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Transcript of Global Investment Perspective
8/2/2019 Global Investment Perspective
http://slidepdf.com/reader/full/global-investment-perspective 1/12
Highlights
• 2011provedanextremelyvolatileyear,
largelyduetoongoinguncertainty
surroundingtheeurozonesovereigndebt
situation.
• Growthhasslowedthroughouttheyear,
withtheInternationalMonetaryFund(IMF)
cuttingits2011GrossDomesticProduct
(GDP)economicgrowthforecastforWestern
economiesfrom2.5%to1.6%.
• Developedeconomies–withtheUSa
major exception–areengagedinausterity
measures,whiletheemergingworldis
lookingtodampenitsmuchstrongergrowth
tostaveoffanythreatofination.
• Anyimprovementnextyearrestslargelyon
theeurozonendinganappropriatesolution
toitsproblems.
• Againstthisbackground,manyinvestorshave
edtowhattheysawassafehavens,forcing
goldpricestorecordhighsandgovernment
bondyieldstogenerationallows.
• Short-termismisrifeinsuchvolatilemarkets,
creatingopportunitiesinsomeassetclasses
forinvestorswhocantakealonger-termview.
• Equitiescurrentlylooktoofferthebestvalue,
withmanycorporatesinsolidnancialshape
afterapplyingtheirownausteritymeasures
amidthecreditcrunch.Strongbalancesheets
areallowingongoingdividendgrowth.
• Sharevaluationsremainlow,reecting
themutedeconomicoutlookinthe
West.Thisignorestwokeyfactors:
thatmanyWesterncompanieshave
growingEasternearningsexposure,and
thatemergingmarketequitieshavethe
potentialtobenetfromtheemerging
markets’strongermacrooutlook.
• CoreWesterngovernmentbonds
representpoorvalue,withshort-term
safehaveninvestingforcingyields
down.Insomeinstancesthisassetclass
currentlyofferstheprospectofnegative
realreturns(returnsafteradjustingfor
ination).
• Acombinationofmorepersistentlonger-
terminationandtheindustrialization
ofemergingmarketsfavorsphysical
assetslikerealestateandcommodities.
Apositivesupplyanddemandpictureis
alsosupportiveforthelatter.
• Goldhasprovenpopularasasafehaven,
butwithnoyield,thepreciousmetalis
challengingtovalueandislikelytosuffer
wheninvestorswanttomoveintomore
risk-orientedassetsagain.
Marketslookedintotheabyssonceagainin2011Havingstartedtheyearrobustlyenough,theoutlookdeterioratedsharplyastheyearprogressed,
withinvestorsfacingtheprospectofrecession(andsomewouldarguedepression)andeven
questioningthefutureofthenancialsystem.Faultlineswereevidentearlyon,withcivilunrest
intheMiddleEastspreadingtoLibyaandresultinginoilpricesrisingtoatwo-and-a-half-yearhigh.
Japanthensufferedahugeearthquake,tsunamiandnuclearincidentinMarch,causingsupplychain
issuesformuchoftheyear.
Therealtestforinvestornervescameoverthesummer.FearscenteredonEurope,withmanynations
sufferingfromhighsovereigndebttoGDPlevels,budgetdecitsandlowgrowth.Whilethisfocused
onperipheralEuropeuntiltheautumn,signsofcontagionspreadtolargernationssuchasItalyand
Spainasbondyieldsrosethrough7%and6%,respectively.Thisinturnputpressureonthebanking
INTHISISSUE
1 Highlights
1 Market Review
3 Outlook for 2012
4 The shift to short-
termism
5 The case for equities
7 Commodities and
global real estate
8 The case against
government bonds
9 Our outlook for the
asset classes
December 2
Outlookfor2012Lookingpasttheabyss
8/2/2019 Global Investment Perspective
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2
sector,asignicantholderofsovereigndebt,andconcernsresurfaced
thatmanyinEuropewouldneedtorecapitalizeoracceleratedeleveraging
(loweringdebtlevels).Furthermore,asbankfundingcostsrose,their
abilitytonancethemselveswasrestricted,preventingthemfrom
supplyingcredittotherealeconomy.Anotherchallengefacedbymarkets
wasoneofslowingeconomicgrowth.Globalgrowthhadbeenrecovering
steadilysincetheendoftherecessioncausedbythe2008nancialcrisis
(albeitratherunevenly,withmutedgrowthindevelopedregionsandmuchstrongerguresinemergingmarkets).
