2017 has been a tough year for Ebearnezer Scrooge

Transcription

1 2017 has been a tough year for Ebearnezer Scrooge

2

3 THE BULL JUST GOES ON AND ON AND (OR HOW TO CORRECTLY PREDICT 10 OF THE LAST 1 MARKET CRASHES) Albert Edwards

4 IS ICE AGE SECULAR DE-RATING OF EQUITIES V BONDS OVER? BOND/EQUITY YIELD (CASHFLOW) RATIO Source: Datastream 4

5 VALUATIONS DON T MATTER APPARENTLY? FORWARD PE Source: Datastream 5

6 SHILLER (P/E10) RATIOS : S&P 500 SECTOR MATCHED TO EAFE Source: GMO 6

7 2017 SAW BUMPER CENTRAL BANK MONEY PRINTING Source: Zero Hedge 7

8 INDIVIDUALS STOCK EXPOSURE IS EXTREME RELATIVE TO CASH Source: Datastream, AAII 8

9 PROFESSIONAL ADVISORS ARE AS ALSO EXTREMELY BULLISH Source: Twitter, Yardeni Research 9

10 THE DONALD IS ALL BULLED UP TOO! Source: Twitter 10

11 US EQUITIES RALLIED THROUGH 1987, DESPITE BOND SELL-OFF y yield (inverted, rhscale) trailing PE Source: Datastream 11

12 US ISM AND BRENT OIL PRICE (JAN 1985-OCT 1987) oil price (brent, rhscale) manufacturing ISM Source: Datastream 12

13 $ STABILIZED IN 1987 DUE TO HIGHER RATES & LOUVRE ACCORD $/DM (rhscale) US 10y Fed Funds Source: Datastream 13

14 IS THIS LIKE 1987? EQUITIES IGNORE RISING YIELDS - FOR NOW S&P dividend yield y Source: Datastream 14

15 THE MARKET HAS LITTLE BELIEF IN FED TIGHTENING PROMISES y y Fed Funds J F M A M J J A S O N D J F M A M J J A S O N D 0 Source: Datastream 15

16 IT LOOKED SO DIFFERENT IN 1994 Source: Datastream 16

17 US DOLLAR NOT BEING DRAGGED UP AS US 2Y YIELDS RISE Source: Datastream 17

18 SPECULATORS ARE VERY SHORT THE DOLLAR NOW AGAINST THIS TIME LAST YEAR THEY WERE VERY LONG! 1.25 EUR/USD CFTC spec EUR, 000s /15 07/15 01/16 07/16 01/17 07/17 01/18 Source: SG Forex, CFTC 18

19 THE FED S TAPER TANTRUM COWARDLINESS = CONVERGENCE US 1y in 10yrs 1y in 5yrs 1y in 2yrs 1y in 1yr 1yr swap Fed Funds /13 07/13 01/14 07/14 01/15 07/15 01/16 07/16 01/17 07/17 01/18 Source: Kit Juckes, SG Forex 19

20 DOVISH HIKES HAVE LOOSENED FINANCIAL CONDITIONS Source: Datastream 20

21 THE MAIN REASON THE MARKET IS BELOW THE FED DOTS IS Source: Datastream 21

22 12M% 4 QTR % BUT IS US CORE CPI SET TO RISE? US GDP AND CORE INFLATION CORE CPI GDP* (RHS) -2-4 * LEADING BY 18M Source: Gerard Minack, Downunder Daily -6 22

23 12M % 12M% NY FED SUGGESTS US CORE CPI COULD SURGE CORE CPI AND NY FED'S UNDERYING INFLATION GAUGE * FRBNY UNDERLYING INFLATION GAUGE FULL DA TA SET (UIGDDA TA INDEX). LEA DING BY 15M. 1.0 CORE CPI (LHS) UNDERLYING 0.5 INFLATION GAUGE* Source: Gerard Minack, Downunder Daily

24 US WAGE INFLATION HAS DRIFTED DOWN! Source: Datastream 24

25 LOTS OF LABOUR SLACK IN THE US? 65 employment rate (employment/working age pop) employment/labour force (1-unempyment rate, rhscale) Source: Datastream 25

