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Economic and market prospects. Brian Parker CFA Investment Strategist MLC Investment Management April 2009. General advice warning and disclaimer. - PowerPoint PPT Presentation
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Economic and market prospects
Brian Parker CFAInvestment StrategistMLC Investment ManagementApril 2009
Any opinions expressed in this presentation constitute our judgement at the time of issue and are subject to change. We believe that the information contained in this presentation is correct and that any estimates, opinions, conclusions or recommendations are reasonably held or made as at the time of compilation. However, no warranty is made as to their accuracy or reliability (which may change without notice) or other information contained in this presentation. To the maximum extent permitted by law, we disclaim all liability and responsibility for any direct or indirect loss or damage which may be suffered by any recipient through relying on anything contained in or omitted from this presentation.This presentation contains general information and may constitute general advice. It does not take into account any person’s particular investment objectives, financial situation or individual needs. It should not be relied upon as a substitute for financial or other specialist advice. It has been prepared solely as an information service for financial advisers and should not be distributed to clients.Before making any decisions on the basis of this presentation, you should consider the appropriateness of its content having regard to your particular investment objectives, financial situation or individual needs. Opinions expressed constitute our judgement at the time of issue and are subject to change. The presenter is a representative of MLC Investments Limited. MLC Investments Limited ABN 30 002 641 661 105-153 Miller Street, North Sydney NSW 2060 is a member of the National group of companies.MLC Investments Limited is the issuer of the MLC MasterKey Unit Trust. Information about the MLC MasterKey Unit Trust is contained in the current Product Disclosure Statement (‘PDS’), copies of which are available upon request by phoning MLC on 131 831 or on our website at mlc.com.au.
General advice warning and disclaimer
Summary• The bad news• The better news• What does all this mean for investors
1. The bad news
Bank failures soared even before the recession had really hit!
0
5
10
15
20
25
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
No. of US bank failures
Source: FDIC. 2009 data as at 6 April
Just how big are the losses and how much money do the US banks need?
US$ billion
What the US banks and investment banks were worth at the end of Q3 2008 1417
Their likely losses# (known + expected) 1744
Shortfall -327
How much they've raised/been given so far 430
Their implied worth 103
Estimated capital required to get back to pre-crisis levels# 1400
Source for data and estimates: Nouriel Roubini and Elisa Parisi-Capone, RGE Monitor, January 2009# losses include loan losses and mark-to-market losses on securities held. Estimates of losses assume afurther 20% fall in US house prices, a fall in US GDP of 5% over 2 years, and an unemployment rate that rises to 9%
Nowhere to hideG3 Manufacturing confidence
-4
-3
-2
-1
0
1
2
3
Q1 1998 Q1 2001 Q1 2004 Q1 2007
USEuropeJapan
Manufacturing confidence - deviation from average
G3 Consumer confidence
-4
-3
-2
-1
0
1
2
3
Q1 1998 Q1 2001 Q1 2004 Q1 2007
USEuropeJapan
Consumer confidence - deviation from average
De-coupling in Europe and Asia? Sharemarkets never really bought it
-70
-60
-50
-40
-30
-20
-10
0 % change in share prices from 2007 peak
Source: Thomson Financial. As at 3 April 2009
Japan’s shrinking manufacturing sector
50
60
70
80
90
100
110
120
Jan-80 Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08
Industrial production (volume index)
Lowest since March ‘83
Every commodity boom comes to an end, and this one was no different
Nickel
700012000170002200027000320003700042000470005200057000
Apr-06 Jan-07 Oct-07 Jul-08 Apr-09
Spot Oil price (WTI)
10
3050
7090
110
130150
170
Apr-06 Jan-07 Oct-07 Jul-08 Apr-09
US$/b
Aluminium
1100
1600
2100
2600
3100
3600
Apr-06 Jan-07 Oct-07 Jul-08 Apr-09
Spot US$/t Copper
120022003200420052006200720082009200
10200
Apr-06 Jan-07 Oct-07 Jul-08 Apr-09
Spot US$/t
The commodity boom in perspective
0
1
2
3
4
5
6
7
8
Peak vs 90s
Latest vs 90s
Ratio
Does the future have greater Clarity?
Australian prospects
• Our households are in more debt, and we live in vastly more overvalued houses than our American friends
• The commodity boom is over – terms of trade effect moves into reverse
• Mild recession in 2009BUT…• Our banks are better regulated, and have been better managed• Our policymakers have enormous flexibility, and have acted
aggressively• $A is doing exactly what we should want it to do!
