The Year of the Snake: Investing in a Rising Rate Environment

Transcription

1 The Year of the Snake: Investing in a Rising Rate Environment Duncan W. Richardson, CFA Chief Equity Investment Officer 13 th February

2 Inflation Deflation 2

3 Depressing Cycle 3 Source: Baseline as of 11 th January 2013.

4 Fear Makes People Do Funny Things 4 Source: Baseline as of 14th January 2013.

5 Central Bank Target Rates Bank of England 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% '73 '76 '79 '82 '85 '88 '91 '94 '97 '00 '03 '06 '09 '12 Source: Bank of England as of 31 st December Bank of Japan 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 Source: Bank of Japan as of 31 st December European Central Bank 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 Source: European Central Bank as of 31 st December U.S. Federal Reserve Bank 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% '82 '84 '86 '88 '90 '92 '94 '96 '98 '99 '01 '03 '05 '07 '09 '11 Source: Federal Reserve as of 31 st December Data provided is for informational use only. Past performance is no guarantee of future results.

6 Global Government Bond Yields 10 Year Government Bond Yields Greece Portugal Spain Italy Ireland New Zealand Australia Norway Belgium France United Kingdom Canada United States Australia Sweden Finland Netherlands Denmark Germany Japan Switzerland 2,1% 2,1% 2,0% 1,9% 1,8% 1,8% 1,8% 1,5% 1,5% 1,5% 1,4% 1,3% 0,8% 0,5% 3,3% 3,6% 4,5% 4,5% 5,3% 7,0% 11,3% 0,00% 2,00% 4,00% 6,00% 8,00% 10,00% 12,00% 14,00% 6 Source: Thomson Reuters as of 31 st December 2012.

7 Fixed Income Asset Class Return Analysis (%) Data provided is for informational use only. Past performance is no guarantee of future results. See end of report for important additional information. Investment Grade represented by Barclays Capital U.S. Corporate Index. MBS represented by Barclays Capital U.S. Mortgage Backed Securities (MBS) Index. Treasury represented by Barclays Capital U.S. Treasury Index. High Yield represented by Barclays Capital U.S. Corporate High Yield Index. Municipal represented by Barclays Capital Municipal Bond Index. Bank Loan represented by S&P/LSTA Leveraged Loan Index. Global AggEx-U.S. represented by Barclays Capital Global Aggregate Ex-USD Index. EM(Local Currency) represented by JPMorgan Government Bond Index-Emerging Markets (GBI-EM) Global Diversified. 7 Source: Morningstar as of 31 st December 2012.

8 MSCI World Index Sectors: Return Analysis Data provided is for informational use only. Past performance is no guarantee of future results. See end of report for important additional information. Small-Cap represented by Russell 2000 Index. Emerging Markets represented by MSCI Emerging Markets Index. Value represented by Russell 1000 Value Index. Mid-Cap represented by Russell Midcap Index. Global represented by MSCI ACWI Index. Growth represented by Russell 1000 Growth Index. International represented by MSCI EAFE Index. 8 Source: FactSet, Zephyr and Morningstar as of 31st December 2012.

9 Stock Correlations Frustrating Fundamental Analysis Correlations of all S&P 500 stock combinations As of 4 th January Sources: BA540D, Ned Davis Research as of 4 th January Pair-wise correlations of all S&P 500 stock combinations. It is not possible to directly invest in an index. Past performance does not predict future results. Copyright 2013 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at For data vendor disclaimers refer to

10 ETFs ETF Volume as % of Total Volume ETFs: Number & Total Assets ($BN) 10 Source: Strategas Group, data as of 30 th November 2012.

11 Investors Have Lost Confidence in Equities Difference Between Equity and Bond Mutual Fund Net Flows ($BN, ICI) 11 Source: Strategas Group, data through 30 th November 2012.

12 Fund Flows/Sentiment Cumulative Net Flows into Equity vs. Bond Mutual Funds $BN, 2008 November Source: Strategas, data through 30 th November 2012.

13 Treasuries Trap is Set 13 Source: Baseline as of 4th January 2013.

14 Record Corporate Bond Issuance 14 Source: Barclays Capital and JP Morgan data as of 31 st December Past performance is no guarantee of future results.

15 Safety At a Premium 15 Source: Baseline, as of 4 th January Represents the annual yield available on treasury notes with five year maturity.

16 And Not Without Risk Bond Price Sensitivity to Higher Interest Source: 13D Research, Bloomberg, 2012 examples from yield levels in Represents the annual yield available on treasury notes with ten year maturity. There is an inverse relationship between price and yield: when interest rates are rising, bond prices are falling, and vice versa. The above data is for informational purposes only, is hypothetical in nature and does not constitute investment advice, a recommendation to buy or sell securities or to adopt any investment strategy. It is simply meant to generally demonstrate the effect certain interest rate change scenarios would have on current yields for comparison and discussion purposes. This is based upon certain hypothetical assumptions and mathematical equations. Eaton Vance provides no warranty regarding the completeness or accuracy of 16 the hypothetical information. Past performance does not predict future results.

