Licensed by the Isle of Man Financial Supervision Commission Stockbrokers & Investment Managers .

Licensed by the Isle of Man Financial Supervision Commission

Stockbrokers & Investment Managers

www.ramseycrookall.com


Today’s Speakers

Stuart Cowan Chartered FCSI Investment Director

“Welcome & Introduction”

Peter Robertson BA (Hons)Chartered FCSI

Senior Investment Manager“Global Economic Outlook”



Disclaimer

Where Ramsey Crookall has expressed views and opinions, these may change. Where markets and securities are mentioned in this document they do not necessarily represent a specific portfolio holding and do not constitute a recommendation to purchase or sell. This does not constitute an offer or solicitation by anyone in any jurisdiction in which such an offer is not authorised or to any person to whom it is unlawful to make such an offer or solicitation. The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

Ramsey Crookall and Co Limited is licensed by the Isle of Man Financial Supervision Commission.



QE to Infinity and beyond

Global markets in 2014



Debt

• Budget deficits have fallen over the last 5 years, due to austerity

• But overall debt levels have continued to rise

• And interest rates are at historically low levels

• Governments would love to inflate away the debt


Sovereign Debt

Global Banking System

Corporate and

consumers



US Oct 2013: $17.07 trillion

EU total public sector debt: €8.75trn

UK total public sector debt: £1.2trn

Japan total public sector debt: $10trn


Quantitative easing and other ‘unconventional measures’

Aim – stimulate the economy when conventional measures exhausted:

• Zero rate interest policy (ZIRP)

• QE: - open market operations

• Forward guidance:




‘Unconventional measures’ - $4.7trn so far and countingTotal assets on central bank balance sheets Q2 2013 (in USD)

Source: Mckinsey 2013


QE – a quick example; Fed buys a Treasury bond from bank


BeforeBank A Fed

Assets Liabilities Assets LiabilitiesReserves 50 Deposits 100 Treasury 0 Bank A Reserve A/C 0Loans 20 Capital 10Treasury 40

After Bank A Fed

Assets Liabilities Assets LiabilitiesReserves 90 Deposits 100 Treasury 40 Bank A Reserve A/C 40Loans 20 Capital 10Treasury 0


QE - the US experience

The FOMC’s ‘dual mandate’: the goals of maximum employment, stable prices and moderate long-term

interest rates’.

•Under Bernanke, Fed Balance sheet has risen from $800bn in 2007 to over $4 trn:

• QE1 (sept 2008): $1.7trn (mortgage backed secs, commercial paper lending facility)

• QE2 (Oct 2010): $600bn (long term Treasury bonds)

• Operation twist (Sept 2011) : sell short dated bonds, buy longs

• QE3 (Sept 2012) $40bn per month MBS

• QE infinity (Dec 2013): increase open ended purchases from $40bn to $85bn per mth

How has this stimulus impacted on the ‘dual mandate’ and these other goals?




Inflation/prices

•Fed targets PCE 2%

•QE has not caused hyper-inflation

•Inflation remains subdued

•Despite an increase in consumer credit:

• Credit cards• Car loans• Personal loans

total outstanding; $3trn ($2.6trn 2008)

Rather than stimulating growth (and inflation), is the Fed ‘fire-fighting’ deflation?



Most of the QE money is in the banking system

•Banks sell assets to Fed, credits bank reserve accounts at Fed

•Fed pays banks 0.25% interest on excess reserves

•Maintaining reserves has little influence on bank’s ability to lend….

•….that’s a function of consumer and business demand for credit



Unemployment

• The ‘official’ rate is trending lower

• But remains above the Fed’s 6.5% target

•A lagging indicator

•Subject to revision



• Mortgage rates have benefited from QE

•But have risen by over 25% in the last 12 months.

•Long dated Treasury bond yield has fluctuated during periods of QE and has, if anything, trended higher during these periods.

QE and long term interest rates



QE and growth

•Growth in the US was trending lower before the credit crisis

•US economy remained in recession for much of QE1 (Nov 08- Mar 10)

•It was a deep recession but economic growth recovered in 2010 and got back to pre Crisis levels.

•QE1 brought some stability



QE: winners and losers

Government: lower borrowing costs, ‘rolling credit facility’ from Central bank holdings

Collective benefit $1.4 trn from lower borrowing costs

$350bn remitted to US Treasury since ‘09

• Banks Fed provided solvency and restored confidence. Interest paid on excess reserves held with Fed.