Labour market is traditionally the best guide to RBA policy
..and the NAB survey suggests trend unemployment will rise further
-30
-25
-20
-15
-10
-5
0
5
10
15
20
Mar-98 Mar-00 Mar-02 Mar-04 Mar-06 Mar-08
NAB Survey employment index
Net balance (%)#
# % of businesses expecting to increase staff less % expecting to reduce staff
Uptrend in unemployment met with aggresssive RBA rate cuts..
0
5
10
15
20
25
Jan-83 Jan-87 Jan-91 Jan-95 Jan-99 Jan-03 Jan-070
2
4
6
8
10
12% %
Trend unemployment rate
(rhs)
Cash rate (lhs)
Bad news waiting (starting?) to happen?
50
100
150
200
250
300
Q1 1988 Q1 1991 Q1 1994 Q1 1997 Q1 2000 Q1 2003 Q1 2006 Q1 2009
US UK Aust
Real (inflation adjusted) house prices. March quarter 1988 equals 100
Sources: Thomson Financial, MLC Investment Management
2. The better news- what can’t get much worse- what’s improving- where are the opportunities
How bad is this really?•A lot of necessary adjustments are well underway (US housing,
household saving)•Policymakers increasingly ‘get it’•America is not Japan•This is not 1931•Every crisis creates opportunities, and this one is no different•Markets are more forward-looking than any of us!
US housing: adjustments are well underway (how much further can starts fall?!?)
300
800
1300
1800
2300
2800
Jan-59 Jan-69 Jan-79 Jan-89 Jan-99 Jan-09
Housing starts
'000
Source: Thomson Financial
US housing is now much more affordable (cheapest in decades!)..
40
60
80
100
120
140
160
180
200
Jan-71 Jan-76 Jan-81 Jan-86 Jan-91 Jan-96 Jan-01 Jan-06
Index of housing affordability
Sources: Thomson Financial
..and now mortgage rates have come down..
4.0
4.5
5.0
5.5
6.0
6.5
7.0
Mar-07 Sep-07 Mar-08 Sep-08 Mar-09
Conventional 30yr Fixed rate mortgage
Conventional 15yr Fixed rate mortgage
%
Sources: Thomson Financial
..however, US banks are not keen to lend yet, but things are improving.
Source: Thomson Financial, US Federal Reserve
US Consumer lending standards are tight, but seem to be easing..
-20
-10
0
10
20
30
40
50
60
70
80
Q1 1999 Q1 2001 Q1 2003 Q1 2005 Q1 2007 Q1 2009
Credit cardsOther consumer lendingPrime mortgages
Net % of lenders tightening standards
..as are standards for both large and small businesses..
-40
-20
0
20
40
60
80
100
Q1 1999 Q1 2001 Q1 2003 Q1 2005 Q1 2007 Q1 2009
Large & medium firms Small firms
Net % of lenders tightening standards
Money market conditions have improved
0
1
2
3
4
5
6
7
Dec-06 Jun-07 Dec-07 Jun-08 Dec-08
Fed funds target3mth USD LIBOR3mth T-billsFed funds actual
Selected short-term interest rates (%)
Source: Thomson Financial
Adjustments underwayUS households are responding to their sharply
reduced wealth
-2
0
2
4
6
8
10
12
14
Q1 1980 Q1 1985 Q1 1990 Q1 1995 Q1 2000 Q1 20054
4.5
5
5.5
6
6.5Personal savings rate (%) (lhs)Net worth as multiple of disposable income (rhs)
1990-91
300
350
400
450
500
550
Oct-89 Mar-90 Aug-90 Jan-91 Jun-91 Nov-91 Apr-92
Datastream total mkt index - Australia
1974-75
30
40
50
60
70
80
90
100
Mar-74 Jul-74 Nov-74 Mar-75 Jul-75 Nov-75
Datastream total mkt index - Australia
Equity markets typically bottom before a recession ends - the Australian experience
1981-1983
80
100
120
140
160
180
200
220
Jun-81 Oct-81 Feb-82 Jun-82 Oct-82 Feb-83 Jun-83
Datastream total mkt index - Australia
Markets have regained some ground recently
0
5
10
15
20
25
30
35
40
45 % change in share prices from their recent lows
Source: Thomson Financial. As at 3 April 2009
Credit markets look very cheap. (US corporate yields seem to be pricing in a massive rise in defaults.)
Source: Thomson Financial
Barclays high yield spread over Treasuries
0
500
1000
1500
2000
2500
Mar-87 Mar-90 Mar-93 Mar-96 Mar-99 Mar-02 Mar-05 Mar-08
Basis points
Spreads on investment grade debt are close to their widest in decades
-100
0
100
200
300
400
500
600
700
Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05
Baa rated corporates
Aaa rated corporates
Basis points
How far do earnings typically fall in a recession?
