Presentation on theme: "GLOBAL PERSPECTIVES Rational Portfolios for Irrational Markets October 2010 for the period ending 9/30/10 Global Perspectives Market Overview Presented."— Presentation transcript:
GLOBAL PERSPECTIVES Rational Portfolios for Irrational Markets October 2010 for the period ending 9/30/10 Global Perspectives Market Overview Presented by: Douglas Coté, CFA SVP and Senior Market Strategist ING Investment Management
GLOBAL PERSPECTIVES Rational Portfolios for Irrational Markets Disclosure This presentation has been prepared by ING Investment Management for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions expressed herein reflect our judgment and are subject to change. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) increasing levels of loan defaults (5) changes in laws and regulations and (6) changes in the policies of governments and/or regulatory authorities. The opinions, views and information expressed in this commentary regarding holdings are subject to change without notice. The information provided regarding holdings is not a recommendation to buy or sell any security. Fund holdings are fluid and are subject to daily change based on market conditions and other factors. Past performance is no guarantee of future results. ING Funds is a wholly owned subsidiary of ING Groep (Group), N.V. All of the data contained herein is as of 9/30/10
The Three Pillars of Investment Success GLOBAL PERSPECTIVES Rational Portfolios for Irrational Markets Global Strategic Allocation We believe a global approach to investing offers potential benefits for all investors, whether their primary objective is capital growth, income, capital preservation or a balance between them. Portfolio Construction We believe both active management and broad asset class diversification offer rewards through intelligent risk-taking. Behavioral Finance We advocate disciplined rebalancing to mitigate timing (behavioral) errors.
33 Overview Where Have We Been –Credit crisis (global financial systemic risk) –Great recession –Global government monetary and fiscal stimulus –Global V-shaped recovery Where Are We –Recovery: U.S. corporate earnings, manufacturing, retail sales consistently exceed expectations –Europe crisis subsiding while Asia, Brazil, Eurozone and Canada show particularly robust growth –Moderate gains in U.S. payrolls support personal income, but unemployment still high –M&A Activity soared with emerging markets accounting for 1/3 of merger activity in 1H10 Where Are We Headed –U.S. and global economic recovery evolve into synchronized sustainable expansion –Earnings, manufacturing and consumer continue to positively surprise –Uncertainty from Tax and Regulatory environment Executive Summary
Market Overview GLOBAL PERSPECTIVES Rational Portfolios for Irrational Markets Much Ado About the Euro: Credit, Earnings Market Resilience Driven by Fundamentals Market Volatility U.S. and World Economies
55 Corporate Spreads Baa 3.1% Spreads have declined since the credit crisis and despite recent volatility, spreads are only slightly higher than year-to-date lows. Ted Spread (Libor – 3 month Treasury) The TED spread stayed near the low end of its historic range, perhaps reflecting an end to the euro crisis. Note: Corporate Baa Spreads are benchmark average rates in excess of 10-year U.S. Treasury yields. “Libor” is the London Inter-bank Offer Rate, the interest rate banks charge each other for loans. Source: Moody’s, Reuters, Federal Reserve, Bloomberg, FactSet % % Fixed Income Lehman crisis Euro crisis 0.13% Much Ado About the Euro
66 Fundamentals Drive the Stock Market Accelerating and positive earnings drive markets up, and decelerating and negative earnings drive markets down, albeit with a reporting lag. Source: Standard & Poor’s, First Call, FactSet, ING Investment Management Equity 1Q 2Q
77 U.S. ISM – Manufacturing 54.4 Global Purchasing Managers Index Source: Institute of Supply Management, Federal Reserve, FactSet Expansionary (>50) Contractionary (<50) ISM – Manufacturing Index greater than 50 is expansionary. A number close to 60 is indicative of rapid economic growth. Economy The Global Purchasing Managers Index for manufacturing includes countries that represent over 75% of global GDP.
88 4.7 Note: Core CPI reflects consumer price inflation excluding food and energy. Source: Bureau of Labor Statistics, U.S. Census Bureau, FactSet Retail Sales ex-Autos Non-farm Payrolls Total non-farm payroll reports reversed their negative trend, turning positive before declining again. The private sector has made positive contributions all year, but the high unemployment rate remains troublesome. In the last three months, retail sales grew at the fastest annual rate in three years, and the monthly change exceeded expectations. 3 month average, % change Economy 000’s -95 most Recent Total +64 most Recent Private Total Private Total Nonfarm Payroll
99 Source: Standard & Poor’s, Chicago Board Option Exchange, FactSet Market Volatility Equity Volatility is capricious and unpredictable Long period of low volatility leads to overconfidence and excessive risk taking Recent tests of volatility –May 6 “Flash Crash” – Market drops 1000 points before partially recovering –Euro crisis –Sovereign Debt worries –Gulf of Mexico oil spill –Economic slowdown September While there is still volatility in the market, levels are nowhere near the highs experienced in 2008. Equity Volatility (VIX) 12/31/07 = 22.5 11/20/08 = 80.9 12/31/08 = 40.0 09/30/10 = 23.7 The VIX “fear gauge” dropped more than 8% on September 1 and has steadily ticked down.