26 PRIME AGE EMPLOYMENT RATE STRONGER THAN TOTAL prime age employment rate (25-54) total employment rate (employment / working age pop) Source: Datastream 26

27 12 M % % OF POPULATION US PHILLIPS CURVE IS NOT DEAD PRIME AGE WAGE GROWTH AND CORE EMPLOYMENT RATE * MEDIAN HOURLY EARNING (MATCHED SAMPLE OVER PRIOR 12 MONTHS). PRIME-AGE ONLY (25-54). FULL TIME PAY ONLY, EXCLUDES SELF-EMPLOYED YEAR OLD EMPLOYED A S % OF POPULA TION. LEA DING BY 6M. PRIME AGE MEDIAN EARNINGS* PRIME AGE EMPLOYMENT RATE* (RHS) Source: Gerard Minack, Downunder Daily 27

28 WHY AREN T US BOND YIELDS RISING MORE QUICKLY? m ch in US bond yield (rhscale) US economic surpises Source: Datastream 28

29 THE MOST IMPORTANT CHART IN THE WORLD? Source: Zero Hedge, 13d Research 29

30 US 10Y YIELD CAN RISE TO 3% AND STILL BE IN A BULL MARKET Source: SG Technical Analysis, Bloomberg 30

31 BACK TO THE WAGE CONUNDRUM. Source: Datastream 31

32 JAPANESE WAGE INFLATION BUMPING ALONG AT ½% YOY Source: Datastream 32

33 JAPANESE LABOUR MARKET MUCH TIGHTER THAN THE US Source: Datastream 33

34 JAPAN: A BIG INCREASE IN FEMALE PARTICIPATION RATIO 34

35 JAPANESE HOUSEHOLD INCOME IS STRONG (YOY%) Source: Datastream 35

36 JAPAN: CONSUMPTION WEAK V INCOME UNLIKE THE US & UK! consumer spending employee compensation Source: Datastream 36

37 JAPANESE STOCKMARKET PROFITS SURGING Source: Datastream 37

38 JAPANESE CORE CPI INFLATION RISING Source: Datastream 38

39 JAPANESE IMPLIED INFLATION EXPECTATIONS BOTTOMING? Source: Datastream 39

40 JAPANESE BEGINNING TO BELIEVE IN INFLATION AGAIN! 4 3 % seeing inflation (rhscale) headline CPI inflation Source: Datastream 40

41 JAPANESE QE IS OFF THE SCALE. COULD THEY TAPER TOO? 100 % of GDP Fed ECB BoJ BoE Sep-08 Sep-11 Sep-14 Sep-17 Source: Bloomberg 41

42 HAS QT ALREADY STARTED IN JAPAN? Source: Zero Hedge, Wolfstreet.com 42

43 KEEP A CLOSE EYE ON YEN/US DOLLAR. STRONGER YEN? Source: SG Technical Analysis, Bloomberg 43

44 CENTRAL BANK QE UNWIND WHAT IMPACT? Source: Zero Hedge, Deutsche Bank 44

45 UNWINDING QE IS GOING TO BE SO EASY APPARENTLY! I have absolutely no doubt that when the time comes to reduce the size of the balance-sheet that we ll find that a whole lot easier than we did when expanding it. Mervyn King BoE Governor, Feb

46 EASY MONEY Andrew Lapthorne GLOBAL QUANTITATIVE STRATEGY

47 Consecutive monthly positive total returns 2017: A RECORD BREAKING YEAR FOR MSCI WORLD 14 months of consecutive total returns for MSCI World Source: SG Cross Asset Research/Equity Quant, Factset 47

48 Annual Sharpe ratio (x) WHO NEEDS HEDGE FUNDS! MSCI World delivered a Sharpe Ratio of more than 4.0x! Source: SG Cross Asset Research/Equity Quant, Factset 48

49 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Realised volatility (%) VOLATILITY FELL, PARTICULARLY IN EQUITY Realised Equity, Bond and FX annualised realised volatility Currency (USD, Euro, Yen, Sterling) Bonds ( Treasuries, Bunds, JGBs, Gilts) Equity (US, Japan, Eurozone, UK) Average 0 Source: SG Cross Asset Research/Equity Quant, Factset 49

