MSF Macro Presentation Q2 2012

MSF ENTERPRISES, LLC
Macroeconomic Presentation Q2 2012

1
Copyright © 2012 MSF Enterprises, LLC

Table of Contents
Developed Markets
United States…………………………………………………..........3
Euro Zone………………………………………………………...…..6
Japan……………………………………………………………………9
Emerging Markets
China…………………………………………………………………..11
India…………………………………………………………………...13
Brazil………………………………………………………………….15
Mexico………………………………………………………………..17
How to Play the Market
Global Opportunities………………………………...…………19

2

U.S.: Current Environment

Economic Environment
• GDP growth for 2012 estimated at 2.1%, forecast as 2.4% for 2013 1
• Debt/GDP at 103%, fiscal deficit above 8% of GDP 2
• Unemployment remains above 8%, compared to 2003-2007 average of 5.2% 3
• Consumer confidence at 62 in June, below historical average of 93 4
Housing
• Housing market showing signs of price stabilization as home sales up 7% in 2012 5
• Asset managers, REITs and HNW individuals purchasing real estate due to low rates and attractive prices
• Refinancing up 4.1% in 2012 due to historically low interest rates 6
• 10MM underwater mortgages and shadow inventory of 1.5MM homes could disrupt supply/demand balance 7
Energy
• More efficient technologies for natural gas extraction have boosted U.S. production over 27% since 2005 8
• The U.S. is projected to cut its reliance on Middle East oil by 2020 and become self-sufficient by 2035 5
Retirement and Pensions
• 10,000 baby boomers are approaching retirement daily 9
• 60% of households report total savings and investments of less than $25,000 9
• Defined-benefit pensions at record underfunding level of $355B for S&P 500 companies in 2011 10
Current Issues
• Dodd-Frank Act and Volcker Rule aimed at increasing transparency and stability in financial system
• Greater regulation, higher capital requirements and elimination of prop trading will likely cut bank profits
• Possible “Fiscal Cliff” at end of 2012
• Expiration of 42 provisions would reduce 2013 spending deficit by 5% of GDP 11
• Real GDP growth could drop to .5% in 2013 if provisions are allowed to expire 11
• Capital gains tax rate would increase from 15% to 20% and dividend taxes from 15% to 39.6% 5
Financial Markets
• S&P 500 P/E ratio of 15.63 is near historic average of 15.48 12
• Analysts earnings estimates have trended down nearly 10% since 2011, yet S&P 500 up nearly 25% 5
• U.S. equities have an average correlation of .56 with all foreign markets 13
• 13% of 2010 S&P 500 revenue was from Europe in 2010 5
• Sectors with high exposure to Europe: Materials (24%), Energy (18%), Industrials (17%), Health Care (17%) 12

3

U.S.: Supporting Charts
U.S. Unemployment Rate

Annual GDP Growth (%)

*Source: World Bank
*Note: Estimated data for 2012

Unemployment above 2003-2007
average of 5.2%

3.0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012

2012

2010

2008

4.0
2006

-6
2004

5.0
2002

-4
2000

6.0

1998

-2

1996

7.0

1994

0

1992

2

8.0

1990

9.0

1988

4

1986

10.0

1984

6

1982

11.0

1980

8

*Source: U.S. Bureau of Labor Statistics

U.S. Government Debt to GDP vs. 10-Yr Treasuries

U.S. Consumer Confidence
Dropping due to
weak job market
and fear of euro
debt crisis

100%
103%
80%
60%
33.4%
40%

Risk-free?

10.80%

20%

1.5%

US Debt to GDP

1996
1998
2000
2002
2004
2006
2008
2010

1982
1984
1986
1988
1990
1992
1994

1980

0%

10-Yr Treasury Yields

*Chart from Trading Economics

*Source: U.S. Bureau of Public Debt, U.S. Department of the Treasury

4

U.S.: Supporting Charts
U.S. Natural Gas Marketed Production
(in Cubic Feet)
Prices
stabilizing?

