www.castlestonemanagement.comFour Main Themes for the Next Decade2 The devaluation of money versus real assets.This has been occurring in the last decade and will continue throughout this decade. Outperformance of equities markets with low levels of Debt-to-GDP versus equities markets withhigh levels of Debt-to-GDP.BRIC, Next 11 Emerging Markets will outperform Developed Equity Markets. High-yielding stocks are appealing.High-yielding, stable, partly-monopolistic, inelastic-demand stocks will remain attractive given interestrates are likely to remain low for many years. Direct and indirect taxes will continue to rise.OverviewSource: Castlestone Management.
www.castlestonemanagement.com$0$500$1,000$1,500$2,000$2,500$3,000$3,500$4,0001946 1957 1968 1979 1990 2001 2012US Federal ExpenditureUS Government Revenue Changes in population growth and government spending on Social Security and Medicare have permanentlyincreased Expenditure creating an eternal deficit between the two: Expenditure and Revenue.Government Expenditure vs. Government RevenueSource: Castlestone Management & Bloomberg. Data as at February 2013.BillionsofDollarsThemes for the Decade
www.castlestonemanagement.com23%20%19%6%13%18%US Expenditure 2011Medicare & MedicaidSocial SecurityDefense DepartmentNet InterestOther MandatoryDiscretionary4%8%19%3%24%41%US Expenditure 1960sMedicare & MedicaidSocial SecurityDefense DepartmentNet InterestOther MandatoryDiscretionaryExpenditure has permanently changedThis is similar for other developed markets (Europe, Japan, Canada) Social Security & Welfare spending across Europe and North America has permanently changed budgets acrossdeveloped markets.Permanent Expenditure ChangesSources: Castlestone Management & Congressional Budget Office, http://www.bis.org/ Data as at February 2013.Themes for the Decade
www.castlestonemanagement.comFour Stages of a Secular Bear MarketThemes for the DecadeSource: Morgan Stanley Research, Castlestone Management & Bloomberg. Chart represents the typical secular bear market on a sample of 19 such bear markets and overlaid by the dates of the recent market trend.Note: Past performance cannot be relied on as a guide to future performance.4060801001201401602007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017MSCI Europe Price Index Since June 2007Typical Secular Bear MarketTYPICAL REBOUNDRALLY: +71% over17 monthsTYPICAL BEARMARKET: -57%over 30 monthsTYPICAL NEXTCORRECTION:-25% over 13monthsTYPICAL TRADING RANGE:52% wide 5.6 years long
www.castlestonemanagement.comSource: Castlestone Management & Bloomberg. Data range January 1990 – February 2013.Note: Past performance cannot be relied on as a guide to future performance.Strong Correlation Between Gold and M1PM16%ReturnThe Devaluation of Money vs. Real AssetsMoneysupply/US$bn0%50%100%150%200%250%300%350%400%450%500%6008001000120014001600180020002200240026001990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012M1 Money SupplyGold Spot Price
www.castlestonemanagement.comPrecious Metals Will OutperformThe Devaluation of Money vs. Real AssetsSource: Castlestone Management & Bloomberg. Data range February 2000 – November 2012.Note: Past performance cannot be relied on as a guide to future performance.0%100%200%300%400%500%600%700%900110013001500170019002100230025002000 2002 2004 2006 2008 2010 2012M1 Money SupplyGold Spot PriceBarclays Precious Metals Index%GoldandPMReturnsMoneysupply/US$bn
www.castlestonemanagement.com400600800100012001400160018002000800100012001400160018002000220024002600Jan-2008 Nov-2008 Sep-2009 Jul-2010 May-2011 Mar-2012 Jan-2013M1 Money Supply (LHS)Gold Spot $/oz. (RHS)Relationship Will Continue as in 2008Source: Castlestone Management & Bloomberg. Data range January 2008 – January 2013.Note: Past performance cannot be relied on as a guide to future performance.Moneysupply/US$bnDivergenceUS$/oz.ConvergenceDivergenceThe Devaluation of Money vs. Real Assets
www.castlestonemanagement.com-100%-50%0%50%100%150%200%2000 2002 2004 2006 2008 2010 2012Emerging Markets IndexS&P 500 Index (US)Nikkei 225 Index (Japan)Equities Show Close to Zero Percent ReturnsSource: Castlestone Management & Bloomberg. Data range February 2000 – December 2012.Note: Past performance cannot be relied on as a guide to future performance.Debt-to-GDP%Returns
www.castlestonemanagement.comSource: Bloomberg & Castlestone Management. Data as at February 2013.Developed vs. Developing Countries+3.8% +1.1%+15.4%Annual equity returns for Developed and Emergingmarket countries over the past ten years%Debt/GDPDebt-to-GDP0%30%60%90%120%150%180%210%240% JapanUSACanadaGermanyFranceUKEgyptMexicoNigeriaSouthKoreaVietnamTurkeyPakistanPhilippinesIndonesia-4%0%-3.22% -1.2%+12.05+15.77%+14.49%+5.5%+12%+13.4%+20.64%+21.5%
www.castlestonemanagement.comHigh Income Class: China and N11Source: Castlestone Management & GS Global ECS Research, Global Economics Paper No: 170, http://www.ryanallis.com/wp-content/uploads/2008/07/expandingmiddle.pdfN1105010020030040050060070080090010002010 2020 2030 2040 2050BrazilChinaIndiaRussiaUSWestern EuropeJapanN 11The number of people with incomesabove $30,000 in 2007 PPPDebt-to-GDP
www.castlestonemanagement.comGlobal Growth PotentialSource: Castlestone Management & GS Global ECS Research.N11054.90% 4.80%3.70%2.10%0%1%2%3%4%5%6%N 11 BRIC World G7By 2050 N11 could 1) Be significantly larger than the US2) Become twice the size of Europe 3) Account for a fifth of the global economyDebt-to-GDPN11 – Key Driver for Growth:Average Growth Rate (2011-2050)
www.castlestonemanagement.comSource: Castlestone Management & Bloomberg. Data as at February 2013.High-Yielding StocksSome High-Yielding Stocks Remain AttractiveHigh-yielding, stable, partly-monopolistic, inelastic-demand stocksMcDonald’s +3.08% Deutsche Telecom +8.49% Trustworth +5.09%Vodafone +6.56% Telstra Corp +8.68% Sasol +4.51%Coca Cola +2.67 Singapore Telecom +5.59% Vodacom +5.81%
www.castlestonemanagement.comSource: The Big Picture, http://www.ritholtz.com/blog/wp-content/uploads/2010/04/top-rate.jpgTaxes Need to Increase as They Have HistoricallyTaxes & Debt
www.castlestonemanagement.com0%25%50%75%100%125%1907 1922 1937 1952 1967 1982 1997 2012US Marginal Tax RateUS Gross Public Debt % GDPUS Marginal Tax Rate vs. Gross Public DebtTaxes & DebtSource: Castlestone Management & Bloomberg. Data as at February 2013.
www.castlestonemanagement.comThe Only Solution to This ProblemSource: Darren Whittingham, http://www.shutterstock.comTaxes & Debt
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