Presentación junio dexia AM

Asset Allocation Review & OutlookJune 2012

Koen Maes, Head of Asset Allocation Strategy & Funds

Nadège Dufosse, Asset Allocation Strategist

3

H1 2012: Strategy ReviewSurprise on the upside in Q1 and support of the liquidity effect…

Source : Bloomberg – Dexia Asset Management

� Supportive macroeconomic momentum and earnings revision

� Peripheral stress eased with the two LTRO

� Liquidity effect was the main performance driver

Central bank balance sheets continue to expand

2

Table of contents

I. H1 2012: Strategy Review� Surprise on the upside in Q1 and support of the liquidity effect� … weakening global context since April…� … while central banks balance sheets stopped expanding� Model score had deteriorated in Q2� Active management

II. Outlook � Somewhere between the best and the worst case

� Deepening crisis in Europe� Risk has not become systemic yet� Historically high level of pessimism

� Rapid and credible answer needed� Investors between hope and despair� Tail risk occurrence still possible

� Can we believe in decoupling?� Longer term structural call for the US� Cyclical call for China

� Compelling valuation for equities� Attractive long term entry points� Too much risk discounted on margins� Does the risk-free rate still exist?

III. Which strategy for H2 2012? � Growing dividend� Convertible bonds

IV. Conclusion

4

H1 2012: Strategy Review… weakening global context since April...


� Economic surprise indicator illustrates the turnaround in macroeconomic indicators, all the regions disappointed:

� Europe in harder recession as a consequence of austerity policies

� Weak employment data in the US should weigh on consumption

� Drop in Chinese macroeconomic indicator revived the fears of hard landing

5

H1 2012: Strategy Review…while central banks balance sheets stopped expanding

Source : ECB, Fed , Bloomberg – Dexia Asset Management

� After the second LTRO, ECB balance sheet stopped increasing

� Lack of liquidity injection was concomitant with weaker fundamentals

� Risk-off mode started with Emerging markets, then Europe

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H1 2012: Strategy ReviewOur model’s score has deteriorated in Q2, but is not yet at an alarming level


Our shorter term factors are negative (-0.6)

-2.00

-1.50

-1.00

-0.50

-

0.50

1.00

1.50

2.00

01/09/08 01/03/09 01/09/09 01/03/10 01/09/10 01/03/11 01/09/11 01/03/12

600

700

800

900

1000

1100

1200

1300

1400

sum of market action + risk appetite +earnings factorsMSCI world

*

7

H1 2012: Strategy Review

� Macro : negative stance

� Valuation : valuation remains attractive and is positive, considering long term expected return

� Earnings Power : the Earnings Revision Ratio remains stable at 0.5

� Market Action : fall due to the correction, and remains negative

� Risk Appetite : stable over the past weeks, has not reached a worrying level yet compared to last summer’s level

� Reversal Risk : no reversal risk identified today (based on several indicators and technical analysis to identify a risk of trend reversal as technical divergences, excess momentum, put/ call ratio, breath, sentiment,…)

Global Score Card

Fundamental Block

Dynamics Block

Reversal Block

Research Block Factor/Model Score PreviousMacro -1.50 -1.50Valuation 1.50 1.50Earnings Power 0.50 0.50Market Action -1.5 -2.00Risk Appetite/Flows -0.50 -0.50

REVERSAL Reversal Risk 0.00 0.00Global Score -0.3 -0.40

FUNDAMENTAL

DYNAMIX

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H1 2012: Strategy ReviewActive Management: we have adapted our exposure to the risk-on / risk-off mode


� Neutral exposure equity/bonds in the first part of the rally

� Overweight equity from the end of January until the end of March (consolidation of the positive momentum)

� Then decrease of our equity exposure (economic momentum has turned more negative)

� Negative stance on equities at the end of April (deterioration of the macroeconomic context and aggravation of the crisis in the Euro-zone)

� Recently: reduction of our underweight exposure to euro-zone equities. Our core scenario remains that a compromise will be found in European discussions

9

Table of contents








IV. Conclusion

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Outlook: somewhere between the best and the worst caseDeepening crisis in Europe


� European crisis has reached a non return point following Greek elections

� “Grexit” not a taboo anymore, consequences not measurable

� Contagion to Spain not manageable and will worsen if not rapidly stopped

11

Outlook: somewhere between the best and worst caseRisk has not become systemic yet, worst case not priced in


� Lack of “panic” surprising, market drop progressive and well ordered in Europe

� High differentiation between safer and riskiest assets in the first correction move

� Our market indicators have not pointed out an excessively bearish behavior (risk appetite, volatility)

12

Outlook: somewhere between the best and worst caseDespite a historically high level of pessimism

Source : BoA Merrill Lynch

� Surveys on the contrary show a historically high level of pessimism

� Sell side indicator has reached its lowest level since 1998

� Level of cash in the last Fund manager survey close to last year’s highest level (september 2011)

� Those are good contrarian indicators

13

Outlook: rapid and credible answer neededInvestors between hope and despair, how long will their patience last?


