How do we define cash on the sidelines? Global M2 minus M1 Money Supply ($ Millions) 30000 25000 20000 15000 US Money Supply European Money Supply Chinese Money Supply 10000 5000 0 Source: Bloomberg, Credit Suisse M2-M1 basically equates to savings accounts, money market accounts, retail money market mutual funds, and COD s
U.S. corporate cash has risen Percent of current assets Percent 45 Q4 2012: 42% 40 35 30 25 Q2 2008: 32% 20 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Bloomberg, Milken Institute
Too many depositors, not enough lenders U.S. Commercial Bank Deposits and Loans ($ in Trillions) $10 $9 $8 $7 Deposits Loans $6 $5 $4 $3 Source: Federal Reserve
Monetary policy has driven real interest rates below 0% Global real interest rate (%) 5 4 3 2 1 0-1 -2 1996 1998 2000 2002 2004 2006 2008 2010 2012 Note: 3-month interest rates; China, Canada, France, Germany, Italy, Japan, United Kingdom, United States; Weighted by 2012 GDP. Source: DataStream, International Monetary Fund, Milken Institute.
Is there evidence that the Great Rotation has begun? Source: ICI, Credit Suisse
Personal savings rates back to pre-crisis levels Personal Savings Rate Percent (%) 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Source: Bloomberg, Credit Suisse
Panel Goals 1 Define and quantify the amount of Cash that is truly on the sidelines 2 Understand the pressures to invest (or not to) and the implications of both 3 Consider ways to spur re-investment (eg products, policy, and/or strategy)
Mustafa Sagun slides
Unleashing Cash On The Sidelines Equities will likely provide the highest absolute returns, but will be volatile Effective volatility management will be key Source: Ned Davis Research.
Win By Not Losing Lower volatility, quality growth delivers more reliable cumulative returns Source: Principal Global Investors.
Fundamental Nature of Volatility Volatility is Related to Changing Growth Expectations Recent success fuels investor enthusiasm Extrapolation leads to excessive optimism for most 25.0% Trailing 3 year Sales Growth Trailing 3yr EPS Growth vs Forward 1yr EPS Growth 20.0% 30.0% 25.0% 15.0% 20.0% 10.0% 5.0% 15.0% 10.0% 5.0% Trailing Forward 0.0% 5th 25th Median 75th 95th 0.0% 5th 25th Median 75th 95th Low Volatility High Low Volatility High Valuations bid up based on high expectations Resulting in low and volatile outcomes for most As of December 31, 2012 Source: Principal Global Equities 5 = lowest volatility stocks, 100 highest volatility stocks Universe is MSCI AC World Index Data represents Jan 1990 Dec 2011 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 5th Forward Earnings/ Price 25th Median 75th 95th Low Volatility High Low Volatility High 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 5th Realized ROE & ROE Variability 25th Median 75th 95th ROE STD
Active Volatility Management is Key Price of volatility changes over time, impacting returns
Reference Slides
Expansion of balance sheets of major central banks Central bank total assets (% of GDP) 35 30 25 20 15 BoJ ECB BoE Fed 10 5 0 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Source: Bloomberg.
