Download Shane Oliver - AMP Capital: Liquidity and investment markets

Presented by
Dr Shane Oliver
Chief Economist & Head of Investment Strategy
AMP Capital Investors
APRA Liquidity Risk Management Conference – May 2007
Liquidity and investment markets
What is liquidity?
z
Monetary liquidity – interest rates, money supply growth, FX
reserves
z
Balance sheet liquidity – are balance sheets cashed up?
z
The operational liquidity of investment markets – the ease with
which assets can be bought and sold
z
The demand for assets relative to their supply
Source: AMP Capital Investors
2
2
The liquidity cycle and the current state of play
z
Liquidity normally follows a similar cycle to the economic cycle –
easiest when economic conditions are tough (as interest rates fall
and balance sheets become cashed up), tightest when conditions
are good (and interest rates rise)
z
But liquidity conditions are still relatively easy despite economic
recovery cycles being relatively mature
Source: AMP Capital Investors
3
3
Liquidity conditions remain favourable
Interest rates are low relative to nominal GDP growth
Interest rate
%
Nominal GDP growth
% pa*
US
5.25
4.8
Germany
3.75
3.9
UK
5.25
6.7
Japan
0.50
1.9
G7 average
4.10
4.7
Australia
6.25
7.1
* Latest available
Source: Thomson Financial, AMP Capital Investors
4
4
Liquidity conditions remain favourable
G7 money supply is rising relative to nominal GDP
10
8
6
Broad money growth less
nominal GDP growth, %
yr on yr (LHS)
Ratio of broad money
to nominal GDP (RHS)
2
1.8
1.6
4
1.4
2
1.2
0
1
-2
0.8
-4
0.6
80 82 84 86 88 90 92 94 96 98 00 02 04 06
Source: Datastream, AMP Capital Investors
5
5
Liquidity conditions remain favourable
Above trend growth in world foreign exchange reserves
50 Annual % change
40
30
20
10
Average
0
-10
-20
80 82 84 86 88 90 92 94 96 98 00 02 04 06
Source: Datastream, AMP Capital Investors
6
6
Liquidity conditions remain favourable
z
Corporate balance sheets are in good shape
z
Household balance sheets are in good shape
….so what is happening?
7
7
Key drivers of the favourable liquidity
environment
z
Solid (but not booming) economic growth and low inflation
Which are in turn driven by the following key factors
z
Globalisation
z
Competition
z
New technology
= a positive supply shock (inverse of 1970’s oil shock)
Source: AMP Capital Investors
8
8
Implications – (1) strong productivity growth
6
5
4
Productivity growth,
annual % change, 3
year average
Developing countries
World
3
2
1
Developed countries
0
-1
-2
90
92
94
96
98
00
02
04
06
Source: IMF, AMP Capital Investors
9
9
Implications – (2) a better growth/inflation
trade-off
Global GDP versus change in inflation
6
5
4
3
2
1
0
-1
-2
-3
-4
-5
Global inflation ,
% change (LHS)
Global GDP growth
(RHS), % year on year
7
6
5
4
3
2
1
0
72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
Source: Datastream, AMP Capital Investors
10
10
China is a classic example of the strong growth/low
inflation story
40
35
Annual % Change
Retail Price Inflation (RHS)
30
30
20
25
10
20
0
15
-10
10
5
Real GDP Growth (LHS)
0
-20
-30
80 82 84 86 88 90 92 94 96 98 00 02 04 06
Source: Datastream, AMP Capital Investors
11
11
Money supply should grow faster than nominal
GDP in a positive supply shock
The quantity theory of money: M x V = P x T
Where:
M = money supply
V = its velocity of circulation
P = price level
T = volume of activity
When there is a positive supply shock T goes up
As inflation and interest rates go down V goes down
So M should be allowed to grow faster than nominal GDP (or P x T) or
else there would be deflation
Source: AMP Capital Investors
12
12
Implications – (3) high profit shares and strong
balance sheets
24
Profits, % GDP
22
14
12
US, after depreciation (RHS)
20
10
18
8
16
6
14
4
12
10
1970
2
Australia (LHS)
0
1975
1980
1985
1990
1995
2000
2005
Source: Thomson Financial, AMP Capital Investors
13
13
Implications – (4) excess labour (emerging mkts)
& capital (easy money), but a shortage of land (eg
high commodity prices)
Economist metal price index, $US
250
230
210
Nominal metal prices
190
170
150
130
110
90
70
50
Real metal prices
30
10
71 74 77 80 83 86 89 92 95 98 01 04
07
Source: Datastream, AMP Capital Investors
14
14
Implications – (5) added impetus to falling
economic volatility. If inflation stays low,
volatility will remain low
Economic volatility has been falling
4
Rolling 10 yr standard deviation of
annual GDP growth
3
US
2
Share market volatility should remain “low”
40
12 month rolling standard
35 deviation of monthly share
price changes
Average of
30
the US, Japan
and Europe
25
20
15
1
10
Australia
0
1960
5
Australia
0
1970
1980
1990
2000
90
92
94
96
98
00
02
04
06
Source: Thomson Financial, AMP Capital Investors
15
15
Favourable liquidity – lots of cash chasing
investments
Unrestrictive
monetary
policy
Positive supply
shock from
China/India,
technology and
globalisation
Solid growth/
low inflation
Strong
balance
sheets
Ample
liquidity
chasing
investments
Confident
lenders &
investors
In the absence of inflation or some blow to confidence this
could go on for a lot longer
Source: AMP Capital Investors
16
16
Market implications
17
17
