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Transcript
Search for yield and crisis fatigue? Themes for fixed income investors in 2013 For investment professionals only David Oliphant- Head of Investment Grade Credit January 2013 What keeps us up at night? 1. 2012 is going to be a difficult year to follow from a return perspective. 2. Complacency around riskier assets is high 3. Geo-political risks have not been eliminated 1. The Eurozone – what happens if OMT does not work? 2. USA - Going over the fiscal cliff, or a resolution that still leads to near recessionary growth in the US 3. The lack of credit growth fuelling yet another growth scare in H1 2013 4. Japan responds inappropriately to deflationary pressures 5. A relapse in Chinese growth 4. Corporate behaviour could become increasingly bond holder unfriendly 5. Vulnerability in the government bond market and negative real yields PT/12/01953 1 Crisis Fatigue Eurozone progress in 2013 has been impressive. Problem solved or more trouble ahead ? Slow growth is assured but the issue for markets has been more about the stability of the monetary union A checklist for a Eurozone solution PT/12/01953 Open-ended commitments to buy troubled debt P Move current accounts back to surplus P Credible plan to restore primary account surpluses P Get rates in Italy and Spain to non-stressed levels P Retreat from misguided view of severe austerity as the solution P Restructure Greece without inducing contagion P Reduce levels of fiscal drag by 2013 P Cohesive policy view and support from Germany P Structural reforms / competitiveness No, but Ireland shows it can be done Banking / fiscal union No Conditions for OMT bond purchases met and agreed to No Finish deleveraging the banking system No, but will peak in 2012/2013 2 Euro area: fiscal policy tightening in all regions Fiscal tightening, % GDP Lending growth, % year 2012 2013 35 Austria 0.0 -0.9 30 Belgium -1.7 -0.8 25 France -1.1 -1.7 20 Finland -0.4 -0.5 Germany -0.1 -0.2 Greece -3.6 -2.5 Ireland -4.4 -0.4 5 Italy -2.9 -1.7 0 Netherlands -1.1 -1.9 -5 Slovenia -3.7 -1.3 Portugal -1.2 -1.6 Spain -4.1 -2.8 % year % GDP 15 10 -10 04 05 06 07 08 09 10 Spanish households Spanish corporates Italian households Italian corporates Fiscal multiplier in normal times assumed at 0.5 Deposit outflows exacerbate this trend But Greek experience suggests downside risk Greek/Irish experiences worsened from here Austerity will continue to drag into 2013 Source: Threadneedle, ECB, OECD, May 2012. PT/12/01953 3 11 12 Fiscal drag will hinder growth in 2013 The impact however has peaked PT/12/01953 4 Fiscal Cliff -2013 The dynamics of the negotiations of the cliff Fiscal Cliff offers The deal so far is small – to avert a rating downgrade and explosive debt dynamic, the large deal is yet to come 11/29/12 12/3/12 12/12/12 12/15/12 12/17/12 12/18/12 1/1/13 Not over ‘til its over Source: Washington Post January 2013 PT/12/02041 5 Current and primary accounts moving back into surplus! A collapse in imports has been part of the story Greece PT/12/01953 Italy Ireland 6 Portugal Spain Emerging market growth has become more sustainable Slow growth should not dent emerging market debt outperformance Gross debt as % of GDP – spot the pattern 2012 growth estimates 8 120% 110.2% 7 100.6% 6 100% 5 80% 4 77.5% 73.8% 3 60% 2 49.6% 41.1% 1 40% 38.7% 33.2% Emerging Europe Latin America CIS Middle East Asia Emerging markets Euro area Japan UK US -1 Advanced economies 0 20% 0% 2000 2005 Developed 2010 2012E Emerging Better growth, better fundamentals in emerging market bonds A play on the structural shift in the global economy Source: IMF, September 2012 PT/12/01953 7 China – Slower growth but bottoming in 2013 Q3 2012 was the seventh consecutive quarter of decelerating growth and a post-crisis low The economy appears to be close to a cyclical bottom Industrial profits have