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Transcript
WHAT WILL THE GLOBAL RECOVERY LOOK LIKE AND WHAT ARE THE
INVESTMENT IMPLICATIONS?
September 2009
Sharper Thinking
From Armageddon .............
•
The Armageddon scenario has slowly unwound since early March:
-
Equities have recovered strongly.
-
Commodity markets have rallied.
-
Credit spreads have fallen.
-
Volatility measures have fallen to pre-Lehmann levels.
- Money market rates have normalised.
Sharper Thinking
World Equities Have Rallied Strongly Since Early March
Sharper Thinking
Volatility Has Fallen As Risk Aversion Has Declined
Sharper Thinking
Money Market Rates Have Normalised
Sharper Thinking
...........To V Shaped Recovery?
•
Growing evidence that global economies recovering.
•
Growing belief in a V shaped recovery.
•
Thanks to unprecedented monetary and fiscal stimulus.
•
China is leading the way.
•
Plenty of liquidity and low interest rates.
•
Surprisingly solid corporate earnings have helped.
Sharper Thinking
Equity And Credit Markets Are In A Sweet Spot
•
Policy measures will stay very accommodating.
•
Thanks to deflationary pressures and low global inflation.
•
And doubts over the sustainability of the recovery.
•
Plentiful and cheap global liquidity.
•
Valuations remain favourable.
•
Sentiment remains sceptical.
•
M&A will likely pick up.
Sharper Thinking
Initial Rallies From Major Bear Market Lows
Bear Market Low
Size of Bear Market
Subsequent Rally
Duration of Rally
November 1903
46%
143%
26 Months
November 1907
48%
89%
24 Months
August 1921
46%
65%
19 Months
July 1932
85%
94%
2 Months
March 1938
55%
60%
8 Months
December 1974
48%
75%
16 Months
October 2002
49%
47%
16 Months
March 2009
54%
58%
6 Months
Source: S&P 500 Index
Sharper Thinking
Distribution Of Equity Returns Versus Growth
Sharper Thinking
The 3 Stages of a Bull Market
•
Stage 1
-
A few forward-looking people begin to believe things will get
better.
•
Stage 2
-
Most investors realise that improvement is actually underway.
•
Stage 3
-
Everyone’s sure things will get better forever.
The 3 Stages of a Bear Market
•
Stage 1
-
A few prudent investors recognise that, despite the prevailing
bullishness, things won’t always be rosy.
•
Stage 2
-
Most investors recognise that things are deteriorating.
•
Stage 3
-
Everyone’s concerned things can only get worse.
Sharper Thinking
However Equities May Consolidate or Correct In The Short Term
•
Technical indicators are overbought and signalling a correction.
•
Is China about to tighten policy?
•
The cyclical bull market could be in a transition phase.
•
The risk of policy error is growing.
•
September/October are often difficult months.
•
We would view any correction as an opportunity to increase equity exposure on
a 6-12 month view.
Sharper Thinking
What Are The Key Risks?
•
The recovery is too strong prompting an early policy tightening.
•
The recovery in not sustainable after “life support” is switched off.
•
Policy error i.e. over-regulation, trade wars etc.
•
Growing fiscal deficits and government debt levels.
•
Will inflation return?
•
More problems in the banking sector i.e. consumer debt, East Europe.
•
Will the global rebalancing work?
Sharper Thinking
Essence Of The US Economic Crisis
Sharper Thinking
Fiscal Stimulus Packages As A Percentage Of GDP In 2009
Sharper Thinking
Creating a Major Long-Term Debt Problem
% of GDP
Public Sector Net Debt as a % of GDP
100
90
80
70
60
50
40
30
20
10
0
1975
IFS baseline forecast plus banking rescue cost
Treasury forecast
2000
2025
2050
Source: ONS / Institute for Fiscal Studies (IFS)
Sharper Thinking
Worldwide Financial Write-down's
Sharper Thinking
When Will Policy Likely Be Tightened?
•
Global deflationary forces are still dominant and powerful.
•
Policy makers are making it clear that they will stay accommodative.
•
High degree of uncertainty regarding strength, magnitude and speed of recovery.
•
The global output gap remains large.
•
US (and others) may see sustained price declines for the first time since 1940’s.
•
No tightening before unemployment rates are declining.
•
Policy unlikely to change very much for at least 6 – 9 months.
Sharper Thinking
Inflation Is Not A Problem Yet!