The shift to low inflation has lead to high (and
rational) capital gains
z
First sovereign bonds - 1980s/90s
z
Then equities - 1990s
z
Then property and infrastructure - this decade
Source: AMP Capital Investors
18
18
Bond yields are now around normal longer
term levels
10 year bond yields, percent
18
16
14
12
10
8
6
4
2
0
1861
Australia
US
1881
1901
1921
1941
1961
1981
2001
Source: Global Financial Data, Datastream, AMP Capital Investors
19
19
Shares – potential for multiple expansion
…stage three of a bull market
30
Forward PE
25
World
20
15
Australia
10
5
88
90
92
94
96
98
00
02
04
06
Source: Datastream, AMP Capital Investors
20
20
Equity risk premiums are around reasonable
levels
Dividend
yield
+ Growth
- Bond
yield
= ERP
Required
ERP
US
1.8
5.2
4.6
2.4
2.5-3.0
UK
3.6
4.2
5.1
2.7
2.3-3.0
Europe
2.7
4.0
4.2
2.5
2.5-3.0
Japan
1.1
3.0
1.7
2.4
2.5-3.0
Asia, ex Japan
2.7
8.0
4.6
6.1
3.5-4.0
World
2.1
4.6
4.3
2.4
2.5-3.0
Australia
3.6
5.7
5.9
3.4
3.0-3.5
Source: Datastream, AMP Capital Investors
21
21
M&A activity is on the rise but still low by past
standards – so could have further to go
35
30
Value of announced M&A
deals, % mkt capitalisation
25
20
Australia
15
10
5
US
0
85
87
89
91
93
95
97
99
01
03
05
Source: Datastream, AMP Capital Investors
22
22
Equity is cheap vs debt – the cost of capital is
below its return – providing an arbitrage
opportunity for private equity takeovers
US
14
Australia
Percent
12
10
8
Forward
earnings yield
6
4
2
10 year bond yield
85 87 89 91 93 95 97 99 01 03 05 07
14
Percent
13
12
11
Forward earnings
10
yield
9
8
7
6
5
10 year bond yield
4
88 90 92 94 96 98 00 02 04 06
Source: Datastream, AMP Capital Investors
23
23
Corporate gearing is relatively low
130
110
Ratio of debt to equity, listed nonfinancial companies, Australia
90
70
50
30
80 82 84 86 88 90 92 94 96 98 00 02 04 06
Source: ABS, Aspect Huntley, RBA, Statex, AMP Capital Investors
24
24
Are we somewhere in the equivalent of 1986?
Aust All Ords price index - Comparison of 1987 to Now
Aug 01 Aug 02 Aug 03 Aug 04 Aug 05 Aug 06 Aug 07
500
500
Indexed to 100 at
Aug 82 and Mar 03
400
400
Jan 1981 to Dec 1987 (bottom)
300
300
200
200
Aug 2001 to
Current (top)
100
0
Jan 81
100
0
Jan 82
Jan 83
Jan 84
Jan 85
Jan 86
Jan 87
Source: Thomson Financial, AMP Capital Investors
25
25
Are emerging markets now the equivalent of
the US in the second half of the 1990s?
z
Main source of global growth
z
Very vibrant and dynamic
z
BRICs as “new paradigm” exciter (like US IT revolution of 1990s)
z
Fuelled by global liquidity boom
Source: AMP Capital Investors
26
26
Non-residential property yields lagged the fall
in other yields, so may have further to fall
14
12
Percent
Earnings yield - Aust shares
Composite nonresidential prop yield
10
8
6
4
2
0
Real bond yield Aust bonds
Residential housing yield
80 82 84 86 88 90 92 94 96 98 00 02 04 06
Source: Jones Lang LaSalle, Datastream, AMP Capital Investors
27
27
The property risk premium is still well above
early 1990’s extremes
8
The non-residential property risk premium
Property risk premium =
6 yld + 2.5% less bond
yld, %pa
Australian unlisted property
4
2
Australian listed property trusts
0
-2
-4
90
92
94
96
98
00
02
04
06
Source: Datastream, AMP Capital Investors
28
28
Hard to see credit spreads narrowing any
further, as increased debt/risk taking occurs
5
50%
US Moody BAA
Credit spread
(LHS)
4
Equity
Volatility 40%
VIX (RHS)
3
30%
2
20%
1
10%
0
0%
86
88
90
92
94
96
98
00
02
04
06
Source: Datastream, AMP Capital Investors
29
29
Conclusion
z
The favourable liquidity environment is being driven by the global
environment of reasonable growth and low inflation
z
This in turn is a function of globalisation, competition and new
technology
z
The favourable liquidity backdrop has the potential to remain in
place for several years pushing asset prices, gearing, etc, to
extremes
z
Things to watch: the US economy, inflation, China, corporate debt
levels
Source: AMP Capital Investors
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30
Thank you
QUESTIONS?
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Important note
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other company in the AMP Group guarantees the repayment of capital or the
performance of any product or any particular rate of return referred to in this
presentation.
Past performance is not a reliable indicator of future performance.
While every care has been taken in the preparation of this document, AMP Capital
Investors makes no representation or warranty as to the accuracy or completeness
of any statement in it including, without limitation, any forecasts.
This document has been prepared for the purpose of providing general information,
without taking account of any particular investor's objectives, financial situation or
needs. An investor should, before making any investment decisions, consider the
appropriateness of the information in this document, and seek professional advice,
having regard to the investor's objectives, financial situation and needs.
This document is solely for the use of the party to whom it is provided.
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