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Economic and Market Perspectives Simon Doyle – Head of Fixed Income and Multi-Asset

A world of uncertainty or a world of opportunity?. Economic and Market Perspectives Simon Doyle – Head of Fixed Income and Multi-Asset. Why? Seeds sown early this decade. Financial engineering. Sub-prime. Leverage. US monetary policy. Financial market failures. Bring out your dead!.

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Economic and Market Perspectives Simon Doyle – Head of Fixed Income and Multi-Asset

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  1. A world of uncertainty or a world of opportunity? Economic and Market PerspectivesSimon Doyle – Head of Fixed Income and Multi-Asset

  2. Why?Seeds sown early this decade Financial engineering Sub-prime Leverage US monetary policy

  3. Financial market failures Bring out your dead! Wounded • Re-incarnated Dead!

  4. Risky assets have suffered Gross 12 month returns by asset class as at 31 October 2008 Growth Assets Balanced Assets Defensive Assets 1 2 3 4 5 6 7 8 Big losses in equities, REITs and higher yielding credit Source: Schroders/Datastream. 1. S&P ASX 200; 2. MSCI World; 3. S&P ASX300 Property Trusts; 4. Merrill Lynch Global High Yield Index; 5. Schroder Hybrid Securities Fund; 6. UBS Credit Index; 7. UBS Bank Bill Index 8. UBS Treasury Index

  5. The pointy end… 2007 AAA structured product and mortgage backed security prices Chinese stock market Indicative market US residential mortgage backed Shanghai SE Composite Index Indicative market CDO Excesses coming home to roost Source: CBA, Schroders

  6. US recession is inevitable US GDP and Conference Board Leading Index It will be an extended slump Source: Datastream

  7. Recession is also likely in Europe and Japan Eurozone GDP and Whole Economy PM Japanese GDP and Econ Watchers Outlook Eurozone GDP – yoy% Japanese GDP – yoy% Weighted ISM (RHS) Eco Watchers Outlook – Lead 2 months (RHS) Surveys indicate sharp slowdown

  8. Inflation is no longer an issue G7 economic activity and change in inflation G7 annual change in inflation G7 GDP – yoy% change, lead 2q (RHS) Inflation follows economic growth down Source: Datastream

  9. Terms of Trade are reversing Terms of Trade and Base Metal Prices MG Base Metal Index (RHS) Australian terms of trade Tailwind to headwind Source: UBS, Datastream

  10. Australia will flirt with recession Australian non-farm product and leading index % Weak sentiment is flowing through to activity Source: Datastream

  11. We have high household debt levels like the US Household sector debt as % of GDP USA UK Australia Aggressive household credit build up across most western economies Source: GSJBW Research Estimates, Goldman Sachs Research Estimates

  12. Global Equities are looking attractive Trailing PE MSCI World vs 25 year historical average P/E ratio +1 std deviation average -1 std deviation Global market is cheap Source: Schroders, Datastream

  13. BHP Billiton Increased volume offset by increased costs Commodity prices have driven profits Underlying EBIT analysis: FY08 vs FY02 Increased prices This is illustrative only and does not represent Schroders’ recommendation on these stocks Earnings driven by increased prices - volume increase offset by higher costs Source: Merrill Lynch 31 August 2008

  14. Something positive from the credit crisis… US high yield % Spread (RHS) Return Credit markets will provide attractive returns Source: Schroders, Datastream

  15. Corporate gearing is low US debt as a percentage of GDP Total* Financials Households Corporates Source: Morgan Stanley, * Includes public sector

  16. Yields from Hybrids are looking attractive Australian hybrid yield and cash rate Hybrid option adjusted yield Cash rate Hybrids are cheap now! Source: Schroders, Datastream

  17. Cash looks good now… Australian cash rate vs US federal funds rate: 1997 - 2008 Australian cash rate ? US federal funds rate …but look what happened in the US Source: Schroders/Datastream

  18. Too much cash – too little bonds Returns of Australian Cash, Government Bond High cash rates + fear = poor long term portfolio construction decisions Source: Schroders/Datastream

  19. Cycle vs. asset class performance Recovery Slow down Recession Expansion Asia Australia Europe Japan Commodities Cash Property Govt bonds US Equities High Yields Bonds Equities High Yields Bonds Equities Preferred asset class and the economic cycle Source: Schroders

  20. Our approach hasn’t changed • We like; • Transparency • Liquidity • Value for money • True economic diversification • Appropriate leverage • Unlisted assets and hedge funds do not provide this!

  21. What have we been doing? June 2007 Remove risk in 2007

  22. What have we been doing? December 2007 Remove risk in 2007

  23. October 2008 What are we doing? Selectively adding risk

  24. Conclusions Economic concerns warrant caution “Risky” assets now have a risk premium Its not the time to sell risk Like higher yielding assets - hybrids Cash was king – but being too defensive could be costly A world of uncertainty…but with selective opportunity

  25. Important • General Disclaimer • This presentation is intended solely for the information of the person to whom it was provided by Schroder Investment Management Australia Limited (ABN 22 000 443 274, AFSL 226473) (Schroders). Investment in the [Insert Fund Name] may be made on an application form in the Product Disclosure Statement (PDS) dated 1 July 2008 which is available from Schroders. The information contained in this Presentation is general information only and does not take into account your objectives, financial situation or needs. Before acting on the information contained in this Presentation you should obtain a copy of the PDS and consider the appropriateness of the information in regard to your objective, financial situation and needs before making any decision about whether to invest, or continue to hold. • Schroders does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this presentation. Except insofar as liability under any statute cannot be excluded, Schroders and its directors, employees, consultants or any company in the Schroders Group do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this presentation or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this presentation or any other person. Returns shown are before tax and fees and all income is reinvested. • You should note that past performance is not a reliable indicator of future performance. Investment guidelines represented are internal only and are subject to change without notice. Opinions constitute our judgement at the time of issue and are subject to change. For security reasons telephone calls may be taped.

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