Why bother with equities?

Transcription

1 Why bother with equities?

2 Why bother with equities?

3 Investment Decision Tree What Phase Is It? Invest in Equities?? Invest in Markets? Financial Collapse?

4 Investment Decision Tree Invest in Markets? Financial Collapse?

5 Long-Term Economic Decline? Financial Crisis Inquiry Report, February 25, 2011: systemic breakdown in accountability and ethics widespread failures in financial regulation and supervision dramatic failures of corporate governance and risk management excessive borrowing, risky investments, and lack of transparency

6 Long-Term Economic Decline?

7 Investment Decision Tree Invest in Equities? Invest in Markets? Barrels, Bartering, Bearskins, Bullion, Bunkers Financial Collapse? Options?

8 Equity Markets

9 Invest in Equities? Equity Risk Premium (ERP) One of the key features of this turbulent period is renewed uncertainty about what may be the most important measure in all of finance - namely, the equity risk premium, or the expected return for equities in excess of a risk-free rate ERP = Expected Equity Return - Risk-Free Return Hammond, P. Brett, and Leibowitz, Martin L Rethinking Risk Premium: An Overview and Some New Ideas

10 Expected Equity Return Expected Equity Return = Income Return + Capital Gain Expected Equity Return = Dividend Yield + Repurchase Yield + Dilution + Inflation + Real Earnings Growth + Valuation Change

11 Historical Equity Return ( ) Historical Equity Return = Income Return 4.1% + Capital Gain 5.8% Historical Equity Return = Dividend Yield 4.1% + Repurchase Yield + Dilution + Inflation 3.0% + Real Earnings Growth 1.9% + Valuation Change 0.9% = 9.9%

12 Forecast Equity Return Expected Equity Return = Income Return 2.0% + Capital Gain Expected Equity Return = Dividend Yield 1.8% + Repurchase Yield 2.2% + Dilution (2.0%) + Inflation 2.4% + Real Earnings Growth + Valuation Change =

13 Real Earnings Growth Aggregate corporate profits cannot grow much different than GDP indefinitely Real Earnings Growth = Real GDP Growth 1) Real GDP Growth = Real Productivity Growth + Labor Force Growth or 2) Real GDP Growth = Real Per Capita GDP Growth + Population Growth

14 Real Annualized Global GDP Growth

15 Real GDP Growth

16 Real GDP Growth

17 Real Earnings Growth Aggregate corporate profits cannot grow indefinitely much different than GDP 1) Real GDP Growth = Real Productivity Growth 1.5% + Labor Force Growth 2.1% Or 3.6% 2) Real GDP Growth = Real Per Capita GDP Growth 1.8% + Population Growth 0.9% 2.7%

18 Valuation Change Historical valuation change can be rationalized by: 1. Expanded access and participation in markets, 2. Increased accounting transparency, and 3. Decreased risk as result of less volatile business cycles

19 Forecast Equity Return Total Equity Return = Income Return 2.0% + Capital Gain 5.1% Total Equity Return = Dividend Yield 1.8% + Repurchase Yield 2.2% + Dilution (2.0%) + Inflation 2.4% + Real Earnings Growth 2.7% + Valuation Change 0.0% = 7.1%

20 Investment Decision Tree Invest in Equities? Invest in Markets? Barrels, Bartering, Bearskins, Bullion, Bunkers Financial Collapse? Options?

21 Alternate Investment Yields

22 Alternate Investment Returns

23 Investment Decision Tree What Phase Is It? Invest in Equities? Invest in Markets? Alternative Asset Classes - Bonds, Commodities, Currencies, Private Equity, Real Estate Barrels, Bartering, Bearskins, Bullion, Bunkers Financial Collapse? Options?

24 What Phase Is It?

25 What Phase Is It?

26 What Phase Is It?

27 So What? Tactical What Phase Is It? Consolidation Bull Market Tactictal Invest in Equities? Invest in Markets? Alternative Asset Classes - Bonds, Commodities, Currencies, Private Equity, Real Estate Barrels, Bartering, Bearskins, Bullion, Bunkers Financial Collapse? Options?

28 Questions? Stefan F. Gräter PhD, CFA Matterhorn Capital Management, LLC 3512 Paesanos Parkway, Suite 301 San Antonio, TX (210) Telephone (210) Fax matterhorncap.com