Equities has the market stabilised towards long-term sustainable returns?

Transcription

1 Equities has the market stabilised towards long-term sustainable returns? Jeff Munroe Investment leader, global equities Newton Investment Management 23 October 2014 Prepared for Professional Clients only. Any views and opinions expressed hereafter are those of the investment manager, unless otherwise noted.

2 R0122 A perspective on investment returns The great moderation is over Returns Time Then and now it s a different world United States 1982 Q2 2014¹ Fed funds rate 12% 0.25% 10-year bond yield 14% 2.5% Monetary base $149 billion $4 trillion Budget deficit as % of GDP -2.2% -3.3% Household debt to GDP ratio 45.9% 77.1% 4 Inflation rate, % yoy 8.9% 2.1% Savings rate 12.4% 5.3% 5 Unemployment rate 8.5% 6.1% Profit margins (national accounts) % 16.1% 4 S&P 500 P/E ratio (1 year trailing) 7.7x 19.0x S&P 500 cycle adjusted PE 3 7.8x 25.0x MSCI USA dividend yield 5.8% 2.0% Demographics average age of babyboomer a more volatile world Investment solutions in a lower return/ volatile world Returns Active, flexible approaches Emphasis on income Strategies that protect capital and aim for asymmetry of return Return based objectives For illustrative purposes only Time 1 June Calculated by the Bureau of Economic Analysis in the US in calculating the national accounts 3 Used 10 years of earnings to remove the effect of the economic cycle from the PE calculation 4 Data as at end Q Source: Datastream, Bloomberg, US Census Bureau, Newton 1

3 Equities supported by policy Markets diverge from fundamentals as debt rises MSCI Index with and without impact of PE re-rating 50 5, , ,000 % change since start of period ,500 3,000 2,500 2,000 1,500 1,000 $bn Sep 08 Sep 09 Sep 10 Sep 11 Sep 12 Sep 13 Sep 14 MSCI World equity index MSCI world index at constant PE since end Sept 2008 Federal Reserve balance sheet, $bn (RHS) Source: Datastream, Bloomberg, Newton September 2014 Earnings have been re-rated since summer

4 Stock selection will be critical following buoyant period for equities While current profitability is at elevated levels (%) US corporate profit margin Source: Datastream, May 2014 Earnings have been re-rated since summer

5 Stock selection will be critical following buoyant period for equities and are factors driving profit margins repeatable? Change in post tax profit margin 2.7 Other; production taxes, subsidies -0.7 Net interest and misc. payments -2.0 Taxes on corporate income 1.4 Rental income of persons with CCAdj¹ 1.5 Proprietors' income with IVA and CCAdj² 1.1 Compensation of employees Change as US% of national income since Q2 2009, 4q average 1 Capital consumption adjustment 2 Proprietors income with inventory valuation adjustment and CCADj Source: US National Statistics, Q Earnings have been re-rated since summer

6 US equity valuation Price to sales data is looking stretched Ratio, x Oct-94 Oct-96 Oct-98 Oct-00 Oct-02 Oct-04 Oct-06 Oct-08 Oct-10 Oct-12 Oct-14 Russell 2000 Index, price to sales ratio Source: Newton, Datastream, as at October

7 Structural deflationary challenges meet ultra-cheap money Theme Implications Debt drag on growth Demographic challenges Global competition Rapid technological change High energy costs Economic and financial market distortions Expect lower trend growth and volatility 6

8 EM strains building? Too much debt? China credit use as % of GDP % GDP Dec 02 Jun 04 Jan 06 Aug 07 Mar 09 Oct 10 May 12 Dec 13 China total social financing % GDP Source: IMF country report 13/211, July For illustrative purposes only. 7

9 Emerging markets 16 Brazil peak employment? 16 Low EM bond yields versus history % 10 % Brazil unemployment rate, 4q average JPM EMBI+ bond yield Source: Datastream, Newton, June 2014 Source: Datastream, Newton, October

10 Emerging market valuations MSCI EM market PE - sector weighted and unweighted average Oct 02 Oct 04 Oct 06 Oct 08 Oct 10 Oct 12 Oct 14 Unwgtd Avg MSCI EM market PE Source: Datastream, Newton, October

11 Emerging market valuations Three-month implied volatilities (a) 10

12 Lower expected returns 5 year median nominal holding period returns December 2008 December Exepcted return, % p.a Exepcted return, % p.a Equities US government Investment grade High yield 0 Equities US government Investment grade High yield Source: Datastream, Newton, January For illustrative purposes only. 11

13 Jeff Munroe PHOTO Size 3.5 x 2.5 Curriculum Vitae 1993 to date Newton Investment Management Investment leader, global equity team University of Western Ontario (Ivey) MBA Towers Perrin Senior research analyst Qualifications CFA MBA BA 21 years at Newton 27 years investment experience Biography Jeff is investment leader of the global equities team, and manages a range of global equities portfolios. He chairs both the global model group and the global ex US equity model group, and is a member of the Newton Board. Prior to his current role, Jeff was CIO at Newton from 2001 to January Jeff has completed an MBA, and is a CFA charterholder and a member of the UK Society of Investment Professionals (UKSIP). CFA and Chartered Financial Analyst are registered trademarks owned by CFA Institute. 12

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