17 Inflation Persistent and Painful $100 Value at Year End Hypothetical Average Annual Inflation Rate 2% 4% 6% 5 Years $90.57 $82.19 $ Years $82.03 $67.56 $ Years $67.30 $45.64 $ Years $55.21 $30.83 $ Source: Eaton Vance. The above data is for informational purposes only, is hypothetical in nature and does not constitute investment advice, a recommendation to buy or sell particular securities or to adopt any investment strategy. It is simply meant to reflect the effect certain rates of inflation would have on the value of $100 over various periods of time. This information is based upon certain hypothetical assumptions and mathematical equations. Eaton Vance provides no warranty regarding the completeness or accuracy of the hypothetical information. Past performance does not predict future results.

18 Equities May Offer an Inflation Hedge 12 Inflation-Adjusted Returns S&P 500 Barclays Capital U.S. Aggregate Citigroup 3-month T-bill Return Lost to Inflation Inflation-Adjusted Return 18 Source: Zephyr as of 31st December Past Performance is no guarantee of future results. It is not possible to invest in an index. Standard & Poor s 500 Index is an unmanaged index of large-cap stocks commonly used as a measure of U.S. stock market performance. Barclays Capital U.S. Aggregate Index is an unmanaged index of domestic investment-grade bonds, including corporate, government and mortgage-backed securities.

19 Multiples Cut in Half over the Decade 25 X 14.3 X 19 Source: Baseline as of 4 th January 2013.

20 Market Multiples NOT at the Demanding Levels of 12 Years Ago NTM P/Es of the 50 Largest Companies in the S&P 500 March 2000 NTM P/Es of the 50 Largest Companies in the S&P 500 December Source: Strategas Research Group as of 31 st December 2012.

21 U.S. Corporate Finances $1.200 S&P 500 Earnings and Revenues Per Share $120 Revenues per Share Earnings per Share $1.100 $100 $1.000 $80 $900 $60 $800 $700 $40 $600 $20 $500 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 est. '12 $0 21 Source: Baseline as of 31 st December Data provided is for informational use only. Past performance is no guarantee of future results.

22 Exceptional Business Performance has not been Rewarded 5 Largest Companies in the S&P 500 Index Today March 2000 December 2012 Mkt-Cap $BN NTM P/E LTM Net Income $BN Mkt-Cap $BN NTM P/E LTM Net Income $BN Apple Inc. $ x $0.7 Exxon Mobil Corp. $ x $9.5 General Electric $ x $11.2 Chevron Corp. $ x $2.8 Int l Business Machines $ x $7.8 $1,078.4 (Sum) 29.0x (Avg.) $31.9 (Sum) $ x $41.7 $ x $44.3 $ x $14.3 $ x $24.1 $ x $16.3 $1,542.6 (Sum) 10.8x (Avg.) $140.7 (Sum) 22 Source: Factset as of 31 st December For illustrative purposes only and not intended to represent the allocation of any investment and not a recommendation to buy or sell any security.

23 Equities Multiples Highest with Modest Inflation P/E ratio 20 Average P/E ratio for Inflation Environment S&P 500, Q4* m trailing P/E 12 12m forward P/E 10 8 <-3% -3% to -2% -2% to -1% -1% to 0% 0% to 1% 1% to 2% 2% to 3% 3% to 4% 4% to 5% 5% to 6% >6% Inflation Range * November 2008 to October 2009 excluded 23 Source: Credit Suisse. The P/E ratios include data to December The trailing/forward estimates are as of 30 th December 2011.

24 5% Ten-Year = P/E Sweet Spot? 24 Source: RBC Capital Markets as of 31 st December Past Performance is no guarantee of future results. It is not possible to invest in an index.

25 The prime purpose of a business corporation is to pay dividends regularly and presumably increase the rate as time goes on. Security Analysis by Graham and Dodd, First Edition

26 Why Dividends? Dividend Paying stocks may offer an attractive income alternative Annualised Returns (%) 20 S&P 500 Returns ,7 5,1 4,4 2,5 10 2, ,9 5,4 6,0 3,0 13,6 3,3 4,4 4,2 1,6 12,6 15,3 1,8 8,5 4,1 5,6-5,3-2, 's 1940's 1950's 1960's 1970's 1980's 1990's 2000's 2010's Capital Appreciation Income Return 26 Source: Ibbotson as of 31st December It is not possible to invest directly in an Index. Past performance is no guarantee of future results.