Millions

24
22
20
18

*Source: U.S. Energy Information Administration

*Source: Standard & Poor’s

S&P Performance vs. Earnings Estimates

Geographic Breakdown of S&P 500
Revenues (2010)
Disconnect
between
market
performance
and earnings
estimates

*Source: Wall Street Journal

Africa
3%

U.S.
54%

Asia
6%

Europe
13%
Canada/
Mexico 2%
South
America
2%
Foreign
Countries
(Unspecified)
20%

*Data from Standard & Poor’s

5

Euro Zone: Current Environment

Euro Zone Overview
•
The 17 countries in the European Union have a combined GDP of $17.55T, greater than the U.S. at $15.09T 1
•
Arrangement is a monetary union without fiscal union
•
Single currency makes shifting money across borders easy, increasing risk of a bank run
•
EU Officials are capable of significant action that can strongly influence markets
•
The U.S. is the euro zone’s top trading partner, accounting for 13.8% of total trade 2
•
Slow growth around 0% for the region, with contraction in some countries 3
•
High fiscal deficits averaging 4.1% for entire euro zone and 7.76% for the GIIPS countries 3
•
Large debt loads, averaging 88% debt/GDP 4
•
High borrowing costs, with some countries above the historically unsustainable level of 7% 5
•
High unemployment averaging 11% for the entire euro zone 3
•
Declining industrial production and gross fixed capital formation over the past year 2
•
The U.K., traditionally considered a safe haven for the region, slipped into recession following contraction in Q2
2012 6
Financial Markets
• Euro declining in value, falling around 15% against the dollar in the past year 7
• European stocks have remained relatively flat over the past two years despite reduced earnings outlooks 8
• Some European companies have been forced to cut or delay raising dividends 9
• Credit default swap spreads on GIIPS debt securities have been rising since 2010 10
Current Issues
•
Bailouts for Greece, Ireland, Portugal, Cyprus and the Spanish banking system
•
Stronger countries such as Germany may be forced to prop up fiscally weaker nations
•
LIBOR fixing scandal may further erode confidence in global banking systems and attract tighter regulation
•
Exact exposure of global banks to credit default swaps cannot be quantified
Outlook
• Depth of issues, combined with timing of action from EU officials complicates near-term outlook
• Short-term risk for both long and short positions
• Long-term buy opportunities
• Companies with significant operations abroad facing steep, sometimes unwarranted, Euro discount

6
2012 MSF Enterprises, LLC

Euro Zone: Supporting Charts
Euro Zone GDP Growth Rate
4.0%
3.0%
2.0%
1.0%
0.0%
-1.0%
Realistic estimate?

-2.0%
-3.0%
-4.0%
-5.0%

2006 2007 2008 2009 2010 2011 2012E 2013E

*Data from Eurostat

Euro Area Unemployment (Avg. 11%)

*Chart from the European Commission

Industrial production accounts for 25% of EU
GDP (ECB)

Euro vs. U.S. Dollar (One Year Performance)

-15.72%

*Chart from Eurostat

*Chart from Yahoo! Finance

7

Euro Zone: Supporting Charts

GDP (in $B)

Euro GDP v. Debt (2011)
GDP (in USD, current prices)
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0

10-Yr Bond Yields on Euro Sovereign Debt

Debt (in USD, current prices)

30%
25%
20%
15%
10%
5%
0%
Jun-09
Dec-09
Jun-10
Germany
Ireland

*Data from International Monetary Fund

Dec-10
Greece

Jun-11
Spain

Dec-11
Italy

*Data from European Central Bank

Change in Consensus Forecast for Stoxx
Europe 600 Index Revised Net Earnings

Euro Stoxx 600 (5 Year Performance)

Flat overall during the past two years
despite reduced outlook?

