investing inthe new_normal_slide_share
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Thank you for your interest. This is a copy of The Finkelstein Group's annual Client Appreciation seminar series. In this document we take a look at the experiences we gained in 2012 and the expectations we have for 2013. Please feel free to take a gander and learn a little bit about investments from 2012-2013 and our investment philosophy.TRANSCRIPT
Investing in the New Normal:
2012 Experience2013 Expectations
Presented by:
Jeff Finkelstein, CIM
Vice President & Portfolio Manager
RBC Dominion Securities
December 4, 2012
A Little Market Humor …
2
Part A: Corporate Fundamentals Are Generally Fine
3
Corporate Profits Never Higher
4
Corporate Cash Levels Never Higher
5
Aggregate Employee Income Never Better
6
Cost of Corporate Borrowing Never Lower
7
Part B: 2012 A Retrospective
8
S&P 500 (1871 to Present)
1
10
100
1000
10000
18
71
18
75
18
80
18
85
18
90
18
94
18
99
19
04
19
09
19
13
19
18
19
23
19
28
19
32
19
37
19
42
19
47
19
51
19
56
19
61
19
66
19
70
19
75
19
80
19
85
19
89
19
94
19
99
20
04
20
08
+531%18-Yrs
19-Yrs
11-Yrs
+1,258%18-Yrs
+141%4-Yrs
+161%10-Yrs
21-Yrs
+290%6-Yrs
19-Yrs
14-Yrs
Sideways Long-Term Market Continues
9
Psychology Drives Market Performance
10
-41%
Volatile Cycles Within the Sideways Bear Market
-41%
+75%
-49%
+90%
July 1999
11
Dynamic Balance of Market Forces
LOW VALUATIONS
EXTREME LOW RATES
OTHER MONETARY STIMULUS
STRENGTHENING DOMESTIC ECONOMY
EUROPEAN SLOW DOWN
PERSISTENT US UNEMPLOYMENT
CONSUMER / BUSINESS CAUTION
FISCAL CLIFF / DEBT CEILING
Positive Negative
STRENGTHENING CONSUMER CONFIDENCE
FEARS OF SOVEREIGN DEFAULTS
12
A
B
CD
A – European Debt Contagion
B – European & US Debt
C – European Debt
D – US Fiscal Cliff
2012
A Closer Look at the Current Cycle (U.S)
13
2012
A B C D
The TSX Burdened by Resource Emphasis
A – European Debt Contagion
B – European & US Debt
C – European Debt
D – US Fiscal Cliff
14
But Equity Income is Still Doing Fine
2012
A
B
CD
A – European Debt Contagion
B – European & US Debt
C – European Debt
D – US Fiscal Cliff
15
Part C: Structural Market Dynamics:
Investor Group Psychology
16
Cycles are a Fact of Life
17
-41%
Impact of Pessimism Illustrated
Between 1999 and 2012 – Profits more than doubled but with no market price growth over the decade
1999 P/E ratio of 43 2012 P/E ratio of 15
18
Yield 2.8% Dividend $1.62 EPS $4.00
Yield 3.2% Dividend $2.00 EPS $4.22
Yield 4.1% Dividend $2.28 EPS $4.96
May 2007 April 2010 November 2012
19
Impact on RBC Shares
Short-Term Market Prices Controlled by Psychology
20
Equity Correlation
About 20% of the trading volume of an equity actually depends upon its fundamentals.
21
Index ETFs + Computer Trading Accelerate This
22
Large Caps & Defensive Sectors are Most Highly Correlated
23
Part D: Structural Market Dynamics:
Policy and Politics
24
MORTGAGES &
HELOCS
DEBT
CREDIT
DERIVATIVES
DEBT
BANKS
NATIONAL GOVERNMENTS
TAXPAYERS CENTRAL BANKS
United States
25
Central Bank
Current Objectives:
1. Shrink the relative government debt burden (by stimulating GDP growth)
2. Shrink the government’s debt service cost
3. Increase personal wealth → increased consumer spending → increased US employment
4. Increase business investment
Current Actions:
1. Force down overnight interest rates – Zero Interest Rate Policy to 2015
2. Force down 10-year Treasury rates - $40B/ month in market buying
3. Force down mortgage bond rates - $40B/ month in market buying
Indirect Consequences:
Financial Repression – prolonged low interest rates punish conservative savers
• Worried retail investors
• Conservative pension funds
26
Financial Repression in Action
Lowest rates in history are deliberately punitive for cautious savers and deliberately supportive for investors (and other spenders).
10-Year US rate now at 1.61%
27
No Impact of Money Printing on Growth or Inflation
28
Part E: Search for Yield and Equity Income
29
SHORT TERM RATES
Frozen to mid-2015
10-YEAR TREASURIES
Operation Twist
AGENCY MBS
QE Infinity
CORPORATE CREDIT
(Investment Grade)
CORPORATE CREDIT
(High Yield & Emerging)
EQUITY INCOME
(Dividend Payers)
EQUITY INCOME
(Dividend Growers)
Investors Hunt for Investment Income
EQUITY GROWTH
30
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
10.00%
DIVI
DEND
YIE
LDS&P500 Historical Yield
70s bear
80s & 90s bull
2000 bear
31
Generally earnings, dividends & dividend growth track the real economy, not speculative fears.
