
16
18
'99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
Y2K9/11
Demand for cash balances is elevated at banks....
Sources: Federal Reserve, Credit Suisse
Ratio: Excess Reserves to Required Reserves
10
-2%
0%
2%
4%
6%
8%
10%
12%
14%
1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007
US personal savings as % of disposable income, 3mma
1959-87 avg: 9.1% May 09
Consumers are increasing savings
Source: Bloomberg, Credit Suisse
Last data point: May 2009, Value: 6.9%
11
US consumer credit has collapsed
Source: Bloomberg, Credit Suisse
12
Emerging and developed economies are decoupling
Source: IMF, Credit Suisse
* Includes 22 oil-exporting nations ** Excludes Russia & Saudi Arabia *** World includes G20 & oil-exporting nations Note: Real annual growth is estimated by
multiplying the real growth rate of each economy to its GDP share in the previous year (at market exchange rates)
0% 1% 2% 3% 4% 5% 6% 7% 8%
Oil exporters* (7.7%)
Emerging G20** (16.7%)
Developed G20(67.6%)
World***
2004 - 08E
2009E - 14E
Growth rateCountry group& share of world GDP (2008)
Contribution to global growth
9%
49%
37%
2004 – 08E
13
G3 countries; inflation has fallen sharply
Credit Suisse; the BLOOMBERG PROFESSIONAL™ service; DataStream
-2%
0%
2%
4%
6%
8%
10%
12%
Jan-81 Jan-83 Jan-85 Jan-87 Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09
G3 yoy% - Headline
G3 yoy% - Core (ex food and energy)
14
Global output gap with cyclical inflation
Credit Suisse; the BLOOMBERG PROFESSIONAL™ service; DataStream
-22
-20
-18
-16
-14
-12
-10
-8
-6
-4
-2
0
2
Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
-1.6%
-1.2%
-0.8%
-0.4%
0.0%
0.4%
0.8%
1.2%
1.6%
2.0%
2.4%
Output Gap w. Forecast (lhs)
G3+ Cyclical inflation (6m lag, rhs)
Forecast
15
Taylor rule: forecasting official interest rates
Credit Suisse; the BLOOMBERG PROFESSIONAL™ service; DataStream
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
9
10
Jan-85 Jan-87 Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09
Dec '10:1.23%0.73%
Taylor Rule Policy Corridor (based on Headline and Core Inflation Taylor Rules)
G3 LIBOR: 0.85% (June '09 average)
Interest Rate Futures
16
Capital market activity has improved
0.0
0.5
1.0
1.5
2.0
2001 2002 2003 2004 2005 2006 2007 2008 2009
US high yield debt issuance (8 week m.a.)
Average
USD bn
Source: Trim Tabs, Bloomberg, Credit Suisse IB Last data point: 25 June 2009
Source: Bloomberg, Credit Suisse Last data point: 26 June 2009
0
5
10
15
20
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
US equity issuance (4wma)
Average
USD bn
17
Credit markets have improved since late 2008
Last data point: 10.07.2009
Source: Bloomberg, Credit Suisse / IDC
0
100
200
300
400
500
600
700
J an 00 J an 01 J an 02 J an 03 J an 04 J an 05 J an 06 J an 07 J an 08 J an 09
US financials US industrials Europe financials Europe industrials
spread to benchmark
18
Credit spreads emerging markets
Last data point: 30.06.2009
Source: Bloomberg, Credit Suisse / IDC
0
500
1'000
1'500
2'000
2'500
Mar 02 Mar 03 Mar 04 Mar 05 Mar 06 Mar 07 Mar 08 Mar 09
Asia Latin America EMEA
spread to benchmark
19
Credit Suisse; the BLOOMBERG PROFESSIONAL™ service; DataStream
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Jan-
93
Jan-
94
Jan-
95
Jan-
96
Jan-
97
Jan-
98
Jan-
99
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Jan-
09
G3+ 10yr yield with kernel trend – yields remain unusually low
20
USD trading above fair value
Source: Bloomberg, Credit Suisse
0
20
40
60
80
100
120
140
Dec 82 Dec 86 Dec 90 Dec 94 Dec 98 Dec 02 Dec 06
29.06.2009
+1 Stdev
-1 Stdev
Fair value USD TWI "Broad"
TWI Broad Index
21
USD: capital inflows into USA still very weak