50 NATURAL LANGUAGE PROCESSING BECAME POPULAR Did someone say BLOCKCHAIN? Online PLC adds Blockchain to its company name to become Online BlockChain PLC Source: SG Cross Asset Research/Equity Quant, Factset 50

51 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Median EV/EBITDA ratios (x) PEAK EQUITY VALUATIONS Median EV/EBITDA ratios Globally, US and Europe US Europe Global Source: SG Cross Asset Research/Equity Quant, Factset, MSCI 51

52 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Median return on assets (%) REGIONAL RETURN ON ASSETS ARE CONVERGING Median company return on assets by region (%) US Japan Europe Source: SG Cross Asset Research/Equity Quant, Factset 52

53 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 3 year relative maximum drawdown (%) PEAK PAIN FOR US VALUE INVESTORS Sector relative FCF yield - 3 year maximum drawdown versus Benchmark Source: SG Cross Asset Research/Equity Quant, FactSet, IBES 53

54 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Total returns (%) GLOBALLY, OUR (SGVB) VALUE INDEX HAD A PRETTY GOOD YEAR MSCI World Enhanced Value MSCI World SG Global Value Beta Index (SGVB) Source: SG Cross Asset Research/Equity Quant, FTSE, I/B/E/S, FactSet. 54

55 AND IN THE LONG RUN Source: SG Cross Asset Research/Equity Quant, FTSE, I/B/E/S, FactSet. 55

56 Annualized Return(%) VALUE DOESN T WORK AMONGST THE LARGEST CAP VALUE PERFORMANCE PER SIZE SEGMENT (DM, LONG/SHORT, ) Smallest Small Mid Large Largest Source: SG Cross Asset Research/Equity Quant, FactSet, IBES 56

57 JAPAN AND FINANCIALS DOMINATE THE CHEAP UNIVERSE Source: SG Cross Asset Research/Equity Quant, FTSE, I/B/E/S, FactSet. 57

58 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 US CORPORATES ARE STILL OUTSPENDING CASH FLOW... 2,000,000 1,800,000 1,600,000 1,400,000 1,200,000 1,000,000 Gross cashflow Capex + Investment + Dividends Capex + Investment + Dividends + Buybacks 800, , , ,000 0 Source: SG Cross Asset Research/Equity Quant, Factset 58

59 US CASH FLOW GROWTH IS NOT AS STRONG AS YOU THINK Source: SG Cross Asset Research/Equity Quant, Factset 59

60 Dec-90 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 BUYBACKS ARE FINALLY DECLINING Net Buybacks Change in Debt Source: SG Cross Asset Research/Equity Quant, Factset 60

61 Aug-95 Aug-96 Aug-97 Aug-98 Aug-99 Aug-00 Aug-01 Aug-02 Aug-03 Aug-04 Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 Rolling annual (daily) correlation BUYBACKS ARE A SIGN OF WEAKNESS NOT STRENGTH Correlation between stocks with the highest buyback yields versus Value and Quality stocks Value stocks High Quality stocks Source: SG Cross Asset Research/Equity Quant, Factset 61

62 Jun-98 Dec-98 Jun-99 Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Net Debt to total assets (%) Debt to Equity (%) MEDIAN S&P 1500 EX FINANCIALS LEVERAGE RATIOS Net Debt % Assets Debt % Equity Source: SG Cross Asset Research/Equity Quant, Factset 62

63 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 EBIT interest cover (x) NO WONDER THE IMF IS FINALLY CONCERNED ABOUT LEVERAGE! Interest cover by size segment Biggest 10% Bottom 50% Average Source: SG Cross Asset Research/Equity Quant, Factset 63

64 MERTON DISTANCE TO DEFAULT A MARK TO MARKET CREDIT MODEL Equity Possible future equity value given a level of volatility Debt Debt Source: SG Quantitative Research 64

65 Aug-00 Feb-01 Aug-01 Feb-02 Aug-02 Feb-03 Aug-03 Feb-04 Aug-04 Feb-05 Aug-05 Feb-06 Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Realised 60 days volatility (%) High Yield Credit Spreads (%) CREDIT RISK AND EQUITY VOLATILITY IS THE SAME THING Average 60 day stock volatility 70 High yield Credit Spreads Source: SG Cross Asset Research/Equity Quant, Factset 65

