Transcript US - News1

Year Ahead 2012
Riders on the Storm:
the rocky road to recovery in 2012
Bill O’Neill – Chief Investment Officer
Merrill Lynch Wealth Management,
Europe, Middle East and Africa
Key points
CIO View – key points for 2012
 Global growth and profits weaker in 2012
 Deleveraging – the contraction of debt held- to persist as key influence in developed economies
 Opposing this trend will be policy loosening or stimulus- its extent and timing are crucial
 Quantitative easing (money printing) will become a global phenomenon
 China will have a ‘soft landing’ in 2012 – again the key development is when policy eases
• Look for portfolio diversification, focus on a strategic framework to respond to the ‘New Normal’
 Equity outperformance versus corporate debt will be modest
 On equities, prefer U.S. and U.K. over Japan and Europe; stress theme of yield - quality - growth
 Little value in core sovereign bonds
 We shall see a weaker euro into 2012 especially if ECB buys government debt
 Upside on gold above $2000 p/oz.; oil price flat for first half, moving higher as demand improves
2
The pressing need for mature economies to contain debt burdens
has taken us to the edge of a second global recession in less than
3 years
Overview
2011 asset class performance
%
Source: Bloomberg. Data as of 30 December 2011.
3
Overview
Eurozone sovereign crisis is also a
banking crisis
Cost of protection for European banks and sovereigns
Basis points
400
European banks
European sovereigns average*
300
200
100
0
2007
2008
2009
2010
2011
Source: Bloomberg. Data as of November 2011. *European sovereigns average is a simple average of French and Italian government debt credit default swaps
(CDS)
4
U.S. bonds following Japan’s example so
far, only this time real rates likely to remain low
Overview
Japan and superimposed U.S. 10 year real bond yield, 13 years later (%)*
%
7
Japan
U.S. (start and end dates shown)
6
5
4
3 2000
2
1
0
-1
1987
2011
1992
1997
2002
2007
Source: Bloomberg. Data as of November 2011. *U.S .10-year bond yield superimposed over Japan, with a lead . U.S. data from November 2000 to November 2011
5
The U.S. recovery in the ‘New Normal’ is
very subdued compared to history
Economics
The Zarnowitz Law, looking at strength of recovery against peak-to trough fall in business cycle
8 quarter gain
from recession trough (%)
16%
14%
1957
12%
2008 - where we
should have been
1981
1960
10%
1953
1973
8.7% difference
8%
6%
2001
1970
2008 - where we were
1990
4%
1980
2%
0%
0%
-1%
-2%
-3%
-4%
-5%
-6%
Loss from peak - to - trough (%)
Source: Bureau of Economic Research, National Bureau of Economic Research, TrendMacro calculations. Data as of September 2011.
6
Reluctance of businesses to invest
risks persistently higher structural unemployment
Economics
U.S. average number of weeks unemployed and business investment as % of GDP
% of total
% of GDP
The Federal Reserve will respond to high unemployment with
direct support to housing. No rate hike until at least 2014
Source: Absolute Strategy Research, Bloomberg. Data as of November 2011.
7
Optimistic growth forecasts still mark
the path to debt stabilisation in the eurozone
Economics
Differing expectations for real GDP growth rates in several eurozone nations in 2012
%
4
Government trend growth assumptions
Bank of America Merrill Lynch 2012 forecast
3
2
1
0
-1
-2
-3
-4
Germany
Ireland
Greece
France
Italy
Source: Factset, Bloomberg, BofA Merrill Lynch Global Research. Data as at November 2011.
8
Economics
European debt deleveraging has a large banking
component
Eurozone* and U.S. total debt to GDP as of Q1 2011**, with sectoral breakdown
U.S.
Eurozone*
23
15
24
33
21
29
Households
Financial
Non-financial
General government
Households
Financial
27
28
Non-financial
General government
Source: BofA Merrill Lynch Rates and Currency Research. Created 15 December 2011. Data as at Q1 2011, except French household (2010).
*Eurozone countries = Germany, France, Italy, Spain, Greece, Portugal, Ireland, Belgium, Netherlands & Slovakia
** Latest data available given lack of data from Greece, inter alia, since start of 2011.
9
China’s next 5-year plan to focus on supporting
consumption following 2009 fiscal expansion
Policy
Chinese exports, fixed asset investment and retail sales as a percentage of GDP
%
Source: Absolute Strategy Research. Data as of October 2011.
10
Policy
Debt reduction options
Solution
Growth
Explanation
 Higher growth leads to lower
government debt
Examples
Feasibility
 South Korea
 High household/financial debt likely to
weigh on activity
 Fiscal support weakens
Fiscal Adjustment
and Austerity
 Governments adopt strict fiscal
austerity
 adopted alongside economic reform
 Eurozone (especially
periphery), U.K., not the U.S.
