Sept. 12 th , 2013 MARKET REVIEW AND OUTLOOK MARTIN LEFEBVRE Asset Allocation and Investment Strategist
Presentation outline The past is no guarantee of the future Short-term outlook Are fundamentals turning against Canada? 2 Source: Datastream
The past is no guarantee of the future
Extreme volatility at play Index Index S&P 500 returns since summit of 2000 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% -10% -10% -20% -20% -30% -30% -40% -40% -50% -50% -60% -60% 2000 2002 2004 2006 2008 2010 2012 Total return Price index 4 Source: Datastream
Stocks: Worst of class since 2000 Total return since 2000 600% 600% 500% 500% 400% 400% 300% 300% 200% 200% 100% 100% 0% 0% -100% -100% 2000 2002 2004 2006 2008 2010 2012 S&P 500 Treasuries Commodities Gold 5 Source: Datastream
Bonds vs Stocks: Same returns but lower volatility YoY % YoY % YoY % YoY % Total return Total return 80 80 80 80 60 60 60 60 40 40 40 40 20 20 20 20 0 0 0 0 -20 -20 -20 -20 -40 -40 -40 -40 1981 1981 1986 1986 1991 1991 1996 1996 2001 2001 2006 2006 2011 2011 S&P/TSX S&P/TSX DEX Overall Universe DEX Overall Universe Annualized return (%) Annualized return (%) 25 years 25 years 20 years 20 years 15 years 15 years 10 years 10 years 5 years 5 years Bonds (Dex Overall Universe) Bonds (Dex Overall Universe) 8.4 8.4 7.4 7.4 6.3 6.3 6.0 6.0 6.3 6.3 S&PTSX S&PTSX 8.3 8.3 9.1 9.1 6.5 6.5 9.2 9.2 0.8 0.8 Volatilité (écart-type)* Volatilité (écart-type)* 25 years 25 years 20 years 20 years 15 years 15 years 10 years 10 years 5 years 5 years Bonds (Dex Overall Universe) Bonds (Dex Overall Universe) 5.2 5.2 4.5 4.5 2.8 2.8 2.4 2.4 1.9 1.9 S&PTSX S&PTSX 17.5 17.5 18.3 18.3 19.7 19.7 17.7 17.7 19.6 19.6 * Monthly frequency (year over year) * Monthly frequency (year over year) 6 Source: Datastream
Poor expected returns from historical low levels of yields % % U.S. 10-year Treasury notes 16 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 0 0 -2 -2 -4 -4 -6 -6 1960 1970 1980 1990 2000 2010 Real yield* Nominal yield 7 Source: Datastream
High volatility is not that unusual Log scale Log scale Log scale Log scale Dow Jones Industrial Average (price index) Dow Jones Industrial Average (price index) 100 000 100 000 100 000 100 000 10 000 10 000 10 000 10 000 10X 10X 12 years 12 years 1 000 1 000 1 000 1 000 5X 5X 18 years 18 years 100 100 100 100 10 years 10 years 20 years 20 years 10 10 10 10 1900 1900 1910 1910 1920 1920 1930 1930 1940 1940 1950 1950 1960 1960 1970 1970 1980 1980 1990 1990 2000 2000 2010 2010 8 Source: Datastream
Short-term outlook
Total returns: Cash was king in August… at 0%! Asset classes August YTD* Cash (3-month T-bills ) 0.1% 0.7% Bonds (Dex Overall Universe) -0.6% -2.1% Dex Overall Federal -0.4% -2.0% Dex Overall Corporate -0.5% -0.5% Dex BBB -0.7% -0.4% 0.0% 0.0% World equity (MSCI AC) -2.0% 9.9% S&P/TSX 1.5% 3.9% S&P/TSX Small cap 2.1% -1.0% S&P500 (USD) -2.9% 16.2% Russell 2000 (USD) -3.3% 19.0% MSCI EAFE (USD) -1.3% 10.1% MSCI EM (USD) -1.7% -9.1% 0.0% Commodities (CRB index) 1.1% -2.3% WTI oil (US$/barrel) 2.4% 16.3% Gold (US$/ounce) 6.7% -16.2% Copper (US$/tonne) 3.0% -8.8% 0.0% Currencies (JPM US Dollar index) 1.0% 4.3% USD per EUR -0.7% 0.0% JPY per USD 0.3% 14.5% CAD per USD 2.5% 6.3% 2013/09/02 10 Source: Datastream
Stock market correction: A repeat of September 2012? 11 Source: Datastream
#1 Risk – Tensions in the Middle-East 12 Source: web
Oil prices at 125$ = bad omen for US stocks US$/barrel Index United States 150 1850 125 1600 100 1350 75 1100 50 850 25 600 2007 2008 2009 2010 2011 2012 2013 Brent oil (left) S&P 500 (right) 13 Source: Datastream
#2 Risk – Summer seasonality : From best to worst % % Dow Jones' monthly returns since 1928 2.00 2.00 1.47 1.46 1.42 1.50 1.50 1.07 0.84 0.81 1.00 1.00 0.51 0.47 0.50 0.50 0.20 0.03 0.00 0.00 -0.24 -0.50 -0.50 -1.00 -1.00 -1.50 -1.50 -1.36 -2.00 -2.00 April July August March May June October January February November September December 14 Source: Datastream
#3 Risk – Bond yields on the rise % % United States 4.50 4.50 4.00 4.00 3.50 3.50 3.00 3.00 2.50 2.50 2.00 2.00 1.50 1.50 1.00 1.00 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 10-year Treasury notes 15 Source: Datastream
