Market Update
John BraiveVice Chairman, CIBC Global Asset ManagementMay 2010
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Economy: Global Outlook
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Japan Europe Emerging Europe
U.S. Canada Latin America
Developing Asia
Emerging Asia
Low growth
High growth
While fiscal austerity is not an option, the timing could not be worse: Potential growth is set to slow markedly in the developed world.
Tightening efforts on the fiscal front will act as an additional source of drag on growth.
Potential GDP Growth Over the Next 10 years (2010 to 2020) & Fiscal Drag
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Economy: U.S. Personal Income
Income growth has been exceptionally weak.
This expansion faces structural headwinds.
The destruction of household wealth should act as a stimulant for household saving.
The consumer won’t be the engine of growth.
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Economy: U.S. Industrial Production
The manufacturing sector is recovering from its near death expansion of a year ago.
Auto sales are starting to rise and are expected to rise 10% in the next year.
Capital equipment spending is also improving as corporations update their technology.
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07M07 08M01 08M07 09M01 09M07 10M01 10M07
Current Expansion of Industrial ProductionAverage of Last Six Expansion
U.S. Industrial Production Expansion vs. Average Expansions
Source: Datastream & CIBC Global Asset Management Inc. Calculations
Assuming recession ended in June 2009 (=100)
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Unit labor costs are the best determinant of future inflation.
The huge overhang of U.S. unemployed will keep wage pressures contained.
Developed markets have little potential for sustained inflationary pressures.
Inflation: U.S. Unit Labour Costs
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Interest Rates: Fiscal Deficits
Source: CIBC Wholesale Banking
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Interest Rates: Canada 30 Year Gov’t Yield
Interest rates remain in their downward channel.
Rising rates would hurt the US housing market and the consumer.
Large supply will be a constant worry.
CIBC GAM forecasts a range of 3.50% to 4.50%.
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Government of Canada - 30 year yield
Source: Datastream
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Interest Rates: Consensus vs Reality
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2002 2004 2006 2008 2010
Consensus Forecast (+1Y) Actual
The consensus view calls for 10-year federal bond yields at 4.10% - well above our forecast.
For the last decade, consensus has always been too pessimistic on Canadian bonds.
Canadian 10Y Bond Yields: 1Y Consensus Forecast vs. Realized
Source: CIBC Global Asset Management Inc.
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Yield Curve - 30yr less 2yr
The yield curve remains steep.
Good for financials and governments.
Central banks should be cautious raising administered rates.
European sovereign debt risks will remain high.
Interest Rates: The Yield Curve
Source: PC Bond, a business unit of TSX Inc.
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Investment Outlook
Conclusion: No dramatic change in bond yields
Secular Economic Outlook POS Protracted deleveraging
Inflation Outlook POS Wage costs will remain low
Monetary Policy NEG Policy will tighten, but gradually
Fiscal Policy NEG Deficits, deficits, deficits
Demographics POS Sociological shift to savings
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Expected Returns: Yield Forecasts
Mar 31 ’10Economic Expansion
Sluggish Recovery
Failed Recovery
% % % %
Bank Rate 0.25 2.25 1.25 0.50
2 Year 1.73 3.25 2.75 1.25
10 Year 3.57 4.25 3.50 3.15
Corporate Yield 3.95 4.55 3.75 4.45
Corporate Spread 1.23 0.65 1.00 1.95
RRB Yield 1.51 2.10 1.75 2.25
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Expected Returns: Global Market Forecasts
Expected returns for the period ending March 31, 2011In Canadian Dollars In local currency
Economic Expansion Sluggish Recovery Failed Recovery Economic Expansion Sluggish Recovery Failed Recovery
Probabilities 20.0% 55.0% 25.0% 20.0% 55.0% 25.0%
Canada Money Market 1.3% 0.8% 0.4% 1.3% 0.8% 0.4%
Canada Govt. Bond -2.0% 3.5% 4.9% -2.0% 3.5% 4.9%
Canada Corp. Bond 1.7% 6.0% 2.0% 1.7% 6.0% 2.0%
Canada RRB -2.4% 1.7% -7.8% -2.4% 1.7% -7.8%
International Govt. Bond -4.0% -2.3% 19.1% 0.9% 3.4% 5.2%
Canada Equity 22.3% 7.7% -14.3% 22.3% 7.7% -14.3%
United States Equity 11.2% 7.0% -3.6% 17.3% 9.6% -16.9%
International Equity 21.9% 2.4% -6.5% 24.8% 7.1% -14.8%
Emerging Equity 28.1% 12.6% -14.7% 25.2% 12.6% -17.6%
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– The default rates implied by current credit spreads are well above historical averages.
– Corporate Canada came into the recession in good shape, and still is relatively healthy.
Why Corporate Bonds Offer Good Value
Source: Bank of Canada
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Canadian mid-term corporate spreads over mid-term government bond yields (in basis points) – Despite having
declined from their highs, credit spreads are still above their historical average, providing a good buying opportunity.
Why Corporate Bonds Offer Good Value
Source: PC Bond, a business unit of TSX Inc..
Dec’07Credit Spreads at “crisis levels”
S&P500 @1460
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Spreads have spiked to new highs at each major crisis, but have consistently returned to historical averages afterwards.
High-yield bonds remain attractive, and we have added new issues.
Selection is key. We do rigorous credit research on each issuer.
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+648
+906Dot-Com
+958
9/11 & Enron
+995
Wcom/Tyco/Actg/Mgmt
+466
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Beginning of Sub-Prime Mortgage Crisis
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US Bank Bailout
Plan
+817Russian
Crisis
Bear Stearns Bailout
US Auto Bailout
Plan
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Gov’t Liquidity
HY Inflows
Spread
Year
Source: Merrill Lynch and CIBC Global Asset Management Inc.
Why Corporate Bonds Offer Good Value
US High Yield Spread
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Key Statistics DEX Government Bond Index
DEX Universe Bond Index
CBCY Fund Benchmark*
Average Yield 3.27% 3.49% 4.86%
Macaulay Duration 6.22 years 6.03 years 5.35 years
Average Term 8.98 years 8.76 years 7.78 years
Credit Rating
Investment Grade 100% 100% 80%
High Yield 0% 0% 20%
As at April 30, 2010
* 100% hedged into Canadian dollars
Bond BenchmarksBond Benchmarks
Renaissance Corporate Bond Capital Yield Fund
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Breakeven Inflation (Nominal yield – Real yield)
Source: PC-Bond, a business unit of TSX Inc.
Food inflation scare
Deflation scare
Buy nominals
Buy RRBs
• Think of breakeven inflation as a hurdle rate for RRBs
• The current level is a bit high
• It’s attractive for RRBs at < 1.8%
Interest Rates: Real Return Bonds
Thank You
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