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Global equities: risks and opportunities
The Advice Exchange – National PD Day
Dom GiulianoPortfolio Manager
This presentation (‘Presentation’) has been produced by Magellan Asset Management Limited (‘Magellan’) ABN 31 120 593 946, AFS Licence No 304 301 and has been prepared for informational and discussion purposes only and does not constitute an offer to sell or a solicitation of an offer to purchase any security or financial product or service. Any such offer or solicitation shall be made only pursuant to a Product Disclosure Statement, Information Memorandum or other offer document (collectively ‘Offer Document’) relating to a Magellan financial product or service. A copy of the relevant Offer Document relating to a Magellan product or service may be obtained by calling Magellan on +61 2 8114 1888 or by visiting www.magellangroup.com.au. This Presentation does not constitute a part of any Offer Document issued by Magellan. The information contained in this Presentation may not be reproduced, used or disclosed, in whole or in part, without the prior written consent of Magellan.
Past performance is not necessarily indicative of future results and no person guarantees the performance of any Magellan financial product or service or the amount or timing of any return from it. There can be no assurance that a Magellan financial product or service will achieve any targeted returns, that asset allocations will be met or that a Magellan financial product or service will be able to implement its investment strategy and investment approach or achieve its investment objective.
Statements contained in this Presentation that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of Magellan. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. Additionally, this Presentation may contain “forward-looking statements”. Actual events or results or the actual performance of a Magellan financial product or service may differ materially from those reflected or contemplated in such forward-looking statements.
Certain economic, market or company information contained herein has been obtained from published sources prepared by third parties. While such sources are believed to be reliable, neither Magellan or any of its respective officers or employees assumes any responsibility for the accuracy or completeness of such information. None of Magellan or any of its respective officers or employees has made any representation or warranty, express or implied, with respect to the correctness, accuracy, reasonableness or completeness of any of the information contained in this and they expressly disclaim any responsibility or liability therefore. No person, including Magellan has any responsibility to update any of the information provided in this Presentation.
Neither this Presentation nor the provision of any Offer Document issued by Magellan is, and must not be regarded as, advice or a recommendation or opinion in relation to a Magellan financial product or service, or that an investment in a Magellan financial product or service is suitable for you or any other person. Neither this Presentation nor any Offer Document issued by Magellan takes into account your investment objectives, financial situation and particular needs. In addition to carefully reading the relevant Offer Document issued by Magellan you should, before deciding whether to invest in a Magellan financial product or service, consider the appropriateness of investing or continuing to invest, having regard to your own objectives, financial situation or needs. Magellan strongly recommends that you obtain independent financial, legal and taxation advice before deciding whether to invest in a Magellan financial product or service.
Important Information
The world – potholes on the road to recovery
Source: Magellan Asset Management
[7]
UNITED STATESEconomy strengthening
QE unwind → rising interest rates
EMERGING MARKETSPolitical instability
Slow structural reformsChina linkages
Rising interest rates
EUROPESlow structural reforms
Institutional reformsSovereign debtUnemployment
Low inflation → deflation
CHINAProperty construction bubble
Credit growthSlowing growth
Structural reforms
JAPANABEnomics?
Note: Data as at 5/9/14
Source: Federal Reserve; Bureau of Labour Statistics; Dept. of Commerce; ISM; US Census Bureau; Bloomberg; US
Treasury
US economic indicators are strengthening
Indicator Latest 1 year ago
Unemployment 5.8% 7.2%
Non-farm payroll employment (last 6 month avg.) 235k 205k
House starts 1.0m 0.9m
Industrial production (yoy growth) 4.3% 3.4%
Bank loans & leases (yoy growth) 6.5% 2.3%
Retail sales (yoy growth) 3.3% 2.5%
Capital goods new orders, ex defence & aircraft (yoy growth)
7.8% 7.7%
Auto sales (yoy growth) 7.9% 5.7%
ISM non-manufacturing PMI 57.1pts 55.1pts
Federal budget balance (% of GDP) -2.9% -3.8%
US RecoveryImprovement in the labour market is real
2006 2008 2010 2012 201462%
63%
64%
65%
66%
67%
0%
2%
4%
6%
8%
10%
12%
Participation rate (LHS)
Unemployment rate (RHS)
US labour market
Improvement in the labour market is
real
• US is creating 2.7m new jobs p.a.1
• 9.6m unemployed as at Aug.
2014, down from 15.4m peak in
Oct. 2009
• Employment only 0.2m below all
time high of 147m in Nov. 2007
• Falling participation is only part of
the story; much of this is
structural change with ageing.