Movingthrough2011,however,thisgrowthstartedtofallrapidly.In
January,theIMFforecast2011GDPgrowthinadvancedeconomies
of2.5%andthenrevisedthisdownto1.6%bySeptember.Emerging
economiescontinuedtobenetfromstructuralgrowthdrivers,butthey
werenotcompletelyimmunefromtheslowdowninthedevelopedworld
andhadtoraiseinterestratesintheirbattleagainstination.Asaresult,
theIMFcutits2011growthforecastfrom6.5%to6.4%.Allinall,the
combinationofslowingeconomicgrowthandfearsthattheeuroandeven
theEuropeanUnionmayceasetoexistintheircurrentformssawinvestors
eeriskierinvestmentcategoriessuchasequitiesandcommodities.They
lookedforsolaceintraditionallydefensiveareassuchas‘safehaven’
governmentbondsandgold.Unusuallyhighlevelsofvolatilityinthevalue
ofdifferenttypesofinvestmentswasevidentformuchoftheyear.
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Centraltoanyoutlookfor2012isthatEuropeanauthoritiesdelivera
comprehensivesolutiontotheongoingeurozonesovereigndebtcrisis.
Ofcialshavebeenapplyingaband-aidapproachtotheirproblems:
ratherthantacklingthingsearly,politicianshaveonlyactedwhen
facedwithseveremarketpressure,andonlythendeliveringjust
enoughtostemthetide.Thisonlyservedtohighlightthefundamental
inadequaciesoftheeurozone’sstructures.Suchatoolittle,toolate
approachisrarelyananswertomarketproblems–investorsinvariably
moveontothenextproblem,andoften,whatstartedasasmallissue
quicklyescalatesintosomethingfarmoreserious.Thesituationin
Europeoverthesummerservesasanexample.Almostfromdayone,
investorsdeemedthepackagetobailoutGreeceasinadequate.
Theyquicklymovedontosystematicallyattackthefarmoreimportant
SpanishandItaliangovernmentbondmarkets,forcingyieldsupto
unprecedentedlevels,(asshownintherstchartbelow).
Globaleconomicgrowthislikelytoremainunderpressure,asshowninthesecondchart.Thisispartlyduetomanydevelopedeconomiesinstigating
austeritypackagesandemergingmarketssteppingonthebrakestoslow
agrowinginationthreat,butEuropeisclearlycompoundingtheproblem.
DespitemanyEuropeancompaniesbeinginrelativelyrobustnancial
positions,theyhavesimplystoppedinvesting,preferringtowaituntil
condenceincreasesbeforespendingtheircash.
Inthefaceofsuchuncertainty,howcaninvestorspositionaportfolioand
evencontinuetoholdmoreriskyassetclasses?Perhapsthebestanswert
thisisencapsulatedbyWarrenBuffett,whosaid,“befearfulwhenothers
aregreedyandgreedywhenothersarefearful.”
The cost of government borrowing increased significantly for Italy and Spain
Source: Reuters from 30 September 2010 to 29 November 2011
0%
1%
2%
3%
4%
5%
6%
7%
8%
Sep-10 Oct-10 Dec-10 Jan-11 Mar-11 May-11 Jun-11 Aug-11 Oct-11 Nov-11
Italy Spain Germany
The growth outlook for developed markets has deteriorated
Source: International Monetary Fund (IMF), as at September 2011
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
January 2011 forecas t Current forecast January 2011 forecas t Current forecas t
20122011
% g
r o w t h
1 0 - y e a r g o v e r n m e n t b o n d y i e l d
Outlook for 2012
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0
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1945 1952 1959 1966 1973 1980 1987 1994 2001 2008
US institutional investors have become more focused on the short term
Source: Based on Morningstar and NYSE data, Goldman Sachs Research estimates, f rom 1945 to 2008
H o l d
i n g
p e r i o d s
i n
y e a r s
Underlyingthesewords,however,issomethingfarmorefundamental.
