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  • 1. The Outlook for UK Equities Business Cycle Investing Julie Dean Prepared for professional advisers only
  • 2. UK Equities…nothing to write home about… Total Local Currency Returns 2007 to 25.02.11 1st January 2007 = 100 Source: Thomson Datastream to 25.02.11 50 70 90 110 130 150 170 190 210 2007 2008 2009 2010 2011 UK Brazil China India 12.1% 12.1% UK FTSE All Share 55.7% 32.7% China MSCI 91.0% 34.2% India Datastream Total Market 145.7% 58.4% Brazil Bovespa Sterling Local currency Index Total returns 2007-to-25.02.11
  • 3. …but plenty of opportunities Source: Thomson Datastream
  • 4. Returns from UK equities can be competitive… Source: Thomson Datastream
  • 5. …if you’re riding the cycle
    • Style grouping exposure driven by business cycle strategy
    • Avoidance of permanent style bias is key
    Industrial Cyclicals Growth Defensives Value Defensives Consumer Cyclicals Commodity Cyclicals Financials Growth Style Groupings Recession   Recovery Expansion Slowdown GDP Growth
  • 6. Business cycle investing
        • Different stocks do well at different stages of the economic cycle
        • Companies and share prices do not work in a vacuum
        • Cyclicals outperform in expansion, defensives in slowdown
        • Where we are and where are we going in the cycle should be reflected in investment portfolios
        • Business cycle investing is a pragmatic approach for achieving consistent returns
    Slowdown Recession Recovery Expansion Expansion Slowdown
  • 7. Horses for courses Source: Datastream
  • 8. Back from the brink
    • Inventory rebuild; economies stabilised
    • Governments and central banks did ‘whatever it took’
    Global industrial production - % change year on year Source: Morgan Stanley, MSCI, Datastream. As at 30th September 2010 yy % change -20 -15 -10 -5 0 5 10 15 1985 1990 1995 2000 2005 2010
  • 9. Risk returns Source: Thomson Datastream
        • Extreme policy has produced extreme moves
        • Risk is cyclical, size and emerging
    Size group performance relative to FTSE All Share UK cyclicals % PER Premium vs Defensives 1st Jan 1990 = 100 0 50 100 150 200 250 300 350 400 450 500 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 FTSE 100 FTSE 250 -60 -40 -20 0 20 40 60 80 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
  • 10. Bulls in a China shop Price/Book in Emerging Markets was cheap Source: Datastream, SG Cross Asset Research
      • Emerged markets
      • East beating West on growth …
        • ... but reflected in stock prices
      • Too much of a good thing
      • Inflation rising; tightening underway
        • ‘ BRIC’ miners and engineers expensive
      • ‘ Doing the math’
      • Middle classes growing in Brazil, India, China
        • Still value in consumer-facing stocks
      • Redressing the balance
        • Growth differentials to narrow as US recovers
        • Looking for exposure to Western corporate investment
    4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 MSCI Developed World MSCI EM
  • 11. Old fashioned values
      • ‘ The new normal’
        • Subdued economic growth
        • Cyclical recovery maturing
      • Growth at a reasonable price
        • Superior returns on equity
        • Dividend growth
      • Case for the defensives
        • Premium quality
        • Discount valuation
    Source: Deutsche Bank, JP Morgan, Cazenove Capital *Stocks with growing dividend yield above 3%, strong free cash flow and superior return on equity Defensives as a % FTSE All Share Market Capitalisation 9.5% 11.0% 13.8% 14.3% Dividend Growth* 2011E 47.5 1.5 5.0% GlaxoSmithKline 2.1 1.8 1.9 Cash Cover* (x) 5.0% 3.6% 3.3% Dividend Yield* 2011E 24.4 29.1 22.5 RoE* 2010E Compass Group Babcock Intl Imperial Tobacco Group 25 30 35 40 45 50 55 1986 1990 1994 1998 2002 2006 2010 % FTSE All Share
  • 12. Regulatory information and risk warnings
    • This document is intended for Independent Financial Advisers, Professional Intermediaries and non-private clients only.
    • Issued by Cazenove Capital Management which is the name under which Cazenove Capital Management Limited and Cazenove Investment Fund Management Limited both authorised and regulated by the Financial Services Authority provide investment products and services.
    • Past performance should not be seen as an indication of future performance. The value of investments and the income from them can go down as well as up and an investor may not get back the amount originally invested and may be affected by fluctuations in exchange rates. The levels and bases of tax assumptions may change.
    • This document is for information purposes only and does not constitute an offer to enter into any contract/agreement nor is it a solicitation to buy or sell any investment or to provide any services referred to therein.
    • This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.