*Chart from Stoxx
*Chart from Factset Research Systems

8

Jun-12
Portugal

Japan: Current Environment
• GDP: $5.87T (world rank #3) 1
• GDP expanded 1.2% in Q2 2012 after contracting .7% in 2011 2
• Highest debt/GDP ratio in the world at 211% 2
• Approximately 20% of government spending is allocated to debt servicing 3
• 93% of government debt is held domestically 4
Trade
• Exports account for 15% of GDP 8
• Strengthening yen is negatively impacting export-driven economy
• Around 35% of Japan’s exports go to the U.S. and China 9
• Japan reported a $37.4B trade deficit in the first half of 2012 as exports fell 2.5% and imports surged 13.1% due to
energy demand from offline nuclear reactors 10
Aging Population
• 65+ demographic accounts for over 23% of the Japanese population 5
• By 2050, around 35% of the population is projected to be over 65 6
• 29.2% of government budget goes toward social security and medical expenses 3
• Japan’s Government Pension Investment Fund (GPIF) is the world’s largest, overseeing $1.45T in assets 7
• GPIF is increasing emerging market exposure to lift return potential, yet the fund does not currently utilize alternative
investment assets 7
• Aging population will present labor force issues but provide opportunities for firms that cater to the demographic

9

Japan: Supporting Charts
Japan Debt/GDP & GDP Growth
250

6
211

200

4
2

150

0

100

-2
-4

50

-6

0

-8

Debt to GDP (Left)

GDP Growth

(Right)

*Source: Wall Street Journal

*Data from the World Bank

Japanese Yen vs. U.S. Dollar (Five Year Performance)

Japan’s Aging Population

+52.3%

*Source: Yahoo! Finance

10

China: Current Environment

• GDP of $7.29T (world rank #2) 1
• GDP growth has slowed 6 straight quarters to 7.6% in Q2 2012, the lowest level since 2008 2
• Low unemployment at 4.1% 2
• Total debt to GDP over 180% 3
• Retail sales rose at a CAGR of 18% between 2005 and 2011 2
Exports
• China’s exports totaled $1.2T in 2011 2
• 25% of the Chinese labor force works in export-related businesses 2
• The U.S., Japan and the EU are China’s largest export markets 4
• The EU accounted for 18% of China’s exports in 2011 4
• Exports to emerging markets make up 45.5% of China’s total 5
• Shift occurring from export-based economy towards a consumption based economy
Debt
• Government debt/GDP is 25.8%, but that figure excludes the debt of state-owned enterprises and local governments
that is implicitly backed by the central government 6
• Consumer debt makes up approximately 18% of total debt 7
• Savings rate is around 28% of disposable income, compared to 3.9% for the U.S. 6,8
Property Market
• Property prices began to decrease in 2012 9
• Average Chinese family holds 41% of its wealth in property 10
• Government control of the property market can distort the supply/demand balance 11
• Multiple “ghost cities” were built in anticipation of high growth but remain largely unoccupied 12
Financial Markets
• Difficult to invest directly in the yuan or yuan-denominated assets due to government capital controls 13
• ETFs may be the best vehicle to invest in China’s equity and debt markets
• Foreign Invested Enterprises can be created to invest in real estate, equity or other asset classes 14
Current Issues
• Infrastructure ranks 69th out of 142 countries, behind Jamaica 15
• Analyst skepticism over timing, accuracy and comprehensiveness of economic data released by the Chinese
government

11

China: Supporting Charts
Quarterly GDP Growth (YoY)

Composition of GDP Growth

Consumer Debt in China (in $B)
2,000
1,500
1,000
500
0
2007

2008

2009

2010

*Source: People’s Bank of China
Note: Exchange rate assumed to be .1566 yuan/dollar

Property Price Change (% YoY)

China Exports (% Change YoY)

*Source: Society Generale

40%

China Population Breakdown (in MM)

