Presentation is loading. Please wait.

Presentation is loading. Please wait.

Capital Markets Outlook 2008 The World in Transition Ben Pace, U.S. Chief Investment Officer New York, December 6, 2007.

Similar presentations


Presentation on theme: "Capital Markets Outlook 2008 The World in Transition Ben Pace, U.S. Chief Investment Officer New York, December 6, 2007."— Presentation transcript:

1 Capital Markets Outlook 2008 The World in Transition Ben Pace, U.S. Chief Investment Officer New York, December 6, 2007

2 Page 2 Agenda The World in Transition 2 Growing Recession Fears 1 Investment Philosophy: Broad asset class diversification 4 Outlook 2008: World Economy and Asset Classes 3

3 Growing Recession Fears

4 Page 4 U.S.: Growing recession fears Rate hike cycleFinancial crisisEconomy 1970Penn Central(Jan)Recession 1974Franklin National(May)Recession 1980First Penn(Feb)Recession 1982Latin America(Jul)Recession 1984Continental Illinois(Jul)Slowdown 1987Black Monday(Oct)Slowdown 1990Savings & Loan(Apr)Recession 1995Mexico(Feb)Slowdown 1997Pac Rim(Aug)Slowdown 1998Russia / LTCM(Oct)Slowdown 2000Nasdaq Bubble(Oct)Recession 2007Subprime(Aug)? Source: ISI Every rate hike cycle of the Fed ended with a financial crisis

5 Page 5 How has the Fed reacted in a recession scenario? YearCrisisLengthS&P 500 LossRate Cut 1987Black Monday / Stop Loss6 months- 35%-70 bps 1990Savings & Loan7 months- 20%-680 bps 1998Russia / LTCM4 months- 20%-75 bps 2007SubprimeSo far 4 months- 10%So far -75 bps Source: ISI

6 Page 6 Never fight the Fed Never underestimate the U.S. consumer Low bond yields External demand and low USD Stable labor market Profit margins and Corporate America in good shape Never fight the Fed Never underestimate the U.S. consumer Low bond yields External demand and low USD Stable labor market Profit margins and Corporate America in good shape Subprime and housing crisis Decelerating U.S. consumption triggered by the housing market Crisis of confidence in U.S. financial markets Rising financing costs – swap and credit spreads strongly widened Rising oil prices High leverage of U.S. consumers Growing inflationary fears caused by USD weakness may keep Fed from easing Subprime and housing crisis Decelerating U.S. consumption triggered by the housing market Crisis of confidence in U.S. financial markets Rising financing costs – swap and credit spreads strongly widened Rising oil prices High leverage of U.S. consumers Growing inflationary fears caused by USD weakness may keep Fed from easing Negative Factors Positive Factors Probability of a U.S. recession: One third Baseline scenario: A growth dip in the winter half-year, recovery thereafter Probability of a U.S. recession: One third Baseline scenario: A growth dip in the winter half-year, recovery thereafter Likelihood of a U.S. recession

7 Page 7 U.S.: Never underestimate the U.S. consumer Record: 62 consecutive quarters with positive real consumer expenditure since 1991 Only 13 negative quarters since 1960 U.S. real private consumer expenditure Sources: T.F. Datastream, Deutsche Bank Private Asset Management QoQ, seasonally adjusted, projected for the whole year in %

8 The World in Transition

9 Page 9 Extreme price volatilities (I) Oil price: Rising from 25 to 90 USD/barrel since 2002 Oil price: Rising from 25 to 90 USD/barrel since 2002 Source: T.F. Datastream, Deutsche Bank Private Asset Management USD/Barrel (WTI) USD/EUR: Euro on new record high Source: T.F. Datastream, Deutsche Bank Private Asset Management USD/EUR Will the U.S. dollar continue to depreciate at this pace? Oil price driven by rising geopolitical risks in the Middle East Oil prices remain highly volatile 11/12/ /12/

10 Page 10 Extreme price volatilities (II) Gold: Price boosted by growing wealth, demand for luxury goods and the search for safety

