Henderson global investors

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Henderson global investors

  1. 1. “ Growth is the key to everything” Nicolas Sarkozy John Pattullo Head of Retail Fixed Income Jenna Barnard Director of Retail Fixed Income September 2011 This document is solely for the use of professionals and is not for general public distribution
  2. 2. Agenda <ul><li>What happened to the cycle? </li></ul><ul><li>Two conflicting policy responses </li></ul><ul><li>Zombie banks </li></ul><ul><li>Credit optically cheap </li></ul><ul><li>Conclusion </li></ul>
  3. 3. The cycle
  4. 4. What happened to the cycle? High Yield Investment Grade Cash & FRNs Debt reduction Profits growing faster then Debt Credit Equities Credit Equities Debt growing faster then Profits Credit equities Credit equities The Bubble bursts Source: Citi Group Henderson Global Investors Recession Recovery Growth Boom Shorter cycle, greater divergences between countries Gilts
  5. 5. The evolution of the Japanese yield curve Source: Bloomberg and Datastream, at 31 July 2011. The Japanese yield curve during recessions % Is the yield curve still a useful cyclical indicator?
  6. 6. The conflicting policy responses
  7. 7. European policy makers have been tightening fiscal and monetary policy Source: Bloomberg and Datastream, at 30 June 2011. % The Austrian solution to a bust = a purge
  8. 8. United States threw everything at it and still no growth Source: Bloomberg and Datastream, at 31 July 2011. % A more expansionary monetary policy and Keynesian fiscal solution but growth continues to follow the typical post-housing bust experience – sub-trend growth
  9. 9. Policy makers running low on credibility <ul><li>Comprehensive solutions in Europe are not politically viable – eurobonds only likely at the end of a fiscal integration process and may even breach the German constitution </li></ul><ul><li>Policy responses likely to become more desperate and innovative but no silver bullet </li></ul><ul><ul><li>Financial repression </li></ul></ul><ul><ul><li>Capital controls </li></ul></ul><ul><ul><li>Regulation </li></ul></ul><ul><ul><li>Financial markets tax (Europe) </li></ul></ul><ul><li>Central banks are the ultimate backstop – European solution will likely require the ECB to engage in €2 trillion+ of bond buying </li></ul>
  10. 10. Meanwhile, markets will punish any growth disappointments Source: Bloomberg, at 1 September 2011. Italy 10-year yield versus PMI %
  11. 11. Punishing growth disappointments Source: Bloomberg, at 1 September 2011. S&P versus Manufacturing ISM %
  12. 12. Long-term government bond market yields Global 10-year yields Source: Bloomberg, at 26 August 2011. MIT have sold $750million of 100 year bonds yielding 5.6% - would you bet against their economics department? Akerlof, Engle, Krugman, Merton, Nash, Scholes, Stiglitz, just to name a few...
  13. 13. Credit markets
  14. 14. Spread implied default rates Source: Deutsche Bank, at 23 August 2011. Cumulative five-year default rates since 1970 Valuations are cheap but overwhelmed by the technical overhang in credit markets. A huge liquidity premium is being demanded. 5.8% 12.5% BBB 2.5% 5.4% A 36.8% 31.3% 3.9% 8.0% Implied 0% recovery 31.5% High yield Euro High yield USD High yield European Investment Grade 31.5% High yield 1.8% AA 2.4% Worst Non-financial Sector
  15. 15. Spreads lead default rates Source: Credit Suisse and Moody's, at 18 August 2011. High yield spreads are highly correlated with default rates bps %
  16. 16. Investible universe comparison Source: Bank of America, at 23 August 2011. Note: Indices – G0L0, UN00, UI00, UT10, HE00, HEAD, CS European Loans Index. 90.0 780 9.3 3.8 High yield (non-fins) Negligible 3.7 5.3 7.7 7.6 9.4 Duration (years) 5.1 10.0 10.9 4.2 4.6 2.4 Yield 740 856 905 200 243 0 Spread 87.0 High yield 83.3 Tier 1 financials 108.5 Industrials (IG) 103.5 Investment grade 112.9 Gilt Loans Asset type 85.5 Average price
  17. 17. Zombie banks
  18. 18. Zombie banks <ul><li>Regulators and weak revenue environment mean there is no equity story </li></ul><ul><li>Funding concerns fundamentally different from 2008 crisis – we are not expecting bank failures </li></ul><ul><li>Capital position much better than 2008 </li></ul><ul><li>Banks are being encouraged to shrink </li></ul>Reregulation means that bank bonds have some merit, equity remains a difficult value story Bank capital and funding are improving Source: Morgan Stanley, at 30 April 2011.
  19. 19. Summary <ul><li>Recession risks have risen rapidly </li></ul><ul><li>Rates are on hold into 2013+ </li></ul><ul><li>Once volatility subsides there will be a grab for fixed rate reliable yield </li></ul><ul><li>Fixed rate BB/BBB appears best reward </li></ul>
  20. 20. Appendix
  21. 21. Investment grade spreads by sector Indices breakout Source: Merrill Lynch, at 19 August 2011. bp Wide 1012 Currently 432
  22. 22. US ISM new orders and prices paid Source: Datastream, at 31 July 2011. Current versus five-cycle mean A mid-cycle correction is consistent with historical recoveries
  23. 23. UK inflation Source: Datastream and desk estimate, at 31 July 2011. Inflation peaking and will tail off throughout into the year end