Inshort,marketshavegonefrombeingdominatedbyinvestorswith
longer-terminvestmenthorizonstobeingdrivenbyshort-termism.Toa
largedegreethisisunderstandable.Whenvolatilityishigh,asitisnow,
investorsquicklyturnfromtargetingwealthgenerationtofocusingon
preservingit.Theprospectofseeinghard-earnedcapitalfallsharply
invalueissimplytoomuchformanyinvestorstobear.Theywould
ratheravoidriskierareasandinvestinmoreconservativeassetclasses,
evenifthelatterappearexpensiveinthelongterm.Compoundingthis
shifttoshort-terminvestingaresomedeeper,structuraltrendswithin
worldstockmarkets.Historically,pensionfundswereclassiclong-term
investors.Theyhadlong-termliabilitiesandneededtoinvestinassets
thatcouldgrowtomeetthese–importantly,short-termvolatilitywas
notamajorconcernandseenasapriceworthpayingforcapitalgrowth.
Morerecently,however,therehasbeenashiftinbehavior,with
manyfundsnownolongertargetingfutureliabilitiesbutratherfocusingon
contributions.Theneedforholdingriskassetclasseshasfallen,withbonds
doingthejobregardlessofwhetherornottheygeneratevalueinthelong
term.Weseethisasafundamentalweaknessinhowindividualsfundtheir
retirement.Further,regulationissuchthatmanyfundshavebeenrequired
toselldowntheirriskierassetclassesandswitchintobonds.Theriseof
hedgefundsandhigh-frequencyinvestorshasexacerbatedthisproblemby
accentuatingvolatilityfurther.
Herethoughistheopportunityforinvestorspreparedandabletoinvest
forthelongerterm;short-termismcreatessomeexceptionalinvestment
opportunities.
The shift to short-termism
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Ifyoucanlookthroughtheshort-termfog,equitiesoffersomeexcellent
opportunitiesforbuildingwealthinthelongertermaspartofabalanced
portfolio.Companies,incontrasttogovernmentsandtheconsumer,
havebeenmanagingthemselvesextremelyprudently.Whilethelatter
werebuildingdebttounsustainablelevels,companieswerepaying
downborrowingandbuildingcashbalances.Equitydividendyields
currentlystandatattractivelevelscomparedwithgovernmentbonds,
whilecompanybalancesheetsareenablingthemtogrowdividends–a
veryattractivecombinationinalowinterestrateenvironment.
0%
1%
2%
3%
4%
5%
6%
7%
1999 2001 2003 2005 2007 2009 2011
USA World
Equity dividend yields are currently at attractive levels
Source: UBS from 31 December 1999 to 30 November 2011
Equity valuations look attractive
Source: HSBC as at 30 September 2011
0
5
10
15
20
25
30
J a n - 9 1
J a n - 9 2
J a n - 9 3
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J a n - 0 0
J a n - 0 1
J a n - 0 2
J a n - 0 3
J a n - 0 4
J a n - 0 5
J a n - 0 6
J a n - 0 7
J a n - 0 8
J a n - 0 9
J a n - 1 0
J a n - 1 1
MSCI All-Country World Index
W o r l d e q u i t y P / E r a t i o
G l o b a l a n d U S
e q u i t y y i e l d
The case for equities
Valuationsarealsoextremelylowbypaststandards.Tosome
degree,thisisjustiedwithgrowthindevelopedeconomieslikelytobesomewhatlowerthanitwashistorically.Butfocusingonlower
growthratesindevelopedeconomiesignorestwokeyfeatures.First,
companiesindevelopedmarketsareincreasinglyglobalintheiroutlook.
Theyarenotjustaplayontheeconomicgrowthofthecountryoftheirdomicile,butinsteadcanbenetfromhigherglobalgrowth.
