2011 investment outlook russ koesterich ishares ® chief investment strategist for financial...
TRANSCRIPT
2011 Investment Outlook
Russ KoesterichiShares® Chief Investment Strategist
FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
2FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Year ahead: 2011
Scenarios
• Economic decoupling
• Double dip
• Inflation
• Return to Goldilocks
3FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Base case for 2011: Continued economic rebound
Source: Bloomberg.
ISM Survey Pricing & New Orders
20
30
40
50
60
70
80
1/00 4/01 7/02 10/03 1/05 4/06 7/07 10/08 1/10
ISM
In
de
x
ISM New Orders
30
35
40
45
50
55
60
65
1/00 4/01 7/02 10/03 1/05 4/06 7/07 10/08 1/10IS
M N
on
-Ma
nu
fac
turi
ng
ISM Non-Manufacturing Survey
4FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Base case continued: Other developed markets also rebound and emerging markets engineer “soft landing”
80
85
90
95
100
105
110
1/05 7/05 1/06 7/06 1/07 7/07 1/08 7/08 1/09 7/09 1/10 7/10If
o I
nd
ex
30
35
40
45
50
55
60
65
70
1/05 9/05 5/06 1/07 9/07 5/08 1/09 9/09 5/10
New
Ord
ers
PM
I S
A
Chinese Manufacturing Index Ifo Pan Germany Business Climate Index
Source: Bloomberg.
5FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
More good news: Low rates/inflation allow for multiple expansion
10-Year Yield Average P/E Median P/E P/E > Average Observations
Below Average (< 6%) 20.27 18.98 86% 152
Average (6% to 9%) 16.32 16.28 47% 240
Above Average (> 9%) 10.28 10.01 2% 92
Average P/E
CPI YoY Less than 1% 15.62
CPI YoY 1% to 3% 19.24
CPI YoY 3% to 5% 16.95
CPI YoY 5% to 7% 13.18
CPI YoY 7% to 9% 10.34
CPI YoY Above 9% 8.77
Rates and Equity Multiples
Inflation and Equity Multiples
Source: Bloomberg, as of 11/30/10.
6FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Not all good—continued consumer deleveraging a headwind
Source: Bloomberg.
Household vs. Federal Debt Growth
-20
-10
0
10
20
30
40
3/52 3/61 3/70 3/79 3/88 3/97 3/06
De
bt
Gro
wth
(%
)
Growth Household Debt Growth Federal Debt
What could go wrong?
8FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Inflation is the major near-term risk in emerging markets
Source: Bloomberg.
-5
0
5
10
15
20
1/00 2/01 3/02 4/03 5/04 6/05 7/06 8/07 9/08 10/09 11/10
CP
I Y
oY
(%
)
US Japan China Brazil Europe
Global Inflation Sample 2000 to Present
9FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
US consumer increasingly dependent on transfer payments
US consumers now get more than $0.20 in every dollar of disposable income from the Federal government
Source: Bloomberg.
5%
7%
9%
11%
13%
15%
17%
19%
21%
23%
1/59 1/66 1/73 1/80 1/87 1/94 1/01 1/08
Tra
ns
fer
Pa
ym
en
ts/D
isp
os
ab
le I
nc
om
e
Transfer Payments as a % of Disposable Income
10FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Deficits are not going away
With the Bush tax cut extension and additional stimulus, the fiscal 2011 deficit is likely to eclipse 2009’s record $1.415 trillion
Source: Bloomberg.
US Treasury Federal Budget Yearly Deficit or SurplusFiscal 1962 to Present
-1,600
-1,400
-1,200
-1,000
-800
-600
-400
-200
0
200
400
1962 1968 1974 1980 1986 1992 1998 2004 2010
An
nu
al D
efic
it o
r S
urp
lus
($ B
illio
ns)
11FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Even in the absence of inflation, deficits will push rates higher
Historically, for every 1% of GDP rise in the deficit, real interest rates rise by 25–50 bps
Source: Bloomberg.