11 Page 11 High money supply growth in the last few years and the corresponding liquidity has contributed to excessive pricing in many asset classes Money and loan growth in China undampened by rate hikes Money supply growth undampened Markets driven by money supply and liquidity China: Money and loan growth % %, yoy Sources: T.F. Datastream, Deutsche Bank Private Asset Management

12 Page 12 Sources: Bloomberg, Angus Madison “Historical Statistics for the World Economy: AD”, DB GMR There is a shift in the share of local global economic performance GDP from AD, shares by countries and regions in % China IndiaEurope / North AmericaJapan Rest of the world 0% 20% 40% 60% 80% 100% year World economy: A historical turning point? China and India gaining significance in the wake of globalization However, both are still well off the heights of historic economic powers

13 Page 13 New investor pools gaining importance Petrodollar investments have grown most Assets under management for new investors are estimated at USD 15 to 20 trillion by 2012** Traditional Investors Pension Funds: USD 21.6trn*** Investment Funds:USD 19.3trn*** Insurance:USD 18.5trn*** ***Year end 2006 New investors: Sharp rise of assets under management in the last six years New investors: Sharp rise of assets under management in the last six years Sources: McKinsey Global Institute, **Hedge Fund Research, Venture Economics, PE Analyst; International Financial Services, Deutsche Bank Private Asset Management *Growth rate calculated on data reported to IMF (USD 2.5trn excl. UAE and Qatar) USD trn Petrodollar assets Asian central banks Hedge fundsPrivate equityNew investors total amount + 19%* + 20% + 19% 20%

14 Outlook 2008: World Economy and Asset Classes

15 Page 15 Global Investment Committee Forecasts as of December 1, 2007

16 Page 16 Outlook as of December 2007 Slowdown in U.S. economic growth. Final quarter of 2007 and first half of 2008 should be below trend due to the effects of the housing recession. Clear shift in international growth: Higher growth contribution by emerging markets; potential rates of growth in the G3 countries converge. While food and energy prices remain volatile, and are impacted by strong world growth and supply disruptions, core inflation has eased and the disinflationary impact of globalization continues. U.S. dollar depreciation continues, but the majority of the depreciation will occur against emerging market and commodity currencies. Tightening in the developed economies has ended while tightening continues in the high-growth Asian and Latin American economies. The Federal Reserve began its easing cycle with a 50 bps cut in September, followed by a 25 bps cut in October. We are forecasting a 3.0% Fed funds rate by year-end We continue to favor emerging market debt, especially local currency-denominated markets. Investment grade and high yield corporate debt spreads have widened to rather attractive levels. Diversification benefits of funds of hedge funds most pronounced in volatile markets. In commodities, we are most bullish towards grains complex and gold. Real estate continues to be an important asset class, but should be viewed in a global context. While equities will remain volatile, we still find valuation levels attractive, especially in an environment of monetary easing. Equities should benefit from both positive profit growth and low interest rates. Inflation & currenciesMonetary policy & bond markets Alternative investments Equity marketsWorld economy

17 Page 17 Global growth: Remains solid, with good prospects Global Economy: Growth rates around 4.5% set to continue into the next decade World economic growth (in % compared to last year) 5-year average Source: IMF, Deutsche Bank Private Asset Management

18 Page 18 Emerging markets as drivers of the world economy Labor force has increased fourfold worldwide over the past two decades Productivity rising strongly in emerging markets Global economy increasingly less dependent on U.S. than in the 1980s and 1990s Labor force is growing, especially in Asia Index, 1980 = 100 in %, yoy Source: IMF, Deutsche Bank Private Asset Management * Measured as real GDP divided by working-age population Source: IMF, Deutsche Bank Private Asset Management Emerging markets leading global productivity trend * Emerging markets leading global productivity trend *

