Trends and opportunities across regions: Europe Monday, 6 June 2011 Head of Institutional Fixed Income Europe
Three themes shaping global opportunities I. Long term: Spheres of influence are shifting among regions II. Mid-term: Global growth and loose monetary policy fuel interest in risky assets III. Short-term: The debt crisis in euro periphery is driving volatility higher Global Fixed Income Seminar 2011 1
Long term: Shifting spheres of influence and a search for stability
By 2013, emerging economies will dominate global GDP GDP of advanced vs emerging economies (rhs) = right hand scale Source: Deutsche Bank ; IMF, World Economic Outlook, March 2011 Global Fixed Income Seminar 2011 3
Government finances under pressure Public Debt (expected, as % of GDP) Forecast Source: Deutsche Bank, March 2011 Global Fixed Income Seminar 2011 4
Inflation is a growing concern History points towards monetisation of public debt and inflation ma= moving average Source: Deutsche Bank, March 2011 Global Fixed Income Seminar 2011 5
The universe of stable assets is shrinking Dagong Moody's Standard & Poor's Fitch Rating Outlook Rating Outlook Rating Outlook Rating Outlook Norway AAA Stable Aaa Stable AAA Stable AAA Stable Denmark AAA Stable Aaa Stable AAA Stable AAA Stable Switzerland AAA Stable Aaa Stable AAA Stable AAA Stable Singapore AAA Stable Aaa Stable AAA Stable AAA Stable Australia AAA Stable Aaa Stable AAA Stable AAA Stable New Zealand AAA Stable Aaa Stable AAA Stable AAA Negative Canada AA+ Stable Aaa Stable AAA Stable AAA Stable Netherlands AA+ Stable Aaa Stable AAA Stable AAA Stable China AA+ Stable Aa3 Positive A+ Stable AA- Stable Germany AA+ Stable Aaa Stable AAA Stable AAA Stable USA A+ Negative Aaa Stable AAA Stable AAA Stable South Korea AA- Stable A1 Stable A+ Stable AA Stable Japan AA- Negative Aa2 Stable AA Negative AA- Stable UK AA- Negative Aaa Stable AAA Stable AAA Stable France AA- Negative Aaa Stable AAA Stable AAA Stable Belgium A+ Stable Aa1 Stable AA+ Stable AA+ Stable Russia A Stable Baa1 Stable BBB+ Stable BBB Positive Poland A Stable A2 Stable A Stable A Stable Spain A Negative Aa1 Stable AA Negative AA+ Stable Brazil A- Stable Baa3 Positive BBB+ Stable BBB- Positive Italy A- Negative Aa2 Stable A+ Stable AA- Stable Portugal A- Negative A1 Stable A- Negative AA- Negative India BBB Stable Ba1 BBB- Stable BBB- Stable Greece BB Stable Ba1 Stable BB+ Negative BBB- Negative Turkey BB Stable Ba2 Positive BB+ Positive BB+ Stable Iceland BB Negative Baa3 Negative BBB Negative BBB+ Negative Argentina B Stable WR Stable B B Stable Ukraine B Stable B2 Stable BB- Stable B Stable as of 19. November 2010 Source: Dagong, Bloomberg; ratings shown are for local currency Global Fixed Income Seminar 2011 6
Mid-term: Global growth and loose monetary policy fuel risk appetite
Economic growth is forecast to improve worldwide Growth is expected to be faster in emerging countries Inflation rates in emerging nations are also likely to be higher GDP growth, % CPI inflation, % 2009 2010F 2011F 2012F 2009 2010F 2011F 2012F G7-3.7 2.8 2.0 2.9-0.1 1.4 2.5 1.9 - US -2.6 2.9 3.2 3.9-0.3 1.6 3.0 2.6 - Japan -6.3 4.0-2.1 1.9-1.3-0.7 0.5-0.5 - EA -4.0 1.8 1.5 1.5 0.3 1.6 2.5 1.9 Asia (ex JP) 6.1 9.5 8.0 7.6 0.7 4.6 5.6 4.3 - China 9.1 10.3 9.4 8.6-0.7 3.3 5.0 3.5 - India 6.8 10.4 8.2 8.6 2.2 9.6 8.0 7.0 EMEA -5.2 4.7 4.4 5.0 9.8 7.6 7.7 7.2 - Russia -7.9 4.0 5.4 5.5 11.8 6.9 9.5 8.1 Latam -2.5 6.1 4.2 4.0 6.3 8.8 8.9 8.4 - Brazil -0.6 7.5 3.6 4.4 4.3 5.9 6.0 5.0 Industrialized nations -3.5 2.6 2.4 2.8 0.0 1.5 2.3 1.9 Developing nations 2.8 7.7 6.5 6.3 3.2 6.2 5.8 5.5 Global -0.7 4.9 4.0 4.4 1.4 3.2 4.2 3.4 As of: April 20, 2011 Source: DB Global Markets F= Forecast Global Fixed Income Seminar 2011 8
Inflation is trending higher across regions Rising food prices are exacerbating inflation in developing economies Developed markets are starting to see a pickup in inflation Large economies with high share of food in CPI already show elevated inflation rates: China ~ 5% Brazil ~ 6% India ~ 9% 6% 5% 4% 3% 2% 1% 0% -1% Developed markets inflation: -2% US 2.7% Eurozone 2.7% UK 4.0% -3% 01/07 07/07 01/08 07/08 01/09 07/09 01/10 Eurozone UK USA 07/10 01/11 As of: April 15, 2011 Source: Bloomberg, Datastream, Eurostat, Bureau of Labor Statistics Global Fixed Income Seminar 2011 9
