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BMO Asset Management
Investment Strategy - Resources
Gavin Graham
Director of Investments
February 2009
For internal use only
BMO Guardian Funds
History
Established in 1962
Wholly-owned by BMO Financial Group since 2001
Currently
$3.6 billion in assets under management
Comprehensive offering of investment products
1
Investment Strategy, February 2009
BMO Guardian Funds
Investment management by 15 world-class firms that together manage over $1.6 trillion
2
Investment Strategy, February 2009
S&P 500 Annual Returns
2008 3rd Worst on Record
Source: Morgan Stanley Research/ Bloomberg
3
Investment Strategy, February 2009
Third worst selloff in TSX in last 50 years
Source: StrategEcon – October 31, 2008, CIBC World Markets Inc.
4
Investment Strategy, February 2009
Sell off in TSX greater than average for indexes suffering
financial crisis
Source: StrategEcon – October 31, 2008, CIBC World Markets Inc.
5
Investment Strategy, February 2009
15 Year Holding Period Returns are back in Negative Territory
S&P 500 Real T otal Return - Compound Annual Rate
15 Year Holding Periods
Median: 8.00
Average: 7.48
15
15
10
10
5
5
0
0
-5
-5
1945
1950
1955
1960
1965
1975
1980
1985
1990
Returns lined up to start of 15 year holding period
M2559
Source: TD Newscrest, John Aitkens
6
1970
Investment Strategy, February 2009
1995
2000
2005
2010
JAN 1994
Strong rebounds in indexes after historical bear markets –
S&P 500
* Some market analysts (notably Stock Traders Almanac) break the 2001-2002 bear market into two separate bear markets. A 2000-2001 bear market
associated with the 2001 recession and the 2002 bear market attributed to the earnings scandal focused on Enron and Worldcom
Source: TD Newcrest, John Aitkens
7
Investment Strategy, February 2009
In the Great Depression the US Devalued in an attempt to
Stimulate its Economy…
Value of U.S. Dollar Against French Franc (Gold Backed) (
Consumer Price Index Level (
)
100
100
90
90
80
80
70
70
60
60
50
50
1931
M1464
Source: TD Newscrest, John Aitkens
8
)
Investment Strategy, February 2009
1932
1933
Jan 1931 indexed to 100
1934
DEC 1934
And Commodity Prices Rose Sharply.
Commodity Price Index
Industrial and Agricultural
105
105
100
100
95
95
90
90
85
85
80
80
75
75
1931
M3987
Source: TD Newscrest, John Aitkens
9
Investment Strategy, February 2009
1932
1933
Source: BLS
1934
DEC 1934
U.S. and Canadian Interest Rates Have Declined to a
75 Year Low
7.0
Interest Rates (%)
6.0
5.0
4.0
Federal Reserve
3.0
2.0
Bank of Canada
1.0
0.0
12/99 5/00 10/00 3/01 8/01 1/02 6/02 11/02 4/03 9/03 2/04 7/04 12/04 5/05 10/05 3/06 8/06 1/07 6/07 11/07 4/08 9/08
Sources: Bank of Canada, U.S. Federal Reserve
10
1.0%
Investment Strategy, February 2009
As of Jan 31, 2009
0-0.25%
The Fed is acting much faster than Japan did in the 1990s…
Source: StrategEcon – October 31, 2008, CIBC World Markets Inc.
11
Investment Strategy, February 2009
Following Sweden’s example, which saw its market recover
rapidly
Source: StrategEcon – October 31, 2008, CIBC World Markets Inc.
