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For internal use only BMO Asset Management Investment Strategy - Resources Gavin Graham Director of Investments February 2009.

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Presentation on theme: "For internal use only BMO Asset Management Investment Strategy - Resources Gavin Graham Director of Investments February 2009."— Presentation transcript:

1 For internal use only BMO Asset Management Investment Strategy - Resources Gavin Graham Director of Investments February 2009

2 Investment Strategy, February 2009 1 BMO Guardian Funds  History  Established in 1962  Wholly-owned by BMO Financial Group since 2001  Currently  $3.6 billion in assets under management  Comprehensive offering of investment products

3 Investment Strategy, February 2009 2 BMO Guardian Funds Investment management by 15 world-class firms that together manage over $1.6 trillion

4 Investment Strategy, February 2009 3 S&P 500 Annual Returns 2008 3 rd Worst on Record Source: Morgan Stanley Research/ Bloomberg

5 Investment Strategy, February 2009 4 Third worst selloff in TSX in last 50 years Source: StrategEcon – October 31, 2008, CIBC World Markets Inc.

6 Investment Strategy, February 2009 5 Sell off in TSX greater than average for indexes suffering financial crisis Source: StrategEcon – October 31, 2008, CIBC World Markets Inc.

7 Investment Strategy, February 2009 6 15 Year Holding Period Returns are back in Negative Territory Source: TD Newscrest, John Aitkens

8 Investment Strategy, February 2009 7 Strong rebounds in indexes after historical bear markets – S&P 500 * Some market analysts (notably Stock Traders Almanac) break the 2001-2002 bear market into two separate bear markets. A 2000-2001 bear market associated with the 2001 recession and the 2002 bear market attributed to the earnings scandal focused on Enron and Worldcom Source: TD Newcrest, John Aitkens

9 Investment Strategy, February 2009 8 In the Great Depression the US Devalued in an attempt to Stimulate its Economy… Source: TD Newscrest, John Aitkens

10 Investment Strategy, February 2009 9 And Commodity Prices Rose Sharply. Source: TD Newscrest, John Aitkens

11 Investment Strategy, February 2009 10 U.S. and Canadian Interest Rates Have Declined to a 75 Year Low Interest Rates (%) Sources: Bank of Canada, U.S. Federal Reserve As of Jan 31, 2009 Federal Reserve Bank of Canada 0-0.25% 1.0%

12 Investment Strategy, February 2009 11 The Fed is acting much faster than Japan did in the 1990s… Source: StrategEcon – October 31, 2008, CIBC World Markets Inc.

13 Investment Strategy, February 2009 12 Following Sweden’s example, which saw its market recover rapidly Source: StrategEcon – October 31, 2008, CIBC World Markets Inc.

14 Investment Strategy, February 2009 13 Yield Curve Offers Substantial Support Source: U.S. Department of the Treasury Yield (%) U.S. Treasury Yields As of February 12, 2009 12/31/06 12/31/07 Current

15 Investment Strategy, February 2009 14 Source: BEA, The Globe and Mail US Real GDP (yoy% chg) … But the Bond Market is a Leading Indicator… The U.S. is in Recession As of December 31, 2008 Yield curve first inverts S&P 500 peaks Yield curve first inverts Shaded areas represent periods of U.S. recession S&P 500 peaks

16 Investment Strategy, February 2009 15 Resulting in a Sharp Slowdown in U.S. Economic Growth Source: Bureau of Economic Analysis % Change in U.S. GDP As of December 31st, 2008

17 Investment Strategy, February 2009 16 Which Will Likely See the Deepest Recession in 25 Years Source: TD Newscrest, John Aitkens

18 Investment Strategy, February 2009 17 Despite the falls in Government bond yields, spreads on even good quality bonds, such as provincials, have widened to record levels Source: TD Newscrest, John Aitkens

19 Investment Strategy, February 2009 18 As have investment grade bonds Source: TD Newscrest, John Aitkens

20 Investment Strategy, February 2009 19 U.S B-Rated Corporate Bond Yields are starting to pull back… Source: The Globe & Mail, January 7, 2009 Is Quantitative Easing Starting to Work?

