Quarterly Press Conference

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Quarterly Press Conference. 2009 OUTLOOK: INVESTING IN A SLOW-GROWTH WORLD. 27 January 2009. Peter Brooke Head of Macro Strategy Investments “ What do you do when bonds are junk and cash is trash?”. Cash is trash Bonds are junk What does that leave? Property Equity. Agenda.
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Quarterly Press Conference2009 OUTLOOK:INVESTING IN ASLOW-GROWTH WORLD27 January 2009Peter BrookeHead of Macro Strategy Investments“What do you do when bonds are junk and cash is trash?”Cash is trashBonds are junkWhat does that leave?PropertyEquityAgendaAsset Class ReturnsFor the 12 Months to 31.12.08US DollarsReturnsRandReturnsSA EquitiesSWIXSA Listed PropertySA BondsSA CashInt’l ReturnsMSCI AC WorldEmerging MarketBondsCash-21.7-4.517.011.4-21.3-36.751.531.518.726.54.39.46.235.57.41.0-42.1-29.4-13.5-17.7-41.9-53.212.0-2.8Source: Macro Strategy Investments (OMIGSA)UK BoE Official Bank RateLowest rate since 1694!!Source Data: BloombergUS 3mth Treasury Bills-4bps in December!!Source Data: BloombergZIRPSouth Africa: Lots of cuts to comeSource: Macro Strategy Investments (OMIGSA)bondsUS 30 year bond yieldLowest level for 50 years10-yr bond = 2.4% nominal returnSource: Macro Strategy Investments (OMIGSA)Global bond yields16.016.0UK Govt 10 year bond (3.69)Germany Govt 10 year bond (3.25)14.014.0USA Govt 10 year bond (2.618)Japan Govt 10 year bond (1.23)12.012.010.010.08.08.06.06.04.04.02.02.0Weighted bond yield = 2.7%0.00.019741979198419891994199920042009Source Data: IRISInflation expectationsDeflation in Japan, no inflation in USSource Data: BloombergCredit is already pricing in the Great Depression Source: Moody’s, The Yield Book, NBER, Morgan Stanley ResearchSA 10 year bond yield (%)Lowest level for 40 yearsSource: Macro Strategy Investments (OMIGSA)propertyWill be the best yielding investment in SA by endof 2009Cyclical outlook poorbut better than equityLonger-term a freeoption on growthBuilding plans passed down 11%SA listed propertySource: Macro Strategy Investments (OMIGSA)equity2008 was a bad yearSecond worst year since 1925Source Data: IRISLeading to a de-ratingPriceEarnings RatioAll ShareTotal Ret.EarningPer ShareForwardDiv. YieldAll ShareIndexDec 20062491525733.0%144017.3xDec 20072895830673.2%199414.5xDec 20082150923544.6%22759.5xAnn. Change-25.7%-23.2%+14%-34%Source: Macro Strategy Investments (OMIGSA)Value has returnedDividend yield also the best for 18 yearsEarnings base still the major riskThe world has entered one of the worst recessions in 100 yearsThe extent of the deterioration has been dramatic The limited precedent makes timing unknownWhen the recovery comes market re-action will be extremely fast When does the economy stop free-falling?US ISM New Orders9080706050403020194819511954195719601963196619691972197519781981198419871990199319961999200220052008US Non Farm Payrolls – Monthly change8006004002000-200-400-600193919421945194819511954195719601963196619691972197519781981198419871990199319961999200220052008Equities cheap relative to bondsLong-term perspective: Real EquitiesSource: Macro Strategy Investments (OMIGSA)Greed: Conviction of a New EraCapitulation and ContemptCautionEnthusiasmDenialFearThe Art – Investor’s PsychologyDistribution of ReturnsExtremes more likely than most investors thinkDividend, Bond & Cash YieldsDIVIDEND YIELD(%)BOND YIELD(%)CASH YIELD (3 MONTH NCD)(%)COUNTRYINDEXU.S. S&P 5003.22.40.1EUROPE DJ STOXX 506.63.02.3JAPAN NIKKEI 2252.61.20.6U.K. FTSE 1005.73.51.1S.A. JSE ALL SHARE5.47.911.5First time in 50 years that US Dividend yields > Bond yieldsSource Data: Bloomberg, 10-year bond yield, NB Dividend yields are probably optimisticGlobal cash and bond returns will be pitifully lowCorporate bonds look interestingEquity returns look attractive in the medium termBad macro & earnings vs. sentiment & valuationMSI StrategyUnderweight: Government bonds, offshore cashOverweight: Offshore equity, SA property, SA cashConclusionAsset Allocation ViewReal ReturnViewCommentNSAGood long-term real return.Concerned about real earnings growth.NEquity7.5%High yield of 9% with growth but cyclical fear.High barriers to entry = electricity & costs.Property7.0%Looking interesting in the next year,but longer-term concerns about inflation.Bonds2.5%Attractive in the short-term but rates will fall. Re-investment risk high.Cash3.0%NOffshoreCheap compared to history but negative earnings momentum.Equity8.0%No inflation risk in short-term but low nominal returns.Bonds1.0%Cash0.0%Downgraded as rates fall sharply.NB: These are long-term, real returns expected over the next five yearsDon’t chase last year’s winnersWe do not expect bonds to give the same level of returnOffshore investments should be focused on equityLow interest rates are here for a whileNow is a good time for “investors” to add to equityGood long-term real return from hereDon’t downgrade your solution unless your risk profile has changedNOTE: This is a general view, for more information, please contact your financial adviser or brokerThe man in the streetRegulatory InformationOld Mutual Investment Group (South Africa) (Pty) LimitedPhysical Address: Mutualpark, Jan Smuts Drive, Pinelands, 7405Telephone number: +27 21 509 5022Old Mutual Investment Group (South Africa) (Pty) Limited is a licensed financial services provider, FSP 604, approved by the Registrar of Financial Services Providers (www.fsb.co.za) to provide intermediary services and advice in terms of the Financial Advisory and Intermediary Services Act 37 of 2002. Old Mutual Investment Group is a wholly owned subsidiary of Old Mutual (South Africa) Limited. Reg No 1993/003023/07.The investment portfolios may be market-linked or policy based. Investors’ rights and obligations are set out in the relevant contracts. Market fluctuations and changes in rates of exchange or taxation may have an effect on the value, price or income of investments. Since the performance of financial markets fluctuates, an investor may not get back the full amount invested. Past performance is not necessarily a guide to future investment performance. Personal trading by staff is restricted to ensure that there is no conflict of interest. All directors and those staff who are likely to have access to price sensitive and unpublished information in relation to the Old Mutual Group are further restricted in their dealings in Old Mutual shares.All employees of Old Mutual Investment Group are remunerated with salaries and standard short-term and long-term incentives. No commission or incentives are paid by Old Mutual Investment Group to any persons. All inter-group transactions are done on an arms lengths basis.In respect of pooled, life wrapped products, the underlying assets are owned by Old Mutual Life Assurance Company (South Africa) Limited who may elect to exercise any votes on these underlying assets independently of Old Mutual Investment Group.In respect of these products, no fees or charges will be deducted if the policy is terminated within the first 30 days. Returns on these products depend on the performance of the underlying assets.Old Mutual Investment Group has comprehensive crime and professional indemnity insurance. For more detail, as well as for information on how to contact us and on how to access information please visit www.omigsa.com.
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