The Illusion of Recovery - Presenation to the JCC (IOM)

Licensed by the Isle of Man Financial Supervision Commission Stockbrokers & Investment Managers Junior Chamber of Commerce Hilton Hotel Tuesday 9 th November 2010

Licensed by the Isle of Man Financial Supervision Commission Today’s Speakers Stuart Cowan Chartered FCSI Investment Director “ Welcome & Introduction” Peter Robertson BA (Hons) Chartered FCSI Senior Investment Manager “ The Illusion of Recovery” Stockbrokers & Investment Managers

Licensed by the Isle of Man Financial Supervision Commission Ramsey Crookall & Co Ltd Stockbrokers & Investment Managers Stockbrokers & Investment Managers

Licensed by the Isle of Man Financial Supervision Commission Ramsey Crookall & Co was established in 1946 and is the Isle of Man’s longest established independent firm of stockbrokers and investment managers. Stockbrokers & Investment Managers

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Stockbrokers & Investment Managers Disclaimer Where Ramsey Crookall has expressed views and opinions, these may change. Where markets and securities are mentioned in this document they do not necessarily represent a specific portfolio holding and do not constitute a recommendation to purchase or sell. This does not constitute an offer or solicitation by anyone in any jurisdiction in which such an offer is not authorised or to any person to whom it is unlawful to make such an offer or solicitation. The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. Ramsey Crookall and Co Limited is licensed by the Isle of Man Financial Supervision Commission. Licensed by the Isle of Man Financial Supervision Commission

Licensed by the Isle of Man Financial Supervision Commission “ The illusion of recovery” Stockbrokers & Investment Managers

Licensed by the Isle of Man Financial Supervision Commission “ are we there yet..........” Stockbrokers & Investment Managers

Licensed by the Isle of Man Financial Supervision Commission Stockbrokers & Investment Managers The average length of time a country spends in a deflationary deleveraging phase is SEVEN years......................... (McKinsey)

Today’s Presentation
Introduction
Remembering the credit crisis
How the authorities responded
Three years on – where we are now
Quantitative easing
What QE did to economic growth
The economic outlook
The market outlook
Conclusion

Remembering the Credit Crisis – ‘its all about debt’
Origins in USA - post dot com, Sept 11 2001. ‘Greenspan Put’
Post Sept 11 recovery driven by cheap debt, easy credit, consumption
US Mortgage Market - securitised
New products
Growth in sub-prime
Single Euro interest rate led to disproportionate growth in Eurozone
Recovery in Emerging Markets post 1998 led to increased trade

Stockbrokers & Investment Managers US Licensed by the Isle of Man Financial Supervision Commission

2007 – bubble bursts
Credit bubble popped in 2007 – Sub Prime Crisis in US
Mortgage backed securities = global contagion
Banks refused to lend
Stock markets collapsed, banks failed eg Lehman, Bear Stearns

How the Authorities responded
Interest rates cut to record low levels
Temporary fiscal stimulus – eg VAT cut to 15% in UK
Central bank intervention – ‘Quantitative easing’ & supporting ‘toxic assets’
Government spending to stimulate the economy
Bank bail outs by Governments
Changes in accounting regulations, eg FASB ‘mark to market’

Stockbrokers & Investment Managers Three years on – where are we now? Bond yields are suggesting low growth. Equities are discounting a ‘V’ shaped recovery. Gold is a hedge against inflation!! How can this be? Licensed by the Isle of Man Financial Supervision Commission 29.10.2007 29.10.2010 Change % 3 month LIBOR 6.26% 0.695% -5.565 UK Base rate 5.75% 0.5% -5.25 US Fed Funds Tgt 4.5% 0.25% -4.25 10 year Gilt Yield 4.84% 3.01 -1.83 FTSE 100 Index 6,706 5,675 -15.3% S&P 500 ($) 1,540.9 1,183.26 -23% Gold ($) 791.8 1,359.4 +71%

‘ Quantitative Easing’
Central bank intervention – aim to stimulate economic growth
Create money, lend to banks, invest in government and corporate bonds
QE since 2009:
US Federal Reserve: $1.7trn PLUS $600bn to Jun 2011
UK Bank of England: £200bn
ECB: €750bn emergency measure (loan guarantees)
The impact so far?
Original aims?
On growth, consumer spending?
On assets and economic data?
On inflation?

Stockbrokers & Investment Managers Licensed by the Isle of Man Financial Supervision Commission

What QE did to Economic Growth
US GDP
Has recovered from 2009 low
Q3 2010: +2%
QE: $1.2 - $1.5trn
But:
Consumer spending 70% GDP
Unemployment high, housing weak
Business investment constrained by tight credit, and ‘offshoring’
Gov’t stimulus temporary impact
Total consumer debt $11.7trn

United Kingdom GDP
Q3 GDP: 0.8%
QE spend so far: £200bn
Construction has been strong
Weak sterling helping exporters
But:
Austerity measures from 2011
Credit remains tight
Total personal debt £1.45trn

EuroZone GDP
Huge divergences between countries
The €750bn ‘comfort blanket’
Penal austerity measures across Eurozone
Greece problems have not gone away
Strong Euro will hurt exporters

The economic outlook
Interest Rates
Components of GDP
Credit/debt markets
Inflation
Potential headwinds