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Second,emergingmarketequitiesthemselvesofferinvestorsthe
opportunitytobenetfromthepositivestructuralgrowthtrends
exhibitedbydevelopingeconomies.Thatsaid,performanceofmany
emergingmarketsin2011showstheyarenotself-sufcientyet,with
ahighrelianceonexportstothedevelopedworld.Astheycontinueto
grow,however,therewillinevitablybegreaterspendingondomestic
infrastructure(asthechartbelowshows)andanincreasinglywealthy
populationwilllooktoconsumemore.Thiswillreducethedependence
onexports,andwithit,makeemergingmarketeconomiesandpossibly
stockmarketsincreasinglyguardiansoftheirowndestinies.
The case for equities (cont’d)
Emerging markets’ future infrastructure requirements are high
Source: Booz Allen Hamilton, Global Infrastructure Partners, World Energy Outlook, OECD, Boeing, Drewry Shipping Consultants, US Dept. of Transportation as at 2007
U S D
T r i l l i o n
Middle East
Africa
North America
Latin America
Europe
Asia0
5
10
15
20
25
Water Power Road and rail Air/seaports
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Acombinationofinationprovingincreasinglypersistentandthe
industrializationofemergingmarketsfavorsphysicalassets.Areas
ofthemarketsuchascommoditiesandrealestateseetheirvalues
risewithinationandalsobenetfromgrowingdemandasemerging
marketsurbanize.Althoughmanycommoditieshaveseenpricedeclines
in2011,reectingtheglobalslowdownineconomicgrowth,theyshould
benetlongertermfromtheseeminglyunstoppablepressuresofrising
demandfrominfrastructureprojectsandlimitedsupplyinmanycases.
Pricesinthelongtermareseeingsignicantupwardpressure.Global
realestateyieldsalsooftengiveinvestorsadecentupliftovermany
governmentbonds(asshowninthechartbelow),whichisanattractive
featureformanyinvestorsinalowinterestrateenvironment.
Theoneexceptiontothisisgold,asillustratedbelow.Tomany,this
representstheultimatesafehaveninvestment–itisaphysicalasset
and,muchtotheuneaseofmanyacentralbanker,youcannotprintany
moreofit.Tosomeextent,wesympathizewiththisview,withgold
typicallyenhancingportfolioreturnsatthesametimeasreducingrisks.
Itdoes,however,haveonemajorproblem:withnointrinsicreturn,
youjustcannotassignafundamentalvaluetoit.Inallprobability,as
aninvestment,itrepresentstheipsideofthecointoinvestinginrisk
assets–thatis,themorepeopleavoidriskassets,themoretheywill
looktobuygoldwiththeircapital.Whenriskyassetsturn,however,you
reallydonotwanttobethelastpersonholdinggold.
Real estate yields look attractive compared with government bonds
Source: Datastream from 29 December 2006 to 06 December 2011
Y i e l d
Gold is seen as a relative safe haven
Source: Reuters from 03 January 2005 to 30 November 2011
G o l d
p r i c e
U S D p
e r o
u n c e
0%
1%
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3%
4%
5%6%
7%
8%
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10%
Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11
Developed world listed real estate yield 10-year treasury yield
0
250
500
750
1,000
1,2501,500
1,750
2,000
Jan-05 Sep-05 May-06 Jan-07 Oct-07 Jun-08 Feb-09 Nov-09 Jul-10 Mar-11 Nov-11
Commodities and
global real estate
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Themirrorimageofthisvalueinequitiesistheovervaluationwithin
manygovernmentbondmarkets,withyieldsinmanycasesnot
sufcientenoughtocoverination.Governmentbondshavenotonly
beenoneofthemainbeneciariesoftheshifttoshort-termismbut
alsothelong-termdowntrendinglobalinationandinterestrates.
Again,muchofthishasbeendrivenbyemergingmarkets,whichhave
increasinglybecomethemanufacturingengineoftheglobaleconomy.