19 Page 19 China: Inflation driven by food prices, supply reaction should relieve the strain on some goods in 2008 U.S. and Euroland: Sharp rise of inflation rates due to drastically higher oil prices Euroland inflation again close to 2% in the medium term, core inflation remains at roughly 2%: Economy slows down Strong trade-weighted euro revaluation No wage price spiral yet Reemergence of inflation... USA: Rising oil causes temporary inflationary push Euroland: Towards 3% at year-end? China: Inflation driven by food prices Sources: T.F. Datastream, Deutsche Bank Private Asset Management Inflation rate, in % yoy Nov 03 Feb 04 May 04 Aug 04 Nov 04 Feb 05 May 05 Aug 05 Nov 05 Feb 06 May 06 Aug 06 Nov 06 Feb 07 May 07 Aug 07 Total inflation rateFoodServices Apr 06Aug 06Dec 06Apr 07Aug 07Dec 07Apr 08Aug 08Dec 08 Inflation rateCore rate Feb 06 Apr 06 Jun 06 Aug 06 Oct 06 Dec 06 Feb 07 Apr 07 Jun 07 Aug 07 Oct 07 Dec 07 Inflation rateCore rate (ex-energy & food) Forecast

20 Page 20 …is only an interlude …but U.S. core inflation under 3% since 1998 …and USD heading further downwards... Strongly rising oil prices… U.S. inflation around 2% although oil prices have increased ninefold since 1998 and the USD has fallen by over 20% since 2002 Strong disinflationary forces: Globalization of the markets for goods, services, capital and labor Deregulations and political reforms IT revolution and quadrupling of the world’s effective labor force since 1990 Sources: T.F. Datastream, Deutsche Bank Private Asset Management %, yoy USD/Barrel (WTI) 1990=100, trade-weighted U.S. dollar index

21 Page 21 Currencies: Interest rate differential turning, yen remaining volatile Yen continues to be dominated by carry trades …between euro and USD is turning Bond yields: The yield gap… Yields on 10Y government bonds, in %Yields on 2Y government bonds, in % Sources: T.F. Datastream, Deutsche Bank Private Asset Management Index points YEN/USD Rate expectations support the euro Dollar remains weak, yen volatile, euro at record levels

22 Page 22 Monetary policy: Fed caught between inflation concerns and a slowing economy Further rate cuts expected in the U.S. ECB remains on hold for now but the probability of rate cuts in 2008 has risen In Japan, rates are normalizing very slowly: Key rates expected at 1% in 12 months Sources: T.F. Datastream, Deutsche Bank Private Asset Management in % Official rates: Global upwards trend over in % 11/12/07

23 Page year government bonds: spread narrows Yield spread widens: 10-year government bonds vs. 2-year government bonds Yield spread widens: 10-year government bonds vs. 2-year government bonds Bonds continue to be relatively unattractive Bond yields should pick up again in the medium term as the global capital markets normalize (subprime crisis overcome) The trend towards steeper yield curves should continue, especially if the Fed continues with rate cuts Sources: T.F. Datastream, Deutsche Bank Private Asset Management in % in %-pts. in % in %-pts EurolandUSA Euroland USA

24 Page 24 Equity markets Equity markets: conflicting forces Weaker U.S. growth Robust world economy, particularly in the emerging markets Profit growth has peaked Rising credit costs Fed rate cuts Liquidity

25 Page 25 Valuations in 2007 are significantly lower than in 2000 Valuations remain attractive compared to bonds Long and medium-term outlook for equity markets is constructive Sources: T.F. Datastream; T.F. I/B/E/S; Private Asset Management Investment regionIndexPrice earnings ratio Nov. 23, 2007 Long term average* Price earnings ratio March 2000 U.S.S&P EuropeMSCI Europe GermanyDAX JapanTOPIX Emerging MarketsMSCI Emerging Markets **23.9 WorldMSCI World * since 1980; ** since 1990

26 Page 26 In the past, there has been a significant correlation between short rates and valuation The Fed is at the start of a rate- cutting cycle Past experience is that rate cuts lead to rising P/E’s U.S.: Price earnings expansion driven by rate cuts Fed rate cuts cause valuation levels to rise Sources: T.F. Datastream, Deutsche Bank Private Asset Management %PER Fed rate (lhs)S&P500 trailing PE ratio (rhs) Falling Fed rate periods