10 July and August were the busiest months for M&A activity and as of August 31 st YTD activity totaled $1.7 trillion, up 24% from the same time in 2009. August was the biggest month for merger and acquisition activity since July 2008, with the consummation of more than 2,800 deals worth upward of $280 billion. Source: Nasdaq, Bloomberg, ING Investment Management Economy GDP expanded 1.6% Q / Q annualized January – June 2010 Deal value (left scale) % Increase (right scale) $ billions
11 Global Equity Returns Note: Returns for periods greater than one year are annualized. All returns reflect total return including dividends expressed as a percentage. Source: MSCI, Standard & Poor’s, FactSet International
12 Note: All spreads are option-adjusted spreads except for Emerging Markets and Senior Loans. Emerging Markets spread is the spread over the U.S. Treasury curve. Senior Loans spread is the average three-year call secondary spread as of 6/25/10. All returns are total returns including dividends expressed as percentages. Returns for 3- and 5-year periods are annualized. All other returns are cumulative. Source: Barclays Capital, JPMorgan, Standard & Poor’s Bond and Loan Returns CMBS led the U.S. investment grade bonds for the month of September but U.S. long term Treasuries still lead in year-to-date return. Fixed Income
13 Stock vs. Bond Valuation Stocks look cheap compared to bonds using the “Fed Model”, which compares the yield-to-maturity on U.S. Treasury bonds to the earnings yield (E/P) of stocks. Bond prices are near 45-year highs. Earnings Yield (solid = forward, dotted = trailing) 2.5 8.8 Note: Earnings Yield is the inverse of the P/E ratio and is calculated as the sum of the reported next twelve months’ earnings estimates divided by market capitalization. The 10-year U.S. Treasury is used for bonds. Source: Standard & Poor’s, First Call, Reuters, Bloomberg, FactSet % Equity Equivalent to P / E of 34.4 U.S. Treasury Yield (10 year) Equivalent to P / E of 11.5
14 Dividend Yield Minus Bond Yield Dividend Yields Note: Bond yield is represented by the 10-year U.S. Treasury note. Source: Standard & Poor’s, Reuters, FactSet Dividend yields remain above levels seen for most of the past decade. Stocks offer attractive dividend yields relative to bond yields. Stocks Attractive Bonds Attractive average % % Rising Stock Prices Falling Stock Prices Equity
15 S&P Case-Shiller Home Price Index Home values have declined by about 29% from the summer of 2006 but have turned positive for the 20 City Composite Index. Source: National Association of Realtors, S&P Case-Shiller, Bloomberg Economy 207 149
16 U.S. Leading Indicators U.S. leading indicators remain consistently positive in 12 out of the last 14 months. Source: Bloomberg Conference Board U.S. Leading Index consists of the weighted average of the following indices: 1. Average weekly hours, manufacturing2. Average weekly initial jobless claims3. Manufacturers’ new orders, consumer 4. Vendor performance, slower deliveries5. Manufacturers’ new orders, capital6. Building permits, new private housing units 7. Stock prices, 500 common stocks8. Money Supply, M29. Interest Rate Spreads10. Index of consumer expectations Economy
17 Real GDP (Q/Q) The economy has surged after each of the past 2%+ falls in GDP (Y/Y) since 1948. Expectations are for a weaker recovery this time, but three consecutive positive quarters have brought us near the previous peak. Expansions historically have lasted for five years. Source: Bloomberg Breakdown Consumption: 71% Government: 20% Investment: 12% Exports: 12% Imports:(15%) Economy
18 Source: The World Bank Group * China, India, Russia, Brazil, Mexico, Korea, Indonesia and Taiwan Importance in the World Economy The largest 8 emerging markets now contribute more to global growth than the European Union, Japan and the U.S. combined. Growth Rates Emerging markets are widely expected to continue growing more rapidly than developed markets. Source: International Monetary Fund International Global Perspectives on U.S. Market
19 International Economics Previously crisis-prone emerging nations weathered the economic turbulence better than the developed economies. China, India and Brazil have resumed rapid growth. China now ranks 2 nd in GDP contribution behind the U.S. Source: CIA – The World Fact Book, Bureau of Economic Analysis, US Department of Labor, Statistics Canada, Statistiches Bundesamt Deutschland, National Institute of Statistics and Economic Studies (France), UK National Statistics, Italian National Institute of Statistics, Japanese Cabinet Office, Statistics Bureau (Japan), FactSet. Data is most recent available. International Global Perspectives on U.S. Market
