Financial Markets : Towards a New Hierarchy of Risks?

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Thomasina Hart
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2 Long-term Shift : From Developed Countries to Emerging Countries Important, Fast & Furious Change Since 2000 % 90 POPULATION & GDP POP. Dev. Countries GDP. Dev. Countries POP. Emg. Countries GDP. Emg. Countries Source : FMI / Morningstar 2

Race LEVEL OF DEBT / GDP IN 2012 % Debt / GDP Source :

3 Long-term Shift : From Developed Countries to Emerging Countries Leveraging and Doping in order to Stay in the Race LEVEL OF DEBT / GDP IN 2012 % Debt / GDP Source : FMI / Banque de France / Fed / Eurostat / Morningstar 3

4 Medium-term Shift : Deleveraging of the World is Underway Low Demographic Growth, Low Economic Growth, Low Returns STOCKMARKETS Dow Jones Ind. Index since 1900 Source : Morningstar

5 Medium-term Shift : More Black Swans More often Paradox : Lower Returns, Higher Risks STANDARD DEVIATION Standard Deviation of Dow Jones Ind. Index since 1950 / Source : Morningstar

6 Medium-term Shift : An Inter-penetrated World Increasing Correlation = Decreasing Diversification 0.7 LEVEL OF CORRELATION Etats-Unis US / France - France US / UK Etats-Unis - Royaume-Uni Correlation of Indexes since 1990 (rolling period of 1 year) Source : Morningstar

7 Short-term Shift : After Convergence, Divergence Eurobonds Already Existed (Between 1998 and 2008) En % YEAR INTEREST RATES IN EUROZONE Spain Espagne Italy Italie France France Germany Allemagne Source : Morningstar 7

8 Short-term Shift : The Flight to Liquidity, Security, Quality Bund as the Riskless Asset 10 YEAR GERMAN INTEREST RATES & INFLATION German Bond OBLIG ZONE EURO Inflation INFLATION German Interest Rate and German Inflation Rate since Source : Morningstar

9 9 Short-term Shift : The Japanese Scenario Deflation, Recession, Ageing of the Population YEAR INTEREST RATES IN GERMANY & JAPAN Japan Japon Germany Allemagne oct.-82 déc.-83 févr.-85 avr.-86 juin-87 août-88 oct.-89 déc.-90 févr.-92 avr.-93 juin-94 août-95 oct.-96 déc.-97 févr.-99 avr.-00 juin-01 août-02 oct.-03 déc.-04 févr.-06 avr.-07 juin-08 août-09 oct.-10 déc.-11 Source : Morningstar

10 Consequence : 2012 = 2008/2009 Cash is King! FUND FLOWS IN EUROPE Monthly Fund Flows in Europe OE Funds- Source : Morningstar

11 Consequence : From Asset Management to Yield Management Nothing but the Yield! Everything but the Euro! Structurally : Solvency II, Basel III Conjuncturally : Cash EBE : Everything But the Euro! CATEGORIE APRIL 2012 YTD 2012 High YieldDebtUSD Corporate Debt GBP Globales Bond Emerging Debt Glob Emerging Debt Local Currency High Yield Bond Hedge Corporate Debt USD Flexible Bond GBP Flexible Bond USD Bond CHF Top Others 62 Bond Categories Catégories avec la collecte nette la plus importante en avril 2012 (millions d'euros) / Source : collecte nette Morningstar Direct.

12 Consequence : A New Hierachy of Risks Corporate Bonds, Banks and Sovereign Debt 40% 30% 20% 10% 8% 6% 4% 2% 1% 0% Grece / 47.82% Portugal / 13.78% Ireland / 5.17% Espagne / 4.80% Italie / 4.33% Brésil / 2.01% France / 1.70% USA / 1.01% Allemagne / 0.70% Bank Tier 1 / 12.23% Bank Tier 2 / 7.09% BNP Paribas / 4.11% Alcatel (B) / 7.51% Renault (BB) / 4.57% Telefonica / 4.40% ENI / 2.74% Bouygues / 2.20% Auchan / 1.96% Air Liquide (A) / 1.77% Etats Banques Entreprises Exemple de taux actuariels 5ans échéance 2017 en mars 2012 / Source : Morningstar

13 Consequence : Mainly a Crisis of Confidence The Cash Run (in France) and the Bank Run (Spain, Greece ) Livret A Other Savings Accounts CEL Cash Deposits Total (bn ) Diff % % % % % march % CASH DEPOSITS IN FRANCE march-12 Evolution des dépôts à vue et livrets réglementés chez les ménages français / Source : Banque de France

