Climate change Tristan Hanson Investment Outlook June 2009.

Climate changeTristan HansonInvestment OutlookJune 2009

Investment Briefing June 2009

Uncertainty is unavoidable

“Safe haven” assets offer low or negative prospective real returns

Risk-assets are offering high compensation for risk by historical standards

Important distinction between types of risk: liquidity; volatility; fundamental

Global policy stimulus efforts are unprecedented: $2.5trn fiscal boost

Close to the end-game in the banking crisis?

Decent odds “news” perceived as less bad

over 2009 and risk-assets rally

Strategy Conclusions (Feb 2009)


Rollercoaster ride for equities since last briefing

80

85

90

95

100

105

110

115

Ashburton Replica SterlingAsset Management Fund

JP Morgan Global GBI

MSCI World GBP

02-F

eb-0

9

16-F

eb-0

9

02-M

ar-0

9

16-M

ar-0

9

30-M

ar-0

9

13-A

pr-0

9

27-A

pr-0

9

11-M

ay-0

9

25-M

ay-0

9


Equities – further upside potential

Government bonds (US/Europe) - oversold and no longer overvalued

Sterling preferred currency major

Macro views

Global economy poised for recovery

Long-term structural growth concerns remain

Inflation fears overdone

Key points


The glass is still half empty

Source: BCA Research

1880 1900 1920 1940 1960 1980 2000



Source: Bloomberg

AAI Investor Survey: % Bulls, 13 week average

PESSIMISM

EUPHORIA

20%

30%

40%

50%

60%

70%

80%

Jun

-90

Jun

-93

Jun

-96

Jun

-99

Jun

-02

Jun

-05

Jun

-08



Source: Ned Davis Research, Bloomberg

US Money Market Funds / stock market capitalisation

0%

5%

10%

15%

20%

25%

30%

35%

40%

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008


Pessimism reflected in depressed valuations

Source: Ashburton, S&P

US: cyclically-adjusted PE ratio

5

10

15

20

25

30

35

40M

ar-

50

Ma

r-5

5

Ma

r-6

0

Ma

r-6

5

Ma

r-7

0

Ma

r-7

5

Ma

r-8

0

Ma

r-8

5

Ma

r-9

0

Ma

r-9

5

Ma

r-0

0

Ma

r-0

5


S&P 500 PE ratio using 12 month forward EPS

Source: Factset

US PE ratio (12mf EPS)

10

12

14

16

18

20

22

24

26

28

Jun-

89

Jun-

91

Jun-

93

Jun-

95

Jun-

97

Jun-

99

Jun-

01

Jun-

03

Jun-

05

Jun-

07


Consensus expectation is a weak recovery

Source: Macroeconomic Advisers

1948-49

1 2 3 4 5 6 7 8 9

1960-61

1969-70

1957-58

2001

1973-75

1980

1953-54

1981-82

1990-91

2007-2009(MA forecast)

0

1

2

3

4

5

6

7

8

9

10

Strength of recovery versus severity of preceding recession

Negative growth in recession (relative to versus trend)

Sha

rper

rec

over

y

Deeper recession


Earnings expectations are very depressed

Source: Nomura, IBES

Net Earnings Revisions %, (Up -Down) / Total, 3MMA

World Earnings Revisions Balance

-40

-30

-20

-10

0

10

20

87 89 91 93 95 97 99 01 03 05 07 09


Asian outperformance expected to continue

Source: Bloomberg

Asia ex-Japan relative to MSCI World

90

100

110

120

130

140

150

De

c-0

6

Ma

r-0

7

Jun

-07

Se

p-0

7

De

c-0

7

Ma

r-0

8

Jun

-08

Se

p-0

8

De

c-0

8

Ma

r-0

9


Government bonds: oversold

US 10yr Treasury Yield - 8 week change

-2.3

-1.8

-1.3

-0.8

-0.3

0.2

0.7

1.2

Jan

-90

Jan

-92

Jan

-94

Jan

-96

Jan

-98

Jan

-00

Jan

-02

Jan

-04

Jan

-06

Jan

-08


US government bonds: no longer so overvalued

US 10yr yield & 10yr average Fed Funds rate

2

3

4

5

6

7

8

9

May-92 May-96 May-00 May-04 May-08

%

10yr Treasury yield

Fed Funds rate (10yr average)


Yield curves are extremely steep

US yield curve: 10yr-2yr

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Jan

-86

Jan

-89

Jan

-92

Jan

-95

Jan

-98

Jan

-01

Jan

-04

Jan

-07

%


German 30yr bunds attractive given macro risks

Value opportunity: yields are higher than during a global boom3.0

3.5

4.0

4.5

5.0

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Jan

-07

Jan

-08

Jan

-09

%


Fear #1: increased government issuance

Like all forecasts, predictions of government finances are subject to bias

Effect on Government Bond Prices

Growth Effect Fiscal Effect Net Effect

Growth stronger than forecast

-ve +ve ??

Growth weaker than forecast

+ve -ve ??


Fear #2: “printing money” & inflation

Central banks are filling the hole left by the private sector

First post-WW2 contraction in household borrowing!