 Unpopular with voters and correct
spending/tax mix challenging
Sovereign
Default/Debt
Restructuring
 Governments write off their debts
 A restructure involves an adjustment
in the terms of existing debt
 Default: Russia, Argentina,
possibly Greece
 Would lead to inability to access capital
markets for funding, adverse effects on
banking sector
Currency
Devaluation
 Devaluing the currency of issue
makes debt easier to repay
 Hungary, Finland, Iceland
 U.S. QE2 (quantitative
easing)
 Risk is higher inflation / social upheaval
 Cannot work for all but needs to happen to
G7 vs. emerging markets esp. China
Inflation
 A rise in domestic price level
reduces the real burden of
domestic denominated debt
 United Kingdom
 Would be attempted via printing money to pay
off debt – QE
Financial Repression – measures taken by governments to force investors to hold more assets with
lower returns and higher risk, than otherwise desired
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ECB’s QE* response tiny compared to other
central banks, will have to change in 2012
Policy
Central banks’ holdings of their nation’s government bonds, as a percentage of relevant GDP
% of GDP
€1 trillion more would take ECB action to same size as Fed’s
response
20%
18%
16%
14%
12%
10%
19.3%
16.8%
8%
6%
11.5%
4%
2%
2.3%
0%
Eurozone
U.S.
U.K.
Japan
Source: Bank of England, Bank of Japan, European Central Bank, U.S. Federal Reserve, Bloomberg. Data as of 15 December 2011 *QE = quantitative easing
12
Divergence in bond yield spreads suggests ECB
already confronted with Euro disintegration
Potential
risks
Cash spreads of selected European 2 year bonds over Germany
Spread over
Germany (basis
points)
1100
1000
Peripheral ex Greece**
Triple AAA*
900
800
700
600
500
400
300
200
100
0
-100
2005
2006
2007
2008
2009
2010
2011
Source: Bloomberg. Data as of 24 November 2011. *arithmetic average of France, Austria, Netherlands and Finland ** arithmetic average of Spain, Italy and Portugal
13
German export story vulnerable
to an investment slowdown in China
Potential
risks
German exports to China and German capital goods orders, in millions of euros
€m
China should experience a soft landing next year. Lower inflation
will see policy focus on growth again. The risk is that the shift in
stance fails to head off a sharp slowdown in investment spending
€m
Source: Bloomberg. Data as of November 2011.
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Potential
risks
Softer Chinese residential property activity may
signal weaker investment in 2012
Chinese residential investment growth and sales growth (year-on-year)
Growth rate
Investment growth
Sales growth
60%
50%
40%
30%
20%
10%
0%
-10%
-20%
2005
2006
2007
2008
2009
2010
2011
Source: Gavekal. 3 month moving average data, as of 14 December 2011
15
Higher inflation remains the key area of
vulnerability for emerging economies
Potential
risks
Inflation across developed and developing economies
Good news is that consumers’ purchasing power will be
supported by easing inflation, but limited to mature economies
Projection
%, year-on-year
12
Developed economies
Emerging and developing economies
9
6
3
0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Source: International Monetary Fund. Data as of September 2011.
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Israel
economics
Israeli GDP growth should be resilient in 2012,
despite weakening net exports
Israel GDP growth, decomposed into consumption, investment and net exports
Estimates
Solid domestic consumption should cushion GDP in 2012 amid
external headwinds from the eurozone
%
10
Consumption
9
Investment
Net exports
GDP growth ()%
8
7
6
5
4
3
2
1
0
-1
-2
-3
-4
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Source: BofA ML Global Economic Research. Data as of 3 January 2012.
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No global recession in 2012 but G5
growth sluggish and China below 9% growth
Forecast
update
Growth forecasts 2011-2012
2011 Forecast (%)
2012 Forecast (%)
Global
3.8
3.5
G5*
1.4
1.1
United States
1.8
1.9
Eurozone
1.5
-0.6
Germany
2.7
-0.5
France
1.5
-0.6
Japan
-0.3
2.3
Italy
0.6
-0.7
United Kingdom
0.9
0.3
Israel
3.9
3.5
Brazil
3.1
3.4
Russia
4.0
3.6
China
9.2
8.6
India
7.0
6.8
Source: BofA Merrill Lynch Economics Research. Data as of 1 December 2011. *G5 refers to the Group of 5, namely Eurozone, Canada, Japan, the United
Kingdom and the United States .