32
Long Term Earnings Consistency
2008 Yield: 7.7%
2009 Yield: 18.5%
2010 Yield: 7.0%
2011 Yield: 6.4%
2012 Yield: 5.1%Consistent Annual Dividend: $1.54 per
Share
-62%
Profit & payout consistency for domestic, defensive, dividend-rich companies
33
2008 Yield: 8.8%
Dividends Paid: $0.84
2009 Yield: 15.0%
Dividends Paid: $0.84
2010 Yield: 6.9%
Dividends Paid: $0.90
2010 Yield: 6.0%
Dividends Paid: $0.96
2010 Yield: 4.7%
Dividends Paid: $1.055 Years
Dividend Growth: 25%
Stock Price Growth: 230%
-43%
Profit & payout consistency for domestic, defensive, dividend-rich companies
34
Long Term Outperformance of Equity Income
35
Low Volatility of Equity Income
Notably less market price volatility than the market
36
Altagas +4.3%
Brookfield Infrastructure +7.0%
Enercare +1.8%
InterPipeline +5.7%
Bank of Nova Scotia +3.6%
Bank of Montreal +3.0%
TD Bank +5.9%
Canadian Apartments REIT +4.0%
BCE +10.0%
Telus +10.0%
Medical Facilities +2.3%
Apple +1.8% (Initiated 2012)
Nike +17.0%
VF Corp +21.0%
Yum Brands +17.5%
Some Examples of 2012 Dividend Growers
37
3 Year 5 Year 10 Year
S&P/TSX Income Trust Total Return Index 24.3% 12.8% 16.2%
S&P/TSX Capped REIT Total Return Index 23.4% 9.2% 13.1%
S&P 500 Total Return (US) 13.2% 0.4% 6.9%
DJ Stoxx 50 Price Return (Europe) -2.6% -10.3% 2.6%
MSCI World Index Price Return (World) 5.6% -5.0% 5.1%
Equity Income Investments Outperform
38
Part F: 2013 Outlook
39
2012
Strong Dividend Support
REITs
TSX
Continued Strength in Equity Income
40
2012
US led by Consumer, Technology and Health Companies
Canada hindered by Resources
U.S
Canada
Continued Strength in the U.S.
41
Expectations of Moderate Growth in Canada
42
And in the U.S.
43
Recovery Leads to a Mild Increase in Long-Term Interest Rates in Canada
44
And in the U.S.
45
Canadian Dollar Remains at Least at Parity
46
Inflation is Controlled
47
No Crisis in Canadian House Prices Forecast
48
Other Macro Future Trends
Demographics
• Powerful growth needed for reliable retirement income “Personal Pension Plans”
• Desire for low volatility; high confidence investments
US Housing Recovery
• Slow turnaround has implications for consumer confidence, retail, resources, job growth
Technology
• As new technologies mature there is more competition, less dominance among the consumer brand names
• The new “App Economy” has added 500,000 US jobs
• Growth of the “Cloud”
• Technology infrastructure has an interesting risk / reward (telecom services, broadcast towers and data storage)
49
Energy
• Based on new drilling technologies, US oil and gas production will eventually outpace Saudi Arabia
• Giant need for new infrastructure (e.g. pipelines)
• Growing environmentalism (indirect impact of Hurricane Sandy)
• US manufacturing benefits from decreased energy input costs
• Will Canada’s oil and gas be stranded?
Consumer
• Increasing wealth transfer to emerging Asia (and they love consuming global brands)
• Slow recovery of NA middle class
• Southeast US labor rates increasingly competitive with Shenzhen
• Global lifestyle changes
50
51
Health Care
• Aging population requires increased services
• “Obamacare” in US, now ratified, increases by 15% the eligible clientele for health services
Financial Services
• Tighter government controls leads to slower long term growth (and renewed interest in the retail client)
• Growing international reputation and global presence of Canadian banks
• RBC sixth in world in wealth management, twelfth in total assets
• Relative decline of the US and European banks
• Fun thought: Toronto as the next Zurich?
Emerging Markets
• New growth centres emerging (SE Asia, East Europe) – but highly speculative
Any further questions?
56
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Thank You from The Finkelstein Group
Investment Trust Units are sold by RBC Dominion Securities Inc. There may be commissions, trailing commissions, management fees and expenses associated with Investment Trust investments. Please read the prospectus before investing. Investment Trusts are not guaranteed, their values change frequently and past performance may not be repeated. This commentary is based on information that is believed to be accurate at the time of writing, and is subject to change. All opinions and estimates contained in this report constitute RBC Dominion Securities Inc.’s judgment as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Interest rates, market conditions and other investment factors are subject to change. Past performance may not be repeated. The information provided is intended only to illustrate certain historical returns and is not intended to reflect future values or returns. RBC Dominion Securities Inc. and its affiliates may have an investment banking or other relationship with some or all of the issuers mentioned herein and may trade in any of the securities mentioned herein either for their own account or the accounts of their customers. RBC Dominion Securities Inc. and its affiliates also may issue options on securities mentioned herein and may trade in options issued by others. Accordingly, RBC Dominion Securities Inc. or its affiliates may at any time have a long or short position in any such security or option thereon. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member-Canadian Investor Protection Fund.