20%

1,000

0%

500
0
1953

-20%

1964

*U.S.-China U.S.C & Bloomberg

1982

1990
Rural

2000
Urban

2011

*Source: World Bank

12

India: Current Environment

• GDP growth of 5.3% is a nine-year low 1
• Agriculture is 52% of labor force but only 17% of GDP 2
Trade
• India’s top trading partners are the EU (18.59%), UAE (10.72%), China (9.5%), and the U.S. (7.3%) 3
• China and India projected to become world’s largest trading partners by 2030 4
• FDI needed to fund current account deficits over 3.5% of GDP 5
Development
• India needs FDI to boost its quality of infrastructure, which ranks 86th out of 142 countries behind Kazakhstan 6
• FDI has declined recently due to lower growth, large deficits and unfavorable tax policies
• Software services and business process outsourcing contribute revenues of over $50B 7
• 32.7% of India’s population lives below the international poverty line 1
• GDP per capita (PPP) ranks 129th in the world 8
• Median age of 25 provides a workforce with potential for high future growth 7
• Growth in tertiary education and adoption of English language will enable development of skilled industries 7
• Middle class expected to grow tenfold by 2025 7
Current Issues
• 2012 monsoon rains are 20% below average and could reduce crop production 9
• In early 2012, India allowed access to foreign investment in single-brand retail but has not yet opened up to multibrand retailers 10
• In 2012, India announced it will allow foreign retail investors to buy up to $1B in local corporate bonds in an effort to
bolster capital inflows and support the rupee 9
• India ranks 132nd out of 183 in terms of ease of doing business, between Ecuador and Nigeria 1
• Factors that complicate the business environment include corruption, cumbersome bureaucracy, regulation on
foreign investment, high fiscal deficits, labor market inequalities and lack of infrastructure 7

13

India: Supporting Charts



25000
20000
15000
10000
5000
0
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011

Investment (in millions, U.S.D)

Foreign Direct Investment in India

*Data from OECD


14

Brazil: Current Environment

• Debt/GDP has declined from 62.9% in 2002 to 35% in 2011 1
• Inflation rate is 4.9%, which is .4% above the central bank’s target 2
• Unemployment at 5.8% 3
• Brazil’s retail sales growth averaged 5.27% from 2001-2012 3
• Brazil receives the most FDI out of any Latin American country, with the U.S. as the largest contributor 1
• FDI has increased at an annualized 30.6% since 2010 to reach approximately $63B in May 2012 2
Trade and commodities
• Trade surplus of $23.9B from June 2011 to June 2012 2
• The portion of Brazil’s total exports going to China increased from 6.2% in 2006 to 17.9% in 2012, while allocation
to the U.S. decreased from 18.2% to 11% 2
• New pre-salt oil basins continue to be discovered, with an estimated 50-100B barrels still remaining to be
extracted 4
• Oil and gas production is expected to expand from 2.02MM barrels per day in 2011 to 4.2MM barrels per day in
2020 2
• Brazil has an 87% average success rate with pre-salt exploration compared to an average rate of 20-25% globally 4
• Pre-salt drilling is more expensive than other extraction methods and has an average break-even price of about $40
per barrel 4
Financial Markets
• Brazilian real has declined nearly 24% against the dollar in the past year 5
• Brazil’s Bovespa index has only provided a total return of 4.82% over the past three years while producing an
annualized rate of 10.82% since 2000 5
• MSCI Brazil Index has a forward P/E ratio of 11x compared to 13.25x for the S&P 500
• Energy and materials account for more than 40% of Brazil’s stock market 6
Current Issues
• 2014 FIFA World Cup and 2016 Olympics in Brazil will necessitate greater investment in infrastructure
• Corruption and political interference with free enterprise have served as inhibitors to growth and FDI

15

Brazil: Supporting Charts
GDP Growth & Market Expectations

Bovespa v. Hang Seng v. S&P 500
Bovespa: 10.82% annual return
Hang Seng: .97% annual return
S&P 500: -.2% annual return