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Macro
summary
CIO View - macro summary for 2012
 We expect a worldwide slump to be avoided in 2012 but the scene is set for a fragile expansion, with U.S.
growth at only 2% and emerging economies again the mainstay of the advance
 A persistent failure to address the systematic issue in the Euro debt crisis - risk of default - means Europe will see
a contraction in activity in 2012
 The dominant policy story in 2012 will be stabilising the euro zone and a global pattern of monetary stimulus
involving monetisation in the developed world
 We do expect US to avoid a recession but weak recovery in business spending will limit pace of expansion
 China’s GDP growth rate should bottom out at around 8% per annum. Easy money stimulus will come sooner than
expected but the price will be persistent higher inflation
 A weak consumer and ripples from the eurozone sovereign debt crisis should push the Bank of England into
further quantitative easing (QE) - this should limit the rise in sterling through 2012
 We expect the euro to weaken as ECB offers a back stop to euro bonds and U.S. consumer gains from lower
inflation
 Global coordinated response is crucial to re-balance the global economy, as political differences pose ongoing
threats to the recovery
 Risks in 2012: Positive: Rebound in business spending/ ECB support/ stronger U.S. housing/ China pro -growth
Negative: Euro disintegration/ government defaults/ bank runs/ currency wars/ excess austerity
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Strategy
Household equity holdings look set to continue
shrinking despite better value, earnings growth
Households’ direct holdings of listed equities as a % of total financial assets
%
Investors are deeply sceptical about the recovery, worried
about the risks of even greater disappointment
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U.S.
30
U.K.
25
20
15
10
1987
1990
1993
1996
1999
2002
2005
2008
2011
Source: U.S. Federal Reserve, BofA Merrill Lynch Global Research. Data as of December 2011.
20
Strategy
More assets performing in the same way a huge challenge for true diversification
Correlation heat maps for 2005 and 2011
2005
2011
Source: Bloomberg, HSBC. Data as of November 2011
21
A strategic framework for navigating the
‘New Normal’
Strategy
2012 may be characterised by low returns, high risk and a polarised environment
Low returns
Polarised
environment
Overpriced safe-haven
assets
Risky assets suffering from
uncertainty
Strategy: sector selection
(high dividends, high
quality stocks)
Shift between “risk-on” and
“risk-off” environments
Deeply divided currencies,
industries and countries
/regions
Strategy: separating
markets and currency
management (funds of
currencies)
High risk
More frequent high volatility
bubbles
Increasing correlations
Strategy: macro/CTA
hedge funds
Source: CIO, EMEA Merrill Lynch Wealth Management
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Optimism on earnings growth fades, especially
in Europe – any improvement modest in 2012
Equities
U.S. (S&P 500) and European (Stoxx 600) 2012 earnings per share (EPS) forecasts
€ per share
$ per share
114
30
112
29
110
28
108
27
106
26
U.S.
Europe
104
25
102
24
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Source: Factset. Data as of November 2011.
23
Market valuation discounts a 10-20% decline
in profits
Equities
12 month forward price to earnings ratio for the MSCI AC World equity market
%
20
Valuation of equities and positioning reflect the multiple dangers ahead.
Upside limited by level of profits’ growth slowdown
18
30% reduction in
earnings
16
20% reduction
in earnings
14
10%
reduction
in earnings
12
10
8
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Source: Factset. Data as of 17 November 2011.
24
Relative to developed, emerging equity markets
are at cheapest valuations since 2009
Equities
12 month forward relative price to earnings ratio for the MSCI Emerging Markets Index*
Ratio
Prefer U.S., U.K. equities over Japanese and European stocks
Source: Factset. Data as at 17 November 2011. * relative to the MSCI World Index
25
Tech, consumer staples and discretionary
stand out – focus on yield, quality and growth
Equities
U.S. S&P 500 sector ranking model
BofA-ML
Research
Position*
Combined
Ranks
Price
Momentum
Rank**
Estimate
Revisions
Ranks**
Valuations
Rank**
Information Technology
Overweight
9.3
9
9
10
Consumer Staples
Overweight
8.0
8
10
6
Healthcare
Neutral
6.7
6
5
9
Consumer Discretionary
Neutral
5.3
5
8
3
Industrials
Neutral
5.0
4
6
5
Utilities
Neutral
5.0
10
4
1
Energy
Neutral
4.3
3
2
8
Materials
Underweight
4.0
2
3
7
Financials
Underweight
4.0
1
7
4
Neutral
3.3
7
1
2
Telecommunications
Source: BofA Merrill Lynch Global Research. Data as of November 2011. *Sector position (overweight/neutral/underweight) reflects the sector weighting of BofA-ML
US Equity Strategy Research.**Price momentum ranked by 3 month change in the sector’s relative price versus the S&P500; Estimate revisions ranked by 3 month
change in relative next 12 month’s consensus earnings estimates versus S&P 500; Valuation ranked by the ratio of current relative Price/Earnings ratio of the sector
compared to its long-term average relative P/E. Combined rank is the equal weighted average of individual ranks.
26
Large-cap stocks favoured
styles for next year, favouring high quality
Equities
Growth versus value* relative performance and large versus small ** cap stocks in the U.S.