Inflation is low… YoY % United States YoY % 6 6 5 5 4 4 3 3 2 2 1 1 0 0 -1 -1 -2 -2 -3 -3 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Total inflation Core inflation 16 Source: Datastream
… And there is no inflationary pressure in the pipeline YoY % United States YoY % 15 3.5 10 3.0 5 2.5 0 2.0 -5 1.5 -10 1.0 -15 0.5 -20 0.0 -25 -0.5 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Leading economic indicator (2.5-year lead, lhs) Core inflation (rhs) 17 Source: Datastream
Will the Fed calm market expectations? % % United States 70 12 Weak labor market 69 11 Strong 68 10 labor market 67 9 The Fed’s 6.5% 66 8 unemployment rate trough… 65 7 64 6 … Could have to be lowered to 6% 63 5 to calm markets’ expectations 62 4 61 3 1980 1985 1990 1995 2000 2005 2010 2015 Unemployment rate (right) Participation rate (left) 18 Source: Datastream
Scenarios and probabilities Probability Implications Strong growth - Reflation efforts from central banks bear fruits - Important infrastructure spending in China 15% - Germany relaxes austerity requirements => Risk assets outperformance Expansion - Weak global growth, but improvements in the second half of 2013 - European problems are contained 70% - The full impact of the US fiscal cliff is avoided => Stocks outperfom bonds, but tactical allocation important World recession - Recession in Europe worse than expected 15% - Hard landing in China - Premature end to QE in the USA causes massive outflows out of EM - Currency devaluation => Cash is king! 19 Source: Datastream
The US economy is improving Index Index United States 80 160 70 140 60 120 50 100 40 80 Long-term average 30 60 20 40 10 20 0 0 1985 1990 1995 2000 2005 2010 Consumer confidence (right) NAHB (left) 20 Source: Datastream
Manufacturing activity is rebounding Index Index Manufacturing Indices 65 65 60 60 55 55 50 50 45 45 40 40 35 35 30 30 2009 2010 2011 2012 2013 ISM United States PMI Eurozone PMI China PMI Germany 21 Source: Datastream
Pressure on interest rates should remain upward % Index United States 6 90 5 80 4 70 3 60 2 50 1 40 0 30 -1 20 -2 10 -3 0 1985 1990 1995 2000 2005 2010 2015 Real Fed funds rate (left) NAHB Construction sentiment (Forwarded 2 years, right) 22 Source: Datastream
Monetray policy will remain highly accommodative % points Index 2 2000 Restrictive monetary policy 1 1800 0 1600 -1 1400 -2 1200 -3 1000 -4 800 -5 600 Accomodative monetary policy -6 400 1995 2000 2005 2010 2015 Spread from neutral rate* (left) S&P 500 (right) * Potential real GDP growth + inflation expectations 23 Source: Datastream
The expansion of multiples should continue Ratio Ratio Cours/Bénéfices (TTM) 30 30 25 25 20 20 15 15 10 10 5 5 1985 1990 1995 2000 2005 2010 S&P500 S&P/TSX 24 Source: Datastream
The economy is still a long way from overheating Index Thousands United States 1800 100 1600 200 1400 300 1200 400 1000 500 800 600 600 700 1998 2000 2002 2004 2006 2008 2010 2012 2014 Initial claims (Inversed scale, right) S&P 500 (left) 25 Source: Datastream
Asset rotation underway US$B US$B Cumulative net new flows in mutual funds 1 500 1 500 1 200 1 200 900 900 600 600 300 300 0 0 -300 -300 -600 -600 2007 2008 2009 2010 2011 2012 2013 Total mutual funds Total fixed income Total equity 26 Source: Datastream
Are fundamentals turning against Canada?
Will Canada continue to catch up? % from peak % from peak TSX vs S&P 500 20 20 10 10 0 0 -10 -10 -20 -20 -30 -30 -40 -40 2009 2010 2011 2012 2013 Local currencies USD terms 28 Source: Datastream
Gold: Not for the long run % YTD % YTD 10 10 0 0 -10 -10 -20 -20 -30 -30 -40 -40 -50 -50 -60 -60 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Gold price Gold miners (TSX) 29 Source: Datastream
TSX: Strong resistance at 12,900 points Indice Indice S&P/TSX 13000 13000 12800 12800 12600 12600 12400 12400 12200 12200 12000 12000 11800 11800 Jan-13 Mar-13 May-13 Jul-13 Sep-13 30 Source: Datastream
Emerging markets: Fundamentals are worsening Jan 2010 = 0% Jan 2010 = 0% 20% 20% 0% 0% -20% -20% -40% -40% -60% -60% -80% -80% -100% -100% 2000 2002 2004 2006 2008 2010 2012 BRIC ($US) vs SP500 EM ($US) vs SP500 31 Source: Datastream
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