27 World of Worries Creates Opportunities Risk-Free Return or Return-Free Risk? 10 Year U.S. Treasury Yield minus S&P 500 Dividend Yield (Basis Points) 27 Source: Strategas Group as of 31 st December 2012.

28 Nearly Half of S&P 500 Yields More than 10-Year Treasury 28 Source: Ned Davis Research S015 as of 31 st December 2012.

29 Potential for Yield in S&P 500 % of S&P 500 Stocks with Dividend Yields Greater than the Average Yields on 10-year Corp. Paper 29 Source: Strategas Research Group as of 31 st December Year Corporate Paper is defined as the BofA Merrill Lynch U.S. Corporate Master Index, with a yield of 2.75% as of 31 st December Past Performance is no guarantee of future results. It is not possible to invest in an index.

30 Corporate Bond Yields vs. Dividend Yields* Company Corporate Bond YTM Maturity Dividend Yield 5Yr. Growth (estimated) ConocoPhillips (COP) 0.61% 1/ % 10% Verizon (VZ) 0.95% 11/ % 4% Merck (MRK) 0.68% 9/ % 2% Johnson & Johnson (JNJ) 0.90% 8/ % 8% 30 Source: Eaton Vance, Corporate Bond Yield, Bloomberg as of January The above information is provided for illustrative and for discussion purposes only. The information does not constitute investment advice and should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any particular securities or to adopt any particular investment strategy. This example is meant to simply provide a general comparison of yields for different securities issued by the same Company. For comparison purposes Corporate Bonds chosen have a 3-5 year maturity. The Companies identified were chosen because they are large capitalization, liquid, and well recognized by the general public. There is no assurance that any securities or characteristics mentioned are currently held in a client s portfolio. Actual portfolio holdings and characteristics will vary for each client and there is no guarantee that a particular client s account will hold any, or all of the securities mentioned. It should not be assumed that any of the securities were or will be profitable, or in the future will equal the performance of the listed securities. Past performance does not predict future results

31 The Search for Income With fixed income yields currently at record lows, global dividend paying stocks may be an attractive source of income Global dividend-paying stocks seek to offer current income as well as the opportunity to grow income over time Yields as of 31 st December Source: Factset & Eaton Vance, as of 31st December Standard & Poor s 500 Index is an unmanaged index of large-cap stocks commonly used as a measure of U.S. stock market performance. MSCI Europe, Australasia, Far East (MSCI EAFE) Index is an unmanaged index of equities in the developed markets, excluding the U.S. and Canada. MSCI World Index is an unmanaged index of equity securities in the developed markets.

32 Dividend Payout Ratio at Historic Low S&P 500 Dividend Payout Ratio 32 Source: Strategas, through 30 th September 2012, This ratio identifies the percentage of earnings (net income) per common share allocated to paying cash dividends to shareholders. The dividend payout ratio is an indicator of how well earnings support the dividend payment.

33 Have investors missed the move off the 09 Lows? S&P 500, 10-Year Real Return 33 Source: Shiller; Bloomberg; MKM Partners.

34 U.S. Equity Returns and Valuation *Calculations are based on quarterly data since 1953 **Nominal yields minus BCA measure of inflation expectations 34 Source: BCA Research as of 31 st December 2012.

35 S&P 500 Index Sectors: 2012 Return Analysis Sectors YTD S&P ,0 Financials 28,8 Consumer Discretionary 23,9 Telecommunication Services 18,3 Health Care 17,7 Industrials 15,3 Materials 15,0 Information Technology 14,7 Consumer Staples 10,8 Energy 4,6 Utilities 1,3-5% 0% 5% 10% 15% 20% 25% 30% 35 Source: FactSet, Zephyr and Morningstar as of 31 st December Data provided is for informational use only. Past performance is no guarantee of future results.

36 MSCI World Index Sectors: 2012 Return Analysis Sectors YTD MSCI World 15,8 Financials 29,4 Consumer Discretionary 24,3 Health Care 17,6 Industrials 16,0 Consumer Staples 13,4 Information Technology 13,4 Materials 11,2 Telecommunication Services 6,4 Energy 1,9 Utilities 1,6-5% 0% 5% 10% 15% 20% 25% 30% 36 Source: FactSet, Zephyr and Morningstar as of 31 st December Data provided is for informational use only. Past performance is no guarantee of future results.

37 A Long-Run Perspective of Commodity Cycles CRB* Raw Industrials x x x 3.2x * Commodity Research Bureau, Inc Note: shaded areas represent bear markets 37 Source: BCA Research as of 31 st December Copyright: BCA Research 2013.

38 Is Gold a Good Investment? 38 Source: Baseline as of 11 th January 2013.

39 2013 The Year of the Snake 39 Source: Microsoft Clip Art.

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41 Thank you. Q & A 41