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| 21/11/2013 |
Source: IMF, BNP Paribas
Source: Macrobond
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| 21/11/2013 |
Source: Datastream, BNP Paribas Fortis Business Confidence
(standard deviation from LT average)
-4 -3 -2 -1 0 1 2 3
05 06 07 08 09 10 11 12 13
Germany Belgium Eurozone US
Consumer Confidence
(standard deviation from LT average)
-4 -3 -2 -1 0 1 2 3
05 06 07 08 09 10 11 12 13
Germany Belgium Eurozone US
3
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Source: Datastream, BNP Paribas Fortis
4
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| 21/11/2013 | Source: Datastream, BNPP Fortis
10
| 21/11/2013 | Source: Datastream, BNPP Fortis
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Institutionele crisis
Eurozone
Agressief beleid ECB
Ademruimte voor
Europese politiek
Herstel groei en
vertrouwen
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Cumulative GDP growth since start crisis (Q1 2008, in % )
-20 -15 -10 -5 0 5 10
US
G er m an y
A us tri a
B el gi um
Fr an ce
E M U UK
N et he rla nd s
Fi nl an d
S pa in
P or tu ga l
Ire la nd
Ita ly
G re ec e
Source: Datastream, BNP Paribas Fortis
13
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Average
since 2000 +11 % since
July 2012
Average since 2000
+8 % since
July 2012
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Deflatie Checklist
• Kredietaanbod:
• Austeriteit:
• Werkloosheid
• Capaciteitsbezetting
• Output Gap
| 21/11/2013 |
| February 2013 |
België
16
| 21/11/2013 | Source: Datastream, BNPP Fortis
17
| 21/11/2013 | Source: Datastream, BNPP Fortis
18
| 21/11/2013 |
Belgian exports market losses have been larger than its competitors (Index, 1990 = 1)
0,6 0,7 0,8 0,9 1 1,1 1,2
90 92 94 96 98 00 02 04 06 08 10 12
Belgium Germany France Netherlands
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Disclaimer
This presentation was created for informative purposes by BNP Paribas Fortis SA/NV.
The information contained in this presentation is subject to change. While BNP Paribas Fortis SA/NV takes great care to ensure that the information is correct, it may not be held liable for possible errors or omissions, or the direct or indirect damage that might result from this.
BNP Paribas Fortis SA/NV, Montagne du Parc 3, B – 1000 Brussels
Seeking high returns in a low rate
environment
21 November 2013 Koen De Leus
Senior Economist, KBC Group www.kbceconomics.be
@kbc_economics
@koendeleus
2
Main messages
Bonds: take care for normalisation Stocks: TINA!
We prefer Europe & small caps, but profit growth vital Be selective in Asia: North Asia
Latin America suffers from ‘dutch disease’
Belgian real estate 10% overvalued
3
22-11-2013 3
Global consensus on monetary policy
( near) zero policy rates, QE and “forward guidance”
100 150 200 250 300 350 400 450 500 550 600 650 700
Fed ECB BoJ
Central banks’ balance sheets
(January 1999=100,local currency)
QE1
QE2
QE3
LTRO
‘Abenomics’
0 1 2 3 4 5 6
Fed ECB
1 1,5 2 2,5 3 3,5 4 4,5 5 5,5
US Germany
10-y. government bond yields (in %)
Steepening yield curve
Central banks’ policy rates (in %)
Outlook
4
22-11-2013 4
0 1 2 3
0 1 2 3 4 5 6 7
US (left) Germany (left) Japan (right) High correlation
(US vs Germany 0.92, Germany vs Japan 0.65)
-2 -1 0 1 2 3 4
EMU (Bund) US Japan
Negative real interest rates
(Interest rates 10Y minus inflation expectations)
‘Euthanasia of the rentier’ (J.M.Keynes)
Global consensus on monetary policy
Low interest rate are here to stay … for a while longer
5
Outline
Where to invest in low rate environment?
6
0 1 2 3 4 5 6 7 8
Dividend Yield S&P500 10Y US Bond Yield
0 2 4 6 8 10 12
7- 01 -1980 7- 01 -1984 7- 01 -1988 7- 01 -1992 7- 01 -1996 7- 01 -2000 7- 01 -2004 7- 01 -2008 7- 01 -2012
10Y German Bond Yield
Dax Dividend Yield
Bonds versus equities
Bonds are relatively expensive
7
0 100 200 300 400 500 600 700 800 900 1000
-10%
-5%
0%
5%
10%
15%
20%
25%
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
‘Normalisation‘ to 2.75%
& 3,5%
Loss: -12%
Bron: KBC Asset Management
German bunds: evolution of interest rates and yearly returns Yearly returns
Cumulative returns
Bonds
End of a 30Y bull market?
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0 2 4 6 8 10 12 14 16 18
1930 1933 1936 1939 1942 1945 1948 1951 1954 1957 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011
15,84% (sep ‘81)
1,55% (nov ’45)
Bonds
Historic evolution of 10Y US Treasuries
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0 50 100 150 200 250
1945 1949 1952 1955 1958 1961 1964 1967 1970 1973 1976 1979
Nominal return
0 50 100 150 200 250
1945 1949 1952 1955 1958 1961 1964 1967 1970 1973 1976 1979
Real return
At first sight … At second …
Bonds
Evolution investment in 10Y US bonds since bottom interest rates
10
Economy favours shares ….
Bond versus Equities?