  24. 24. Prior recoveries from big bear markets Source: Datastream, at 26 August 2011. Dow industrials versus prior recoveries The recovery is still within the bounds of prior recoveries
  25. 25. Is there any information in the US curve? Source: Bloomberg, at 26 August 2011. US 2s 10s spread
  26. 26. Finding relative safety Source: Merrill Lynch G0L0, UC10, UC20, UC30, UC40, HE00 & UT10 26 August 2011. Six month rolling correlation to Gilts The correlation of different assets to Gilts Caveat – a rapid sell off in rates would be expected to cause a sell off in risk assets generally
  27. 27. HY new-issue trends: are we back to pre-crisis patterns? Aggressive issuance share (%) of overall market Refinancing % of lower rated issuance Source: JP Morgan, 30 April 2011. Lower rated issuance for refinancing (%) Percent of the market (%) Note: Aggressive issuance includes lower rated securities, excluding refinancings, plus Wireline Telecommunications issuance.
  28. 28. Forecasting global earnings recessions Source: Citigroup, at 30 April 2011. 1.00 0.0 1.0  Global ROE 0.19 0.6 0.5  Metal prices 0.38 0.3 0.5  Food prices 0.42 0.5 0.7  Inventories 0.65 0.4 0.8  Oil prices 0.68 0.6 1.0  Earnings revisions 0.75 0.2 0.8  Global real policy rates 0.84 0.2 0.9  Global Government yield curves 0.93 0.1 1.0  Labour market tightness Score Proportion of false signals Success rate Now Rank indicator
  29. 29. Two routes yield two negative feedback loops - Europe <ul><li>Fiscal retrenchment </li></ul><ul><li>No monetary expansion </li></ul><ul><li>Banking reregulation </li></ul><ul><li>Soft patch </li></ul>Deleveraging Crisis of confidence/ ECB rate hike Political turmoil No growth
  30. 30. Two routes yield two negative feedback loops - USA <ul><li>Fiscal and monetary expansion </li></ul><ul><li>Banking reregulation </li></ul><ul><li>Devaluation </li></ul><ul><li>Soft patch </li></ul>Deleveraging Crisis of confidence Political turmoil No growth
  31. 31. <ul><li>A – Austerity (core Europe) </li></ul><ul><li>B – Growth stimulus (USA) </li></ul><ul><li>Crisis of confidence, everybody retrenches “Paradox of thrift” and “Liquidity trap” </li></ul><ul><li>Need global policy response </li></ul><ul><li>Need growth (real or nominal) </li></ul>Plan A and Plan B – different but the same outcome <ul><li>Political wrangling </li></ul><ul><li>Deleveraging </li></ul><ul><li>Bank reregulation </li></ul><ul><li>Financial repression </li></ul>
  32. 32. Strategy A - Europe <ul><li>Market demanded austerity </li></ul><ul><ul><li>UK delivered but -> no growth, even with effective devaluation </li></ul></ul><ul><ul><li>Greece’s economy shrank -> no growth, structurally sunk? </li></ul></ul><ul><ul><li>Germany, France and Italy have all slowed unexpectedly, no devaluation possible </li></ul></ul><ul><li>ECB raised rates twice to contain inflation </li></ul><ul><li>ECB eventually forced to support peripheral bond markets in </li></ul><ul><li>Italy and Spain </li></ul><ul><li>Slow political response and political posturing -> crisis of confidence </li></ul>
  33. 33. Strategy B - USA <ul><li>Not austerity, rather the opposite! </li></ul><ul><ul><li>Tax cuts </li></ul></ul><ul><ul><li>Fiscal expansion </li></ul></ul><ul><ul><li>QE3 </li></ul></ul><ul><li>Hit soft patch – Japanese earthquake, weather and oil </li></ul><ul><li>No material change in unemployment </li></ul><ul><li>Housing market still not clearing </li></ul><ul><li>Debt ceiling/political posturing -> crisis of confidence </li></ul>
  34. 34. Henderson Global Investors 201 Bishopsgate, London EC2M 3AE Tel: 020 7818 1818 Fax: 020 7818 1819 This document is intended solely for the use of professionals, defined as Eligible Counterparties or Professional Clients, and is not for general public distribution. Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially. Nothing in this document is intended to or should be construed as advice.  This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment. Any investment application will be made solely on the basis of the information contained in the Prospectus (including all relevant covering documents), which will contain investment restrictions.  This document is intended as a summary only and potential investors must read the Prospectus before investing.  Issued in the UK by Henderson Global Investors. Henderson Global Investors is the name under which Henderson Global Investors Limited (reg. no. 906355), Henderson Fund Management Limited (reg. no. 2607112), Henderson Investment Funds Limited (reg. no. 2678531), Henderson Investment Management Limited (reg. no. 1795354), Henderson Alternative Investment Advisor Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE), Gartmore Investment Limited (reg. no. 1508030), Gartmore Fund Managers Limited (reg. no. 1137353) , (each incorporated and registered in England and Wales with registered office 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Services Authority to provide investment products and services. Telephone calls may be recorded and monitored.

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