27 Page 27 Rally of the BRIC*markets in 2007 Performance of Chinese and Indian equities recalls the bubble in Japan in the 1980s BRIC story increasingly priced in = 100, * RTS Russia, Hang Seng China Enterprise, Brazil Bovespa, India BSE30 Sources: T.F. Datastream, Deutsche Bank Private Asset Management TEXT aus HH-Präsentation HK Japan of the 1980s as a model? Sources: T.F. Datastream, Deutsche Bank Private Asset Management End-of-month values (incl. last available value of November 2007) TOPIX in USD since 12/31/1979; rebased on 12/31/1999 = 100 Sensex since 12/31/1998; rebased on 12/31/1999 = 100 Chinese H-shares since 12/31/1999; rebased on 100 Emerging markets: Some valuations very high - danger of a bubble?

28 Page 28 Hedge Funds: Good performance expected for 2007 Hedge funds managed to close a difficult third quarter in positive territory Performance year- to-date remains on a competitive level Hedge funds: Strong performance continues Sources: Bloomberg, Edhec, $-performance, Deutsche Bank Private Asset Management 15.3% 15.5% 13.7% 5.2% 11.2% 11.8% 7.4% 7.5% 18.8% 7.5% 5.9% 12.3% 13.1% 12.8% 9.3% 6.3% 4.1% 6.6% 12.4% 22.2% 10.6%11.1% 7.9% 0% 5% 10% 15% 20% 25% Convertible Arbitrage CTA Global Distressed Securities Emerging Markets Equity Market Neutral Event Driven Fixed Income Arbitrage Global Macro Long/Short Equity Merger Arbitrage Funds of hedge funds Cash (1M USD Libor) $ 2006Year-to-date (as of end of October)

29 Page 29 Energy Oil prices are expected to trade in a range around the current level. Crude oil price near-term forecast: USD 85 (12m horizon). Base Metals Supply bottlenecks are overcome for most base metals. Industrial metals especially are sensitive to a downturn in world economic growth. Precious Metals Gold is likely to benefit from renewed USD weakness and falling U.S. real interest rates on a 12M horizon. Agriculture Valuation of corn and wheat still low with further upside potential. Reasons: Increased demand for protein in Asia, rising ethanol production and further decline in inventories. Energy Base Metals Precious Metals Agriculture Source: Deutsche Bank Global Markets Commodities: Greatest potential in agricultural sector

30 Investment Philosophy: Broad Asset Class Diversification

31 Page 31 Broad asset class diversification benefited clients in 2007 Performance of international equities and bonds augmented by currency appreciation Returns in alternative asset classes, particularly commodities and funds of hedge funds Strong implementation vehicle performance in key asset classes Risk mitigation through uncorrelated asset classes

32 Page 32 Our investment approach We employ a modern portfolio theory approach to investing through: An optimal mix of asset classes driven by our quantitative analysis Broad asset class diversification Proprietary investment expertise for core asset classes Top quartile external managers We seek to broaden the diversification available to our clients by: Exploring and implementing new asset classes Utilizing Deutsche Bank’s Global Manager Research team to provide clients with open architecture solutions Broadening client exposure to alternative asset classes, where appropriate

33 Page 33 Traditional Assets U.S. equities International equities Emerging market equities U.S. bonds TIPS International bonds High yield bonds Cash Alternative Assets Hedge funds Private equity Liquid real estate Commodities A mixture of traditional and alternative assets can reduce risk and enhance performance Availability of alternative investments, such as hedge funds, is subject to regulatory requirements, and is available only for “Qualified Purchasers” as defined by the U.S. Investment Company Act of 1940 and ”Accredited Investors,” as defined in Regulation D of the 1933 Securities Act.

34 Page 34 Benjamin A. Pace III Benjamin Pace is a Managing Director and Chief Investment Officer of Deutsche Bank Private Wealth Management in the U.S. He sits on the PWM Global Investment Committee, providing input on the U.S. economy and capital markets. His primary responsibilities include chairing the U.S. Investment Committee which determines investment strategy and asset allocation for the U.S. discretionary portfolio management team. He also oversees the U.S. Equity Strategy, the Quantitative and Fixed Income groups along with the Performance Measurement team to ensure overall consistency with investment policy. Mr. Pace is a member of the PWM-U.S. Executive Committee. Mr. Pace has more than 20 years of experience in investment management. Prior to joining Deutsche Bank in 1994, he managed equity income funds for two investment organizations. During his tenure with those institutions, he also served as a security analyst with particular emphasis on the financial services and healthcare industries. Mr. Pace earned his B.A. in economics from Columbia University and M.B.A. in finance from New York University. He can be reached at (212) or ed at Chief Investment Officer, PWM-U.S.