• Borrowers: low interest rates, low real borrowing costs

• Exporters: initially benefitted from weaker currency

• Investors: falling bond yields initially, rising stock markets

• Biggest losers have been savers – Savings rates decimatedNegative real returns


Since the introduction of QE in the US

•Short term interest rates have stayed at historically low levels

•Bond yields have fluctuated with the timing of different phases

of QE but have not been controlled by the Fed

•The dollar weakened initially – helping exports

•Potential ‘USD carry trade’ – significant capital inflows in to

higher yielding emerging markets

•CPI inflation has remained low – no ‘hyper-inflation’

•The Fed’s aggressive stance and forward guidance has improved ‘confidence’

•And a renewed appetite for risk. Highest inflation in asset prices (stocks, housing)


US Fed Funds



Bouyant stock market

• Fed support has given investors confidence

• Better relative value vs bonds

• Share buy backs

2011: $405bn2012: $399bn2013 to Q3: $344bn


US Housing




Tapering

• Fed recently announced a $10bn reduction in its monthly asset purchases to $75bn – still extremely accommodating policy

• Further tapering ‘data dependent’

• Assume an improving economy: Lower budget deficitLower unemploymentHigher Government revenues via taxesConsumer/business demand for credit – higher bank lending

• Options : Sell bonds back to banksReduce interest payments on reservesAbandon QE via progressive scale-backRetain bond interest on residual holdingsNew laws forcing banks and pension schemes to hold more Govt debt

Don’t expect any of these to happen in the immediate future


Japan and ‘Abenomics’ – origins in Fukushima


The solution?



‘Abenomics’ – the ‘three arrows’

1. Aggressive monetary easing

2. A credible fiscal plan

3. Growth strategy based on structural reform

Aims: Target inflation rate of 2% paDecimate yen – boost exports

Expect: currency wars (competing trading partners will respond)

ultimate failure



Results so far

•A notable weakness in the yen (as hoped)

USD/JPY 104

•A strong rise in the Japanese Stock market

But…



Fiscal Plan

• Debt to GDP 240%

• 24% of revenues to pay debt interest

•Sales tax rise from 5% to 8% April 2014

•Demographics not supportive of GDP growth

• Ageing population reduces productivity potential.

• Poor track record in structural reform

• Who will buy Japan’s debt with a known 2% inflation target?



Eurozone – heading for deflation?

•ECB cut discount rate to 0.25% in Nov 2013 – lowest level on record

• Deflationary forces persist in the Eurozone

• Inflation reached a 4 year low of 0.7% in October (below Japan).

•Eurozone unemployment: 12.1% (all time high)Italy youth: 41.6%

Spain: 26.7% (all time high)France: 11.03% (16 year high)

• Will ECB consider some form of QE in 2014?• Bond markets stable since Draghi’s June ’12 ‘whatever it takes’ comments



UK – tentative recovery

•BOE did £375bn of QE – owns 31% of UK gilts

•Potential to do more if we see ‘triple dip’

•Expect more austerity in 2014

• BOE now using forward guidance – no rate rise until unemployment falls to 7% (currently 7.4%)

• Economy showing tentative signs of recovery

• ‘Help to buy’ supportive of housing market

• UK consumer remains heavily indebted but are taking on more debt (total net lending rose by £1.5bn in Nov)


The market outlook

• Growth forecasts

•Interest rates/credit

•Bonds

•Equities

•Commodities

•Currency



Growth Forecasts

2013 GDP

2013 CPI

2014 GDP

2014 CPI

2015 GDP

2015 CPI

USA 1.6 1.4 2.6 1.4 3.4 1.4

Japan 2.0 0.04 1.2 2.8 1.1 1.9

Eurozone -0.4 1.5 1.0 1.5 1.3 1.4

UK 1.4 2.7 1.9 2.3 1.9 2.0

G7 1.5 2.5 2.6 1.5 3.3 1.7

Source: IMF World Economic Outlook Sept 2013



Growth Forecasts: ‘BRICS’

Source: IMF October 2013


2013 GDP

2013 CPI

2014 GDP

2014 CPI

2015 GDP

2015 CPI

Brazil 2.5 6.3 2.5 5.7 3.1 5.3

Russia 1.5 6.7 3.0 5.7 3.5 5.3

India 3.8 10.8 5.1 8.9 6.3 7.5

China 7.6 2.7 7.2 3.0 7.0 3.0

31.12.2012 % Chg 31.12.2013 Chg % All time high (date)

Bovespa 60,952 +7.4 51,507 -15.5 73,516 (20.05.08)

RSTI 1,526 +10.5 1,442 -5.5 2,487 (19.05.08)