*Chart from Yahoo! Finance

*Chart from Central Bank of Brazil

Exports by Destination
2006
16.70
%
6.20%

Oil and Gas Production

Jul 11 – Jun 12

26.90
%

16.50
%

21.50
%

3
17.90
%

18.20
%

20.10
%

22.90
%

2

11%

9.10%
*Data from Central
Bank of Brazil

4

13%

Brazil’s portion of
exports to China has
nearly tripled since 2006
while the portion sent to
the U.S. has declined 40%

*Chart from Central Bank of Brazil

16

Mexico: Current Environment
• CAGR of 2.34% since 2000 trails Latin America’s 3.5% 1
• Third largest recipient of migrant remittances, averaging 2% of GDP 1
• Economy closely follows the U.S., with 80% of Mexican exports going to the U.S. 2
• Mexico’s industrial production exhibited a correlation of .9 with U.S. manufacturing from 1994-2011 2
• Despite receiving lower levels of FDI, Mexico’s stock market outperformed Brazil 52.9% to 4.8% over the past three
years 1, 11
Outsourcing Environment
• Manufacturing costs in Mexico are becoming more competitive with China, as the spread between average wages has
tightened from 237% in 2002 to only 13.8% in 2010 3
• Peso has declined about 18% against the dollar in the past five years while the Chinese yuan has increased 19% 4
• Lower transport costs relative to China and free trade agreement with the U.S. could encourage a shift in production
to Mexico
Tourism and Retirement
• Travel and tourism contributed 12.4% of total GDP and 13.7% of total employment 5
• Mexico had a 14.9% share of the total number of tourists to the Americas in 2011, yet had only a 6% share in overall
tourist receipts 6
• 8% of total investment in Mexico is related to travel and tourism, this amount is expected to increase 6.5% annually
over the next ten years 5
• There are an estimated 40,000 to 80,000 American retirees living in Mexico 7
• Cost of living comfortably in Mexico is approximately 50-75% cheaper than in the U.S. 7
Development
• Education levels in Mexico are rising as the labor force is becoming more skilled 8
• Mexico has 5% unemployment, yet 26% underemployment 8, 9
• Mexico has a high level of income inequality with a Gini coefficient of .47, which is one of the highest in the OECD and
is just behind Chile and Brazil 2
• Mexico’s quality of infrastructure ranks 73rd out of 142 countries, behind Ukraine and Albania 10
• Corruption, concentration of power, political instability and violence are major obstacles to development

17

Mexico: Supporting Charts
Remittances to Mexico

Mexican Poverty Levels

*Chart from JP Morgan, data from CONEVAL

Share of U.S. Manufacturing Imports

Wages in the Manufacturing Sector

Will share of U.S. manufacturing imports
compress along with wages?

*Chart from JP Morgan, data from Ministry of Finance

*Chart from Hanson, Gordon (2010)

Capital Investment in Travel & Tourism

*Chart from World Travel and Tourism Council

18

Macro Strategies
•
•
•
•
•

•
•
•
•
•

U.S.
Real estate opportunities due to discounted prices
and low interest rates
High growth in Oil & Gas industry could boost related
companies, especially midstream firms
Baby boomer retirement may increase demand for
wealth management and assisted-living services
Market may present mispriced securities for investors
with a long-term horizon
Equities with high dividend yields may outperform

Europe
Limit exposure to the euro zone and consider hedging
current exposure
Opportunity in equities facing steep euro discount
despite having significant operations abroad
Yield opportunities for dividend-paying companies
with a stable outlook
Pre-owned, repair-based and discount goods
businesses may benefit from reduced spending
Play dips in the market and short weaker securities

•

•
•

•
•

•
•

•
•

•
•
•
•


Japan
Aging population presents opportunities in nursing
homes and assisted-living
Shift away from nuclear energy may boost investment
and growth in alternative energies
Japanese pension funds may need to incorporate
alternative investments and other high return assets
to meet obligations
Japanese debt may perform well as a safe haven in an
uncertain global economy