been very weak but have started to rebound in recent months Leadership transition is almost complete, current policies likely to continue However, external risks remain a concern Real GDP growth (%) Profits of larger industrial firms by ownership (YoY %) 20 30 18 25 State control Collective Foreign & HMT Share Holding Private 20 16 15 14 10 12 5 10 0 8 (5) (10) 6 (15) YoY QoQ saar 4 (20) (25) 2 2007 2008 2009 2010 2011 2012 2012E Jan 12 Source: Threadneedle as at September 2012 PT/12/01953 8 Feb 12 Mar12 Apr12 May12 Jun12 Jul12 Aug12 Sep12 The Debt - Equity cycle Corporate Leverage is low but has stopped improving It’s about 3:00 o’clock, but it’s not clear this is a classic cycle Corporate Leverage falling REPAIR RECOVERY 2H08 onwards 2H 2009 - ? Balance sheet repair, rights issues to pay back debt, focus on cash generation and survival! Credit better than equity 1 The DebtEquity Clock Lower Economic growth DOWNTURN 2H07, 1H08 2 4 PT/11/00506 EXPANSION 2006-07 Margins peak, leverage rising, FCF falling, volatility rising, M&A/LBOs more speculative. Credit bear market starts, equities still in bull market Both Equity and Credit Down Source: Morgan Stanley, October 2011 Both equity and credit up Higher Economic growth 3 Recession. Attempts to delever foiled by falling asset prices. Continued bear market for credit. Equities enter bear market Restructuring efforts boost cashflow. Margins rising, FCF growing, leverage falling Equity better than Credit Corporate Leverage rising 9 Government bond yields and credit spreads Spreads are attractive; core government bond yields are not Government Bond Yields Credit Spreads (UK, US and German 10 year bond yields) (investment grade, high yield & emerging market bonds relative to government yields) 12 25 10 20 Spread (pct) Yield (pct) 8 6 15 10 4 5 2 0 0 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 UK US 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 IG Spreads Germany Source: Bloomberg, October 2012 PT/12/01953 10 HY Spreads EMD Spreads Where to find yield today Investors of all types are demanding income with relative safety Current asset class yields (%) vs. volatility 8% 7% US HY 6% EU HY 5% Yield EM Soverign 4% Eurostoxx FTSE 100 3% US IG S&P 500 2% EU IG UK Gilts CMBS 1% Treasuries Bunds US T Bills 0% 0% 2% 4% 6% 8% 10% 12% Trailing 24 m onth volatility Low yields and higher volatility requires an evolving investment framework Source: Merrill Lynch 31st December 2012 PT/12/01953 11 Where are the opportunities in bond markets? Corporate credit is still attractive despite a powerful rally High Yield spreads are wide relative to defaults 16% Global High Yield YTM 2,000 14% 1,800 13.1% 1,600 11.9% 12% 10.3% 1,400 1,200 7.5% 8% 1,000 7.2% Defaults (2013e) 2.3% Loss Given Default 60% Default Assumptions 8.6% 10% 6.6% 6.9% 800 6% 600 4% Total Expected Default Losses 1.3% Excess Premium Over Default Losses 5.3% 400 2% 200 0 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06 20 08 20 10 20 12 0% Default Rate (LHS) US Spread (RHS) Europe Spread (RHS) Corporate credit quality is still improving relative to sovereign quality Source (left hand chart) Merrill Lynch, JPMorgan as at September 2012. European Spread used is the HPS2 Index. US Spread is H0A0 Index; (right hand table): Merrill Lynch and Threadneedle as at January 2013. PT/12/02041 12 Can bonds deliver respectable total returns? It’s not as bad as you might think Total return projections for various market environments (12-month horizon) 12% 7.5% 8% 4.3% 4% 8.9% 7.1% 4.4% 3.1% 2.0% 0.3% 0% -4% -0.8% -0.3% -0.9% -8% -7.7% -12% Double dip Bunds Slow growth EU Corp EU High Yield Recovery USD Emerging Market Sovereign Recession – Bunds -40bps, IG spread +50bps, HY spread +175bps*, EM spread +100bps Slow growth – Bunds +35bps, IG spread -50bps, HY spread -110bps**, EM spread -65bps Recovery – Bunds +125bps, IG spread -70bps, HY