� QE expectations are integrated in investors’ assumptions

� In the absence of improving fundamentals, market remains “liquidity addict”

� Easing has started in China, favored by lower CPI data and last macroeconomic indicators weakness

14


Source : Exane BNP Paribas – Dexia Asset Management

� QE3 expectations have increased in the US

� Fiscal cliff and an anemic job market could be the trigger for further easing, maybe in September

15


� In Europe, more easing could be necessary to support growth, but ECB answer will come in last resort and will not be sufficient alone

� A credible answer is now needed in Europe given the depth of the crisis

� Potential game changer could come from discussions around ERF: � credible because proposed by German people

� efficient because could reduce the cost of debt and dependency from markets.

� A first step towards Eurobonds


16


� Spanish banks bailout plan not sufficient to save Spain or the European banking system.

� A more ambitious plan for banks will be necessary in Europe� Limit contagion between government and bank debt (on the contrary to was has been done until now)

� Deposit insurance scheme

EFSF, EFSM and IFM to the rescue

223

26

145

18

12

2623

117

26

48252

0 50 100 150 200 250 300 350 400

available if Spain drops oflist of guarantors

used for Portugal

used for Greece

used for Ireland

EUR bn

EFSF EFSM IMF

Spanish central government funding

38

80118

87 0

8780

0

8067

0

67

0

50

100

150

200

250

300

350

400

Total funding needs* Bank recap, assumption Cumulative funding needs

EU

R b

n

rest of 2012 2013 2014 2015


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Outlook: rapid and credible answer neededTail risk occurrence still possible

Source : IMF

� Last couple of weeks in June will be critical as investors’ patience and hope won’t last forever

� Disappointment on European announcement, further deterioration of economy in the US or emerging markets could lead to a more negative outcome

18

Outlook: can we believe in decoupling? Longer term structural call for the US

Source : IMF - Bloomberg – Dexia Asset Management

� Decoupling was one of 2012 assumption. Despite some disappointment, this remains our baseline scenario

� The US have built a sounder basis for future growth over a longer term perspective

19


Source : McKinsey Global Institute – Dexia Asset Management

� Deleveraging process well engaged

� Real estate market bottoming out

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Source : Exane BNP Paribas - Bloomberg – Dexia Asset Management

� Increasing cost competitiveness� Energy costs dropped

� Flexible labor market, labor costs have been reduced

� Decrease of the USD

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Source : Congresionnal Budget Office - Bloomberg – Dexia Asset Management

� Fiscal cliff shorter term issue� Results of the elections will be critical in this respect

� QE3 could help limiting the impact on the economy

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Outlook: can we believe in decoupling? Cyclical call for China, more sceptical on longer term issues

Source : Morgan Stanley Research - Bloomberg – Dexia Asset Management

� China is a more cyclical call for us� The economy should trough somewhere in Q2 (encouraging last indicators in May)

� Authorities have the means to support the economy, have learnt from past errors

� Fiscal and monetary easing have started

23

Outlook: can we believe in decoupling? Cyclical call for China, more sceptical on longer term issues

Source : UBS - Bloomberg – Dexia Asset Management

� The transition towards a more consumption oriented growth is a longer term issue� End of the 1st demographic dividend, will China get older before getting rich?

� Trend growth will decrease,7- 8% is the intermediate target for the years to come

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Outlook: compelling valuation of equitiesAttractive entry points to equities over a longer term perspective

� US equities at a historically highly attractive level compared to bonds.

� Increasing Equities risk premium covers � the risk of earnings downgrades (disappointment on margins, revisions on top line)

� the highly uncertain context in Europe that could impact all the regions

Source : Société Générale - Datastream – Dexia Asset Management

25

Outlook: compelling valuation of equitiesToo much risk discounted on margins

� Margins have already started to decrease in Europe and in the US

� If our baseline macroeconomic scenario holds, the earnings downwards revisions risk in Europe is not so high and more than discounted by current indices prices

Source : Goldman Sachs - Bloomberg – Dexia Asset Management

26

Outlook: safer assets not safe from a valuation perspectiveDo the risk-free rate still exist?

