Investment strategy in an uncertain world Henry Boucher Deputy Chief Investment Officer, Sarasin & Partners
An uncertain world... The future growth potential of the global economy has diminished The magic of central bank confidence tricks is wearing-off The Brexit vote adds to the longer-term instability of the Euro Crisis in Accountability: restive voters and major potential shifts of power The operating outlook for most large global companies is getting much tougher 1
The long-term context... SHORT AND LONG-TERM INTEREST RATES Source: Andrew Haldane / Bank of England Research 2
The capital required to generate sufficient income to pay pensions has expanded as yields have fallen BOND YIELDS DECLINE OVER 40 YEARS At a 10% yield, 100 of funds generates 10 of income At today s yield, you need 1,316 of funds to generate 10 of income 3
Many 10 year bonds have negative yields generate no income German 30 year bonds generate hardly any income INVESTMENT REQUIRED TO GENERATE 10 P.A. OF INCOME 4
The consequence for equities is that short term performance has been driven by valuation changes rather than fundamental growth UNTIL 2011 PROFITS AND SHARE PRICES WERE CLOSELY TIED Over time, share price performance is strongly linked to profit performance SINCE THEN PRICES HAVE DEPARTED FROM FUNDAMENTALS Since 2011, global equity prices have risen >20% but profits have fallen 180% 160% 140% 120% 100% 80% Global Equity Index 135% 130% 125% 120% 115% 110% 105% 100% Global Equity Index Valuations up 60% 40% 1/1/05 1/1/06 1/1/07 1/1/08 1/1/09 1/1/10 1/1/11 12 month trailing EPS Price 95% 90% Earnings down 85% 1/4/11 1/4/12 1/4/13 1/4/14 1/4/15 1/4/16 12 month trailing EPS Price Source: Bloomberg / Sarasin & Partners Source: Bloomberg / Sarasin & Partners 5
Perceived reliable or low volatility stocks have seen exceptional gains TOBACCO SECTOR PROCTOR & GAMBLE Source: Bloomberg 2016 Source: Bloomberg 2016 6
as profits come under pressure US CORPORATE SECTOR, PROFIT MARGIN DECLINING WITH PRESSURES TO CUT COSTS Source: Macrobond 7
Changes on a vast scale: Decarbonisation The IMF estimates that post-tax energy subsidies were $5.3 trillion in 2015 (6.5% of global GDP) The largest impact of reducing subsidies would be in EM, particularly on coal Very large scale change will lead to stranded assets, requiring major strategy shifts by energy producers Over the next 15 years, the demand for new infrastructure could exceed $90 trillion* Green bonds have gained market acceptance, with growing issuance * Better Growth, Better Climate report, The New Climate Economy 2014 8
Risks to the business from carbon pricing Carbon Intensity (tonnes/$m sales) Strategy for change: Decarbonisation Carbon-intensive sectors are high risk 10000 8000 Power Producers 6000 Construction Materials Electric Utilities 4000 Multi Utilities 2000 Oil & Gas E&P Chemicals Steel Integrated Oil & Gas Metals & Mining 0 0 10 20 30 40 50 60 70 80 90 100 110 Carbon Emissions (m tonnes) -2000 Risks to the planet from CO 2 emissions Source: Sarasin & Partners, MSCI ESG Research. The size of the bubbles represents the % weighting in the MSCI ACWI index. The data represents Scope 1 and Scope 2 emissions. Scope 1 are direct emissions from sources owned or controlled by the company, including emissions from fossil fuels burned and emissions from owned or leased vehicles. Scope 2 are indirect emissions from consumption of purchased electricity, heat or steam and any associated transmission and distribution losses. 9
Other long-term changes on a vast scale thematic drivers Consequences of ageing Amgen, CSL, Intuitive Surgical, Essilor Internet integration, machine intelligence and data explosion Alphabet, Keyence, Fanuc, Mobileye, Equinix, Getting more from less Amazon, Costco, AB Foods, Facebook, TJX, Novozymes Expanding horizons travel, knowledge, infrastructure Shimano, Netflix, Disney, Boskalis 10
Investment strategy in an uncertain world opportunities from change and companies managed for shareholders Highest conviction 11
Investment Strategy - this is not the time to be passive, either in stock selection or lack of engagement with the issues 1. Cash and fixed-income now offer next to no yield. It would be adding insult to injury if the borrower failed to pay you back. Managing credit risk is critical. 2. With the returns on other assets so low, the natural choice is to invest in equities for their relatively attractive income growth and dividend yields. But you need to be highly selective to avoid business disruption and the price distortion of reliable bond substitutes 3. Selecting equities requires a clear focus on how they will generate growing income in the long-term. A thematic approach helps sort the positive underlying trends from the negative 4. Beware illiquid assets. In difficult market environments, forced sellers can disrupt the valuations of illiquid assets. We are careful to limit investment in assets that appear to offer a very attractive illiquidity premium 5. Be careful of financial leverage. Gearing can work in reverse, increasing corporate risk 6. Recent sterling weakness has highlighted the importance of maintaining a high proportion of international earnings in the portfolio 7. Diversification of the sources of income in the portfolio is crucial, geographically, across industries and across asset classes 8. In volatile markets, we are keeping an eye on the long-term and don t attempt to best-guess short-term market moves. However, we may look to take advantage of long-term opportunities if volatility provides attractive entry points. 9. Consider the big picture - asset owners and their managers should be engaged to optimise the market economy 12
Important information This document has been issued by Sarasin & Partners LLP which is a limited liability partnership registered in England and Wales with registered number OC329859 and is authorised and regulated by the UK Financial Conduct Authority and passported under MiFID to provide investment services in the Republic of Ireland. It has been prepared solely for information purposes and is not a solicitation, or an offer to buy or sell any security. The information on which the document is based has been obtained from sources that we believe to be reliable, and in good faith, but we have not independently verified such information and we make no representation or warranty, express or implied, as to their accuracy. All expressions of opinion are subject to change without notice. Please note that the prices of shares and the income from them can fall as well as rise and you may not get back the amount originally invested. This can be as a result of market movements and also of variations in the exchange rates between currencies. Past performance is not a guide to future returns and may not be repeated. Neither Sarasin & Partners LLP nor any other member of the Bank J. Safra Sarasin group accepts any liability or responsibility whatsoever for any consequential loss of any kind arising out of the use of this document or any part of its contents. The use of this document should not be regarded as a substitute for the exercise by the recipient of his or her own judgment. Sarasin & Partners LLP and/or any person connected with it may act upon or make use of the material referred to herein and/or any of the information upon which it is based, prior to publication of this document. If you are a private investor you should not rely on this document but should contact your professional adviser. Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect of any such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct. indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI s express written consent. 2016 Sarasin & Partners LLP all rihts reserved. This document can only be distributed or reproduced with permission from Sarasin & Partners LLP. Sarasin & Partners LLP Who's pulling the strings? 13
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