12
Investment Strategy, February 2009
Yield Curve Offers Substantial Support
U.S. Treasury Yields
5.0
12/31/06
4.0
Yield (%)
3.0
12/31/07
2.0
1.0
Current
0.0
3 Mth
6 Mth
1 Yr
Source: U.S. Department of the Treasury
13
Investment Strategy, February 2009
2 Yr
3 Yr
5 Yr
7 Yr
10 Yr
As of February 12, 2009
20 Yr
… But the Bond Market is a Leading Indicator… The U.S. is in
Recession
10.0
Yield curve
first inverts
8.0
Yield curve
first inverts
Yield curve
first inverts
Yield curve
first inverts
US Real GDP (yoy% chg)
6.0
4.0
2.0
S&P 500
peaks
0.0
-2.0
S&P 500
peaks
Mar-73
S&P 500
peaks
S&P 500
peaks
-4.0
Mar-70
S&P 500
peaks
Mar-76
Mar-79
Mar-82
Mar-85
Mar-88
Mar-91
Mar-94
Mar-97
Mar-00
Mar-03
Mar-06
Shaded areas represent periods of U.S. recession
Source: BEA, The Globe and Mail
14
Investment Strategy, February 2009
As of December 31, 2008
Mar-09
Resulting in a Sharp Slowdown in U.S. Economic Growth
% Change in U.S. GDP
10.0
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
-6.0
99/Q2
00/Q2
01/Q2
02/Q2
Source: Bureau of Economic Analysis
15
Investment Strategy, February 2009
03/Q2
04/Q2
05/Q2
06/Q2
07/Q2
As of December 31st, 2008
08/Q2
Which Will Likely See the Deepest Recession in 25 Years
U.S. Real GDP - Blue Chip Consensus Forecast
Qtr/Qtr %Change Annual Rates
6
6
Consensus Forecast
Annual avg
4
4
3.1
2.1
2
2
0
0
-2
-2
-4
-4
-6
-6
2006
2007
2009
2010
Latest consensus survey, released February 10th
Q178
Source: TD Newscrest, John Aitkens
16
2008
Investment Strategy, February 2009
2011
2008:4
Despite the falls in Government bond yields, spreads on even good
quality bonds, such as provincials, have widened to record levels
Source: TD Newscrest, John Aitkens
17
Investment Strategy, February 2009
As have investment grade bonds
Source: TD Newscrest, John Aitkens
18
Investment Strategy, February 2009
Is Quantitative Easing Starting to Work?
U.S B-Rated Corporate Bond Yields are starting to pull back…
20.0%
17.5%
15.0%
12.5%
10.0%
7.5%
5.0%
1
/3
2
1
00
/2
7
9
/2
1
0
00
/2
8
6
/2
2
0
00
/2
8
6
/2
3
0
00
/2
8
3
/2
4
0
00
/2
8
Source: The Globe & Mail, January 7, 2009
19
Investment Strategy, February 2009
1
/2
5
0
00
/2
8
7
/1
6
0
00
/2
8
5
/1
7
0
00
/2
8
2
/1
8
0
00
/2
8
8
/0
9
0
00
/2
8
6
/0
0
1
00
/2
8
3
/0
1
1
00
/2
8
0
/3
1
1
00
/2
8
9
/2
2
1
00
/2
8
Deflation and Deleveraging
Source: RBC Capital Markets, September 2, 2008
20
Investment Strategy, February 2009
Poor Economic Indicators…
Source: RBC Capital Markets, September 2, 2008
21
Investment Strategy, February 2009
Global Industrial Production is Plummeting Sharply Reducing
the Demand for Commodities…
Global Industrial Production
%Change Year/Year
8
8
Global
OECD
6
6
4
4
2
2
0
0
-2
-2
-4
-4
-5.2
-6
-6
-7.6
-8
90
91
92
93
94
95
96
98
99
00
01
02
03
04
05
Shaded Areas Represent U.S. Economic Recessions
M1826
Source: TD Newscrest, John Aitkens
22
97
Investment Strategy, February 2009
06
07
08
09
-8
10
NOV 2008
And Hence their Prices…
200
Industrial Commodity Prices
Indexed to 100 in 1981
200
CRB Spot Industrials
180
180
160
160
140
140
120
120
100
100
80
80
82
84
86
88
90
94
96
98
00
02
Shaded Areas Represent U.S. Inventory Corrections
M649
Source: TD Newscrest, John Aitkens
23
92
Investment Strategy, February 2009
04
06
08
JAN 2009
Led by U.S. Auto Sales…
22
U.S. Motor Vehicle Sales - Millions Annual Rate
Cars and Light T rucks - Domestic & Imported
22
12 Month Average
20
20
18
18
16
16
14
14
12.64
12
12
10
10
9.54
8
8
82
84
86
88
90
94
96
98
00
02
04
Shaded Areas Represent U.S. Economic Recessions
M477
Source: TD Newscrest, John Aitkens
24
92
Investment Strategy, February 2009
06
08
10
JAN 2009
And U.S. Housing…
2000
U.S. Single-Family Housing Starts
T housands
2000
12 Month Average
1800
1800
1600
1600
1400
1400
1200
1200
1000
1000
800
800
600
600
400
-53.7% Yr/Yr
200
200
82
84
86
88
90
92
94
96
98
00
02
04
Shaded Areas Represent U.S. Economic Recessions
M10