1. Based on past six months of non-farm payroll data annualisedSource: BLS; Bloomberg; Magellan
Source: US Federal Reserve; Bureau of Economic Analysis; Magellan
US RecoveryHousehold deleveraging has freed up wallets
96%
2009
46%
1983
77%
2014
(2003 levels)
US Household Debt to GDP (%)
US RecoveryHome building is heading back to ‘normal’
Note: Monthly data at a Seasonally Adjusted Annual Rate (SAAR)Source: US Department of Commerce; Bloomberg; Magellan
1993 2003 20130.0
0.5
1.0
1.5
2.0
2.5
Anticipated demand = 1.3-1.4m
US Housing Units Started (millions annualised)
Source: Bloomberg; Magellan
US Treasury and Bund yields are near record lows
1998 2000 2002 2004 2006 2008 2010 2012 20140%
1%
2%
3%
4%
5%
6%
7%
US Treasuries avg 2008-2014: 2.8%
US Treasuries avg 1998-2007: 4.9%
Treasuries
10 year US Treasury and German Bund yields
Fed announces QE
Bunds
Italian and Spanish yields are also at record lows
Source: Thomson Reuters
1991 1996 2001 2006 20110%
2%
4%
6%
8%
10%
12%
14%
16%
Spain
Italy
5/9/14Italy: 2.3%Spain: 2.0%
10 year Italian and Spanish sovereign yields
In 1994, the US Federal Reserve raised interest rates 250bps after ~1.5 years on hold
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
$0b
$1,000b
$2,000b
$3,000b
$4,000b
$5,000b
US Federal Reserve assets
Source: US Federal Reserve; Magellan
US Treasury securities
Mortgage-backed securities
Other
~25% of US
GDP
5x
‘Quantitative Easing’ has taken us into unchartered waters
Orderly exit
• Steady US recovery; gradual increase in credit
• US short term interest rates ~2-3%
• US 10 year Treasury yields ~4.5-5.5%
• Elevated market volatility; dramatic repricing of some assets
Disorderly exit
• Sharp US recovery; strong demand for credit
• Market loses faith in Federal Reserve’s ability to exit QE
• US 10 year Treasury yields ~8-10%
• Large & rapid falls in asset prices
• Potential emerging markets & Eurozone crisis
Most likely
‘Fat tail’
Two scenarios
Credit has exploded since 2008
31 Dec 2008 31 Dec 20130%
50%
100%
150%
200%
250%
128%
217%
+89% pts
China credit to GDP Dollar value of credit growth
equivalent to US banking system
Debt service ratio 30% of GDP p.a.
Central and local govt debt 56% of
GDP
Source: Fitch; Economist; Societe Generale; Magellan Asset Management
Credit has helped fuel a housing boom
Note: Demand estimate assumes normalised completions increase with income and household formation.Source: National Bureau of Statistics
2001 2006 2011 20160.0
0.5
1.0
1.5
2.0
2.5
China housing completions
Billion sqm
?
Rapid credit growth since
GFC
~3-4 years excess supply
Anticipated housing demand
Estimated housing
vacancy rate: 22%
China’s economy is slowing
Source: National Bureau of Statistics; Bloomberg; CEIC; Magellan
Average growth p.a. 2000-2008
2009-2013
2014
Real GDP growth 8.9% 9.0% 7.5%
Credit growth (Financial institution domestic currency loans)
14.0% 19.0% 13.4%
Steel production 15.0% 10.8% 4.4%
Electricity production 10.9% 12.0% 5.3%
Cement production 10.7% 10.5% 5.3%
Housing floor space sold 20.6% 15.3% -9.4%
EuropeChallenging economic backdrop
• “Too much debt” remains a problem for banks, households, governments
• Country level reforms occurring at varying paces
• Fighting to prevent deflation
• Russia has added to the difficulties
• ECB has underpinned markets with its “do whatever it takes” rehetoric….and now a European version of QE.
Data and Device Explosion
Cashless Society
Internet/eCommerce
Emerging Market Consumer
US Housing Recovery
Rising US Interest Rates
Key Investment Tailwinds
2013 % of Sales from Emerging Markets
2013 Emerging Markets growth rate (YOY)
Yum! Brands 60%* -18%***
Unilever 56.7% 8.7%
Danone 53% 10%**
Coca-Cola 40%** 6%**
Nestle 44% 9%
Growing Emerging Market Consumption
Source: Company filings & Magellan estimates. *% of operating profit. ** Magellan estimates. *** China business impacted by Avian Bird Flu scare and poultry supply concerns
Quality multinationals are already embedded
Magellan investment opportunitiesTechnology and payments 31% of Magellan’s portfolio
Huge and growing online
audience
Device innovation enabling
connectivity and mobility
E-commerce / payments
Advertising
Technology enabled
enterprises
Magellan Global Fund Portfolio As at 30 June 2014
Consumer Defensive; 17.6%
Mass-Market Retail; 14.5%
Health Care; 7.7%
Internet & eCommerce; 6.3%Information Technology; 12.2%
Consumer Discretionary; 7.2%
Payments; 11.9%
Financials; 12.7%
Media Content and Distribution; 5.5%
Cash; 4.4%