capital markets after a tumultuous decade kevin gardiner, global head of investment strategy,...
TRANSCRIPT
Capital markets after a tumultuous decade
Kevin Gardiner, Global Head of Investment Strategy, Barclays Wealth
Outline of presentation
1. How we got here: “A richness of embarrassments”
2. Where next? Investment outlook 2010 – a half-time talk
A Richness of Embarrassments
The Panic of 2008/9?
• Financial complexity, opacity, interdependence
• Leverage – whose?
• US consumer behaviour beforehand
• Historic parallel: 1907, not 1929
“A richness of embarrassments”
• LTCM (1998) – “picking up nickels in front of bulldozers”
• Y2K, TMT and the “new economy”
• MBS, CDO, CDS, house prices – the credit episode
• Oil, metals, food, some GEMs – the commodities episode
• Banks, brokers, insurers
• Asset returns and volatility
• Accounting & regulation: good intentions, bad results
• Financial analysis – spurious precision
Financial crisis: volatile volatility
0
10
20
30
40
50
60
70
Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10
Implied S&P volatility (VIX, %)
Source: Bloomberg
Equity/bond total return indices (to end-2009)
80
100
120
140
160
180
200
1925 1929 1933 1937 1941 1945 1949 1953 1957 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009
UK US
Logged, 1925 = 100
Source: Datastream, Barclays Wealth Strategy
Accounting & regulation
• Good intentions
• Accountant’s “fair value” vs PM’s “investment opportunity”
• Design problems
• Practical impact
Financial analysis: precisely wrong?
• How useful are those decimal points?
• MPT: you may not get “paid” for taking risk
• P&L small relative to BS; many assets are intangible
• “Beta” shouldn’t be correlative
• Correlation is not causation
• Historical financial data – it’s all we’ve got
“Prediction is very difficult, especially if it’s about the future” (Niels Bohr)
Conclusions?
• Deregulation fostered seemingly-arbitrary gyrations in asset markets, volatility and (eventually) the economy
• Unintentionally, parts of the regulatory and accounting framework likely added to market instability
• Financial knowledge is not what we thought it was
• Future savings products: simplicity and liquidity
• But… the wider economy can recover
Investment Outlook 2010:
A Half-Time Talk
Recap: the Panic of 2008/9
• Since 1998, deregulated capital markets have experienced a “Richness of Embarrassments”
• The financial sector and financial analysts face some deep-seated questions…
• … But global business can grow again – and it is
Investing in 2010: asset allocation at mid-year
• Obvious risks: debt, euro, taxes, geopolitics, oil, mood…
• Less obvious opportunities: profits, cashflow, valuations
• Equities preferred to bonds, and bonds to cash
• Companies look more attractive than governments
• Developed markets (tactically) preferred to GEMs
• Portfolio insurance: options, VIX, high-quality bonds
• Conclusion: no rush, but a good long-term entry point
Selected ideas
• Commodities: portfolio diversification, tactical appeal too
• Sell gold (carefully); sell oil volatility
• Property: still early (in China, late) – UK CRE preferred
• F/X majors: sterling & dollar preferred to euro & yen
• Cash management: money rates on hold
• For G7 bond bears: emerging Asian sovereign bonds
• M&A wave; unhedged Korean equities
Money market tension: LIBOR-OIS spreads
0
50
100
150
200
250
300
350
400
J un-07 Dec-07 J un-08 Dec-08 J un-09 Dec-09 J un-10
GBP 3m Libor - OIS Spread (bps)EUR 3m Libor - OIS Spread (bps)USD 3m Libor - OIS Spread (bps)
bps
Source: Bloomberg, Barclays Wealth Strategy
Eurozone: 2-year Government bond yields
Source: Bloomberg
0
2
4
6
8
10
12
14
16
18
20
Apr-09 J un-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 J un-10
Portugal Ireland ItalyGreece Spain Germany
%
Government deficits & debt (2011, OECD)
0
20
40
60
80
100
120
140
France Germany Italy Greece Portugal Spain Ireland
Government debt as a % of GDP
%
0
2
4
6
8
10
12
14
France Germany Italy Greece Portugal Spain Ireland
Government deficit as a % of GDP
%
Source: OECD
Real world: global order books look solid
Source: Datastream, Barclays Wealth Strategy
-4
-3
-2
-1
0
1
2
'91 '93 '95 '97 '99 '01 '03 '05 '07 '09G3 industrial survey
standard deviations from trend
Source: Datastream, Barclays Wealth Strategy
-10
-8
-6
-4
-2
0
2
4
6
8
Q4 1980 Q4 1985 Q4 1990 Q4 1995 Q4 2000 Q4 2005
Private sector Government Current account
Financial balance: % GDP
US cashflow: public and private sectors
Source: Datastream, Barclays Wealth Strategy
US housing: what’s the next big move?
Source: Datastream, Barclays Wealth Strategy
10
30
50
70
90
110
130
150
Q1 1960 Q3 1967 Q1 1975 Q3 1982 Q1 1990 Q3 1997 Q1 2005
US private housing starts per capita
Q1 1960 = 100
The “new normal” in context: trend US growth
Source: Datastream, Barclays Wealth Strategy
2
2.5
3
3.5
4
4.5
5
Q1 1961 Q3 1968 Q1 1976 Q3 1983 Q1 1991 Q3 1998 Q1 2006US GDP 10 yr moving average
y-o-y % change
90
95
100
105
110
115
120
125
130
135
50 53 56 59 62 65 68 71 74 77 80 83 86 89 92 95 98 01 04 07Real S&P earnings through to end '09(E) Fitted trend
Real S&P earnings and fitted trend: index, March 1950 = 100
Real S&P profits
Source: Datastream, Barclays Wealth Strategy
Valuing US stocks: let’s call the whole thing off?