Thisphenomenonhashadtworelatedimpacts,withbothdrivingdown
bondyields.First,byexportingcheaperconsumergoodsintoWestern
economies,inationrateshavebeenhelddown.Second,theseexports
havecreatedsignicantcurrentaccountsurpluseswithindeveloping
markets,whichhaveinmanycasesbeenrecycledintoWestern
governmentbonds,furtherpushingdownyields(asthechartbelow
illustrates).
Whileinationarypressureslookmutedintheneartermasausterity
packagesintheWestkickin,weseethestructuraldowntrendin
inationcomingtoanend.
Wagesinmanyemergingmarketsarenowrisingrapidlyasthese
economiesgrowricherandtheirworkersdemandhigherwages.
Also,astheglobaleconomyrebalancesoverthelongterm,theows
intoWesterngovernmentbondsofrecentyearsareunlikelytobe
repeated.Hencebondshavebeenthebeneciaryofanalmostperfect
storm–along-termdownwardshiftinyields,asthechartbelowshows,
acceleratedbyinvestorspursuingsafetyintheshortterm.However,
surelyjustasthebondevangelists’callsforstructurallyloweryields
becomemorevocal,investorswithalong-termoutlookshouldbe
avoidingthiscategorygiventheprospectofnegativereallong-term
returns.
The case against government
bonds
Wearekeennottounderplaytherisksofinvestinginglobalstockmarketsatpresent.However,theshort-termdirectionisinthehandsofpoliticians.
IntheWest,politiciansaregrapplingwithexcessdebt,globaleconomicimbalancesand,perhapsmostimportantly,howtosolvetheeurozonedebtcrisis
inthefaceofinadequategovernance.Conversely,inAsia,centralbankersarewalkingatightropeofreducinginationwithoutkillingoffgrowthcompletely.
Historically,theChineseauthoritiesinparticularhavebeensuccessfulinachievingthisbuttherisksremain.Thismakestheshorttermuncertain,but
forthosewiththeluxuryofbeingabletotakelong-terminvestmentdecisions,thisincreasinglyshort-termworldiscreatingsomerareopportunitiesto
generatewealth.Thestartpointmaybeuncertainbuteventualupsideispotentiallysignicant.
Conclusion
Government bond yields have fallen dramatically
Source: Reuters from 02 January 1992 to 03 October 2011
1%
2%3%
4%
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6%
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8%
9%
10%
11%
Jan-92 Jun-94 Dec-96 May-99 Nov-01 May-04 Oct-06 Apr-09 Oct-1
1 0 - y e a r b o n d y
i e l d
UK Germany France US
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Our outlook for the asset classes
TheoutlookfortheUSeconomyremainstough,particularlyasunemploymentisstubbornlyhigh,atabout9%,andconsumerspendingakeydriverofgrowth.However,theUSdoesappeartobeseeingstrongergrowththanotherdevelopedeconomies.Thismayprovidesomesupport
to2012corporateearnings,atleastcomparedwithotherdevelopedmarkets,especiallyifeconomicstimulusmeasuresareextendedinto2012.
Althoughvaluationsaresomewhathigherthanforotherdevelopedmarkets,witha2012forecastprice/earningsratioof10.9times,weconsider
thisafairpremiumgiventhestrongereconomicmomentum.PoliticaldeadlockhasbeenasevereimpedimenttotheUSdealingwithitsbudgetary
problems,withthecountrystandingaloneamongmajoreconomiesinnotenactingscalausterity.2012seespresidentialandcongressional
electionsandwewouldhopethataftertheprimarystagesofthecontest,whicharelikelytoseecandidatesappealtotheirnarrowpartybases,
theyseekcommongroundandrealisticwaysofresolvingthelong-termbudgetpressures.