66 BALANCE SHEETS WERE A KEY PERFORMANCE DRIVER LAST YEAR Top vs Bottom 20% US stocks based on Merton Distance to Default Source: SG Cross Asset Research/Equity Quant, Factset 66

67 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 US$ Bln THERE IS A GOOD REASON WHY MANY ARE SHORT RUSSELL 2000! Net Debt versus EBITDA for the Russell Net Debt EBITDA Source: SG Cross Asset Research/Equity Quant, Factset 67

68 WE'RE WATCHING THE RED LINE CLOSELY! Balance sheet performance in the Russell 2000 Source: SG Cross Asset Research/Equity Quant, Factset 68

69 Dec-00 Jul-01 Feb-02 Sep-02 Apr-03 Nov-03 Jun-04 Jan-05 Aug-05 Mar-06 Oct-06 May-07 Dec-07 Jul-08 Feb-09 Sep-09 Apr-10 Nov-10 Jun-11 Jan-12 Aug-12 Mar-13 Oct-13 May-14 Dec-14 Jul-15 Feb-16 Sep-16 Apr-17 Nov-17 Profit share as % of AC MSCI World THE EUROPEAN QUOTED SECTOR IS LOSING GLOBAL RELEVANCE 60 USA Europe Japan Emerging Source: SG Cross Asset Research/Equity Quant, FactSet, IBES 69

70 Dec-85 Dec-86 Dec-87 Dec-88 Dec-89 Dec-90 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 % of Europe JAPAN NOW GENERATES THE EQUIVALENT OF 50% OF EUROPEAN PROFITS (MSCI Japan total 12m forward and reported earnings as % of MSCI Europe in USD) m forward earnings Reported Earnings Source: SG Cross Asset Research/Equity Quant, FactSet, IBES 70

71 Japan seriously!

72 FUNDAMENTALLY JAPAN HAS BEEN OKAY VALUATION WAS THE ISSUE Source: SG Cross Asset Research/Equity Quant, FTSE, I/B/E/S, FactSet. 72

73 THE LONG ROAD TO NORMALISATION 12M FORWARD PE BY REGION Source: SG Cross Asset Research/Equity Quant, FTSE, I/B/E/S, FactSet. 73

74 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Median Dividend Yield (%) MEDIAN JAPAN DIVIDEND YIELD IS SIMILAR TO THE US Median company dividend yield by region Japan Europe US 0.0 Source: SG Cross Asset Research/Equity Quant, FTSE, I/B/E/S, FactSet Note: Past performance is not indicative of future performance. Portfolio presented assumes no transaction costs. For additional details on portfolio performance please contact us. 74

75 JAPAN HONG KONG DENMARK USA GERMANY NETHERLANDS SINGAPORE SWEDEN CANADA FRANCE SPAIN FINLAND AUSTRALIA SWITZERLAND UK ITALY NORWAY Payout ratio (%) JAPAN HAS THE LOWEST PAYOUT RATIO Dividend payout ratios by region Source: SG Cross Asset Research/Equity Quant, MSCI 75

76 Japan Switzerland Germany Denmark Sweden France United States Singapore Spain Netherlands Hong Kong United Kingdom Canada Australia Italy % of companies net cash (%) JAPAN HAS MORE NET CASH BALANCES THAN OTHER REGIONS Percentage of companies with a net cash balance (MSCI Indices) Source: SG Cross Asset Research/Equity Quant, MSCI, FactSet 76

77 SGQI JAPAN VS NIKKEI 225 YEN SENSITIVITY Source: SG Cross Asset Research/Equity Quant, FactSet, IBES 77

78 SGQI JAPAN PERFORMANCE Launch Date Source: SG Cross Asset Research/Equity Quant, Bloomberg 78

79 CONCLUSIONS Central bank policies have resulted in record valuations and record levels of corporate leverage well done! US corporate sector is vulnerable; average corporate profitability is weak and balance sheets are in a dangerous state. US small caps could be the source of the next market crisis. Central banks will not be able to hold back the wave of balance sheet issues in 2018, as they couldn t in Will still like Japan, the equity market is cheaper and less leveraged than Europe or the US and now represents a sensible long term investment proposition.. 79

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