Risks and Opportunities in Global Equities Today BCI Global Investment Conference Tom Mann, CFA Senior Portfolio Manager June 2017 For professional investors only. Not suitable for retail clients
05/06/2017 18:33:46 Where are the opportunities for investors today? Key themes 1. Growth Bubble 2. Financials Weighing up Risk and Return 3. Emerging vs Developed Markets Source: Schroders, QEP 1
05/06/2017 18:33:46 Market Review Your experience will have been very different depending on what you owned 325 300 275 250 225 200 175 150 125 100 1. US equities have led the charge over the last six years 2....as Growth and Momentum stocks were pushed to even higher valuation levels 3. Emerging Markets struggled to keep pace Nasdaq 100 US Momentum US Growth US Index World Growth Word Index World Value World ex US Emerging Markets 75 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 Dec 15 Dec 16 Source: Schroders, FactSet in USD as at 30 April 2017. MSCI indices are Net Dividend Re-invested. Past performance is not a guide to future performance and may not be repeated. 2
Growth bubble yet to deflate Fashionable darlings of social media, internet and tech have continued winning... Stock Country Industry Market Cap ($m) Forward P/E Ratio Forward Sales Price / Growth Sales (Next Year) EPS ex Forward Extras EPS Growth Growth (3yr) (Next Year) PEG Ratio YTD Return (USD) 3 Yr Return (USD) Facebook Inc US Software 419,835 28.9 14.4 35% 120.2% 17.6% 1.6 30.7% 151% Tencent Hldgs Ltd CN Software 316,178 35.5 14.3 37% 32.1% 37.4% 0.9 35.4% 155% Alphabet Inc US Software 643,389 26.8 6.9 18% 19% 4% 6.2 20.8% 76% Tesla Inc US Autos 50,282 Lossmaker 6.2 61% -14% -24% 3.5 52.0% 71% Amazon Com Inc US Retail 451,572 116.8 3.2 22% 225% 50% 2.3 28.2% 216% Some Mega cap stocks have been priced for exceptional growth Expensive valuation not limited to the US, or to software Source: Schroders as at 12 May 2017. Returns in US dollar terms. Securities mentioned are for illustrative purposes only and not a recommendation to buy or sell. 3
Growth bubble yet to deflate creating a range of opportunities elsewhere Stock Country Industry Market Cap ($m) Forward EPS Growth (Next Year) Forward P/E Ratio Return on Capital Employed Operating Margin YTD Return (USD) 3 Yr Return (USD) Infosys Ltd IN IT Services 33,929 3.4% 14.7 32.4% 24.9% 1.6% 21.6% Novo-Nordisk As DK Pharmaceuticals 104,579 4.8% 17.6 126.0% 43.4% 17.6% 3.7% Taiwan Semicon Man TW Semiconductors 176,400 7.4% 14.5 25.8% 41.2% 21.7% 84.4% Apple Inc US Hardware 801,889 12.8% 15.7 28.6% 26.9% 33.9% 87.6% Unilever Nv NL Consumer Staples 165,666 11.9% 22.7 25.1% 15.3% 37.6% 41.5% Source: Schroders as at 24 May 2017. Returns in US dollar terms. Securities mentioned are for illustrative purposes only and not a recommendation to buy or sell. 4
Financials Focus upon balance sheet strength Funding and Leverage Risk Example criteria used to assess Quality in selected banks US Bank Australian Bank South African Bank Deposits to Net Loans 161% 76% 110% Implied Leverage* 9 14 10 Debt to Assets 24% 31% 2% QEP Financials Quality Rank High Quality Low Quality High Quality Source: Schroders. Table data as at 28 February 2017. *Implied Leverage is calculated based on Tangible Assets to Tangible Equity. 5
Financials US banks currently offer best risk-return, more selective in Europe, cautious elsewhere Price/Tangible Book 3,0 2,5 Reassuringly Expensive US Simple Banks Canada Australia Potential Shorts 2,0 1,5 HK & SG Scandinavia 1,0 US Complex Banks Continental Europe 0,5 UK 6 Opportunity Knocks 0,0 0% 25% 50% 75% 100% High Quality Selective High Risk/Return QEP Global Quality Rank Source: QEP investment team, as of 31 March 2017. Price/Tangible Book of the large banks by assets versus QEP Global Quality Rank. Countries mentioned are for illustrative purposes only and not a recommendation to buy or sell. Japan Low Quality Cautious
Emerging Markets vs. Developed Markets Trading at a 30% discount 60% Premium or discount of MSCI EM to MSCI World 40% PE PB Important considerations for investors 1. Index concentration buyer beware 2. Be active and be selective 3. Country (and currency) risk matters 20% 0% -20% Expensive -40% -60% Cheap -80% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: MSCI, 31 January 2000 to 31 March 2016. Premium/discount relative to MSCI World 7
Emerging Markets Index concentration risk Nearly 50% in just two sectors (financials & technology) Index Weight Sectors Over 50% in just three countries (China, Korea & Taiwan) SOE s account for 25%, and Financials alone account for over 11% 36% 24% Index Weight State Owned Enterprises (SOE)* 16,00% 14,00% 12,00% 10,00% 25% 15% Financials Tech Resources Other Sectors Index Weights Countries non-soe's 75% SOE's 25% 8,00% 6,00% 4,00% 46% 27% 2,00% 0,00% China Other Countries 12% 15% Other Sectors China Korea Taiwan Other countries Source: MSCI as at 31 March 2017. *Data for Index Weight SOE is as at 25 February 2016; weight represents percentage of the MSCI EM Index where the Government owns more than 20% of the equity. Sectors and countries mentioned are for illustrative purposes only and not a recommendation to buy or sell. 8 Financials 8
Emerging Markets Most sectors attractively valued relative to developed Regional Sector Forward Price-Earnings Multiple Sector Emerging Markets World Health care 21.1 16.3 Cons. Staples 20.9 19.9 Utilities 10.2 16.3 Telecoms 16.0 14.3 Cons. Discretionary 15.5 16.9 Industrials 13.9 17.5 Technology 14.2 18.5 of which: Tech Software 24.7 22.0 of which: Tech Hardware 10.1 15.2 Materials 11.7 15.8 Energy 8.7 21.1 Financials 9.2 12.7 Real Estate 10.1 24.7 Benchmarks 12.2 16.6 Source: Schroders, MSCI as at 31 March 2017. Sectors mentioned are for illustrative purposes only and not a recommendation to buy or sell. 9
Germany Sweden Denmark Finland Netherlands Taiwan Norway Switzerland Austria Korea Hong Kong Japan Ireland Singapore United Kingdom Czech Republic New Zealand Canada Australia France United States Spain Poland Belgium Israel Thailand Malaysia Italy Philippines Portugal Romania Chile Mexico Hungary China Serbia Indonesia Greece United Arab Emirates Colombia Morocco Kazakhstan Peru India Qatar South Africa Turkey Russia Sri Lanka Vietnam Brazil Saudi Arabia Kenya Kuwait Jordan Argentina Pakistan Oman Egypt Nigeria 05/06/2017 18:33:46 Country Risk Matters QEP approach to evaluating country (and currency) risk 120,0% 100,0% Currency Valuation Currency Credibility Credit Risk Growth Prospects ESG Risk 80,0% 60,0% 40,0% 20,0% 0,0% Source: Schroders. Data as at 23 March 2017. Countries mentioned are for illustrative purposes only and not a recommendation to buy or sell. 10
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