US EQUITIES
POSITIVE
Despitevolatilitystemmingfromtheeurozonedebtcrisis,CanadianequitiesmanagedtonishNovemberlargelyunchanged.Animprovingpicture
intheUS–Canada’skeytradingpartner–helpedshoreupCanadianequities.China’sdecisiontoloosenmonetarypolicyalsobodeswellfor
demandforkeycommoditiesproducedinCanada.CommoditypricescameunderpressureinNovemberandearlyDecember,butthelong-termdemandpictureisstillpromising.Canadiancompaniesalsocontinuetomaintainsolidbalancesheetsandaredeliveringdecentearnings.Thewider
equitymarketoffersanaveragedividendofcloseto3%andaprice/earningsratioofabout11.5timesexpected2012earnings.Thissuggeststhat
Canadianequitiesaretradingatadiscountrelativetorecenthistory,giventhatthe25-yearaverageratioisapproximately15times.
CANADIAN EQUITIES
POSITIVE
ProspectsforcontinentalEuroperemaindominatedbytheeurozonedebtcrisis.Europeanequitiestradeonalowmultipleof8.8timesforward
earnings,implyingtheassetclassofferssignicantvalueshouldasolutionbefound.Abreak-upoftheeurozone,whichisnotourcentralscenario,
wouldhaveseverenegativeimplicationsfortheEuropeaneconomyandequitieswouldlikelyseesignicantdownsideinthisevent.Whilethe
outlookfortheUKeconomyremainssubduedanddependentondevelopmentsintheeurozone,wehaveamorepositiveviewonUKequities.
Theybenetfromsignicantexposuretointernationaleconomies.Valuationsareattractivewithaforwardearningsratioofabout8.6times
(comparedtoa10-yearaverageofabout14times)andadividendyieldofabout3.6%.
EUROPEAN EQUITIES
POSITIVE
Japaneseequitiesfrequentlytradedinadisconnectedmannerfromothermarketsin2011.Likeotherequitymarkets,valuationsremainattractive,
particularlyifJapanesecompaniescanboosttheirlevelsofreturnonequity,althoughthisislikelytobealonger-termdevelopment.For2012,
Japaneseequitiesarelikelytobeaffectedbytheslowdowninglobalgrowth,whilewewouldalsoexpectappreciationtodampencorporate
performance.
JAPANESE EQUITIES
POSITIVE
Powerfullonger-termphenomenasuchasindustrializationandurbanization,aswellasmorerobustscalpositions,underpinourpositiveviewonemergingmarketequities.Wecontinuetoseestrongergrowthfromemergingeconomiescomparedwithdevelopedeconomiesin2012,albeitat
slowerratesthanpreviously.Emergingmarketequitieshaveunderperformeddevelopedmarketequitiesin2011.Thereissomeriskthatfurther
downwardrevisionsinglobalgrowthcouldleadtothemcontinuingtotradeashigher-riskplaysratherthanreectingthesuperiorstructuralfeatures
oftheireconomies.However,valuationsareattractive,withaggregateemergingmarketequitiestradingatabout9timesnextyear’searnings,against
a10-yearaverageofabout11times.EasternEuropeanequitiesareexposedtotheriskofacreditcrunchasdeleveragingbankswithdrawcreditfrom
theregion.WithinEasternEurope,wefavorRussianequities,wherevaluationsremainlowatabout4.9timesearnings(againsta10-yearaverageof
about8times).Thecountryisaplayonoilandotherhardcommoditieswherewehavepositiveviews.Theoutlookfortheoilpricerepresentsthe
keyriskfortheassetclass,andamorepronouncedeconomicslowdown,whichwilllikelyleadtoamaterialfallintheoilprice,wouldbeparticularly
negativeforRussianequities.Thisisnotourcentralscenario.Politicalrisksalsoremain,particularlyinapresidentialelectionyear.
EMERGING MARKET EQUITIES
POSITIVE
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Our outlook for the asset classes
LatinAmericanequitiesarealsoextremelyattractivelyvaluedonaP/Eratioof9times2012forwardearnings,comparedwithave-yearaverageof11.4times.SlowingworldwidedemandandfallingcommoditypriceshaveraisedfearsforLatinAmerica,however,despitethis,commoditysupplies
remaintightoveralland,sofar,thelikelihoodofacrashsimilartothatof2008/2009seemslow.Shouldtherebeaprolongeddownturn,theregion’s
economieshavemanytoolsattheirdisposaltocounterthis–forexample,thereisampleroomtocutratesifnecessary(Brazilhasalreadystarted
thismeasure).Onamacroeconomiclevel,manyLatinAmericancountriesareinbettershapethantheirdevelopedmarketpeers,supportedbyhigher
levelsofconsumercondenceandsolidscalaccounts.