The economic outlook - Interest Rates
US: 0.25%
UK: 0.5% interest rates at historically low levels
Eurozone: 1%
Further QE suggests they will remain at current levels
Expect them to rise sharply once the recovery gains traction
Must keep an eye on inflation
Market rates (bond yields) will provide guidance

The economic outlook – credit/debt markets
Governments are carrying massive debts
Expect the US Government to continue spending, UK and Eurozone embracing austerity
Who will buy the US debt?
- Largest holders of US Treasuries : China $868.4bn
(Nov 2010) US Federal Reserve $842.0bn
Japan $836.6bn
Banks remain reluctant to lend (Basel III, balance sheet rebuilding)
UK mortgage lending sluggish – lending multiples much stricter than pre-credit crisis

The economic outlook - Inflation
UK inflation remains ABOVE Bank of England’s target
Possible food price inflation from 2011
Oil price just hit a 2 year high ($87)
Little wage inflation at this time – job preservation more important
Licensed by the Isle of Man Financial Supervision Commission US UK Eurozone CPI (m/m) 0.1% 0.0% 0.2% CPI (y/y) 1.1% 3.1% 1.8% Core CPI (y/y) 0.8% 2.7% 1.0%

The economic outlook – Potential Headwinds
Sovereign Debt crisis – GREECE, IRELAND!
Collapsing US dollar – potential inflationary consequences
30 year US Treasury bond – watch the yield
Further issues in US securitized mortgages market – watch BAC
Austerity measures, higher taxes, eg UK VAT 20% from Jan 2011
Is the recovery an illusion? Has the credit bubble only part deflated?

Stockbrokers & Investment Managers Consensus Forecasts Source: Consensus Economics: 13.09.2010 Licensed by the Isle of Man Financial Supervision Commission 2010 GDP 2010 CPI 2011 GDP 2011 CPI USA 2.7 1.6 2.4 1.4 Japan 3.0 -0.9 1.3 -0.3 Eurozone 1.6 1.5 1.4 1.6 UK 1.5 3.1 2.1 2.6 G7 2.2 1.3 1.8 1.4 Asia ex Japan 8.5 3.9 7.4 3.7

The market outlook
Bonds
Equities
Commodities
Currency

The market outlook - Bonds
Bonds are fundamentally expensive (2yr Gilt yields 0.7%; 5yr Gilt 1.5%)
Yields have been ‘juiced’ by QE over last 18 months
Everything depends on outlook for inflation – yields to rise as economy recovers
Only Central Banks (or avid deflationists) will buy bonds at these levels!
Licensed by the Isle of Man Financial Supervision Commission Bond Price 3 rd Apr 2009 GRY Apr 2009 Price 2 nd Nov 2010 GRY Oct 2010 Tesco 5% 24.02.2014 £100.00 5.0% £109.07 2.12% Vodafone 4.625% 09.09.2014 £101.20 4.37% £108.05 2.40% Nat’l Grid 6.125% 13.04.2014 £101.50 5.89% £111.52 2.58%

The market outlook - Equities
Equities are cheap compared to bonds!
Dividend yields are attractive (FTSE All Share 3.5%)
Equity markets have been discounting a ‘V’ shaped economic recovery
They remain susceptible to bad news, especially Europe & US!
Note the rise of the Far East Asian and Emerging Markets
Creditor nations
Strong Exports
Increasingly affluent and aspirational consumers

FTSE 100 Index

The market outlook: Commodities
Commodities have benefited from
A weak USD
Rapid growth in the emerging markets
Instruments such as exchange traded funds
Gold and precious metals are now a hedge against economic mis-management
Global demographics support agriculture commodities

Goldman Sachs Commodities Index
Reuters CRB Commodities Index

Gold

The market outlook: Currency
USD being ‘debased’ by Federal Reserve
To keep US exports attractive
Eurozone issues have not gone away. Only looks expensive due to
Fed action on US dollar
Austerity measures in Europe
Japan currency market intervention unlikely to succeed
Sterling has benefited from Govt savings review – ‘tackling the deficit’

Stockbrokers & Investment Managers US Dollar: Trade Weighted index Long term trend –down! Licensed by the Isle of Man Financial Supervision Commission

Conclusion
Strong recovery in asset prices since 2009
Helped by the actions of Central Banks
But economic recovery in the West remains fragile
Government have taken over the role of borrower from consumers
Double dip still possible. Consumers retrenching, unemployment remains high
Equity markets discounting good news (susceptible to disappointments)
It ‘feels’ illusory! Where would we be without Quantitative easing?

Stockbrokers & Investment Managers Disclaimer Where Ramsey Crookall has expressed views and opinions, these may change. Where markets and securities are mentioned in this document they do not necessarily represent a specific portfolio holding and do not constitute a recommendation to purchase or sell. This does not constitute an offer or solicitation by anyone in any jurisdiction in which such an offer is not authorised or to any person to whom it is unlawful to make such an offer or solicitation. The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. Ramsey Crookall and Co Limited is licensed by the Isle of Man Financial Supervision Commission. Licensed by the Isle of Man Financial Supervision Commission

Stockbrokers & Investment Managers Questions Stuart Cowan Chartered FCSI Director Peter Robertson BA (Hons) Chartered FCSI Senior Investment Manager Licensed by the Isle of Man Financial Supervision Commission

The Illusion of Recovery - Presenation to the JCC (IOM)

by Owen Cutajar on Nov 11, 2010

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The Illusion of Recovery - Presenation to the JCC (IOM) — Presentation Transcript

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