Transcript Aberdeen(White) Template

For Professional Use Only
Not for public distribution
Suffolk Pension Fund
Presentation to the Committee
28 November 2011
Natalie WinterFrost, Client Director
Email: [email protected]
Telephone: 020 7463 6399
Anthony Fletcher, Fixed Income Portfolio Manager
Email: [email protected]
Telephone: 020 7463 6261
Table of Contents
• Sovereign bond yields, inflation and real valuations
• Europe, Credit markets and Financials
• Emerging Market Debt and Asian bonds
• Investment outlook Summary
• Appendices
1
Bond yields are now at unprecedented lows
UK government 10 year yields
Fear of deflation
Positive Sentiment
Negative Sentiment
Markets optimistic on growth
Commodity prices rising
Growth disappoints
Growth OK
Commodity prices falling
5.0
4.5
Bernanke hints at QE2
Jackson Hole,
27 Aug 10
Trichet (ECB)
1st mention
of “Strong
vigilance”
4 Mar 11
QE2
starts
12 Nov 10
4.0
US debt
ceiling
negotiations
26 Jul 11
Portugal
S&P places
requests
US on
bailout
negative
6 Apr 11
watch
17 Apr 11
Fed cuts US
growth
prospects
22 Jun 11
S&P
downgrades
US
6 Aug 11
3.5
Start of the
Arab spring
14 Jan 11
3.0
2.5
2.0
Ireland
requests
bailout
20 Nov 10
Japan
Earthquake
11 Mar 11
‘Open’
discussion
of Greek
default
3 Sep 11
US Budget
cuts $6.2tn
15 Apr 11 New Greek
bailout
agreed
3 Jun 11
OBAMA extends
Bush tax cuts
6 Dec 10
ECB hikes 25 bps
US growth
revised
down
29 Jul 11
1.5
Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11 Jul 11
Source: Aberdeen Asset Management, Bloomberg
Aug 11 Sep 11
2
Global government bond yields have fallen significantly
• In the US; lower GDP, protracted debt ceiling
discussions and the S&P downgrade; proved to
be the catalyst for a material change in
sentiment
• In Europe, the absence of a credible solution to
the European debt crisis sent credit spreads
wider and further injured sentiment prompting a
wholesale flight into ‘safe‘ sovereign assets
• Forecasters slashed growth forecasts and
talked openly of economies moving into
recession
• Yields in “safe” Sovereign bond markets fell
significantly
• All European Sovereign spreads widened
relative to Germany
• Later in the quarter the Fed announced it was
ready to buy longer dated bonds to try and
stimulate refinancing activity
US Treasuries Yield Curve and changes
5
4
3
2
1
0
Δ
30 Jun 11
2 yr
5 yr
10 yr
-0.21
-0.80
-1.22
30 yr
-1.38
Euro German Sovereign Yield Curve and changes
5
4
3
2
1
0
Δ
30 Sep 11
2 yr
5 yr
10 yr
15 yr
-1.05
-1.09
-1.12
-0.85
20 yr
-1.01
30 Jun 11
30 yr
-1.12
UK Government Bond Yield Curve and changes
5
4
3
2
1
0
Δ
Source: Bloomberg
30 Sep 11
30 Sep 11
30 Jun 11
2 yr
5 yr
10 yr
15 yr
-0.25
-0.68
-0.91
-1.09
20 yr
-0.86
30 yr
-0.70
3
Inflation pressures have continued to increase
Headline CPI
• Western economies have benefitted from falling
inflation brought about by over 15 years of
globalisation; this trend may be about to change
• Headline inflation pressures have not
moderated as much as central banks expected
6.0
4.0
2.0
0.0
-2.0
US
-4.0
2005
2006
UK
2007
2008
EUR
2009
2010
2011
US Core CPI QoQ Annualised
8.0%
• QE2 had some quite negative effects on
headline inflation; and may be responsible for
the accelerating pace of core inflation
• These factors all point to the risk of higher
inflation over the medium term
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
Source: Bloomberg, As at 30 Sep 11
0.0%
1990
1993
1996
1999
2002
2005
2008
2011
4
At these levels, Sovereign bond markets are expensive
UK 10 Year Gilts vs UK CPI Inflation
(%)
10 Year Gilts
UK Inflation
US 10 Year Treasuries vs US CPI Inflation
Germany 10 Year Bunds vs German CPI
Inflation
(%)
(%)
10 Year US Treasuries
US Inflation
7.0
7.0
7.0
6.0
6.0
6.0
5.0
5.0
5.0
4.0
4.0
4.0
3.0
3.0
3.0
2.0
2.0
2.0
1.0
1.0
1.0
0.0
0.0
0.0
-1.0
-1.0
-1.0
-2.0
-2.0
-2.0
-3.0
-3.0
00 01 02 03 04 05 06 07 08 09 10 11
Spread/Difference
(%)
6.0
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
-4.0
(%)
6.0
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
Source: Bloomberg, 19 Oct 11
Germany Inflation
-3.0
00 01 02 03 04 05 06 07 08 09 10 11
Spread/Difference
00 01 02 03 04 05 06 07 08 09 10 11
10 Year German
00 01 02 03 04 05 06 07 08 09 10 11