Source: BCA Research 2009
Sharper Thinking
Every Banking Crisis Is Deflationary
•
The Multiplier (Irving Fisher)
M
(Money Stock)
X
V
=
(Velocity of Money)
P
(Price Inflation)
X
Q
(Economic Growth)
•
As the velocity of money has collapsed, either inflation falls, or growth or BOTH.
•
Increased money alone will not fix the problem.
•
The global economy needs easier monetary conditions AND the return of more
normal lending/borrowing conditions.
•
Good news: collapsing inflation will make it easier to take the necessary action.
•
Authorities are now targeting the velocity of money.
Sharper Thinking
Are We Returning To A Deflationary Boom?
Sharper Thinking
It’s Still Too Early To Call A New Secular Bull Market
1982 to 2000 – Market rallied 1250%
The market rally produced annualised returns of c.15%.
There were however 2 significant events, the stock
market crash of 1987 when the market fell 35% in 2
weeks and LTCM in 1998 when the market fell 20% in 1
month.
1920 to 1929 – Market rallied 490%
1929 to 1932 – The ‘Great Depression’
triggered a market fall of 90%
1963 to 1982 – Market moved sideways!
1932 to 1963 – Market rallied 1850%
An investment in the market between 1963 and 1982
would have produced no capital gain. Inflation however
would have eroded any capital investment. There were
also significant peaks and troughs in the market - 4 periods
when the market rallied in excess of 40% and 4 periods
when the market fell more than 40%.
Sharper Thinking
China – Becoming A World Leader
•
For the first time since WW11, China is leading global recovery.
•
China was the first to implement an aggressive fiscal stimulus in late 2008.
•
China now contributes more to global growth than all developed economies put
together.
•
China is the world’s third largest economy and will soon overtake Japan.
•
For most countries, China is now a top three trading partner.
•
China is either the first or second largest consumer of most commodities.
•
China is in a demographic “Sweet Spot”.
Sharper Thinking
China – Some Interesting Facts
•
30,000 MBA students expected to graduate in 2008 (1998 = 0).
•
649.7 million mobile phones in circulation in 2008.
•
500 coal fired power plants to be built in China by the next decade.
•
30 Nuclear power plants currently being built.
•
160 cities with population > 1 million (US = 9 & UK = 2).
•
97 new airports to be built in the next 12 years (total = 244 by 2020).
•
80% of world’s toys are made in China.
•
70% of world’s pirated goods come from China.
•
6.3 million passenger cars are registered (2004 = 2.4 million).
•
5 million will visit ski resorts this year (1999 = 500).
Source: Gavekal
Sharper Thinking
China’s Growth is Having A Global Impact
Sharper Thinking
How Has China Contributed To Global Recovery?
•
China was the first to aggressively stimulate both fiscally and monetary.
•
Much of the money has gone into infrastructure spending.
•
Which should lead to higher productivity growth.
•
And which has triggered a stock-piling of materials.
•
Focus on social spending to encourage less saving and more consumption.
•
Asset prices have stabilized or soared.
•
Chinese liquidity has supported other global markets.
Sharper Thinking
Chinese GDP Is Misunderstood
Sharper Thinking
China – Where Now From Here?
•
China has all 3 pillars for a sustained bull market:
–
–
–
Attractive valuations.
Superior economic growth.
Excess liquidity.
•
China is still very early in its industrialization.
•
China is in economic transition from export led to more balanced growth.
•
Chinese consumption is growing faster than any other country.
•
China is rapidly deregulating and opening up its capital markets.
•
China can sustain its high growth rate: productivity and population growth.
Sharper Thinking
China: Still In Early Stages Of Industrialization
Sharper Thinking
China Is A Key Factor For The Global Economy And Markets
•
The world needs a strong China.
•
As relations with Japan thaw, the whole Asian region will benefit.
•
China is focused on preventing asset bubbles through overly loose credit growth.
•
But will not tighten policy to threaten its recovery or long term ambitions.
•
Investors will focus increasingly on what China says and does.
•
The RMB will gradually appreciate but will not threaten the Dollar in the short-tomedium term.
Sharper Thinking
Formulating A Sensible Investment Strategy
•
The global economy is in a major period of transition.
•
Will 2009 be the year that China finally becomes a world power?
•
It remains a very challenging investment environment.
•
We are cyclically bullish but tactically cautious.
•
We strongly advocate an absolute return approach for most clients.
Sharper Thinking
Rationale - The Case for Absolute Return Approach
•
For most investors, beating cash net of all fees is a minimum objective.
•
For most investors, managing risk = minimising loss of capital.