Source: Bloomberg, Credit Suisse / IDC Last data point 31.05.2009
External balance: the current account deficit has narrowed, but net capital inflows have also dramatically fallen
22
USD/JPY: Yen weakness is correlated with increased investor risk taking
Source: Bloomberg, Credit Suisse / IDC
23
EM currencies: Brazil, China, India, Indonesia, Korea, Mexico, South Africa, Turkey vs. USD
Source: Datastream, Credit Suisse
90
100
110
120
130
140
150
01/2008 03/2008 05/2008 07/2008 09/2008 11/2008 01/2009 03/2009 05/2009
J anuary 2008 = 100
Appreciation vs. USD
Depreciation vs. USD
24
Source: Bloomberg, Credit Suisse
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%C
NY
KR
W
TW
D
MX
N
SG
D
SE
K
TH
B
PLN
GB
P
CH
F
JPY
ZA
R
NO
K
HU
F
CA
D
US
D
EU
R
NZ
D
AU
D
expensive
cheap
Trade-weighted fair value measures
25
Credit Suisse; the BLOOMBERG PROFESSIONAL™ service; DataStream
Historic equity recoveries
(indexed to 100 at beginning of recovery, trough 1-2 Std Dev below trend)
100
120
140
160
180
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
February 1866 June 1877March 1938 June 1949December 1974 February 2009Average
26
Equity downside is protected by the credit rally
Source: © Datastream International Limited ALL RIGHTS RESERVED, Credit Suisse research
Trough Peak Trough Peak Trough PeakJun-80 Aug-81 May-80 Nov-80 1 9Dec-82 Oct-87 Aug-82 Aug-87 4 2Oct-87 Apr-90 Dec-87 Jul-90 -1 -3Dec-90 Aug-97 Oct-90 Jul-98 2 -11Oct-98 Jan-00 Aug-98 Apr-00 2 -2Oct-02 Feb-07 Oct-02 Jul-07 0 -5Mar-09 Mar-09 0Average 1 -2
Credit (BBB corporates) Equities (S&P 500) Equity leads... (months)
Over the past year, credit and equities have moved together
600
700
800
900
1,000
1,100
1,200
1,300
1,400
Jul-08 Sep-08 Nov -08 Jan-09 Mar-09 May -09 Jul-09
300
500
700
900
1,100
1,300
1,500
1,700
S&P 500, lhs
CDX high y ield spread, rhs, inv erted
27
Investors are still long cash underpinning markets
5%
10%
15%
20%
25%
30%
35%
Q11952
Q11957
Q11962
Q11967
Q11972
Q11977
Q11982
Q11987
Q11992
Q11997
Q12002
Q12007
US households, direct equitiesas % of all financial assets
US households, equities as % of all financial assets
Source: US Insurance team, © Datastream International Limited ALL RIGHTS RESERVED, Credit Suisse research
US money market funds reached a record 49% of market cap in early March (currently 36%)
0
5
10
15
20
25
30
35
J un 83 J un 87 J un 91 J un 95 J un 99 J un 03 J un 07
Retail Money Market mutual funds/US Eq. Market capInst. Money Market mutual funds/US Eq. Market cap
in %
28
Earnings revisions
-80
-60
-40
-20
0
20
40
60
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
S&P500
MSCI World
Net positive revisions as % of total%
Source: Datastream, Credit Suisse
Last data point: 1 July 2009
29
Corporate sector balance sheets have repaired themselves
US non-fin corporate FCF, % of GDP
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
Q4 1969 Q4 1975 Q4 1981 Q4 1987 Q4 1993 Q4 1999 Q4 2005
US non-financial Corporate FCF/GDPLT Average
US non-residential investment, % of GDP
8%
10%
12%
14%
16%
18%
20%
Q3 1959 Q3 1965 Q3 1971 Q3 1977 Q3 1983 Q3 1989 Q3 1995 Q3 2001 Q3 2007
US Investment/GDP US non-residential investment/GDP
US non-fin corporate financing gap
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
Q41969
Q41972
Q41975
Q41978
Q41981
Q41984
Q41987
Q41990
Q41993
Q41996
Q41999
Q42002
Q42005
Q42008
US corporate non-financial : Financing gap(capex-int. generated funds) % GDP
30
Global equity risk premium (GERP)
Last data point: 13.07.2009
Source: Datastream, Credit Suisse / IDC
-2
0
2
4
6
8
10
12
J un 91 J un 93 J un 95 J un 97 J un 99 J un 01 J un 03 J un 05 J un 07 J un 09
Earnings Yield Gap Mean + / - 1 std. dev. + / - 2 std. dev.