Inflation rates are near or even above policy rates Negative real rates very positive for risky assets 7 6 5 4 3 Global policy rate Global inflation 2 1 Global, real policy rate 0-1 12/01 11/02 11/03 11/04 11/05 11/06 11/07 11/08 11/09 11/10 11/11 F 11/12 F Global policy rate Global inflation Global, real policy rate Dotted lines are Morgan Stanley forecasts As of March 4, 2011 Source: Morgan Stanley F= Forecast Global Fixed Income Seminar 2011 10
Short-term: The debt crisis in euro periphery is driving volatility higher
Debt crisis in euro periphery driving up risk premiums Credit default swaps in Euro region Basis points 1,600 1,400 Greece 1,200 1,000 800 600 Ireland Portugal 400 200 0 Jul/ 09 Jan/ 10 Jul/ 10 Jan/ 11 Spain Italy Germany Germany Italy Portugal Spain Ireland Greece Source: Bloomberg, May 2011 Global Fixed Income Seminar 2011 12
Rising fiscal deficits are widespread Government debt levels (% of GDP) Source: EU Commission, Morgan Stanley, May 2011 e= estimate Global Fixed Income Seminar 2011 13
A likely pair: Fiscal deficits and current account deficits Relationship between fiscal and current account positions Source: Haver, Deutsche Bank, March 2011 Global Fixed Income Seminar 2011 14
Result: Greater dependence on foreign investors 2010 net interest payments on government debt Note: Information on foreign vs. domestic based on 2009 data Source: OECD, EuroStat, Deutsche Bank, March 2011 Global Fixed Income Seminar 2011 15
PIGS debt: A burden to overstretched banking system Euro area bank exposure to PIGS (USD billion) Source: BIS, CIRA, Citi, May 2011 Global Fixed Income Seminar 2011 16
Some European banks could experience difficulty Disclosed exposure of European banks to Greece Source: Morgan Stanley, * Estimates for Credit Suisse and UBS, May 2011 Global Fixed Income Seminar 2011 17
EU institutions offer some support ECB: European Central Bank Based on Article 13 and receives its capital from national central banks of the 27 EU Member States (quotes) Max. Volume: unlimited -- Instruments: secondary market-bond-purchases EFSM: European Financial Stabilization Mechanism Based on Article 122 and is available to and jointly guaranteed by all 27 EU Member States Max. Volume: EUR 60 bn -- Instruments: Loans to requesting EMU Members States EFSF: European Financial Stability Facility Guarantees 15 EMU Member States excl. requestors According to quotes "Pari passu" to other lenders Max. Lending volume: EUR 440 bn (post step-up) Instruments: Loans & primary market-bond-purchases ESM: European Stability Mechanism Guarantees as well as "callable capital" 17 EMU Member States According to quotes similar to ECB Senior to every lender except of IMF Max. Lending volume: EUR 500 bn Instruments: Loans & primary market-bond-purchases Timeline May 2010: Set up mechanisms Jan 2011: first issuance End of Jun 2013: EFSF replaced by ESM EFSF era ESM era Global Fixed Income Seminar 2011 18
Due to EU support, attractive opportunities exist EU/EFSF agency bonds and German bad bank bonds PRICING Date ISSUER ISIN NOTIONAL COUPON MATURITY TENOR YEARS TO MATURITY ISSUE Midswaps+ Issue Bunds+ CURRENT Mid-Swaps+ CURRENT Bunds+ Book Size 05. Jan 11 EU EU000A1GKVZ9 EUR 5,00bn 2,500% 04. Dez 15 4 4,5 12 71,2-8,7 43,1 EUR 20bn 25. Jan 11 EFSF EU000A1G0AA6 EUR 5,00bn 2,750% 18. Jul 16 5 5,1 6 56,1-1,9 52,8 EUR 44.5bn 17. Mrz 11 EU EU000A1GN002 EUR 4,60bn 3,250% 04. Apr 18 7 6,8 8 45,1 8,6 52,2 EUR 15bn 22. Mrz 11 EAA DE000EAA0A63 EUR 1,50bn 3,125% 29. Mrz 16 5 4,8 20 63,1 16,6 66,2 EUR 2.2bn 24. Mai 11 EU EU000A1GRVV3 EUR 4,75bn 3,500% 04. Jun 21 10 10,0 14 51,5 12,6 50,7 >EUR 11 bn 25. Mai 11 EU EU000A1GRYT1 EUR 4,75bn 2,750% 03. Jun 16 5 5,0 0 49,1-2,0 48,6 >EUR 10bn 26. Mai 11 FMS DE000A1KRHP2 EUR 3,00bn 2,750% 03. Jun 16 5 5,0 10 57.6 6,1 52,4 > EUR 11bn Current pricing and spreads as of June 01, 2011 For illustrative purposes only. Not intended as a recommendation for the purchase or sale of any security. Please see Important Information. Global Fixed Income Seminar 2011 19
Implications for investors I. Long term: Assets are likely to flow out of developed into emerging markets. As investors seek stability and shelter from inflation, low duration strategies, alternatives and portfolio diversification are likely to be key themes II. Mid-term: The combination of global growth and policy rates that are below or only slightly higher than inflation will spark investors interest in risky assets III. Short-term: The eurozone debt crisis is driving volatility higher, and some banks are likely to experience difficulty. But due to EU support, interesting opportunities exist for astute investors Global Fixed Income Seminar 2011 20
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