21 Investment Strategy, February 2009 20 Deflation and Deleveraging Source: RBC Capital Markets, September 2, 2008

22 Investment Strategy, February 2009 21 Poor Economic Indicators… Source: RBC Capital Markets, September 2, 2008

23 Investment Strategy, February 2009 22 Global Industrial Production is Plummeting Sharply Reducing the Demand for Commodities… Source: TD Newscrest, John Aitkens

24 Investment Strategy, February 2009 23 And Hence their Prices… Source: TD Newscrest, John Aitkens

25 Investment Strategy, February 2009 24 Led by U.S. Auto Sales… Source: TD Newscrest, John Aitkens

26 Investment Strategy, February 2009 25 And U.S. Housing… Source: TD Newscrest, John Aitkens

27 Investment Strategy, February 2009 26 However, America No Longer Driving the Bus Oil Exporters* 10% Other 31% U.S. 12% * OPEC, Russia and Mexico Percentage of World GDP Growth, 2004-07 Source: CIBC World Markets China 30% Emerging Asia, ex-China 17%

28 Investment Strategy, February 2009 27 Positive Secular Driver Continues

29 Investment Strategy, February 2009 28 Asian Industrial Production Plummeting Source: TD Newcrest, John Aitkens, Feb, 2009

30 Investment Strategy, February 2009 29 But US Exports Not the Main Driver of Asian GDP JP Morgan, 2007 NationExport share of GDP US share of exports Japan1523 Korea3713 China3721 Taiwan5914 ASEAN*7314 * 10 Southeast Asian countries with a combined GNP of $1 trillion

31 Investment Strategy, February 2009 30 For Resources, we may be in a Cyclical Bear Market but a Secular Bull Market…. Cyclical Dynamic Long-term Trend Are we here today? 1980 2008 Time

32 Investment Strategy, February 2009 31 Some Seasonal & Cyclical Risks China GDP Growth Slows to 7% Unrest in China & India Low Oil Revenues Causes Unrest In The Middle East US Recession Deeper Than Expected World Deflation vs Weakening Dollar Naysayers Teetering Into Depression???

33 Investment Strategy, February 2009 32 The Cyclical Bear USA Officially In Deepening Recession Manufacturing is 85% of China’s Exports Exports Are 1/3 GDP (excl Imports) The Good News Huge Stimulus Package unveiled In China 10% of GDP Infrastructure Spend; Tax Relief ; Low Interest Rates China Centrally Planned Economy

34 Investment Strategy, February 2009 33 Asia’s Growing Ability to Consume GDP per Capita (US$) $500 $1,000 $1,500 $2,000 $2,500 19801985199019952000 China India Indonesia Thailand $5,000 $15,000 $25,000 $35,000 $45,000 19801985199019952000 Korea Taiwan Hong Kong Japan Singapore Sources: CEIC and Bloomberg

35 Investment Strategy, February 2009 34 China Urbanization Source: BHP Billiton

36 Investment Strategy, February 2009 35 Urbanization Leads to a Major Increase in Commodity Demand…

37 Investment Strategy, February 2009 36 Real Commodity Prices are Back Down to Bear Market Levels Source: Bloomberg, The Economist, Jones Heward

38 Investment Strategy, February 2009 37 And are Still Cheap vs. Stocks even with the Bear Market

39 Investment Strategy, February 2009 38 An 18 Year Bear Market in Commodities against Financial Assets Source: Bloomberg, Jones Heward

40 Investment Strategy, February 2009 39 US$ Commodities Index Drives TSX Index Source: Bloomberg

41 Investment Strategy, February 2009 40 US$ Commodities Index Drives TSX Resources Source: Bloomberg

42 Investment Strategy, February 2009 41 Source: BloombergAs of Jan 31, 2009 Canadian Dollar – To Parity and Back! 81

43 Investment Strategy, February 2009 42 Having Performed Relatively Well Over the Last 5 Years… Source: Bloomberg; (CDN$) 5-Year Returns to January 31, 2009

44 Investment Strategy, February 2009 43 …Canadian Equities Have Lagged Over the Last Year… Source: Bloomberg; (CDN$) 1-Year Returns to January 31st, 2009

45 Investment Strategy, February 2009 44 …With Financials Continuing to Lag Source: Bloomberg; (CDN$) 1-Year Returns to January 31st, 2008

46 Investment Strategy, February 2009 45 Oil Exports Are Falling… OPEC, Russia and Mexico (2005-2012) Source: CIBC World Markets

47 Investment Strategy, February 2009 46 Due to Soaring Rates of Car Ownership in Russia, China and Elsewhere Source: CIBC World Markets, Sept 2008

48 Investment Strategy, February 2009 47 Investment in the Global Energy Sector Source: Merrill Lynch Research

49 Investment Strategy, February 2009 48 ….But These Investments Are Not Yielding Increases In Supply Source: IEA, Merrill Lynch Commodity Research

50 Investment Strategy, February 2009 49 Source: CIBC World Markets Depletion Adds to Needed Capacity Growth

51 Investment Strategy, February 2009 50 Investment Opportunities In The Top 10 Resource Holders Have Been Reduced Source: Merrill Lynch Research

