Download No Slide Title

2002 outlook
FFG Global Investment Research
February 2002
FORUM FINANCE GROUP S.A
Investment Perspectives 2002 - Outlook
FFG
2002 a long road to recovery
• Recovery underway
• consumer demand
• housing and construction
• inventory correction
Global Investment Research
• But it may be a bumpy ride
2
•
•
•
•
excess capacity
unemployment on the rise
corporate profits depressed
global recovery delayed
Copyright Forum Finance Group S.A.
February 2002
FORUM FINANCE GROUP S.A
Investment Perspectives 2002 - Outlook
FFG
The Recovery
• Consumption remains healthy - near LT average
• Confidence appears to have stabilized
– expectations component steadily increasing
7
6
160
US Personal Spending
US Consumer Confidence
140
5
Global Investment Research
4
3
120
3
100
2
80
1
0
Jan-90
Jan-93
Jan-96
Jan-99
Jan-02
60
-1
-2
40
Jan-90
Copyright Forum Finance Group S.A.
Jan-93
Jan-96
Jan-99
Jan-02
February 2002
FORUM FINANCE GROUP S.A
Investment Perspectives 2002 - Outlook
FFG
The Recovery
• Low financing costs keep housing market bouyant
– Durable goods sales appear steady in January
• Construction spending maintained
20
2000
US Construction Spending
US Housing Starts
15
1800
Global Investment Research
10
4
1600
5
1400
0
Jan-90
Jan-93
Jan-96
Jan-99
Jan-02
1200
-5
1000
-10
-15
-20
800
600
Jan-90
Copyright Forum Finance Group S.A.
Jan-93
Jan-96
Jan-99
February 2002
Jan-02
FORUM FINANCE GROUP S.A
Investment Perspectives 2002 - Outlook
FFG
The Recovery
• Inventory Correction is nearing its end
– Largest decline in post war history
• Businesses are becoming more Positive
12
10
Philadelphia Fed Business Outlook
US Business Inventories
50
8
30
Global Investment Research
6
5
4
10
2
0
Jan-90
Jan-93
Jan-96
Jan-99
Jan-02
Jan-90
-10
Jan-93
Jan-96
Jan-99
-2
-4
-30
-6
-8
-50
Copyright Forum Finance Group S.A.
February 2002
Jan-02
FORUM FINANCE GROUP S.A
Investment Perspectives 2002 - Outlook
FFG
The Headwinds
• Unemployment on the rise
– historically rises long after GDP bottom
• Personal Income growth continues to slow
– Is the consumer out of gas?
10
8
Unemployment Rate US
9
US Personal Income
8
Global Investment Research
7
6
7
6
6
5
4
5
3
2
4
1
0
3
Jan-90
Jan-93
Jan-96
Jan-99
Jan-02
Jan-90
Copyright Forum Finance Group S.A.
Jan-93
Jan-96
Jan-99
Jan-02
February 2002
FORUM FINANCE GROUP S.A
Investment Perspectives 2002 - Outlook
FFG
The Headwinds
• Capex Lag
– Capex trails Industrial Production bottom by 3-9 months
• Capacity Utilisation near all time lows
– Tech sector extremely depressed, together argues for longer lag
this time around
30.00
95
US CAPEX vs. IP
% change annual
25.00
IP
Global Investment Research
20.00
7
85
Capex
15.00
80
10.00
75
5.00
0.00
Mar-71
70
Mar-74
Mar-77
Mar-80
Mar-83
Mar-86
Mar-89
Mar-92
Mar-95
Mar-98
Mar-01
-5.00
9 month lag
-10.00
-15.00
Capacity Utilization US
90
3 month lag
6 month lag
6 month lag
??
65
Tech
60
Non Tech
55
50
Jan-90
Copyright Forum Finance Group S.A.
Jan-93
Jan-96
Jan-99
Jan-02
February 2002
FORUM FINANCE GROUP S.A
Investment Perspectives 2002 - Outlook
FFG
The Headwinds
• Depressed Corporate Profits
– Little cash for expansion of business spending
• Fed is pushing on a String
– Low rates not enticing borrowing yet.
25.00%
US Corporate Profits
% change
Bank Commercial Credit
20.00%
Seasonally Adjusted
Global Investment Research
15.00%
8
10.00%
5.00%
0.00%
-5.00%
-10.00%
Jan-74
Copyright Forum Finance Group S.A.