EMERGING MARKET EQUITIES (CONTINUED)
POSITIVE
TheslowdowninglobaleconomicactivityhashadanimpactonAsiaex-Japan,givenitsrelativelyhighlevelsofexportstodevelopedcountries.
However,westillviewtheeconomicbackdropfavorably,withitseconomiesofferingstrongergrowththanthedevelopedworld.Inationisshowing
signsofmoderatingandwecouldseelooseningmonetarypoliciesin2012,whichwewouldregardaspositivefortheregion’seconomiesandequity
markets.WithinAsiaex-Japan,wefavorChineseequitieswherevaluationsarelowinourview,withthemarkettradingonabout8.2times2012
earnings,signicantlybelowthemarket’s10-yearaverageofabout12.5times.Therearerisksinthattherapidrisesinresidentialrealestatepricescouldreverseandbecomedestabilizingtopartsoftheeconomy,butoverall,weforecastasoftratherthanahardlandingfortheeconomyandforecast
2012economicgrowthofaround8%.
ASIA EX-JAPAN EQUITIES
POSITIVE
USgovernmentbondyieldsremainextremelylowdespiteinvestorslosingcondenceintheroleofpoliticalinstitutionstotacklefundamental
budgetaryproblems.TheUSCongressionalBudgetSuperCommitteefailedtoreachabipartisandecitreductionagreementafterthreemonthsof
intensenegotiations,despiteasimilarpoliticaldeadlockoverthesummerleadingtotheUScreditratingbeingdowngradedbyonenotchbyStandard
&Poor’s.Morepositivelyfortreasuries,theFederalReservedecidedtolengthentheaveragematurityofitstreasuryholdingsbysellingUS$400
billionofshort-datedsecuritiesandpurchasinglonger-termbonds.TheyalsocommittedtokeepFedfundrateslowforalongerperiodoftime.
NotwithstandingFederalReserveactionsthatarecurrentlysupportingprices,weremaincautiouslynegativeonUStreasuriesasanassetclass.We
believethepositivesurpriseseenineconomicdatacancontinueandshouldtheeurozonereachagreementonalastingsolutiontoitssovereigndebt
crisis,thesafehavenpremiumembeddedinUStreasurypricesmaystarttoevaporate.Thiswouldforceyieldstorisetolevelsmorereectiveofthecurrenteconomicandscalbackdrop.
US GOVERNMENT BONDS (TREASURIES)
NEGATIVE
Canadaretaineditsstatusasasafehaveninthewakeoftheongoingeurozonedebtcrisis.ThebroaderCanadianbondmarketdelivereda0.84%
gaininNovember.GovernmentofCanadabondswere0.92%higher.Asexpected,onDecember6,theBankofCanadamaintaineditsovernightrate
at1%.Wedon’tseetheBankraisingratesuntillate2012orbeyond.Onbalance,recenteconomicindicatorsinCanadasuggestthatgrowthinthe
secondhalfofthisyearwasslightlystrongerthantheBankprojectedinOctober.Inationisalsoseendecliningfromitscurrentlevelofabout3%to
2%overthenext12months.WealsoforecastGDPgrowthof1.9%in2012.Againstthisbackdrop,westillprefercorporatebonds,despiterecent
underperformance,becausetheycontinuetoofferbettervaluesthangovernmentbonds.Companybalancesheetsarestrong,anddemandforyield
frominvestorsismaintaininghealthyinterestinnewcorporatedebtissuance.
