jersey investment briefings

Jersey Investment Briefings - November 2010

Tristan Hanson

November 2010

Structural Themes & Asset Allocation Update


Overview

Structural Themes:

I. Quantitative Easing and implications for asset prices

II. Equities: the most attractive major asset class

III. Contrasting fortunes: emerging vs developed economies

IV. Uncertainty is unavoidable

Asset Allocation update


Theme 1: The goals of QE

Higher asset prices

Bond yields down (prices up) Other asset prices rise (corporate bonds, equities, property)

Wealth effect on spending

Lower cost of borrowing

Influence expectations


Source: Ashburton, S&P, Bloomberg

Implied equity risk premium is high

US: Implied Equity Risk Premium (%) Based on 12mth forward earnings per share

0

1

2

3

4

5

6

7

8

Sep-89 Sep-94 Sep-99 Sep-04 Sep-09

%

US: Implied Equity Risk Premium Based on Trend EPS

-2

0

2

4

6

8

10

12

Dec-69 Dec-79 Dec-89 Dec-99 Dec-09


Equity valuations imply attractive relative returns

Source: Ashburton, Factset, Bloomberg

Expected long-term real returns(local ccy)

0

2

4

6

8

10

US 10yrGovt

GER10yrGovt

JAP10yrGovt

SA 10yrGovt

US IGCorp

US HYCorp

USEquity

EY

GEMEquity

EY

EUEquity

EY

SAEquity

EY

%


US Corporate Leverage(Ex-Financials)

40%

50%

60%

70%

80%

90%

100%

110%

120%

130%

Jul-8

1

Jul-8

6

Jul-9

1

Jul-9

6

Jul-0

1

Jul-0

6

Debt/Equity

Corporations are in good shape

Source: Deutsche Bank, Barclays Capital

US Average Corporate Bond Yield

2

4

6

8

10

Jan-

90

Jan-

95

Jan-

00

Jan-

05

Jan-

10

%

US Corporate Leverage(Ex-

Financials)


Corporations are in good shape

European EBIT Margins %


Theme 3: Structural divergence in growth rates

Source: IMF

Industrial Production

80

90

100

110

120

130

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jan

2007

= 1

00

Retail Sales

80

90

100

110

120

130

140

150

160

170

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jan

2007

= 1

00

Emergingeconomies

World Advancedeconomies


EM: lower debt levels & improved fundamentals

Source: IMF, WB

41

27

21

33

50

56

108

51

109

145

108

108

211

194

164

8

33

43

40

47

64

17

77

29

27

66

85

52

71

195

0 100 200 300 400

Russia

Indonesia

Mexico

Turkey

Poland

Brazil

China

India

Korea

South Africa

Germany

Singapore

UK

USA

Japan

Private + Public Debt 2008% of GDP

Private

Public


US Household Balance Sheet

Source: Bloomberg, Federal Reserve

0%

100%

200%

300%

400%

500%

600%

700%

800%

Mar

-57

Mar

-67

Mar

-77

Mar

-87

Mar

-97

Mar

-07

% o

f dis

posa

ble

inco

me

Assets/IncomeNet Worth/IncomeDebt/Income

50%

70%

90%

110%

130%

150%

Dec

-80

Dec

-85

Dec

-90

Dec

-95

Dec

-00

Dec

-05

% o

f dis

posa

ble

inco

me

Debt/Income


European sovereign risk will not disappear

Source: Barclays Capital

77 77

92 92100

121

148

0

50

100

150

Germany Spain France Portugal Ireland Italy Greece

Government Debt/GDP (%)

2007 2013


Theme 4: Uncertainty

Policymakers and investors in uncharted territory

Quantitative easing & experimental monetary policy Public debt levels & sovereign debt crises Global coordination/global rebalancing Perceived large tail-risks

How quickly things can change:

“In due course, however, as the expansion matures the Federal Reserve will need to begin

to tighten monetary policy conditions to prevent the development of inflationary

pressures”.

Ben Bernanke, “Federal Reserve’s exit strategy”, speech 10th February, 2010

Asset Allocation Update

November 2010


Asset Allocation

Source: Ashburton

fixed income range 0% - 80%

Equityrange 0% - 50%

Replica Asset Management FundAsset Allocation (21/10/10)

Equities - US

Equities - EU

Equities - Japan

Equities - Asia ex-Jap

Corporate Bonds

DM - Government Bonds

EM - Government Bonds

Cash/Equivalents

16

14

4

15

14

15

12

10


Asset Management Funds: asset allocation update

Equity exposure has been effectively at limit since end-August

Equity exposure diversified globally; high exposure to China

Government bond exposure concentrated in long-end US, UK curves to exploit term premia

Long-dated TIPS exposure closed out in October following decline in real yields

High correlations and volatility make currency markets challenging. Long-term belief that the euro will decline from current levels against a currency basket.


US/UK 30yrs: risk premium is high

Source: Bloomberg

US 30yr yield less 10yr yield

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

Mar-96 Mar-99 Mar-02 Mar-05 Mar-08

%

UK 30yr yield less 10yr yield

-1.5

-1

-0.5

0

0.5

1

1.5

Mar-96 Mar-99 Mar-02 Mar-05 Mar-08%


Equities: EM re-rating argues for global diversification

DM cheap

EM cheap

Source: JP Morgan, Datastream, MSCI


Conclusion

Global equities are priced to deliver attractive returns. We maintain diversified exposure across DM and EM.

Bottom-up corporate fundamentals strong

Macro/policy risks likely to cause periodic volatility & trading opportunities – be sceptical of extreme views/price action

Relative value in long-dated US and UK government bonds

Thank you

Active Investment Managers

DISCLAIMER

Ashburton (Jersey) Limited is referred to in this context as ‘Ashburton’. This document does not constitute an offer or solicitation to any person in any jurisdiction in which Ashburton is not authorised or permitted to communicate with potential investors, or to anyone who would be an unlawful recipient, and is only intended for use by original recipients and addressees. The original recipient is solely responsible for any actions in further distributing this document, and should be satisfied in doing so that there is no breach of local legislation or regulation. The information is intended solely for use by Ashburton clients or prospective clients, and should not be reproduced or distributed except via original recipients acting as professional intermediaries. This document is not for distribution in the United States.

Prospective investors should inform themselves and if need be take appropriate advice regarding applicable legal, taxation and exchange control regulations in countries of their citizenship, residence or domicile which may be relevant to the acquisition, holding, transfer, redemption or disposal of any investments herein solicited.

Any opinions expressed herein are those at the date this material is issued. Data, models and other statistics are sourced from our own records, unless otherwise stated. Ashburton believes that the information contained is from reliable sources, but we do not guarantee the relevance, accuracy or completeness thereof.

We caution that the value of investments and the income derived, may fluctuate and it is possible that an investor may incur losses, including a loss of the principal invested. Past performance is not generally indicative of future performance. Investors whose reference currency differs from that in which the underlying assets are invested may be subject to exchange rate movements that alter the value of their investments.

Ashburton (Jersey) Limited (Company Registration No. 26087) is a member of the FirstRand Group, is regulated by the Jersey Financial Services Commission and has its registered office at 17 Hilary Street, St Helier, Jersey JE4 8SJ. Ashburton (Jersey) Limited is registered as a Foreign Investment Services Provider in South Africa in accordance with Section 8 of the Financial Advisory & Intermediary Services Act 2002.

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