spread -225bps***, EM spread -130bps Source: Bloomberg, Threadneedle as at 31st December 2012. * 4% defaults with a 40% assumed recovery rate ** 2% defaults with a 40% assumed recovery rate *** 1% defaults with a 40% assumed recovery rate PT/12/01953 13 Fixed income – the path forward in 2013 The search for yield is not yet over, as policy rates will remain lower than inflation Valuations in corporate and emerging market bonds are not stretched and these sectors are poised to outperform Core government bonds represent poor value but a spike in yields is not imminent The tug-of-war between reflationary policy and sluggish growth will continue to produce bouts of volatility throughout the year In the eurozone, receding default and break-up risk are the key drivers – expect a better year on that front but with lower returns There will be pockets of good return in fixed income, but adjust your sights lower! PT/12/01953 14 Conclusion Macro economic background is very challenged and there are considerable downside risks Interest rates will stay low for a very long time Yielding assets remain attractive against this backdrop Equity valuations continue to be undemanding Our asset allocation stance reflects a more positive view on equities as tail risks begin to abate PT/12/01953 15 Current asset allocation model Strongly Dislike Dislike Neutral Favour Government Bonds Index Linked Property Commodities Cash Equities Credit Global Equity Region Europe ex UK US Japan UK EM Pacific ex-Japan Global Equity Sector Energy Staples Utilities Telecoms Financials Materials Industrials Consumer Cyclicals Healthcare Japan Germany US UK Nordic Australia EM Local Sterling Investment Grade EM Debt European High Yield Asset Allocation Bond - FX Hdgd Credit Commodity FX JPY AUD Technology Base Metals Softs Grains Livestock Precious Metals Energy Euro GBP Nordic USD Portfolio Risk X Source: Threadneedle, November 2012. PT/12/01953 Strongly Favour 16 Threadneedle Absolute Return Fixed Income Product Range Benchmark Performance objective Asset class focus Launch date Relative performance since inception Global Opportunities Bond Fund Absolute Return Bond Fund Credit Opportunities Bond Fund Absolute Emerging Markets Macro Fund 1M $ LIBOR 3M Libor 1M EURIBOR 3M $ LIBOR BM +4.5% gross BM +3.0% gross BM +3.5% gross 7.5%–12.5% net Diversified global Macro, Developed Governments, Rates, FX Credit – Investment Grade and High Yield Emerging market sovereign, local and international currency and FX August 2011 October 2005 May 2009 September 2010 +7.29% +1.99% p.a. +6.79% p.a. +3.37% p.a. Source: Threadneedle / FactSet as at 31 July 2012. Gross performance from 31 March 2010 onwards is based on daily cash flows and valuations, from 1 January 2008 to 31 March 2010 based on Global Close prices, and prior to January 2008 based on 12pm prices. Fund data is quoted on a bid to bid basis with gross income reinvested at bid. Fund returns calculated Gross of TER (and Tax) for comparison with index. The relative returns shown are calculated on a geometric basis and are annualised. PT/12/01108 17 Threadneedle absolute return funds’ performance UCITS absolute return funds Launch date Ccy. 2012 2011 2010 2009 2008 2007 2006 2005 2004 Absolute Return Bond Fund Oct 2005 GBP 0.48 0.59 -1.17 3.16 13.50 6.93 2.86 - - 3.35 2.76 Target Return Fund Apr 2008 EUR -0.14 1.16 -1.26 3.33 11.28 4.92 - - - 2.80 2.82 Target Return Core Fund1 Jun 2008 EUR -2.66 1.80 0.30 2.14 3.22 - - - - 1.09 1.54 Target Return (USD) Fund Aug 2009 USD 0.07 -1.77 -1.21 - - - - - - -1.07 2.59 Credit Opportunities Fund2 Apr 2009 EUR 6.78 0.27 7.43 7.43 - - - - - 5.64 3.11 Absolute Emerging Market Macro Fund Sep 2010 USD 11.88 -0.76 -3.33 - - - - - - 3.20 n/a Global Opportunities Bond Fund Aug 2011 USD 6.54 1.80 - - - - - - - 6.28 n/a American Absolute Alpha Fund Jun 2010 USD 4.52 3.61 1.70 - - - - - - 3.93 n/a UK Absolute Alpha Fund Sep 2010 GBP 2.37 3.81 3.89 - - - - - - 4.68 n/a European Smaller Companies Absolute Alpha Fund Mar 2011 EUR 3.73 1.94 - - - - - - - 3.24 n/a Source: Morningstar as at 31 December 2012. Performance stated net of fees. Net performance based on noon prices, unadjusted income reinvested. Volatility based on annualised standard deviation. 