BSE Sensex 19,444 +25.8 21,097 +8.7 21,326 (09.12.13)

Shanghai SE 2,233 +3.17 2,115 -7.7 6,092 (16.10.07)

BRIC: recent stock market performance


A quick word on China

•The only country in the world that sets growth targets (7.5% pa)

•Q3 GDP rose 7.7% in Q3 2013

•Investment makes up 56% of GDP

•Most of it funded by debt, local govt, corporate borrowing: now 200% GDP

•Economy trying to shift from export and investment led growth to consumer led (34%)

•Bank assets have ballooned in last 5 years



The economic outlook

Interest Rates/credit

•US: 0.25% UK: 0.50% interest rates remain at historically low levels

Eurozone: 0.25% US/UK/ECB ‘Forward guidance’ suggests short term rates will stay low

•Must keep an eye on inflation – recovery in consumer credit/borrowing

•Market rates (bond yields) will provide guidance

•Will the ECB undertake QE?



The market outlook - Bonds

•Bonds remain fundamentally expensive

•Governments still carrying massive debts

•Yields on 5-30 year bonds creeping higher (UK, US)

•No sign of hyper-inflation. Negative real returns out to 5 yrs

•Low market rates supportive for corporate borrowers

•Disparity among European Government bonds to continue in 2014 although spreads have narrowed since Q3 2012.

•Expect aggressive QE from Japan in 2014

•Spreads on high yield debt have fallen, as investors embrace risk and yield (again)


Maturity Yield%Nov

2011

Yield% Jan

2014

3 month 0.49 0.29

6 month 0.46 0.37

1 Year 0.51 0.33

2 Year 0.52 0.48

5 Year 1.11 1.68

10 Year 2.19 2.83

20 Year 2.98 3.38

30 Year 3.19 3.57



Anything with ‘yield’ (source: Financial Times)


The market outlook - Equities

•Remain attractive relative to bonds but some caution required

•Non cyclically adjusted forward PE’s do not look excessively demanding, nor excessively cheap (FTSE 100 FPER: 12.4x)

•Dividend yields are attractive (FTSE All Share 3%)

•Far East Asian and Emerging Markets – various headwinds

•Markets of developed countries have scope for further gains in 2014

•But could experience a c5-10% correction, as looking ‘overbought’ short term.

•UK listed: Focus on dividends, cash flow, low debt, international revenues. Need to keep an eye on earnings

•Have some international exposure too



FTSE 100 Index (Jan 2014)



The market outlook: Commodities

•Commodities underperformed developed equity markets in 2013

•Potential headwinds: Slowdown in ChinaStronger US dollar, ‘taper’

concernsRising supply expectations

•Difficult year for precious metals

•Recent poor weather should support agriculture

•Future performance growth dependent



Gold – Jan 2014



The market outlook: currency – ‘the race to devalue’ continues

•Aggressive policy by Japan to deliberately weaken yen- expect retaliation

•USD- should strengthen as taper now in play

• Eurozone – strong due to restrictive nature of EU monetary policy• Significant QE (none so far) will weaken the Euro. Watch banking sector

• Swiss Central Bank has ‘pegged’ SFr to Euro at €1 = SFr 1.20

• Sterling has benefited from Govt austerity – ‘tackling the deficit’



Summary of main themes for 2014

• Tapering of QE in United States – but data dependent

• US Government debt ceiling

• Action by ECB to stimulate growth – how will they act?

• Tensions between Japan and F.E neighbours over Abenomics • China – watch the financial sector

• Geopolitical (Mid East, Japan/China, European Elections, social unrest)

• Fukushima Unit 4 reactor

• Expect pace of global growth to remain below pre-crisis levels – still too much debt• Choice of asset driven by attitude to risk and potential return• Investment portfolios need to remain well balanced by asset class/geography



Questions

Stuart Cowan Chartered FCSIDirector

Peter Robertson BA (Hons) Chartered FCSISenior Investment Manager



Disclaimer

Where Ramsey Crookall has expressed views and opinions, these may change. Where markets and securities are mentioned in this document they do not necessarily represent a specific portfolio holding and do not constitute a recommendation to purchase or sell. This does not constitute an offer or solicitation by anyone in any jurisdiction in which such an offer is not authorised or to any person to whom it is unlawful to make such an offer or solicitation. The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

Ramsey Crookall and Co Limited is licensed by the Isle of Man Financial Supervision Commission.


Licensed by the Isle of Man Financial Supervision Commission Stockbrokers & Investment Managers .

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Transcript of Licensed by the Isle of Man Financial Supervision Commission Stockbrokers & Investment Managers .