Spread/Difference
(%)
6.0
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
00 01 02 03 04 05 06 07 08 09 10 11
00 01 02 03 04 05 06 07 08 09 10 11
5
The European Crisis remains unresolved
• Despite protracted discussions, the European
debt crisis remains unresolved
2 Year Government Bond Yields
30
25
• The consequences of a break up of the Euro
project would be significant for the European
financial system
Portugal (lhs)
Ireland (lhs)
Spain (lhs)
Greece (rhs)
80
Italy (lhs)
70
60
20
50
15
40
30
10
• The current crisis highlights the need for further
integration of European monetary and fiscal
policy
• The Euro 440 billion European Financial
Stability Facility (EFSF) is now in place but
exactly how it will be used has yet to be agreed
20
5
0
Jan
10
10
0
Mar
10
May
10
Jul
10
Sep
10
Nov
10
Jan
11
Mar
11
May
11
Jul
11
Sep
11
10 Year Government Bond Yields
30
Portugal
• Euro 106 billion is the price for recapitalisation
of the banking system
• Investors have “volunteered“ to accept a 50%
haircut on Greek debt
Ireland
Italy
Greece
Spain
25
20
15
10
5
• Greece will remain in the euro
Source: Bloomberg
0
Jan
10
Mar
10
May
10
Jul
10
Sep
10
Nov
10
Jan
11
Mar
11
May
11
Jul
11
Sep
11
6
European credit markets have weakened, led by financials
• Credit spreads continued to widen on concern
over peripheral European governments’
finances and the uncertain outlook for global
growth
• Contagion spread to Italy and Spain with
worrying implications for the Euro-zone
• Corporate fundamentals remain sound,
although recent profit warnings have brought
into focus the potential impact of faltering
economies
• Banks’ continuing fundamental improvements
are being undermined by ongoing sovereign
concerns and disrupted funding markets
• Market implied default rates are well above both
historical averages and the worst 5 year period
since 1970
European Credit by sector (OAS)
700
Industrials
Utilities
Financials
600
500
400
300
200
100
0
Jan
08
May
08
Sep
08
Jan
09
May
09
Sep
09
Jan
10
May
10
Sep
10
Jan
11
May
11
Sep
11
Market implied default rates vs history
100.0
Average
Worst Year Since 1970
Cum Default Rate*
80.0
60.0
40.0
20.0
NOTE:
Analysis base on senior bonds only with a remaining maturity
between 4-6 years.
Actual default rates based on data since 1970
Source: Deutsche Bank, Moody’s, Bloomberg, Sep 2011
0.0
AAA
AA
A
BBB
BB
* Implied 5yr Cumulative Default Rate (40% Recovery)
B
CCC
7
Banks are in a better position to weather the current ‘storm’
• On average banks are much better placed now
than in 2008. Capital and liquidity positions
have been significantly enhanced ahead of
tough new Basel regulations
• LIBOR is elevated but not showing the levels of
stress seen in 2008
• The ability of Governments to guarantee bank
debt or provide capital is being called into
question
European Banks – significant increase in capital
Assets/equity
CT1 ratio (rhs)
Adj assets/equity
T1 ratio (rhs)
30x
14%
28x
12%
26x
10%
24x
8%
22x
6%
20x
4%
18x
2%
0%
16x
• Central banks have acted to ease both short
and medium term liquidity
• Primary markets have been virtually closed
since July, but most banks are funded for this
year
Q4 05
Q4 06
Q4 07
Q4 08
Q4 09
Q4 10
Libor – OIS since 2008
2.5
• Banks continue to call their subordinated bonds
2.0
• Banks are inextricably linked to the health of
sovereigns
1.5
• Consequently, an early resolution to the current
sovereign crisis remains a priority for policy
makers
Source:
Barclays Capital/Bloomberg
Sep 2011
Q4 04
1.0
0.5
0.0
Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep
07 07 07 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11
8
Emerging Market Debt
• Stronger balance sheets and more attractive yields compared to
advanced economies
• EMD offers appeal in the 'lower for longer' environment
• Blended strategy – hard currency sovereign, corporates and local
currency bonds
• Local currency offers more attractive returns than hard currency, but
higher volatility
• EMD is a compelling story, though not a safe haven
Source: Aberdeen Asset Management, Nov 11
Sovereign debt iceberg …
General Government Debt (% GDP) vs Government Balance (% GDP)
Gross General Government Debt for 2011 (% of GDP)
Japan's Govt.