1 Performance data for 2008 since launch of Threadneedle Target Return Core Fund in June 2008. 2012 performance data to 31 October 2012 due to fund closure. 2 Performance data for 2009 since launch of Threadneedle Credit Opportunities Fund in April 2009 PT/11/00780 18 Since inc. Volatility (p.a.) ( p.a.) 1 Appendix Core Government bond yields US 10 year note less core inflation 8 7 Adjusted for inflation Government bond yields have rarely been more expensive 5 This reflects risk aversion 4 The path to credit downgrade 3 But……….. little likelihood for a spike higher until rates change direction Real Yields % 6 2 1 0 -1 -2 75 78 81 84 87 90 93 96 99 02 05 08 11 Real Yield Source: Bloomberg as at 31 December 2012. PT/12/01953 20 Heightened fear of corporate defaults Implied investment grade defaults Current iTraxx Main Index 103 bps Assumed recovery rate 40% 20% 5-year assumed default rate 7.1% The € CDS Credit Market is implying a high level of Investment Grade defaults in the coming years At current spread of around 133, European Credit market is discounting 11.1% cumulative default probability (on a 40% recovery assumption). Itraxx Main Index is a basket of 100 Corporate and 25 Senior Financial issuers Historic experience has been far less than this Average 5-year default experience is 0.8% Worst cohort exhibited 2.4% in last 40 years ‘Great Depression’ estimated at around 5% But how to price the risk of redenomination of the Euro? 5.4% Market default expectations are still running high Source: Bloomberg as at 7 January 2013 PL12/10/078 21 Historical default experience is very different 5-year cumulative default rate history 2.00% 1.50% 1.00% 0.50% 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 1979 1978 1977 1976 1975 1974 1973 1972 1971 0.00% 1970 Cumulative default rate 2.50% Historically IG Corporate defaults are very low Source: JPMorgan 2012 PL12/10/078 22 Important notes For institutional clients, distributors, intermediaries and consultants only (not to be passed on to any third party). Past performance is not a guide to future performance. The value of investments and any income from them can go down as well as up. The research and analysis included in this document has been produced by Threadneedle Investments for its own investment management activities, may have been acted upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed. The mention of any specific shares or bonds should not be taken as a recommendation to deal. This presentation and its contents are confidential and proprietary. The information provided in this presentation is for the sole use of those attending the presentation. It may not be reproduced in any form or passed on to any third party without the express written permission of Threadneedle Investments. This presentation is the property of Threadneedle Investments and must be returned upon request. This presentation is not investment, legal, tax, or accounting advice. Investors should consult with their own professional advisors for advice on any investment, legal, tax, or accounting issues relating an investment with Threadneedle. Threadneedle Asset Management Limited. Registered in England and Wales, No. 573204. Registered Office: 60 St Mary Axe, London EC3A 8JQ. Authorised and regulated in the UK by the Financial Services Authority. Threadneedle Investments is a brand name and both the Threadneedle Investments name and logo are trademarks or registered trademarks of the Threadneedle group of companies. www.threadneedle.com PT/12/01953 23