Source: TD Newscrest, John Aitkens
25
400
Investment Strategy, February 2009
06
08
10
12
JAN 2009
However, America No Longer Driving the Bus
Percentage of World GDP Growth, 2004-07
Oil Exporters* 10%
China 30%
Other 31%
Emerging Asia,
ex-China 17%
U.S. 12%
* OPEC, Russia and Mexico
26
Investment Strategy, February 2009
Source: CIBC World Markets
Positive Secular Driver Continues
27
Investment Strategy, February 2009
Asian Industrial Production Plummeting
Asian Industrial Production
%Change Year/Year of T hree Month Average
30
30
S. Korea
Thailand
Japan
Taiwan
20
20
10
10
0
0
-7.7
-10
-10
-11.9
-14.4
-20
-20
-24.3
-30
-30
97
98
99
00
M1020
Source: TD Newcrest, John Aitkens, Feb, 2009
28
Investment Strategy, February 2009
01
02
03
04
05
06
07
08
09
DEC 2008
But US Exports Not the Main Driver of Asian GDP
Nation
Export share of
GDP
US share of
exports
Japan
15
23
Korea
37
13
China
37
21
Taiwan
59
14
ASEAN*
73
14
* 10 Southeast Asian countries with a combined GNP of $1 trillion
JP Morgan, 2007
29
Investment Strategy, February 2009
For Resources, we may be in a Cyclical Bear
Market but a Secular Bull Market….
Cyclical
Dynamic
Long-term
Trend
1980
30
Investment Strategy, February 2009
Are we here
today?
2008
Time
Some Seasonal & Cyclical Risks
•
•
•
•
•
•
31
China GDP Growth Slows to 7%
Unrest in China & India
Low Oil Revenues Causes Unrest In The Middle East
US Recession Deeper Than Expected
World Deflation vs Weakening Dollar
Naysayers Teetering Into Depression???
Investment Strategy, February 2009
The Cyclical Bear
• USA Officially In Deepening Recession
• Manufacturing is 85% of China’s Exports
• Exports Are 1/3 GDP (excl Imports)
The Good News
• Huge Stimulus Package unveiled In China 10% of GDP
• Infrastructure Spend; Tax Relief ; Low Interest Rates
• China Centrally Planned Economy
32
Investment Strategy, February 2009
Asia’s Growing Ability to Consume
GDP per Capita (US$)
$45,000
$2,500
$35,000
Japan
$2,000
$25,000
Hong Kong
$1,500
Thailand
China
Singapore
Korea
Taiwan
$15,000
$1,000
Indonesia
India
$500
$5,000
1980
1985
1990
1995
2000
Sources: CEIC and Bloomberg
33
Investment Strategy, February 2009
1980
1985
1990
1995
2000
China Urbanization
Source: BHP Billiton
34
Investment Strategy, February 2009
Urbanization Leads to a Major Increase in Commodity
Demand…
35
Investment Strategy, February 2009
Real Commodity Prices are Back Down to Bear
Market Levels
Source: Bloomberg, The Economist, Jones Heward
36
Investment Strategy, February 2009
And are Still Cheap vs. Stocks even with the
Bear Market
37
Investment Strategy, February 2009
An 18 Year Bear Market in Commodities against
Financial Assets
Source: Bloomberg, Jones Heward
38
Investment Strategy, February 2009
US$ Commodities Index Drives TSX Index
Source: Bloomberg
39
Investment Strategy, February 2009
US$ Commodities Index Drives TSX Resources
Source: Bloomberg
40
Investment Strategy, February 2009
Canadian Dollar – To Parity and Back!
1.10
1.00
0.90
0.80
81
0.70
Source: Bloomberg
41
Investment Strategy, February 2009
/0
8
12
/0
6
12
/0
4
12
/0
2
12
/0
0
12
/9
8
12
/9
6
12
/9
4
12
/9
2
12
/9
0
12
/8
8
12
/8
6
12
/8
4
12
/8
2
12
/8
0
12
/7
8
12
/7
6
12
/7
4
12
/7
2
12
12
/7
0
0.60
As of Jan 31, 2009
Having Performed Relatively Well Over the Last 5 Years…
5-Year Returns to January 31, 2009
10%
8%
6%
4%
TSX Com posite
2%
DAX
0%
-2%
Nikkei 225
-4%
-6%
MSCI World
S&P 500
Nasdaq
-8%
Source: Bloomberg; (CDN$)
42
FTSE 100
Investment Strategy, February 2009
…Canadian Equities Have Lagged Over the Last Year…
1-Year Returns to January 31st, 2009
8%
4%
0%
-4%
-8%
-12%
-16%
Nikkei 225
-20%
-24%
Nasdaq
-28%
MSCI World
-32%
TSX Com posite
-36%
-40%
Source: Bloomberg; (CDN$)
43
S&P 500
Investment Strategy, February 2009
DAX
FTSE 100
…With Financials Continuing to Lag
1-Year Returns to January 31st, 2008
40%
30%
20%
10%
0%
-10%
-20%
-30%
Consum er
Staples
Health Care Telecom m
Serv.