35 Page 35 Disclaimer All opinions and estimates, including forecast returns, reflect our judgment at the time of publication and are subject to change without notice. These opinions and analyses involve a number of assumptions that may not prove valid. The opinions are of the authors and do not necessarily reflect those of Deutsche Bank AG or any of its affiliates. Deutsche Bank makes no warranty or representation, express or implied, nor does it accept any liability with respect to the information and data set forth. The information in this document was obtained from sources we believe are reliable, but we do not guarantee its accuracy, completeness or fairness. All information should be verified and supplemented by professional advice before any action is taken. The sole purpose of this document is to inform, and it in no way constitutes a solicitation of orders to buy or sell securities or other instruments. This document contains forward-looking statements. Forward-looking statements are statements that are not historical facts; they include statements about our beliefs and expectations. Any statement in this document that states our intentions, beliefs, expectations or predictions (and the assumptions underlying them) is a forward-looking statement. These statements are based on plans, estimates and projections as they are currently available to the management of Deutsche Bank. Forward-looking statements therefore speak only as of the date they are made, and we undertake no obligation to update publicly any of them in light of new information or future events. Hedge Funds: An investment in a hedge fund is speculative and involves a high degree of risk, and is suitable only for “Qualified Purchasers” as defined by the U.S. Investment Company act of 1940 and ”Accredited Investors,” as defined in Regulation D of the 1933 Securities Act. No assurance can be given that a hedge fund’s investment objective will be achieved, or that investors will receive a return of all or part of their investment. Investments in hedge funds are suitable only for persons who can afford to lose their entire investment. Prospective investors should carefully consider these risks before investing. Commodities: The risk of loss in trading commodities can be substantial. The price of commodities (e.g., raw industrial products such as gold, copper and aluminum) may be subject to substantial fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. Additionally, valuations of commodities may be susceptible to such adverse global economic, political or regulatory developments. Prospective investors must independently assess the appropriateness of an investment in commodities in light of their own financial condition and objectives. Not all affiliates or subsidiaries of Deutsche Bank Group offer commodities or commodities-related products and services. Please be aware that investments in international markets, including the foreign exchange markets, can be affected by a host of factors, including political or social conditions, diplomatic relations, limitations or removal of funds or assets or imposition of (or change in) exchange control or tax regulation. Investments denominated in an alternative currency will be subject to changes in exchange rates, which may have adverse effects on the value, price or income of the investment. Investments in structured products are speculative and include a high degree of risk. Structured products investing is suitable only for persons who can afford to lose their entire investment. Prospective investors should carefully consider these risks before investing. Unless you are notified to the contrary, the products and services mentioned are not insured by the FDIC (or by any governmental entity) and are not guaranteed by or obligations of Deutsche Bank. These products are subject to investment risk, including possible loss of principal. Past performance of a product or service does not guarantee or predict future performance. Distribution hereof does not constitute financial, legal, tax, accounting or other professional advice. It is also not intended to offer penalty protection or to promote, market or recommend any transaction or matter addressed herein. Recipients should consult their applicable professional advisors prior to acting on the information set forth herein. All trademarks and service marks on this statement belong to Deutsche Bank AG or its affiliates, except third-party trademarks or service marks, which are the property of their respective owners. “Deutsche Bank” means Deutsche Bank AG and its affiliated companies, including Deutsche Bank Trust Company Americas, as the context requires. Deutsche Bank Private Wealth Management refers to Deutsche Bank’s wealth management activities for high-net-worth clients around the world.


Download ppt "Capital Markets Outlook 2008 The World in Transition Ben Pace, U.S. Chief Investment Officer New York, December 6, 2007."

Similar presentations


Ads by Google