Transcript Slides from client presentation(PowerPoint, 4 MB)

Capricorn Investment Partners Limited
Client Presentation
8 March 2012
General advice warning
This presentation and the associated
discussion is general in nature and does not
take your individual situation into account.
You are advised not to act on anything
contained herein, or discussed as a
consequence of the contents of this
document, without receiving financial advice
from a suitably qualified person such as a
financial planner, lawyer or accountant.
What will be covered
Australia and the Global Economic Environment
&
Stock Market Performance
A quick look back at 2011...
Characterised by crises, both natural and financial:
Natural
• Floods in Queensland (January), Thailand (November), New South Wales (December)
• Cyclone Yasi
• Earthquakes in Japan and New Zealand
Financial
• Ongoing Greek and Euro-zone sovereign debt issue
• European austerity measures and public reaction
• US government debt ceiling negotiations
• USA loses AAA credit rating
The impact of these events on the ASX
Greek debt crises
Japanese earthquake
& tsunami
US govt debt ceiling
negotiations
2011
The Australian economy remains relatively strong
Despite the wide-ranging crises of 2011, the Australian economy is still
relatively well-positioned
GDP growth has remained positive and is expected to be around trend at 2.5 to 3.0%.
Inflation is also under control and expected to be within RBA target
The retail sector continues to struggle
Australian retailers are being forced to cut costs and rationalise
store numbers, as sales growth disappears
And this is why..... ”Paradox
of Thrift”
Household debt levels may have peaked
Not only are we saving more, we’re also less inclined to take on more
debt, be it credit cards, car loans or mortgages
The property market has also suffered, with average prices
falling by over 5% in 2011
The ‘Two-speed’ economy remains an issue
Most growth and the majority of corporate profits are concentrated
in the mining sector
No growth in profits
Banking
ASX – Net Profits by Sector
Mining
Mining industry dominates investment
The majority of business investment now takes place in the mining
industry, with less emphasis on traditional sectors such as manufacturing
However the mining industry is still a relatively minor employer, with only
2.1% of Australians employed directly in the industry
But reliance on mining poses risks
If the current commodities boom should end, economic activity would
slow, tax revenues would fall and the government would have few
options to stimulate demand
What happens
if this occurs?
???
Primary concern remains the AUD
The continued strength of the AUD presents problems for a range of
sectors of the economy: retail, travel, manufacturing and others
110% appreciation of the
AUD against the USD
over past decade
Average since
float in 1983: 83c
The Global Economic Environment
Continuing concerns over Europe, some signs of
growth in the United States
Europe: yet more crises to come
17 summits were held in 2011 to resolve the Euro-zone sovereign debt
crisis and still no definitive solution has been found
‘Austerity’ is the new economic paradigm
Faced with high sovereign debt levels, governments in Europe have
adopted various austerity measures to lower their debt/GDP ratios
However austerity at the time of a recession can be self-defeating
where tax revenues fall faster than spending is cut
It’s still possible that Greece will default
Even after the most recent $160 billion bailout, Greece will still have
a debt/GDP ratio of 120%
90% debt/GDP
ratio – commonly
viewed as point of
no return
Greek economic recovery assumptions are heroic
For Greece to avoid default, its economy must exhibit a stunning turnaround over the next few years
The reality is very different: 48% youth unemployment, -6.8% GDP
growth, $6 billion of annual tax evasion, 13.6% govt deficit
Collapse in Greek Manufacturing
A rapid economic recovery in Greece looks unlikely when you
consider what is happening to the manufacturing sector
Greek Manufacturing PMI
The Greek stock market reflects the gloom
The Greek stock market is down 86%
from its pre-GFC peak
Why does Greece matter?
With an economy the same size as Victoria’s, Greece is a minor
economic player, the real issue is the European banking system
Greece
Owes $400bn to
banks in Europe
If Greece
defaults...
Which leads to a
credit crisis in
A number of banks in
Europe collapse
Europe as banks
pull their funding
or are nationalised
The
banks
write-off
their
loans
Italy & Spain
Resulting in a
European
recession
Contagion then spreads
to other Euro nations
such as...
And on it
goes...
Problems of too much debt are widespread
Many countries are close to the 90% government debt/GDP
ratio, which usually presages an economic crisis
Recent ECB action has helped avoid a crisis
Similar to action taken by the US Federal Reserve, the European
Central Bank has taken steps to provide liquidity to the European
banking system through a form of quantitative easing
LTRO = Long-Term Refinancing Option
The ECB agrees to supply
unlimited amounts of Euros for
3 years at 1%
European banks have so far
borrowed €1.018 trillion
Which is then invested in
sovereign bonds yielding
upwards of 6%
LTRO has had a significant impact
The costs of funding for highly-indebted European countries has
fallen significantly as European banks invested funds from the
LTRO in Euro-zone government debt
Italian 10-year bond yield
LTRO 1
LTRO 2
A similar outcome for Spain
LTRO 1
Spanish 10-year bond yield
LTRO 2
Primary purpose of LTRO is to buy time for indebted countries to act
to reduce their debt/GDP ratios – it is not a permanent solution
United States – signs of recovery
Growing signs of a recovery by the US economy may help to offset
any fallout from the ongoing European sovereign debt crisis
Weak but
clear signs of
recovery in
US rail
growth
Manufacturing in the US has also improved
The health of the manufacturing sector closely tracks overall GDP
and recent readings are positive
Another positive sign – US car sales
US consumers are regaining some level of confidence following
the GFC, evidenced through their willingness to buy new cars
US unemployment finally recovering...
Sustained reduction in the US unemployment rate as the private
sector begins to re-hire workers
...although there is still a long way to go
But...the US Housing market is still weak
Despite the pickup in employment and faster economic growth, the
US housing market, the source of the GFC, still remains weak. A
sustained recovery requires an improvement in the housing market
Stabilising
but not yet
growing
Stock market performance
Fairly cheap by historical standards
Pre-GFC high
ASX All Ordinaries – 1992 to 2012
Based on the past 20
years, the Australian
stock market appears
undervalued
GFC market low
Dotcom bubble
collapse
1994 bond
market crisis
Similar story over 40 year timeframe
ASX All Ordinaries – 1970 to 2012
8.37% compound
annual growth rate
from 1974/75 to 2009
Yet the ASX has underperformed US market
Despite the Australian economy not having a recession during the
GFC, and the lack of a housing crash, our stock market has
significantly underperformed the US market over the past 2 years
All Ords down 7.73%
Dow Jones up 24.74%
Most likely explanation for the underperformance – the persistently strong AUD
Investment approach
Given the local and global economic situation, our investment approach
remains focused on:
- generating a high level of portfolio income through fixed-interest
investments and fully-franked dividend paying industrials; and
- investing in selected cyclical and growth-oriented companies where
appropriate
Current opportunities we favour:
- selected fixed interest securities (e.g. Origin, recent and existing bank
issues)
- specific companies where we consider them oversold or
underappreciated: NIB, Cromwell (income), Origin, Telstra, Leighton
Holdings
Thoughts for the year ahead
2012 is likely to be dominated by a number of key issues:
- ongoing sovereign debt crisis in Europe, and
- the resilience or otherwise of the US economic recovery
In regards to Australia:
- we expect slowing economic conditions to force the RBA’s hand,
with a number of interest rate cuts by the end of the year, and
- stock market performance, while volatile, should improve over
the -13% experienced over 2011
Questions
?
Thank you