Public sector significantly out-borrowing the private sector Total Private and Public Borrowing, $bn 6000 Private Sector 5000 Public Sector 4000 Total 3000 2000 1000 0-1000 -2000-3000 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 Sources: Federal Reserve, Credit Suisse
Challenges facing banks under Basel III Recalibrating to Basel III Current Shortfalls* Under B3 16% 14% 12% 10% 8% 6% 4% 2% 0% 8% Tier 2 4.0% Hybrid T1 2.0% CET 1 2.0% Basel I & II 15.5% CET 1 2.5% CET 1 2.5% CET 1 2.5% Tier 2 2.0% HT1 1.5% CET 1 4.5% Basel III Surcharge for Global SiFI Countercyclical Buffer Capital Conserv. Buffer B3 Minimum CET1 $225bn Balance Sheet (RWA) Funding ( NSFR ) $2.4tn Source: The Quantitative Impact Study Group of the Basel Committee on Banking Supervision, June 2012; Credit Suisse * As calculated by the Basel Committee for the ~200 banks included in their study. CS estimates that this study accounts for 40-60% of global banking system
What is safe? Gold JPY-USD (Inverse Convention) AAPL 2000 1800 1600 1400 1200 1000 800 600 400 0.014 0.013 0.012 0.011 0.010 0.009 0.008 0.007 800.0 700.0 600.0 500.0 400.0 300.0 200.0 100.0 0.0 Source: Bloomberg, Credit Suisse
What are the implications of shifting demographics? Source: Credit Suisse Economic Research
Increase in corporate cash balances Selected major countries Cash and near cash items, percent of GDP 45 2005 Q1 2013* 40 35 30 25 20 15 10 5 0 Source: Bloomberg Note: * 2012 GDP data used
Increase in cash balances among the top U.S. corporations US$ billions +133B 140 2000 2012 120 100 80 60 40 20 +48B +47B +43B +29B +29B +7B +19B +13B +8B 0 Source: Bloomberg Note: * Q1 2013 data. ** 2004 data for Google, as it did not IPO until then
Financial sponsors still have cash on the sidelines but less than at the peak of the crisis Private Equity Dry Powder, $ billions $600 $500 $400 380 446 493 495 429 391 365 $300 258 $200 185 177 $100 $0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Prequin
Primary dealer holdings of short-term securities have declined Primary dealer positions of coupon treasuries, 3 years or less, US$ billions 90 80 70 60 50 40 30 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Source: Bloomberg, Milken Institute, March 2013
The effects of Quantitative Easing or flight to safety? Decline in the government bond yields in major advanced countries 10-year government bond yield (%) 6 5 Germany UK US 4 3 2 1 Japan 0 2006 2007 2008 2009 2010 2011 2012 2013 Source: Bloomberg.
Yields and Spreads for High Yield and Investment Grade Corporates at or near all-time lows High Yield & Investment Grade Yields High Yield vs Investment Grade Spreads 25.00% 2000 bp 1800 bp 20.00% 1600 bp 1400 bp 15.00% 1200 bp 1000 bp 10.00% 800 bp 600 bp 5.00% 400 bp 200 bp 0.00% 1/6/2000 1/6/2003 1/6/2006 1/6/2009 1/6/2012 0 bp 1/6/2000 1/6/2003 1/6/2006 1/6/2009 1/6/2012 HY IG HY IG Source: Credit Suisse High Yield and LUCI Indices
The growth of alternative strategies when cash is not an option U.S. public pension funds U.S. corporate pension funds 100% 90% 4.9% 5.9% 9.6% 7.3% 19.4% 100% 90% 8.3% 7.2% 10.4% 6.9% 17.3% 80% 70% 60% 49.8% 34.2% 28.7% 26.7% 80% 70% 60% 33.3% 27.2% 28.0% 37.1% 50% 50% 40% 40% 30% 20% 38.0% 57.5% 60.1% 52.2% 30% 20% 51.5% 63.5% 59.9% 43.6% 10% 10% 0% 1984-1994 1995-2000 2001-2007 2008-2011 0% 1984-1994 1995-2000 2001-2007 2008-2011 Equity Fixed income Cash Alternatives Equity Fixed income Cash Alternatives Source: Credit Suisse
Monthly share buybacks since 2009 S&P 500 ($ bln) 80 70 60 50 40 30 20 10 0 2009 2010 2011 2012 2013 Source: Bloomberg, Milken Institute, March 2013.
U.S. corporate bond issuance US$ trillions 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 High yield Investment grade 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: SIFMA.
Leverage has fallen (S&P 500 Companies) Net debt-to-ebitda 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Bloomberg, January 2013.
S&P 500 volatility at pre-crisis levels Chicago Board Options SPX Exchange Volatiilty Index (VIX) 90 80 70 60 50 40 Pre-crisis average, 2004 to June 2007: 13.6 30 20 10 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Bloomberg
US Liquid Assets