Utilities
Industrials
-40%
-50%
-60%
Source: Bloomberg; (CDN$)
44
Investment Strategy, February 2009
Materials
Info. Tech.
Energy
Cons. Disc.
Financials
Oil Exports Are Falling…
OPEC, Russia and Mexico (2005-2012)
Source: CIBC World Markets
45
Investment Strategy, February 2009
Due to Soaring Rates of Car Ownership in Russia, China and
Elsewhere
Source: CIBC World Markets, Sept 2008
46
Investment Strategy, February 2009
Investment in the Global Energy Sector
Source: Merrill Lynch Research
47
Investment Strategy, February 2009
….But These Investments Are Not Yielding Increases In
Supply
Source: IEA, Merrill Lynch Commodity Research
48
Investment Strategy, February 2009
Depletion Adds to Needed Capacity Growth
Source: CIBC World Markets
49
Investment Strategy, February 2009
Investment Opportunities In The Top 10 Resource Holders Have
Been Reduced
Source: Merrill Lynch Research
50
Investment Strategy, February 2009
Little New Supply Due to Low Real Commodity Prices
CRB Index Jan. 1973 – Dec. 2007
4.0
3.5
Commodity Research
Bureau Spot Index
3.0
2.5
2.0
1.5
Commodity Research Bureau Spot Index
Deflated by U.S. Consumer Price Index
1.0
0.5
0.0
Jan-73 Jan-75 Jan-77 Jan-79 Jan-81 Jan-83 Jan-85 Jan-87 Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07
Source: Bloomberg, Ibbotson
51
Investment Strategy, February 2009
Ag Commodities Lower Over 4 Decades in Real Terms
Source: TIS Group, [date]
52
Investment Strategy, February 2009
Gold Inflation Adjusted by CPI is Only Back to Level of Early
1970s
Source: TIS Group, [date]
53
Investment Strategy, February 2009
Energy Prices: Likely to Remain Higher than
Many Expect
Crude Oil Prices
Crude Oil Prices
$70.00
$65.00
$60.00
$50.00
$45.00
$40.00
Source: Bloomberg
54
Investment Strategy, February 2009
Dec-09
Nov-09
Oct-09
Sep-09
Aug-09
Jul-09
Jun-09
May-09
Apr-09
Mar-09
Feb-09
Jan-09
$35.00
Dec-08
US$/bbl
$55.00
February 2009
March 2009
April 2009
May 2009
June 2009
July 2009
August 2009
September 2009
October 2009
November 2009
December 2009
44.60
48.59
50.57
51.96
53.16
54.31
55.36
56.30
57.13
57.93
58.73
Average
$53.51
December 2009
December 2010
December 2011
December 2012
58.73
66.23
69.94
71.67
As of December 31, 2008
Gold Breaking Out In all Currencies…
Value of Gold
Indexed to 100 at T rough
140
140
EURO
USD
JPY
130
130
120
120
110
110
100
100
Oct
Nov
2008
Jan
Indexed to 100 at Trough
D307
Source: TD Newscrest, John Aitkens
55
Dec
Investment Strategy, February 2009
Feb
2009
Mar
20 FEB 09
But Gold Stocks Massively Underperformed
T SE Gold & Silver Index
Divided By T he Price of Gold (Cdn $)
6
5
+1 Dev
4
Average
3
-1 Dev
2
1
90
91
92
93
94
95
96
D53
98
99
00
01
02
03
04
05
06
07
08
09
19 FEB 09
Source: TD Newscrest, John Aitkens
56
97
Investment Strategy, February 2009
Commodity Prices
Commodity Prices
Indexed to 100 at Low
220
220
200
200
180
180
160
160
140
140
Gold
120
120
Oil
Copper
Nickel
Zinc
Aluminum
100
Nov
Dec
Jan
2008
U.S Dollars
D517
Source: TD Newscrest, John Aitkens
57
Investment Strategy, February 2009
Feb
2009
100
Mar
20 FEB 09
Industrial Commodity Price Indexes
Industrial Commodity Price Indexes
130
130
10 TSE Commodities
CRB Spot Industrials
120
120
110
110
100
100
90
90
80
80
70
70
60
60
J
F
M
A
M
J J
2007
A
S
O
N
D
J
F
M
A
M
J J
2008
A
S
O
Aluminum Nickel Copper Lead Zinc Gold Silver Oil Gas Lumber
D738
Source: TD Newscrest, John Aitkens
58
Investment Strategy, February 2009
N
D
J
F M
2009
19 FEB 09
When The Going Gets Tough………
Source: Bloomberg
59
Investment Strategy, February 2009
The Tough Go Drinking !