•

•
•
•

China
Infrastructure investments are needed, which could boost
construction, materials and utilities firms
Opportunity in consumer finance as consumers have room to
borrow and credit cards were only introduced in last 10 years
Privatized Chinese government assets may be a good way to
invest in debt securities

India
High growth software services segment presents opportunities
Growth potential in infrastructure-related firms due to India’s
growing need for utilities, roads, etc.
High projected growth of middle class presents opportunities for
consumer goods companies
Tech firms could outperform due to growing rate of technology
adoption in the country

Mexico
Manufacturing sector may provide opportunity as outsourcing
costs have become competitive with China
Gradual development of middle class may offer future
outperformance of consumer goods companies
Companies that cater to American preferences may benefit from
tourism and migrant retirement trends

Brazil
Opportunities in oil sector due to increased production and
discovery of new basins
High growth in retail provides opportunities for consumer goods
companies
Infrastructure-related firms may benefit from build-up in
advance of 2014 World Cup and 2016 Olympics

Contact Information

Michael Fields
Managing Partner
717 17th St., Suite 2160
Denver, CO 80202
(303) 847-4649
mfields@msfenterprises.com

Dan Urmann
Chief Operating Officer
717 17th St., Suite 2160
Denver, CO 80202
(303) 847-4651
durmann@msfenterprises.com

Nicholas Dier
Associate
ndier@msfenterprises.com

Austin Lindsey
Associate
alindsey@msfenterprises.com

Collin Ricker
Associate
cricker@msfenterprises.com


Crystal Parzik
Director of Marketing
717 17th St., Suite 2160
Denver, CO 80202
(303) 847-4650
cparzik@msfenterprises.com

Maggie Ehrenreich
Associate
mehrenreich@msfenterprises.com

Sources
U.S.
1. World Bank
2. U.S. Bureau of Public Debt,
Department of Treasury
3. U.S. Bureau of Labor Statistics
4. The Conference Board
5. The Wall St. Journal
6. Bloomberg
7. Forbes
8. U.S. Energy Information
Association
9. Employment Benefit Research
Report
10. Barron’s
11. Congressional Budget Office
12. Standard & Poor’s
13. MSCI, Thomson Reuters
Euro Zone
1. World Bank
2. European Commission
3. Eurostat
4. International Monetary Fund
5. European Central Bank
6. U.K. Office for National Statistics
7. Yahoo! Finance
8. Stoxx, Factset Research
9. European Securities Network
10. Bloomberg, Federal Reserve
Bank of Dallas

Japan
1. World Bank
2. Japan Ministry of Finance
3. The Wall St. Journal
4. Fitch
5. Yahoo! News
6. United Nations Population
Division
7. Bloomberg
8. Trading Economics
9. Thomson Reuters
10. Associated Press

India
1. World Bank
2. CIA World Factbook
3. India Department of
Commerce
4. ASSOCHAM
6. World Economic Forum
7. U.S. Department of State
9. Thomson Reuters
10. Bloomberg Businessweek

China
1. World Bank
2. National Bureau of Statistics
3. Fitch
4. Thomson Reuters
7. People’s Bank of China
8. St. Louis Federal Reserve Bank
9. Societe Generale
10. UBS
11. The Economist
12. BBC
13. Bloomberg
14. American Chamber of Commerce
in Shanghai

Mexico
1. World Bank
2. JP Morgan
3. Ministry of Finance
4. Yahoo! Finance
5. World Travel and Tourism
Council
6. United Nations World Tourism
Organization
7. U.S.A Today
8. INEGI
11. Bloomberg
Brazil
1. World Bank
2. Central Bank of Brazil
4. The Economist
5. Yahoo! Finance
6. Bloomberg

21

MSF Macro Presentation Q2 2012

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