%
31
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007
Market cap / GDP average
Non-farm, non-financial US corporates
Valuations: equity valuations are in line with their long-run averages
US Tobin’s Q US market cap-to-GDP
US P/E on trend earnings US 12-month forward P/E
Source: © Datastream International Limited ALL RIGHTS RESERVED, Credit Suisse research
0.5
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1.4
1.5
Q3
1953
Q2
1958
Q1
1963
Q4
1967
Q3
1972
Q2
1977
Q1
1982
Q4
1986
Q3
1991
Q2
1996
Q1
2001
Q4
2005
US Tobin's Q ( EV at market/replacement v alue, nonfinancial business)
10.0
12.0
14.0
16.0
18.0
20.0
22.0
24.0
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
US 12m Price/Earnings
32
Low-debt / higher beta sectors
Source: Datastream, HOLT, Credit Suisse
Utilities
Div. Tel.
Wireless Tel.
Semi'sSoftware
Tech Hard/ W
Food Retail
House. + Prsnl. Prod.Tobacco
Beverages
Food ProductsMetals & Mining
Pulp & Paper
Chemicals
Cons. Mats
Energy
Transport
Comm Servs.Cap. Goods
Retail
Hotels
Media
Cons Dur.Autos
Biotech
Pharma
HCare Equip
R Estate
Insurance
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.5 0.7 0.9 1.1 1.3 1.5 1.7
Beta
HO
LT
Tota
l Boo
k D
ebt/
Mar
ket C
ap(F
Y0)
Banks & Diversified Financials
33
Emerging markets equities
Source: Bloomberg, Credit Suisse
Last data point: 2 July 2009
50
100
150
200
250
300
350
J ul 99 J ul 00 J ul 01 J ul 02 J ul 03 J ul 04 J ul 05 J ul 06 J ul 07 J ul 08 J ul 09
MSCI World
MSCI Emerging Markets
Index (-10Y= 100)
34
EM to World: P/E valuation relative
Last data point: 06.07.2009
Source: Datastream, Credit Suisse / IDC
0.40
0.50
0.60
0.70
0.80
0.90
1.00
1.10
J an 01 J an 02 J an 03 J an 04 J an 05 J an 06 J an 07 J an 08 J an 09
rel P/E EM to World Avg +/ - 1 STD
35
Capital market conclusions and investment strategy The G3 countries have emerged from a steep recession but will experience at least 3
years of mediocre growth. The smaller European economies and central Europe will emerge from recession last
Government action through expansionary monetary and fiscal policies has prevented a sustained depression and a successful rescue of the banking industry has largely taken place
Headline inflation has decelerated rapidly but long-term deflation should be avoided. Inflationary expectations may deteriorate in 1H2010, but any upturn in inflation will prove short-lived
The growth slowdown in the larger emerging markets has reversed quickly, although emerging markets with current account deficits and over-leveraged banking systems will remain under severe pressure in the medium term
On trend, Asia and Latin America are the most attractive emerging markets
After the strong performance of equity markets from early March until early August, the 1-2 months outlook is for an equity market correction. During the 4th quarter, equity markets should outperform. In 2010 there is a risk that the equity market rally in developed markets fails with markets going through a medium term period of broad stability
36
Capital market conclusions and investment strategy Foreign exchange market volatility has fallen. The Asian and Latin American currencies are
the most undervalued. The sterling devaluation is over
The investment grade credit rally is durable, although risk in the high yield market has risen sharply. Risk/reward in Government bond markets is starting to erode
The banking system will be characterised by further de-leveraging. Banks with high commission income and emerging market exposure will outperform those banks with government ownership
Although real estate markets are undervalued, it is premature to forecast a recovery in this sector. The central scenario is that real estate markets will move sideways for 2-3 years
Consumption will remain weak where consumers are de-leveraging, notably in the US and the UK
On a 1-2 year view, defensive equity sectors in the G3 markets with strong cash flows will out perform cyclical sectors. On trend, emerging markets will out perform developed markets
Sectors that will benefit from the recession easing are IT and infrastructure
The nature of private equity is changing radically with 2009 being characterised by significant valuation write-downs and sales of distressed assets. The improvement in the hedge fund industry since the beginning of 2009 is likely to prove durable
37
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