Source: Bloomberg
60
Investment Strategy, February 2009
Some Less Than Others……….
Source: Bloomberg
61
Investment Strategy, February 2009
Others …More !
Source: Bloomberg
62
Investment Strategy, February 2009
Resources Major Component of TSX
Source: Bloomberg
63
Investment Strategy, February 2009
TSX in US Recession
64
Investment Strategy, February 2009
Conclusion
•
•
•
•
•
•
65
The New Secular Trend In Commodities Is Intact
An Interruption Not A Reversal Of Trend
We are in Seasonal and Cyclical Bear Markets
China Exports To US Are Non-Metal Related
China Infrastructure Boosted By Stimulus Package
Once International Trade Volumes Resume, Commodity
Prices Could Rapidly Reverse
Investment Strategy, February 2009
Top Performers: Defensive Inflation Plays and
Income Asset Classes
Funds
BMO Guardian Canadian Bond Fund
GGOF Monthly Dividend Fund
BMO Guardian Global Diversified Fund
BMO Guardian Asian Growth and Income Fund
BMO Guardian Monthly High Income Fund II
BMO Guardian Canadian Large Cap Equity
Indices
Nikkei 225 Index
S&P 500 Index
S&P/TSX Composite Index
FTSE 100 Index
Source: Bloomberg
66
Investment Strategy, February 2009
Asset Class
1-Year Return (%)
Canadian Fixed Income
0.94
Canadian Balanced
-19.49
Global Balanced
-21.67
Asia ex. Japan
-23.05
Canadian Income Trust
-25.76
Canadian Equity
-29.30
Country
1-Year Return (%)
Japan
-12.83
U.S.
-24.45
Canada
-31.80
U.K.
-33.76
As of Jan 31st, 2009; (CDN$)
Conclusions
•
Canada has outperformed other major markets for the last few years helped by
budget and trade surpluses and its commodity exposure. Oil was at record
highs in mid 2008 and will likely remain at levels which encourage further
development of Canadian resources.
•
The US economy has been in recession since December 2007 and probably
will remain so until mid 2009. It appears to be the deepest recession for 25
years, led by the US consumer retrenching, but The Fed has slashed interest
rates to record lows at 0-0.25% to stimulate the economy.
•
The US dollar strengthened sharply against all currencies except the Yen, on a
‘flight to safety’ move. With the addition of U$1.5 trillion in new debt to address
the credit crisis, it is likely the C$ will appreciate against the U$ over the next
year or so.
67
Investment Strategy, February 2009
Conclusions
• Corporate Earnings, having reached a 40 year high as a share of GDP
in mid decade, have fallen for a year and a half in the US and are
forecast to fall in Canada as well as the US in 2009, but the 35-40% fall
in stock markets last year has left valuations at the cheapest level in 20
years.
• Having experienced the third worst year in the last 100 years in 2008,
stocks in Canada, the US and Europe should experience a strong
rebound this year. Government Bonds are expensive at present levels.
68
Investment Strategy, February 2009
Conclusions
• The spreads above Government bond yields for investment grade and
high yield debt are at record high levels making non-Government debt
attractive despite the recession.
• The effects of the deep recession in North America and Europe are
more than fully reflected in stock markets and the extensive stimulus
delivered by Governments worldwide will eventually flow into financial
markets.
69
Investment Strategy, February 2009
Disclaimer
Sales commissions, service fees, management fees and expenses all may be
associated with mutual fund investments. Please read the prospectus before
investing. The indicated rates of return include changes in unit value and assume
reinvestment of all distributions, and do not take into account sales, redemption or
optional charges or income taxes payable by any securityholders, which would have
reduced returns. Mutual funds are not guaranteed, their values change frequently
and past performance may not be repeated.
70
Investment Strategy, February 2009
Q&A
For internal use only
Thank You
For internal use only