Jan-78
Jan-82
Jan-86
Jan-90
Jan-94
Jan-98
February 2002
Jan-02
FORUM FINANCE GROUP S.A
Investment Perspectives 2002 - Outlook
FFG
The Headwinds
• Global Economy in a recession
– lagging US trends
• Europe continues to falter
– Employment and growth continue to fall
1.5
12
5
2
EU Business Climate
0
Dec-92
Dec-95
Dec-01 11
Dec-98
Global Investment Research
1
9
-5
0.5
10
-10
0
Jan-90
Jan-93
Jan-96
Jan-99
Jan-02
-0.5
-15
-1
-20
9
8
-1.5
-25
-2
-30
-2.5
-3
EU Consumer Confidence
EU Unemployment
RHS
LHS
6
-35
Copyright Forum Finance Group S.A.
7
February 2002
FORUM FINANCE GROUP S.A
Investment Perspectives 2002 - Outlook
FFG
Conclusion
• Economy
Global Investment Research
– Recovery will be slow
10
•
•
•
•
•
•
Inventory led growth in Q1
Lull into Q2/3 as end demand lags
Capex begins to recover in late 2002
2003 real year of acceleration
US leads EU growth by at least 1 quarter
Euro remains weak until 2nd half of year
Copyright Forum Finance Group S.A.
February 2002
FORUM FINANCE GROUP S.A
Investment Perspectives 2002 - Outlook
FFG
Markets
•
Equity Valuation
– Early recovery priced in
• Long term DDM indicates fair value at these levels
• Short term risk as temporary economic lull may be coming
• Implied Growth in Tech sector still too high
•
Yield Curve
Global Investment Research
– Interest rate have likely bottomed in the US, close in Europe
– Look for higher short term rates by year end
Implied Growth Analysis
30%
EARNINGS $ 51
52
53
54
55
56
57
58
25%
P/E
25%
RATES %
21%
4.40%
4.50%
4.60%
4.70%
4.80%
4.90%
5.00%
5.10%
5.20%
5.30%
20%
15%
12%
13%
10%
5%
0%
Implied
Technology
11
S&P 500 DDM
Estimate
Implied
Estimate
1623
1488
1373
1275
1190
1116
1050
992
939
893
1655
1517
1400
1300
1213
1138
1071
1011
958
910
1686
1546
1427
1325
1237
1159
1091
1031
976
928
1718
1575
1454
1350
1260
1181
1112
1050
995
945
1750
1604
1481
1375
1283
1203
1132
1069
1013
963
1782
1633
1508
1400
1307
1225
1153
1089
1032
980
1814
1663
1535
1425
1330
1247
1174
1108
1050
998
1845
1692
1562
1450
1353
1269
1194
1128
1068
1015
32
29
27
25
23
22
21
19
18
18
Non-Tech
Copyright Forum Finance Group S.A.
February 2002
FORUM FINANCE GROUP S.A
Investment Perspectives 2002 - Outlook
FFG
Markets
• Asset Allocation
– Underweight market slightly - await second leg of correction
– Fixed Income allocation focused on 2-4 years, and increased exposure to lower
grade corporate bonds
• Sector Allocation (focus on)
– Consumer cyclical
Global Investment Research
• Favor electronics and apparel for second half 2002
12
– Valuations favourable, (Radio Shack, Abercrombie & Fitch)
– Energy
• Favor large cap Integrated and Oil Services
– Valuations depressed, earnings growth implied too low (Total Fina, Schlumberger, BJ Services)
– Technology
• Telecom equipment no recovery until late in 2002
• Favor software, enterprise networking, wireless operators, semi-equipment (Oracle,
Cisco, Vodafone, KLA tencor)
Copyright Forum Finance Group S.A.
February 2002
FORUM FINANCE GROUP S.A
Investment Perspectives 2002 - Outlook
FFG
Conclusion
• Markets
– Underweight slightly in asset allocation -risk of correction
Global Investment Research
• Focus on Select technology, Energy and Consumer cyclicals
• Equities should outperform in 2nd half 2002
• Increase equity weighting in event of market sell off.
13
– Overweight near term maturities and corporate debt in fixed income
allocation
Copyright Forum Finance Group S.A.
February 2002