Relative
Performance
Relative
Performance
Growth outperforms
value
Source: Bloomberg. Data as of 17 November 2011. *MSCI US Growth total return vs. MSCI US Value total return indices
** S&P 500 total return vs. Russell 2000 total return indices, 3 month moving average
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Equities
In periods of decelerating profit, continue with
dividend yield theme in the U.S.
Performance of dividend yield and dividend growth in different profit environments for S&P 500
12%
11%
High Dividend Yield
High Dividend Growth
8%
6%
4%
0%
-1%
-4%
-8%
-9%
-12%
Profits Decelerations
Profits Accelerations
Source: Factset, Bloomberg., BofA Merrill Lynch Global Research. Data as of October 2011.
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U.S. high yield debt in favour, as long as defaults
remain low
High yield price index and default rate for the U.S.
%
Fixed
income
Estimates
Index level
Source: Bloomberg. Data as of November 2011.
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Extending duration will not pay in 2012 unless
deflation fears rise or Fed is aggressive with QE3*
Fixed
income
U.S. Treasury real yield curves for January and November 2011
%
Core sovereign bonds
unattractive in all scenarios other
than a global recession
Source: Bloomberg. Data as of 17 November 2011. *QE3 = third round of quantitative easing
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Unless there is another global recession in 2012,
copper prices look unusually cheap
Commodities
Ratio of gold price to copper price (average shown by dotted line)
Ratio
0.3
0.2
0.1
0.0
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Source: Bloomberg. Data as of November 2011.
31
Rebound in industrial metals in coming months,
with energy prices following in second half of 2012
Commodities
Oil, base and precious metal forecasts into 2012
Spot
June 2012
(Forecast)
December 2012
(Forecast)
Brent Crude Oil ($/barrel)
113.41
104.00
116.00
WTI* Crude Oil ($/barrel)
102.64
96.00
110.00
Aluminium ($/metric tonne)
2,065
2,250
2,500
Copper ($/metric tonne)
7,540
8,000
8,500
Lead ($/metric tonne)
2,060
2,000
2,200
Nickel ($/metric tonne)
18,795
18,500
18,000
Zinc ($/metric tonne)
1,869
2,100
2,300
Gold ($/oz)
1,613
1,750
2,000
Commodity
Source: BofA Merrill Lynch Global Commodity Research estimates. Data as of 5 January 2012. * WTI = West Texas Intermediate
32
Although interest rates will likely fall in 2012, the
shekel should remain supported by fundamentals
Currencies Israel
Israeli shekel (ILS) per U.S. dollar (USD) exchange rate and real effective exchange rate
We expect modest shekel appreciation versus the U.S. dollar by
end of 2012, with USD-ILS at 3.65 from around 3.85 currently.
ILS per USD
Index
140
5.0
ILS real effective exchange rate
ILS per USD (right hand scale)
130
4.5
120
4.0
110
3.5
100
90
3.0
2005
2006
2007
2008
2009
2010
2011
Source: BofA ML Global Economic Research. Data as of 3 January 2012.
33
A good first six months for the dollar - renminbi
appreciation to continue
Currencies
Developed majors
Currency
Spot
June 2012
(Forecast)
December 2012
(Forecast)
EUR – USD
1.32
1.25
1.30
USD – JPY
78
73
76
EUR – GBP
0.85
0.82
0.85
GBP – USD
1.56
1.52
1.53
USD – CHF
0.93
0.99
0.97
BRIC (Brazil, Russia, India and China) group
USD – BRL
1.83
1.90
1.85
USD – RUB
31.63
32.00
30.00
USD – INR
52.84
53.00
49.00
USD – CNY
6.36
6.35
6.20
Source: BofA Merrill Lynch Global Research. Data as of 12 December 2011
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CIO View - market outlook for 2012
Market
outlook
 The task of ensuring diversification across investment portfolios is complicated by a shrinking set of ‘safe havens’
 We continue to stress the need for a strategic framework to deal with ‘New Normal’ (sluggish growth, higher risks), including
managing for scenarios involving big losses (drawdown); volatility bubbles and constant switching between ‘risk on /risk off’
 Equity outperformance relative to higher risk corporate debt will be modest
 We stress yield, quality and growth in selecting equities, supporting:
 Large caps
 Dividend growth
 U.S. and U.K. equities
 M&A and corporate cash flow
 Secular themes such as the emerging market consumer and infrastructure
 Too early for financials and Europe and we await China’s policy easing to add to emerging markets
 Within fixed income, bias to investment grade credit, particularly the U.S., persists.
 Tight control of supply and inventories limits a possible fall in the crude oil price.
 Copper would benefit from China’s easing. Upside to gold price above $2,000
 Risks in 2012
+ Positive: Better performance for U.S. banks, M&A pick up, recovery in U.S. housing and cyclical stocks
− Negative: Profits contraction, tax raids on corporates, financial repression, protectionism
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