•
Thus, absolute return (cash-plus) investing is growing in popularity.
•
Many investors will be disappointed with their manager’s performance in 2008.
•
Liquidity has also become a real issue as many funds restrict/close to redemptions.
•
Cash is unattractive but it remains a challenging investment environment.
Sharper Thinking
UK Asset Real Returns (% pa)
50 Year Real
Returns
20 Year Real
Returns
10 Year Real
Returns
UK Equities
7.2%
6.7%
3.1%
Gilts
2.4%
5.1%
3.3%
Sterling Cash
2.0%
3.5%
2.5%
Absolute Return (Cash Plus 4%)
6.0%
7.5%
6.5%
• In the long term, an absolute return approach should deliver similar returns to
a market benchmark approach (relative) but with reduced risk and a higher
degree of consistency.
Source : 2008 Barclays Equity Gilt Study
Sharper Thinking
Rationale – Our Approach To Absolute Return Investing
•
We believe in a multi-strategy and multi-asset approach.
– Flexibility of mandate and tools available.
– Markets and asset class returns are still cyclical.
– Diversification benefits of access to all asset classes.
– Ability to trade short/medium term.
– Better liquidity.
– Need to be active, flexible and adaptable to meet objectives.
– A higher beta (participation) in bull markets.
•
Management team have a proven track record of success in managing money this
way.
Sharper Thinking
Strong Risk Management
•
We view risk as absolute loss first and volatility second.
•
We view risk as multi-dimensional and fluid.
•
We will take risk when we have conviction and are being adequately rewarded.
•
We will reduce risk through diversification, but will focus on higher conviction
positions.
•
Asset allocation and market timing are key to managing risk.
•
Risk monitoring is an integral and ongoing part of our process.
•
Derivatives will be used from time to time.
Sharper Thinking
Hedge Funds Have Recovered
Sharper Thinking
Hedge Funds Will Survive and Evolve
•
The Hedge Fund industry is rapidly shrinking.
–
–
–
–
Poor performance.
Reduced leverage.
Redemptions.
Increased regulation/transparency.
•
Surviving managers/funds will have stronger business model and lots of opportunity.
•
Performance has improved in 2009 but disparity of returns is large and indices are
subject to survivor bias.
•
Industry will evolve into liquid, transparent strategies and longer lock-up, specialist
managers.
•
Liquidity is still a key consideration.
Sharper Thinking
Our Current Investment Strategy
•
We have taken profits and reduced risk in short term.
•
We will use any weakness in equities to increase exposure.
•
Market leadership will likely change in next phase of recovery.
•
Government bonds offer little long term value but present trading opportunities.
•
Credit markets are still in a “Sweet Spot” but stock selection is key.
•
Gold is in a bull market.
•
We favour selected emerging market currencies.
•
Liquidity remains key.
•
As always we will remain adaptable. nimble and flexible.
Sharper Thinking
Our Current Asset Allocation
Sharper Thinking
•
•
•
•
This document is for the information of clients and prospective clients of Spearpoint Limited and is not intended
as an offer or solicitation to buy or sell securities. Spearpoint Limited does not make any warranties, express or
implied, that the products or services referred to are available in your jurisdiction. Accordingly, if it is
prohibited to advertise or make the products or services available in your jurisdiction, or to you (by reason of
nationality, residence or otherwise) such services are not directed at you. The information given is believed to
be correct but cannot be guaranteed and opinions constitute the judgment of Spearpoint which are subject to
change. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some
investors.
You should consult the investment adviser handling your portfolio before contemplating any investment or
transaction. You must be aware that prices may fall as well as rise and that all investments are subject to risk,
including the risk that you may lose all the money that you have invested. Income can fluctuate and is not
guaranteed and past performance is no guarantee of future performance. Where investment is made in
currencies other than the investor’s base currency, movements in exchange rates may have an independent
effect, which may be favorable or unfavorable, on the gain or loss otherwise accruing to the value of the asset.
The availability and value of tax relief depends on individual circumstances. Any tax rules referred to are those
applying under current legislation, which may change. If you have doubts about your tax position, you should
seek professional advice. This statement should be read in conjunction with Spearpoint’s current terms of
business. Redistribution or republication of the material contained in this document is strictly prohibited. All
rights reserved.
Spearpoint is licensed and regulated by the Guernsey Financial Services Commission, Jersey Financial Services
Commission and is a member of and complies with the rules and regulations of the London Stock Exchange.
Spearpoint is registered in Guernsey.
Sharper Thinking