Recovery Expansion Slowdown Recession
Shares 90% 90% 2,5% 0%
Real Est. 10% 0% 10% 0%
Bonds 0% 0% 27,5% 100%
Cash 0% 0% 50% 0%
Comm. 0% 10% 10% 0%
Total 100% 100% 100% 100%
Ideal asset allocation through cycle
-8 -6 -4 -2 0 2 4 6
35,0 40,0 45,0 50,0 55,0 60,0
Qoqa Growth Average PMI
PMI Composite EMU and growth forecasts: in
positive territory
11
40 60 80 100 120 140 160
MSCI USA U$ - NET RETURN (~EB) MSCI EMU U$ - NET RETURN (~EB)
+40%
-20%
Equities
In the sweet spot
US versus EMU stock markets
… so does momentum
- Last 10Y model performed on average
>2% p.a. better than 50/50 portfolio
- Model points to 96% weight in shares !!!
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Focus on local economy….. ... more sensitive to economy
58% 72% 74% 78%
42% 28% 26% 22%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Mega Caps Large Caps Mid Caps Small Caps
Geografische verdeling van de omzet (in%)
Westerse markten Groeimarkten
40% 55%
31%
21%
22% 20%
7% 4%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Large Caps Small & Mid Caps
Sectorale verdeling van de omzet (in %)
Energie Financiële waarden Defensieve sectoren Cyclische sectoren
Equities
Eurozone accent: small caps
Geographic division turn-over (in %) Sectoral division turnover (in %)
EM
LM
Emerging versus local markets
Energy Financials
Defensives
Cyclicals
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Not expensive Offering more possibilities
• Quest for opportunities
• Less efficient markets
• Less follow up by analysts
• More prone to take-over
• Liquidity premium
• Universal truths (also called motto)
• ‘easier to grow when you are small’
• ‘Today’s small cap is tomorrow’s blue chip’
0,8 0,9 1,0 1,1 1,2 1,3 1,4 1,5 1,6
P/E Small vs Large Caps
Equities
Eurozone accent: small caps
14
Emerging markets
Drivers in the long run
Strong link with growth differential … as well as with commodity prices
15
Growth effect important for Asia
Out- / underperformance when growth differential increases / decreases
Conclusion :
Poor performance EM in 2012-2013 partly related with growth slowdown, partly tapering
Economic recovery in
North Asia should support market
Asia: difference in growth
Emerging markets
Asia
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-10 -5 0 5 10 15 20
-40 -30 -20 -10 0 10 20 30 40
CRB commodities index
Export growth Latin America (right)
Emerging Markets
Latin-America
Growth export from Latin America &
commodities
(YoY, 3 month MAV, in %)
2 4 6 8 10 12 14 16 18 20
-40 -30 -20 -10 0 10 20 30 40
CRB Commidities index
Industrial production China (right)
Chinese industrial production &
commodities
(YoY, 3 month MAV, in %)
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Latin America
Increase current account deficit … again
30 35 40 45 50 55 60 65
Share commodities in export
Latin America
(in %)
-5 -4 -3 -2 -1 0 1 2
Latin America Brazil
Current account
(in % gdp)
‘Dutch disease’ again ?
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Equities
Valuation
5 10 15 20 25 30
Forward PE Actual PE
Average forward Average actual
5 10 15 20 25 30 35
Forward PE Actual PE
Average forward Average actual
MSCI Europa S&P500
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Equities
Long term valuation
0,00 5,00 10,00 15,00 20,00 25,00 30,00 35,00 40,00 45,00 50,00
1881 … 1885 … 1890 … 1895 … 1900 … 1905 … 1910 … 1914 … 1919 … 1924 … 1929 … 1934 … 1939 … 1943 … 1948 … 1953 … 1958 … 1963 … 1968 … 1972 … 1977 … 1982 … 1987 … 1992 … 1997 … 2001 … 2006 … 2011,7
GRAHAM & DODD KW10Y* S&P500
(1881-today)
ACTUAL G&D PE: 20.6
Long term average: 16.4
Bull Bull Bull Bull Bull
Bear Bear Bear Bear Bear
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Rising interest rates only start hurting when rates risk slowing down
economic and profit growth
Stocks suffer when rate >
6%
Reaction US stocks since 1964 on rising interest rates
(US, since 1964, monthly)
Rate Rising Falling All Periods
<2% +3,3% +0,2% +2,2%
2%>R>4% +1,1% -0,3% +0,5%
4%>R>6% +1,1% -0,3% +0,3%
6%>R>9% -0,8% +2,1% +0,6%
R>9% -0,2% +2,2% +1,1%
Total +0,2% +1,1% +0,6%
Red: lower than average movement
Equities
What about rising interest rates?
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Implications ZIRP in the long run
TINA
Inflation / deflation expectations stable
Inflation / deflation risk increased
Inflation is the devil central bankers know
Inflation: excess liquidity finds it’s way to economy via
increased credit
Deflation: excess liquidity leads to bubbles, which burst and lead to deflation
-2 -1 0 1 2 3 4
EMU US Japan
“Normal” inflation expectations….
(10 year inflation expectations in %)
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60 80 100 120 140
160 Price-to-income ratio (affordability) Price-to-rent ratio
Interest-adjusted affordability Econometric regression (*)
Overvalued
Undervalued
Valuation measures Belgian housing market (long- term average = 100)
Source: own calculations
60.8
37.3
8.7 11.6
% overvaluation Price-to-rent ratio (Q2 2013) Price-to-income ratio (Q1 2013)
Interest-adjusted affordability (Q1 2013) Econometric regression (*) (Q1 2013)
Belgium
Housing market about 10 % overvalued
Most reliable and comprehensive approaches
(*) Deviation from the ‘fundamental’ price as determined by disposable income,
mortgage interest rate, unemployment rate and number of households
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