Debt is 233%
180
Eurozone
G10
Asia
CEEMA
LatAm
Japan
Greece
160
Jamaica
140
Lebanon
Italy
120
Barbados
Ireland
100
Portugal
USA
Belgium
France
80
Egypt
Canada
UK
Germany
Hungary
Netherlands
Brazil
India
Egypt
Philippines
Poland MalaysiaVietnam
El
SalvadorThailand
Lithuania
Sw itzerland
Croatia
Ukraine
Serbia
Belarus
Slovenia
Venezuela
Argentina
Iraq
South Africa
Colombia Panama Turkey Sw eden
Georgia Indonesia
Korea
Costa Rica
Peru
China
Luxembourg
Guatemala
Australia
Kazakhstan
Russia
Chile
Spain
60
40
20
Norw ay
Qatar
UAE
Saudi Arabia
0
-12
-10
-8
-6
-4
-2
0
2
4
6
General Government Balance for 2011 (% of GDP)
Source: IMF, World Economic Outlook Database, Sep 11
8
10
12
14
Diverging credit trends between EM and DM countries
DM vs EM sovereign credit ratings
EM rating
DM rating
BBB
AAA
BBB-
AA+
BB+
AA
BB
AA-
Source: Morgan Stanley, Aug 11
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
A+
1998
1997
1996
BB-
Asia’s share of global GDP may reach 50% by 2050
2010
2050f
Other
9%
Japan Africa
4%
6%
Other
9%
Developing
Asia
27%
North
America
22%
Japan
2%
Africa
12%
North
America
11%
Latin
America
8%
Latin
America
9%
Europe
9%
Europe
23%
Source: Citi Mar 11; GDP measured in 2010 PPP USD
Developing
Asia
49%
Asian fixed income risk/return profile
Average annual USD return vs standard deviation of annual USD returns;
2005 to 2010; unhedged
Average annual return
18.0%
Asia Pacific Equities
16.0%
14.0%
EM L/C Debt
12.0%
Asian short duration
10.0%
EM Debt
Asian L/C
8.0%
Asian USD Credit
6.0%
4.0%
US Fixed Income
Global FI
Global Equities
2.0%
0.0%
0.0%
2.5%
5.0%
7.5%
10.0% 12.5% 15.0% 17.5% 20.0% 22.5% 25.0% 27.5% 30.0%
Risk (standard deviation)
Source: Aberdeen Asset Management, as at 31 Dec 10
Indices used are BAC Global Agg, BAC US Agg, JPM JACI, JPM EMBIGD, JPM GBI-EM (ELMI), MSCI World, MSCI AC Asia Pacific ex Japan, iBoxx Asia ex
Japan Sovereign 1 - 3, iBoxx Asia ex Japan Govt
Outlook summary
• Sub trend growth to continue in developed economies
• Economic activity to be stronger than the markets expect
• Bond yields to rise
• Negative market sentiment threatens economic recovery
• Central Banks to remain accommodative
• China and SE Asia expected to continue to grow strongly
• Japanese recovery on track, exports recovering
• Falling commodity prices to ease pressure on consumer spending
• Investment grade credit remains fundamentally attractive
• Resolution to European sovereign debt crisis required to see recovery in bank debt
• Greece to restructure debt but stay in the Euro
Appendix
Your team
Natalie WinterFrost: Client Director for the Suffolk County Council Pension Fund
• 17 years pension and investment experience
• BSc (hons) in Mathematics and Economics from Bristol University and a CFA Charterholder and
Actuary
Steven Nicholls: Head of EMEA Fixed Income Client Portfolio Managers
• 28 years industry experience
• A member of the Chartered Institute for Securities and Investment
Anthony Fletcher: Fixed Income Portfolio Manager
• 24 years investment experience
• BSc in Geology from the University of London and a Diploma in Technical Analysis
from the Society of Technical Analysts
16
For professional use only
Not for public distribution
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17