20 Overview Where Have We Been –Credit crisis (global financial systemic risk) –Great recession –Global government monetary and fiscal stimulus –Global V-shaped recovery Where Are We –Recovery: U.S. corporate earnings, manufacturing, retail sales consistently exceed expectations –Europe crisis subsiding while Asia, Brazil, Eurozone and Canada show particularly robust growth –Moderate gains in U.S. payrolls support personal income, but unemployment still high –M&A Activity soared with emerging markets accounting for 1/3 of merger activity in 1H10 Where Are We Headed –U.S. and global economic recovery evolve into synchronized sustainable expansion –Earnings, manufacturing and consumer continue to positively surprise –Uncertainty from Tax and Regulatory environment Executive Summary
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Appendix GLOBAL PERSPECTIVES Rational Portfolios for Irrational Markets www.INGglobalperspectives.com
23 Source: Bloomberg, US Treasury Both government debt and the deficit are up sharply in the wake of the recession The total federal public debt outstanding is $13.5 trillion and exceeds 90% of GDP. Notably, entitlements such as Social Security and Medicare are not included. The current U.S. deficit (receipts – outlays) is over $1.4 trillion—more than 10% of GDP. Ten years ago the U.S. posted a surplus of over $200 billion. Economy > 10% of GDP > 90% of GDP Tax & Spend - U.S. Government Debt and Deficit Levels
24 Corporate tax rates in the U.S. are high relative to other major economies Tax & Spend – taxing corporate profits abroad
25 Inflation – CPI Core and headline inflation remain under control, but compounded for many years, price levels are at historic highs. 25 Note: Core CPI reflects consumer price inflation excluding food and energy. Source: Bureau of Labor Statistics, U.S. Census Bureau, FactSet Economy $ %
26 Barclays Capital U.S. Aggregate Bond Index is composed of U.S. securities in Treasury, Government-Related, Corporate, and Securitized sectors that are of investment-grade quality or better, have at least one year to maturity, and have an outstanding par value of at least $250 million. Barclays Capital U.S. Corporate High-Yield Bond Index tracks the performance of non-investment grade U.S. dollar-denominated, fixed rate, taxable corporate bonds including those for which the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below, and excluding Emerging Markets debt. Barclays Capital Global Aggregate Bond Index measures a wide spectrum of global government, government-related, agencies, corporate and securitized fixed-income investments, all with maturities greater than one year. The Credit Suisse/Tremont Hedge Fund Index is an asset- weighted hedge fund index covering over 5000 funds with at least US$50 million under management, a 12-month track record, and audited financial statements. It is calculated net of performance fees and expenses. CS/Tremont sub-indexes track hedge fund strategies according to the methods by which fund managers seek investment opportunities such as by asset class and/or use of leverage. Dow Jones Industrial Average is a price-weighted average computed from the stock prices of 30 large, widely held public companies in the U.S., adjusted to reflect stock splits and dividends. FTSE NAREIT US Real Estate Index presents comprehensive REIT performance across the U.S. economy, including all commercial investment and property sectors. FTSE EPRA/NAREIT Global Real Estate Index is designed to represent general trends in eligible real estate equities worldwide. Index Definitions The Chicago Board Options Exchange Volatility Index (CBOE VIX) is a measure of the implied volatility of S&P 500 index options. It is one measure of the market's expectation of volatility over the next 30 day period. JPMorgan Emerging Markets Bond Index Plus (EMBI+) tracks total returns for actively traded emerging markets debt instruments including U.S.-dollar denominated Brady bonds, Eurobonds, and traded loans issued by sovereign entities. MSCI EAFE Index is a free float-adjusted market capitalization weighted index designed to measure the developed markets’ equity performance, excluding the U.S. & Canada, for 21 countries. MSCI Europe Index is a free float-adjusted market capitalization weighted index designed to measure equity performance of the developed markets in Europe consisting of 16 country indices. MSCI Pacific Index is a free float-adjusted market capitalization weighted index designed to measure developed markets’ equity performance of the in the Pacific region consisting of 5 countries. MSCI Emerging Markets Index is a free float-adjusted market capitalization index that measures emerging market equity performance of 22 countries. The Municipal Bond Index is a bond index that includes investment-grade, tax-exempt, and fixed-rate bonds with long-term maturities (greater than two years) selected from issues larger than $50 million. NASDAQ Composite Index is a market capitalization weighted index of the performance of domestic and international common stocks listed on The NASDAQ Stock Market including over 2,800 securities.