-400

-200

0

200

400

600

800

1000

1200

1400

Ma

r-8

0

Ma

r-8

5

Ma

r-9

0

Ma

r-9

5

Ma

r-0

0

Ma

r-0

5

US Household Borrowing ($bnannualised quarterly rate)




Source: Bloomberg

US: net change in consumer credit ($bn, 3m avg)

-16

-12

-8

-4

0

4

8

12

16

20

Dec-88 Dec-93 Dec-98 Dec-03 Dec-08

US

$ b

n




8.5%

0%

20%

40%

60%

80%

100%

120%M

ay-

06

No

v-0

6

Ma

y-0

7

No

v-0

7

Ma

y-0

8

No

v-0

8

US M2 (% YoY)

US Monetary Base (% YoY)


Sterling – positive trend

Source: BIS

CHEAP

EXPENSIVE

GBP: real effective exchange rate (100 = 2005)

70

100

130

Jan

-64

Jan

-69

Jan

-74

Jan

-79

Jan

-84

Jan

-89

Jan

-94

Jan

-99

Jan

-04

Jan

-09


US$ - prone to swings in sentiment, but downward trend

Source: Bloomberg

US$ vs US equities

600

700

800

900

1000

1100

1200

1300

1400

1500

Jan-08

S&

P 5

00

In

de

x

70

72

74

76

78

80

82

84

86

88

90

US

$ I

nd

exUS equities

US$ index


Taiwan dollar: long-term valuation case + catalyst

Source: Bloomberg

Asian FX performance vs US$ (100=Sep 1994)

70

75

80

85

90

95

100

105

Sep-94 Sep-99 Sep-04

Se

p 1

99

4=

10

0

Asian Basket

TWD


Taiwan dollar: long-term valuation case + catalyst

Source: Bloomberg

Taiwan: current account

-2,000

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Mar-94 Mar-99 Mar-04 Mar-09

TW$ m Taiwan: foreign exchange reserves

0

50

100

150

200

250

300

350

Mar-94 Mar-99 Mar-04 Mar-09

US$ bn


Ashburton Investment Strategy


Investment Strategy Replica Asset Management

Asset Allocation

Bonds 54%

Govt/Govt Guaranteed 24%

Supranational 13%

Inflation-linked bonds 13%

Corporate 4%

Equities 39%

US 13%

Pan Europe 11%

Asia 15%

Cash/Tbills 7%

100%

Source: Ashburton - as at 4 June 2009


Investment StrategyReplica Asset Management – currency overlay

Currency Weightings (%)

£ € $

GBP 89 5 5

EUR - 75 -

USD - 4 82

JPY - - -

AUD - 3 -

NOK 3 5 -

TWD 5 5 5

Other Asia 3 3 8

Source: Ashburton


Two ways to beat the market*:

(1) Predict the “news” better

Short-term forecasting is pointless

Focus on understanding medium-term structural trends

(2) Predict the reaction to “news” better

Sentiment, positioning, consensus views

Valuations

Technical analysis/trend analysis

What is important is not the “news”, but how the “news” differs from what was expected

Diversification: reduce risk but also augment returns

*adapted from Woody Brock’s work (www.sedinc.com)

Investment Process

DISCLAIMER

Ashburton (Jersey) Limited is referred to in this context as ‘Ashburton’. This document does not constitute an offer or solicitation to any person in any jurisdiction in which Ashburton is not authorised or permitted to communicate with potential investors, or to anyone who would be an unlawful recipient, and is only intended for use by original recipients and addressees. The original recipient is solely responsible for any actions in further distributing this document, and should be satisfied in doing so that there is no breach of local legislation or regulation. The information is intended solely for use by Ashburton clients or prospective clients, and should not be reproduced or distributed except via original recipients acting as professional intermediaries. This document is not for distribution in the United States.

Prospective investors should inform themselves and if need be take appropriate advice regarding applicable legal, taxation and exchange control regulations in countries of their citizenship, residence or domicile which may be relevant to the acquisition, holding, transfer, redemption or disposal of any investments herein solicited.

Any opinions expressed herein are those at the date this material is issued. Data, models and other statistics are sourced from our own records, unless otherwise stated. Ashburton believes that the information contained is from reliable sources, but we do not guarantee the relevance, accuracy or completeness thereof.

We caution that the value of investments and the income derived, may fluctuate and it is possible that an investor may incur losses, including a loss of the principal invested. Past performance is not generally indicative of future performance. Investors whose reference currency differs from that in which the underlying assets are invested may be subject to exchange rate movements that alter the value of their investments.

Ashburton (Jersey) Limited (Company Registration No. 26087) is a member of the FirstRand Group, is regulated by the Jersey Financial Services Commission and has its registered office at 17 Hilary Street, St Helier, Jersey JE4 8SJ. Ashburton (Jersey) Limited is registered as a Foreign Investment Services Provider in South Africa in accordance with Section 8 of the Financial Advisory & Intermediary Services Act 2002.

Climate change Tristan Hanson Investment Outlook June 2009.

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