Source: Thomson Financial
Global equities - profit declines vs cyclical peaks
-25
-20
-15
-10
-5
0
Jan-76 Jan-83 Jan-90 Jan-97 Jan-04
% change in EPS from 3yr high
Australian equities - profit declines vs cyclical peaks
-50
-45
-40
-35
-30
-25
-20
-15
-10
-5
0
Jan-76 Jan-83 Jan-90 Jan-97 Jan-04
% change in EPS from 3yr high
Is enough bad news on earnings priced in?
Trailing PEHow far have EPS already fallen (%) ?
PE assuming EPS fall 40% from
peak
Australia 10.6 -26.5 14.1
US 11.7 -24.8 15.3
Japan 14.5 -20.1 19.7
EU 7.2 -34.0 8.9
UK 7.3 -14.7 10.7
Developed mkts 9.5 -25.5 12.8
Emerging Mkts 8.2 -25.4 10.9
Source: Thomson Financial DatastreamData as at 31 March 2009
3. What does all this mean for investors?
There’s always a crisis around the corner..• The 1929 crash• Great depression• WW II• Korean War• Cuban missile crisis• Vietnam War• OPEC oil crisis I• OPEC oil crisis II• Latin American debt crisis• Australia’s ‘banana republic” moment• 1987 stockmarket crash
• The fall of the Berlin Wall• Iraq War I• US savings and loan crisis• The recession we had to have• Bond market crash 1994• Mexican debt crisis 1995• Asian crisis 1997• Russian debt/LTCM crisis• Tech wreck• September 11• Afghanistan• Iraq War II
Australian market downturns and their aftermath
1973 - 1974...
20
30
40
50
60
70
80
90
100
110
120
Jan-73May-73 Jul-73 Oct-73 Jan-74 Apr-74 Jul-74
Total return index
…5 years' later
20
40
60
80
100
120
140
160
180
200
Jan-73 Jan-74 Jan-75 Jan-76 Jan-77 Jan-78 Jan-79
Total return index
Source: Thomson Financial
Australian market downturns and their aftermath
1980 - 1982
120
170
220
270
320
370
Nov-80 May-81 Nov-81 May-82
Total return index
…five years' later
120
220
320
420
520
620
720
820
920
Nov-80 Nov-82 Nov-84 Nov-86
Total return index
Source: Thomson Financial
Australian market downturns and their aftermath
Source: Thomson Financial
The biggest crash in sharemarket history..
400
500
600
700
800
900
1000
1100
Sep-87 Oct-87 Oct-87 Oct-87
Total return index
..five years' later
400
500
600
700
800
900
1000
1100
1200
1300
Sep-87 Sep-88 Sep-89 Sep-90 Sep-91 Sep-92
Total return index
Australian market downturns and their aftermath
1994
1400
1450
1500
1550
1600
1650
1700
1750
1800
Feb-94 Mar-94 May-94 Jul-94 Sep-94 Nov-94
Total return index
…five years' later
1400
1900
2400
2900
3400
3900
Feb-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99
Total return index
Source: Thomson Financial
Australian market downturns and their aftermath
Emerging mkts/LTCM crises
2200
2300
2400
2500
2600
2700
2800
Apr-98 Jun-98 Aug-98 Oct-98
Total return index
…five years' later
2200
2400
2600
2800
3000
3200
3400
3600
3800
4000
Apr-98 Apr-99 Apr-00 Apr-01 Apr-02 Mar-03
Total return index
Source: Thomson Financial
Australian market downturns and their aftermath
Post tech/Sep 11, et. al...
3000
3100
3200
3300
3400
3500
3600
3700
3800
3900
4000
Jun-01 Dec-01 Jun-02 Dec-02
Total return index
..five (and a bit) years' later
3000
4000
5000
6000
7000
8000
9000
10000
Jun-01 Dec-02 May-04 Nov-05 May-07
Total return index
Source: Thomson Financial
Australian market downturns and their aftermath
Source: Thomson Financial
?
The sub-prime crisis/GFC
4000
5000
6000
7000
8000
9000
10000
Jul-07 Jan-08 Jul-08 Jan-09
Total return index
What everyone needs to know• This is the biggest global financial crisis since the 1930s but..
• ..every crisis, every bear market, every recession, comes to an end, and this will be no different.
• Crises provide opportunities – this one is no different!
• Good financial plans are built on the basis that recessions, crises, bear markets, will happen.
• Exposure to businesses will still deliver over time (the world has not changed THAT much)..
• Risk management, not risk avoidance
• Everyone’s different: need to take enough risk to achieve decent long-term returns, but not so much risk that you can’t sleep.