27 Index Definitions The NCREIF (National Council of Real Estate Investment Fiduciaries) Property Index (NPI) is a market value-weighted index of total rates of return for a large pool of commercial real estate properties acquired in the private market for investment purposes. For properties with leverage, returns are reported as if there were no leverage. Russell 3000 Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investible U.S. equity market. Russell 1000 Index measures the performance of the large-cap segment of the U.S. equity market and includes approximately 1000 of the largest securities based on market capitalization and representing approximately 92% of the U.S. market. Russell 1000 Growth Index measures the large-cap growth segment of the U.S. equity market including Russell 1000 companies with higher price-to-book ratios and forecasted growth. Russell 1000 Value Index measures the large-cap value segment of the U.S. equity market including Russell 1000 companies with lower price-to-book ratios and lower expected growth. Russell Midcap Index measures the performance of mid-cap stocks in the U.S. equity market including 800 of the smallest securities in the Russell 1000® Index, based on market capitalization. Russell Midcap Growth Index measures the performance of the mid-cap growth segment of the U.S. equity market including Russell Midcap Index companies with higher price-to-book ratios and forecasted growth. Russell Midcap Value Index measures the performance of the mid-cap growth segment of the U.S. equity market including Russell Midcap Index companies with lower price-to-book ratios and forecasted growth. Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity market including approximately 2000 of the smallest securities based on market capitalization. Russell 2000 Growth Index measures the performance of small- cap growth stocks in the U.S. equity market including Russell 2000 companies with higher price-to-value ratios and forecasted growth. Russell 2000 Value Index measures the performance of small-cap growth stocks in the U.S. equity market including Russell 2000 companies with lower price-to-value ratios and forecasted growth. S&P 500 Index is a widely regarded as the best single gauge of the U.S. equities market, including 500 leading companies in major industries of the U.S. economy. S&P/LSTA (Loan Syndications and Trading Association) Leveraged Loan Index (LLI) is a total return market value index that tracks fully funded, senior secured, first lien term loans syndicated in the U.S., as well as dollar-denominated overseas loans, including 90-95% of the institutional universe. The S&P GICS (Global Industry Classification Standard) sectors were developed by MSCI and Standard & Poor’s to provide standardized industry definitions consisting (in the U.S.) of 10 sectors, 24 industry groups, and 68 industries. Thomson VentureXpert TM is a database provided by Thomson Venture Economics, a leading provider of industry data about venture capital and private equity firms, which is regarded as the industry-standard source for comprehensive information on venture funds, private firms, venture-backed companies and limited partners, as well as analytics for fund statistics and performance. U.S. Treasury Index is a component of the Barclays Capital U.S. Aggregate Index.
28 Important Disclosures This information has been prepared by ING Investment Management for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management's current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels and (4) increasing levels of loan defaults (5) changes in laws and regulations and (6) changes in the policies of governments and/or regulatory authorities. All indexes are unmanaged and an individual cannot invest directly in an index. Index returns do not include fees or expenses. Past performance is no guarantee of future results. The performance quoted represents past performance. Investment return and principal value of an investment will fluctuate, and shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. You may obtain performance information current to the most recent month-end by visiting www.ingfunds.com.www.ingfunds.com An investor should consider the investment objectives, risks, charges and expenses of the Fund(s) carefully before investing. For a free copy of the Funds' prospectus, which contains this and other information, visit us at www.ingfunds.com or call ING Investments Distributor, LLC at (800) 992-0180.www.ingfunds.com Please read the prospectus carefully before investing. ING Investments Distributor, LLC The views and judgments expressed are those of ING Investment Management. They are subject to change at any time. These views do not necessarily reflect the opinions of any other firm. All investing involves risks of fluctuating prices and the uncertainties of rates of return and yield inherent in investing. All security transactions involve substantial risk of loss. You should consult your tax, legal, accounting or other advisors about the matters discussed herein. As indicated on each page, some information was obtained from outside sources and is believed to be reliable, but ING does not guarantee its completeness or accuracy. Not FDIC Insured; no bank guarantee; may lose value