14 Consequence : High Returns for Safe Haven Assets Gold, Swiss Franc, Govies TOP & BOTTOM CATEGORIES : SHORT, MEDIUM & LONG-TERM Category / Risk Return (ann,) YTD (%) 3M (%) 1Y(%) 3Y%) 5Y(%) SD 3ANS 1 Gold 1,96-5,48 5,37 16,17 15,69 23,42 2 Global Bond CHF 3,26-2,53 1,57 18,02 13,27 10,72 3 Global Bond Hedge 4,84-0,84 10,08 17,67 11,60 10,28 4 Bond AUD 1,77-1,05 15,44 18,57 10,90 7,61 5 Global Bond Aggregate CHF 3,54 0,59 6,81 13,40 10,14 9,84 6 Bond CHF 5,28 1,45 5,57 14,10 9,75 10,43 7 Money Market AUD 0,36-2,29 10,23 14,59 8,95 7,95 8 Global Bond 5,58 3,99 15,82 10,78 7,87 8,52 9 Aggregate Bond USD 7,28 7,30 23,24 12,40 7,71 12,36 10 Money Market CHF 1,20 0,46 1,57 8,38 7,51 9,86 11 Corporate Bond USD 8,49 6,52 21,96 13,78 7,28 11, Equity Small & Mid Caps France -5,10-20,80-37,57 4,81-8,63 17, Equity Small Caps Europe 3,68-10,19-16,64 9,67-8,87 17, Equity Large Cap "Value" Europe -2,55-10,97-13,77 3,63-9,35 15, Equity Large Cap Euro -3,12-13,50-20,22 0,77-10,05 18, Equity Large Cap France -2,10-12,09-21,39-0,50-11,09 18, Equity Spain -14,12-17,08-27,40-4,22-11,61 21, Equity Belgium 2,46-7,58-16,04 6,13-11,84 14, Equity Polish -1,71-16,04-32,49 3,29-13,42 26, Equity All Caps Euro -0,14-11,56-21,87-1,44-13,96 18, Equity Italy -4,56-16,19-28,78-7,08-16,86 19, Equity Greece -24,13-29,58-53,20-31,35-32,86 29,25 Source : Morningstar / June 2012

15 Consequence : New Regulation at the Worst Possible Time! Solvency II, Basel III, UCITS IV THE DECREASING OF THE EXPOSURE TO STOCKS : NOT ONLY A MARKET EFFECT! 30,00% 25,00% 20,00% 15,00% 10,00% 5,00% 0,00% : % of Equity in the Asset Allocation by French InstitutionalInvestors (base 100 in 1999) : CAC40 Index (base 100 in 1999) Source : AF2i / Morningstar

16 Conclusion : A New Hierarchy of Opportunities? Opportunities for Experts in their Respective Fields Specialists in EmergingMarkets Specialists in Credit Specialists in Sovereign Debt Specialists in Risk Management, Volatility Specialists in Correlation/Decorrelation

17 Conclusion : A New Hierarchy of Opportunities? Opportunities in Stock Markets? 6% 5% YIELD OF MAIN ASSET CLASSES 2012 Average 10Y 4% 3% 2% 1% 0% European Equities Bund 10Y Govies US 10Y Corporate Bonds (A) Euribor 3M Source : Morningstar / End of June 2012

18 Morningstar Morningstar Global Operations Chicago Toronto Mexico City Santiago Sao Paulo Amsterdam Copenhagen Frankfurt London Luxembourg Madrid Milan Munich Oslo Paris Stockholm Zurich Bangkok Hong Kong Seoul Shenzhen Singapore Taipei Tokyo Auckland Sydney We re a leading provider of independent investment data and research. We serve clients globally through our presence in North America, South America, Europe, Asia, and Australia. Our 3,500+ employees work in offices worldwide, offering local market expertise. Since 1984, we ve been recognized for pioneering contributions to the investment industry. Our global database includes approximately 380,000 funds.

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MANDATORY PROVIDENT FUND SCHEMES AUTHORITY. Guidelines on Recognized Exchanges

Guidelines III.4 MANDATORY PROVIDENT FUND SCHEMES AUTHORITY III.4 Guidelines on Recognized Exchanges INTRODUCTION Section 2 of the Mandatory Provident Fund Schemes (General) Regulation ( the Regulation