-6
-4
-2
0
2
4
6
8
10
-12 -10 -8 -6 -4 -20
2 4
Deficit as % GDP
Re
al
10
-Ye
ar
Inte
res
t R
ate
s (
%)
US Deficits and Real Interest Rates1962 to Present
12FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Look ahead: 2011
Scenarios
• Economic decoupling: Probability 55%
• Double dip: Probability 25%
• Inflation: Probability 10%
• Return to Goldilocks: Probability 10%
Investment Strategies
1. Overweight equities versus bonds
2. Within equities, favor exporters and energy while underweighting US consumer
3. Within bonds, favor corporates over treasuries
This information should not be construed as research, investment advice or a recommendation regarding any security in particular. This information is strictly for illustrative and educational purposes and is subject to change.
13FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Long term: Who is the biggest sovereign risk?
Sources: Eurostat, CBO, Morgan Stanley Research.
0
50
100
150
200
250
300
350
400
Spain France Germany UnitedKingdom
Portugal Italy Ireland Greece US (Federal
Government)
De
bt/
Re
ve
nu
e (
%)
Government Debt/Revenue2009
Questions?
Appendix
16FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Government debt: Who is the biggest risk?
US has shortest maturity, second highest maturing debt and second highest gross financing needs
Advanced Economies Gross Financing Needs: 2010(in % of GDP, unless otherwise specified)
Maturing Deficit Gross Gross Debt Average MaturityDebt Financing 2009 (years)
Needs
Australia 2.0 -5.0 7.0 15.5 4.8Belgium 20.8 -5.1 25.9 97.3 5.4Canada 15.9 -5.3 21.2 82.5 5.6France 16.9 -8.2 25.1 77.4 6.5Germany 10.2 -5.7 15.9 72.5 6.0
Greece 13.4 -8.1 21.5 115.1 7.4
Ireland 7.7 -12.2 19.9 64.5 6.7
Italy 21.2 -5.2 26.4 115.8 6.7
Japan 54.2 -9.8 64.0 217.7 5.2
Portugal 13.0 -8.8 21.8 77.1 6.2
Spain 10.3 -10.4 20.7 55.2 6.7
Sweden 6.8 -3.3 10.1 40.9 6.0
United Kingdom 8.6 -11.4 20 68.2 12.8
United States 21.2 -11.0 32.2 83.2 4.4
Sources: April 2010 IMF World Economic Outlook; Bloomberg and IMF staff estimates for maturing debt and average maturities.
17FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Spot Gold vs. US Money Supply (M2) 1959 to Present
Commodity run should continue, absent a “hard landing” in emerging markets
Gold does not look as frothy when compared against the growth in the money supply
Source: Bloomberg.
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
3/59 3/65 3/71 3/77 3/83 3/89 3/95 3/01 3/07
Ch
ang
e G
old
/Ch
ang
e M
2
18FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION
Surge in government spending and record deficits are supporting gold—this is likely to continue
Based on changes in money supply and federal spending, increase in gold prices looks more reasonable
Source: Bloomberg.
Federal Spending vs. Gold/M2 Ratio
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
-20% -10% 0% 10% 20% 30% 40%
Annual Change Federal Spending
Ch
an
ge
Go
ld/C
ha
ng
e M
2
The information included in this material has been taken from trade and other sources considered reliable. No representation is made that this information is complete, and it should not be relied upon as such. Any opinions expressed in this material reflect our judgment at this date and are subject to change. This information should not be construed as research, investment advice or a recommendation regarding any security in particular. No part of this material may be reproduced in any manner without the prior written permission of BlackRock, Inc.
Russ Koesterich is an affiliate of BlackRock Fund Distribution Company and BlackRock Execution Services, which are subsidiaries of BlackRock, Inc.
©2011 BlackRock Institutional Trust Company, N.A. All rights reserved. iShares® is a registered trademark of BlackRock Institutional Trust Company, N.A. All other trademarks, servicemarks or registered trademarks are the property of their respective owners. iSg-1579-0111 3415-CM05-1/11
Not FDIC Insured • No Bank Guarantee • May Lose Value
Thank you