52 Investment Strategy, February 2009 51 Little New Supply Due to Low Real Commodity Prices Source: Bloomberg, Ibbotson Commodity Research Bureau Spot Index Commodity Research Bureau Spot Index Deflated by U.S. Consumer Price Index CRB Index Jan. 1973 – Dec. 2007

53 Investment Strategy, February 2009 52 Ag Commodities Lower Over 4 Decades in Real Terms Source: TIS Group, [date]

54 Investment Strategy, February 2009 53 Gold Inflation Adjusted by CPI is Only Back to Level of Early 1970s Source: TIS Group, [date]

55 Investment Strategy, February 2009 54 Source: Bloomberg US$/bbl Crude Oil Prices Energy Prices: Likely to Remain Higher than Many Expect As of December 31, 2008

56 Investment Strategy, February 2009 55 Gold Breaking Out In all Currencies… Source: TD Newscrest, John Aitkens

57 Investment Strategy, February 2009 56 But Gold Stocks Massively Underperformed Source: TD Newscrest, John Aitkens

58 Investment Strategy, February 2009 57 Commodity Prices Source: TD Newscrest, John Aitkens

59 Investment Strategy, February 2009 58 Industrial Commodity Price Indexes Source: TD Newscrest, John Aitkens

60 Investment Strategy, February 2009 59 When The Going Gets Tough……… Source: Bloomberg

61 Investment Strategy, February 2009 60 The Tough Go Drinking ! Source: Bloomberg

62 Investment Strategy, February 2009 61 Some Less Than Others………. Source: Bloomberg

63 Investment Strategy, February 2009 62 Others …More ! Source: Bloomberg

64 Investment Strategy, February 2009 63 Resources Major Component of TSX Source: Bloomberg

65 Investment Strategy, February 2009 64 TSX in US Recession

66 Investment Strategy, February 2009 65 Conclusion The New Secular Trend In Commodities Is Intact An Interruption Not A Reversal Of Trend We are in Seasonal and Cyclical Bear Markets China Exports To US Are Non-Metal Related China Infrastructure Boosted By Stimulus Package Once International Trade Volumes Resume, Commodity Prices Could Rapidly Reverse

67 Investment Strategy, February 2009 66 Source: Bloomberg As of Jan 31st, 2009; (CDN$) FundsAsset Class1-Year Return (%) BMO Guardian Canadian Bond FundCanadian Fixed Income0.94 GGOF Monthly Dividend FundCanadian Balanced-19.49 BMO Guardian Global Diversified FundGlobal Balanced-21.67 BMO Guardian Asian Growth and Income FundAsia ex. Japan-23.05 BMO Guardian Monthly High Income Fund IICanadian Income Trust-25.76 BMO Guardian Canadian Large Cap EquityCanadian Equity-29.30 IndicesCountry1-Year Return (%) Nikkei 225 IndexJapan-12.83 S&P 500 IndexU.S.-24.45 S&P/TSX Composite IndexCanada-31.80 FTSE 100 IndexU.K.-33.76 Top Performers: Defensive Inflation Plays and Income Asset Classes

68 Investment Strategy, February 2009 67 Conclusions Canada has outperformed other major markets for the last few years helped by budget and trade surpluses and its commodity exposure. Oil was at record highs in mid 2008 and will likely remain at levels which encourage further development of Canadian resources. The US economy has been in recession since December 2007 and probably will remain so until mid 2009. It appears to be the deepest recession for 25 years, led by the US consumer retrenching, but The Fed has slashed interest rates to record lows at 0-0.25% to stimulate the economy. The US dollar strengthened sharply against all currencies except the Yen, on a ‘flight to safety’ move. With the addition of U$1.5 trillion in new debt to address the credit crisis, it is likely the C$ will appreciate against the U$ over the next year or so.

69 Investment Strategy, February 2009 68 Conclusions Corporate Earnings, having reached a 40 year high as a share of GDP in mid decade, have fallen for a year and a half in the US and are forecast to fall in Canada as well as the US in 2009, but the 35-40% fall in stock markets last year has left valuations at the cheapest level in 20 years. Having experienced the third worst year in the last 100 years in 2008, stocks in Canada, the US and Europe should experience a strong rebound this year. Government Bonds are expensive at present levels.

70 Investment Strategy, February 2009 69 Conclusions The spreads above Government bond yields for investment grade and high yield debt are at record high levels making non-Government debt attractive despite the recession. The effects of the deep recession in North America and Europe are more than fully reflected in stock markets and the extensive stimulus delivered by Governments worldwide will eventually flow into financial markets.

71 Investment Strategy, February 2009 70 Disclaimer Sales commissions, service fees, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rates of return include changes in unit value and assume reinvestment of all distributions, and do not take into account sales, redemption or optional charges or income taxes payable by any securityholders, which would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

72 For internal use only Q&A

73 For internal use only Thank You


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