Source: Datastream, Robert Shiller, Barclays Wealth Strategy
0
10
20
30
40
50
1881 1894 1906 1919 1931 1944 1956 1969 1981 1994 2006
G&D PE 25 yr MAV 50 Yr MAV 100 yr MAV
P/E
Valuing US stocks: (yet) another view
-1
0
1
2
3
4
5
6
7
8
'86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08
Using government bonds Using corporate bondsAverage Average
Implied equity risk premia (%)
Source: Datastream, Barclays Wealth Strategy
Treasury yields – flight to safety
US Conventional Bond Yield (10yr)
1
2
3
4
5
6
7
May-00 May-02 May-04 May-06 May-08 May-10
%
US 10yr Yield US ForecastUS 10yr Average + / - 1 stdevFair Value Estimate
Source: Barclays Capital
UK focus: never worse - deficit & debt (% GDP)
Source: 2009 Pre-Budget Report, Barclays Wealth Strategy
0
10
20
30
40
50
60
70
80
'74 '77 '80 '83 '86 '89 '92 '95 '98 '01 '04 '07 '10-4
-2
0
2
4
6
8
10
12
14
Net debt Deficit (RHS)
Net debt Deficit
UK focus: the “misery index”
0
5
10
15
20
25
30
35
31/01/71 31/01/81 31/01/91 31/01/01
"Misery index" = Unemployment + inflation rate (%)
Source: Datastream, Barclays Wealth Strategy
UK focus: return on equity
-20
-15
-10
-5
0
5
10
15
20
25
'74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08RoE inflation-adjusted RoE
%
Source: Datastream, Barclays Wealth Strategy
Disclaimer
This document must not be regarded as independent research, which means that it has not been prepared in accordance with legal requirements designed to promote the independence of ‘investment research’, as defined in the UK FSA Handbook. As such, it has been signed off as a financial promotion. Investment ideas presented herein are not subject to any prohibition on dealing ahead of the dissemination of investment research, which applies only to independent research. Employees of Barclays Wealth are, however, subject to our internal Personal Account Dealing Policy and our Conflicts Management Policy.
This document has been prepared by Barclays Wealth, the wealth management division of Barclays Bank PLC ("Barclays"), for information purposes only. Barclays does not guarantee the accuracy or completeness of information which is contained in this document and which is stated to have been obtained from or is based upon trade and statistical services or other third party sources. Any data on past performance, modelling or back-testing contained herein is no indication as to future performance. No representation is made as to the reasonableness of the assumptions made within or the accuracy or completeness of any modelling or back-testing. All opinions and estimates are given as of the date hereof and are subject to change. The value of any investment may fluctuate as a result of market changes. The information in this document is not intended to predict actual results and no assurances are given with respect thereto.
The information contained herein is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. The investments discussed in this publication may not be suitable for all investors. Advice should be sought from a financial adviser regarding the suitability of the investment products mentioned herein, taking into account your specific objectives, financial situation and particular needs before you make any commitment to purchase any such investment products. Barclays Wealth and its affiliates do not provide tax advice and nothing herein should be construed as such. Accordingly, you should seek advice based on your particular circumstances from an independent tax advisor. Neither Barclays Wealth, nor any affiliate, nor any of their respective officers, directors, partners, or employees accepts any liability whatsoever for any direct or consequential loss arising from any use of or reliance upon this publication or its contents, or for any omission. Past performance does not guarantee or predict future performance. The information herein is not intended to predict actual results, which may differ substantially from those reflected.
The products mentioned in this document may not be eligible for sale in some states or countries, nor suitable for all types of investors. This document shall not constitute an underwriting commitment, an offer of financing, an offer to sell, or the solicitation of an offer to buy any securities described herein, which shall be subject to Barclays’ internal approvals. No transaction or services related thereto is contemplated without Barclays' subsequent formal agreement.
Barclays Bank plc, Barclays Capital Inc., Member SIPC, and / or its affiliated companies may make a market or deal as principal in the securities mentioned in this document or in options or other derivatives based thereon. Barclays, its affiliates and the individuals associated therewith may (in various capacities) have positions or deal in transactions or securities (or related derivatives) identical or similar to those described herein. One or more directors, officers, and / or employees of Barclays Capital Inc. or its affiliated companies may be a director of the issuer of the securities mentioned in this document. Barclays Capital Inc. or its affiliated companies may have managed or co-managed a public offering of securities for any issuer mentioned in this document within the last three years.
"Barclays Wealth" is the wealth management division of Barclays and operates through Barclays Bank PLC and its subsidiaries. Barclays Bank PLC is authorised and regulated by the U.K. Financial Services Authority and is registered in England. Registered No: 1026167. Registered Office: 1 Churchill Place, London E14 5HP. This publication has been issued and approved by Barclays Bank PLC. Barclays Bank PLC is incorporated in England. Its members have limited liability.