� German bund has benefited from a flight to quality

� Current price is historically high. It partly anticipates ECB quantitative easing but does it reflect the country’s risks?

� Bundesbank’s Target2 claim on the ECB shows that de facto a kind of debt mutualisation exists in Europe

� Extreme gap between sovereign bonds and equities valuation is a risk for bonds in many scenarios


27

Table of contents








IV. Conclusion

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Which strategy for 2012?Our preferred equity investment themes: growing dividends

An attractive dividend yield, with a globally low p ay-out ratio, with a high level of free cash flow y ield and healthy balance sheets. High dividend yield should enhance portfolio return s… but remain selective!

Source : UBS – Morgan Stanley - Bloomberg – Dexia Asset Management

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Which strategy for 2012?Our preferred fixed income asset class: convertible bonds

50% Equity 50% Bonds

100% Convertible

2

3

4

5

6

7

4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5

Volatility (%)

Per

form

ance

ann

ualiz

ed (

%)

Convertible bonds offer carry, which helps to optim ise convexity

Convertibles are attractively valued

The current context would imply a resurgence in the primary market Including convertible bonds in a di versified portfolio can boost performance and reduce risk

European CB primary market

913

2330 33

53

26

44

16 12 1626

10

2313

8 5

43

64

78

62

54

78

53

84

57

4853

64

16

64

26

11

40

0

10

20

30

40

50

60

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

€ bn

0

10

20

30

40

50

60

70

80

90

Amounts Numbers

Implied Volatility CB - Implied Volatility 18M DJ E uro Stoxx 50

-20

-15

-10

-5

0

5

10

15

20

Nov-07May-08

Nov-08May-09

Nov-09May-10

Nov-10May-11

Nov-11May-12

Source : Deutsche Bank Convertible Research

PREMIUM

DISCOUNT

Delta and Running Yield of the index UBS Convertibl e Europe

10

20

30

40

50

60

70

80

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Delta

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%Running Yield

Source : Dexia Asset Management

30

Table of contents








IV. Conclusion

31

ConclusionAsset Allocation 2012

Asset Allocation Equities Fixed Income

Commodities Alternative Assets Currencies

Constructive towards equitiesfor the second half of the year

once some credible answers are found in Europe

� Coordinated QE could support the economy in Q3

� Equity risk premium could benefitfrom the reduction in stress in Europe, end of June decisionscritical

Overweight US

Quality growth stocks and dividend plays

Corporate bonds more attractive

� Carry in a low interest rate environment

� Low medium-term refinancing needs

Overweight convertible bonds

Gold and oil as hedge against fat tail risk Assymetric long volatility

strategies

USD & Scandies as diversification currencies

Constructive towards EM

Short duration

Long-short market neutral strategies

Opportunistic currency arbitrage

Emerging Debt

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ConclusionOur scenario

Source : MS, Goldman Sachs, Credit Suisse

� Quantitative easing will be once again an answer to current crisis. It is already partly discounted by investors at least in Europe, in the US and China.

� Given the non return point we have reached in Europe, it will not be sufficient alone to feed a longer lasting rally. Our baseline scenario is that a compromise is found in Europe with discussions around the European Redemption Fund as the most credible game changer. Relaxing the pressure of austerity policies will also be necessary to give more oxygen to peripheral countries.

� The next couple of weeks will be critical in that respect. A binary outcome still possible, since stress and psychological pressure remain the engine in European negotiations.

� Equities: Following recent market drop, valuation of equities relative to bonds is historically attractive. Investors’ sentiment and positioning has reached extreme pessimism level which is positive from a contrarian perspective. Current phase of stress could be followed by a more risk-on move if our scenario is valid. We would not move too aggressively positive until we get some credible answers in Europe.

� Safest assets valuation is now a risk for investors. Best rated countries' government bonds have benefited from a move of flight to quality. Their valuation is now relatively expensive at risk in many scenarios: developed markets government fundamentals are not safe given the necessity to deleverage, it also already largely anticipates a possible coordinated QE.

� Our favorite themes remain thus rather defensive and growth oriented. We still favor high dividend yield stocks, attractive given the move on the real yields. We remain also still positive on convertible bonds which offer carry, an exposure to equities if market rebounds and are attractively valued.

33 September 2010

Disclaimer

Money does not perform. People do.

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Moreover, Dexia AM specifies that:• in the case where performances are gross, the performance may be affected by commissions, fees and other charges;• in the case where the performance is expressed in another currency than that of the investor’s country of residence, the returns mentioned may increase or decrease as a result of currency

fluctuations.

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Economy & Finance

Presentación junio dexia AM