CANADIAN BONDS
NEGATIVE
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Our outlook for the asset classes
ConcernsoverthedifcultiesfacingGreeceandothertroubledEuropeannations,aswellasslowingeconomicmomentum,ledtocorporatebonds
underperforminggovernmentbondsin2011.Financialissueswereweakerthannon-nancial,largelydictatedbytheextentoftheirexposureto
peripheralEurope.Debtwithlesspriorityforrepaymentwithinthecapitalstructure–suchasTier1instruments–sufferedmost.Corporatebonds
issuedbyothernon-nancialsectorsalsosufferedduetocontagioneffectsandanincreasedexpectationthatcompanieswillfarelesswellifthe
economicbackdropdeteriorates.Thepoorperformanceofcorporatebondsin2011hasseenyielddifferentialsoverthesafestsovereignissuers
risetorelativelyattractivelevels,particularlyiffearsofadouble-diprecessionareoverdone.Thereforetheassetclasslooksattractiveonaforward
lookingbasis.
CORPORATE BONDS
POSITIVE
Emergingmarketdebtmarketshaveseenatransformationoverrecentyears,withcountriesshowingsignicantlyimprovedscalpositionsand
tradebalancesaswellasrobusteconomicgrowth.Valuationsremainreasonableandweseeemergingmarketsovereignbondsoutperformingthe
‘safehaven’developedeconomybondmarkets,thelatterofwhichofferverylowyieldstoinvestorsinourview.
SOVEREIGN EMERGING MARKET BONDS
NEUTRAL
Wearebroadlypositiveonglobalrealestateasanassetclass.Itoffersanattractiveyieldupliftovergovernmentbonds,whichshouldpersistas
centralbanksmaintainaccommodativemonetarypolicies.AsiaPacichasthestrongestfundamentals,althoughrentalgrowthmaymoderate
shouldtheglobaleconomyslow.HighlevelsofUSunemploymentandthetoughoutlookfortheEuropeaneconomyarelikelytoprovidea
challengingenvironmentforrentalgrowth.
GLOBAL REAL ESTATE
POSITIVE
Lowinterestrates,andtheprospectsforfurthercentralbankinterventionbygovernmentsindevelopedeconomies,havebeensupportiveforgold.
Weremainalerttotherisksthatabubblecouldbeformingintheassetclass.Thesharpsell-offinSeptember2011indicatesgoldisnotnecessarily
defensiveandcouldseesignicantdownsideintheeventthattheworld’simbalancesarecorrectedandtheuncertaintylifted.Thisriskandthedifculty
invaluinggoldmakesuswaryofholdingsignicantpositionsoverthelongerterm.However,asitcanprovidesomethingofahedgetoextreme
negativeevents,wecontinuetoadvocatemodestholdingsindiversiedportfolioswhiletheoutlookfortheglobaleconomyremainssouncertain.
GOLD
NEUTRAL
Webelievehardandsoftcommoditiesoffertheprospectsforattractivelonger-termreturns,givencontinueddemandgrowthfromemerging
markets.Thisisgrowingfromalowbase,andsupplyremainsrestrictedduetoadeclineinminingcapitalexpenditurefollowingthe2008nancial
crisis.Manycommoditymarketshaveseendeclinesin2011,aseconomicactivityhasslowed.However,asemergingeconomiesarethekey
driversofdemandgrowthandwedonotforecastaglobalrecession,webelievethepricedeclinesseenin2011arecorrectionsratherthantheend
ofpositivelonger-termtrends.
COMMODITIES
POSITIVE
Manycurrencymarketshavebeendrivenbysimilarfactorsasequitiesandbonds,suchastheSwissFranc,forexample,whichhasseensignicant
appreciation.WewouldseearesolutionoftheeurozonesovereigndebtcrisisaspositivefortheEuroandnegativefortheSwissFranc,andpossibly
theUSDollarandYen,shouldsucharesolutionbeaccompaniedbyawiderincreaseinriskappetite.Longerterm,weseetheemergingmarket
currenciesaswellplacedtoappreciate,reectingtheirlong-termstructuraladvantages,althoughpolicyactionsmayslowdowntheprocess.
CURRENCIES
POSITIVE
8/2/2019 Global Investment Perspective
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