Too much pain - little gainKlaus Kaldemorgen, 07 June 2011
2
1987 1989 - 1992 1997 - 1998 2000 2008
I. Risk aversion by retail investors remains Retail investors are unnerved by sharp setbacks in equity markets
Market crash October 1987
1989
1989
1990
1990
1991
1991
1992
1992
1992
1993
1993
10000
20000
30000
40000
Nikkei 225 Index
Japan crisis Dec 1989 – Aug 1992
- 35%
- 57%
Source: Bloomberg
06/1
997
07/1
997
08/1
997
09/1
997
10/1
997
12/1
997
01/1
998
02/1
998
03/1
998
05/1
998
0.02
0.09
0.16
0.23
0.3
Jakarta Composite Index
In USDIndex points
In Yen
Asia crisis Sep 1997 – Feb 1998
- 85%
06/1998 06/1999 06/2000 06/2001
100015002000250030003500400045005000
NASDAQ Composite Index
Tech bubble
- 75%
2003 2005 2007 2009 2011
600
800
1000
1200
1400
1600
1800
MSCI World Index
Credit crunch
- 60%
In USDIndex points
In USDIndex points
In USDIndex points
Equity Multi Asset Fixed Income Money Market0
40
80
120
160
200
240
2000 2010
3
I. Risk aversion by retail investors remains Fund flows into various asset classes
+ 239 %
+ 7 %
+ 34 %
+ 45 %
Equity Multi Asset Fixed Income Money Market
-5,200
-3,200
-1,200
800
2,800
4,800
6,800
2010 YTD
Net flows in mutual funds in Germany,in mio EUR
AuM of mutual funds in Germany from 2000 to 2010, in bn EUR
Source: BVIAs of May 2011
4
II. Hedge Funds desperate to create volatilityLow volatility and sudden outbreaks of high volatility remain a problem
…but recently uncertaincies are feeding through (3 months)
Implied volatility* of the US market still quite low… (3 years)
* CBOE OEX Volatility Index
06/2008 10/2008 03/2009 08/2009 12/2009 05/2010 10/2010 02/201110
20
30
40
50
60
70
80
90
1/3/11 15/3/11 29/3/11 12/4/11 26/4/11 10/5/11 24/5/1110
12
14
16
18
20
22
24
26
28
30
Source: BloombergAs of May 2011
5
II. Hedge Funds desperate to create volatilityImportant trends mature (Emerging Markets, Resources)
EM starting to underperformMSCI EM vs. MSCI World, YTD
01/2011 02/2011 03/2011 04/2011 05/2011 06/2011
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
MSCI Materials vs. MSCI World
Source: Goldman Sachs, Thomson Reuters DatastreamAs of May 2011
2006 2007 2008 2009 2010 2011-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
MSCI Materials vs. MSCI World
6
III. Equities remain the superior asset class for performance contribution
Attractive valuation compared to fixed income and own history
Return to shareholders grows (dividends, share buy backs, M&A activity)
Monetary conditions remain favourable
Sovereign debt crisis puts risk positions in perspective (corporates are the ultimative
source of wealth creation)
Profitability may decouple from growth perspective
Inflation potential may help equities’ role as "real assets"
High liquidity in comparison to alternative assets
7
Attractive valuation compared to fixed income and own history
0,0
0,2
0,4
0,6
0,8
1,0
1,2
1,4
1,6
12.79 05.84 10.88 03.93 08.97 01.02 06.06 11.10
DAX P/E to REXP
Bonds cheaper
Equities cheaper
Source: Thomson Reuters DatastreamAs of May 2011
8
IV. Economic growth fueled by emerging markets and monetary stimulus in jeopardy
Emerging market dilemma
Monetary stimulus failed to ignite job- and housing market
Europe burdened by sovereign debt crisis
Stagnating growth and easy money will lead to higher inflation
9
Emerging Market dilemma
Export growth is fading - consumer demand growth is essential
Inflation is biggest threat to political stability and consumer demand
Higher interest rates necessary to fight inflation - currencies will rise further
Infrastructure spending as an additional growth element
Debt markets are growing
10
Monetary stimulus failed to ignite job- and housing market US economy not yet fully recovered
Source: Goldman Sachs, BloombergAs of June 2011
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011-1000-800-600-400-200
0200400600
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110
2
4
6
8
10
12
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110
200
400
600
800
1000
1200
1400
1600
US non-farm payrolls, mom US unemployment rate
US new home sales Case shiller house price index*
05/2
001
01/2
002
09/2
002
05/2
003
01/2
004
09/2
004
05/2
005
01/2
006
09/2
006
05/2
007
01/2
008
09/2
008
05/2
009
01/2
010
09/2
010
100
120
140
160
180
200
220
in %
in thousands
*indexed Jan 2000 = 100
in thousands
Europe burdened by sovereign debt crisis Is Germany too strong for Europe?
11
EMU-ex GER Germany0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2011 2012
Real GDP growth estimates for 2011 and 2012in %
Source: Morgan StanleyAs of June 2011
V. Sector rotation indicates an economic slowdown and lower risk appetite
12
Top Performer Flop Performer
Source: Thomson Reuters Datastream (Total Return)As of end of May 2011
2011 YTD
Health Care 7.1%
Energy 3.4%
Consumer Staples 3.0%
Telecommunication 1.9%
Industrials -0.3%
(MSCI World Index) -0.3%
Consumer Discretionary -0.8%
Financials -2.8%
Information Technology -3.8%
Utilities -4.0%
Materials -4.7%
What we make out of it
M&A Opportunities
Stable growth, defensives,
dividends and "late cyclicals”
Energy companies as a hedge against
inflation
European financials as
trade
Emerging Markets closely
monitored
Active beta and volatility
management
Corporate bonds/converti
bles as alternative to
equities
13
14
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