cazenove capital management2
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The Outlook for UK Equities
Business Cycle Investing
Julie Dean
Prepared for professional advisers only
- 2 -
UK Equities…nothing to write home about…
Total Local Currency Returns 2007 to 25.02.11
1st January 2007 = 100
50
70
90
110
130
150
170
190
210
2007 2008 2009 2010 2011
UK
Brazil
China
India
2007-to-25.02.11 Total returns
Index Local currency Sterling
Brazil Bovespa 58.4% 145.7%
India Datastream Total Market 34.2% 91.0%
China MSCI 32.7% 55.7%
UK FTSE All Share 12.1% 12.1%
Source: Thomson Datastream to 25.02.11
- 3 -
…but plenty of opportunities
Source: Thomson Datastream
- 4 -
Returns from UK equities can be competitive…
3 year
median
total return
3 year
lower quartile
total return
3 year
upper quartile
total return
3 year
median volatility
(% p.a.)
3 year
Beta vs
FTSE All-Share Index
IMA Global Bonds 36.5 29.4 44.3 12.6
IMA Global Emerging Markets 29.4 22.0 37.8 27.2
IMA Asia Pacific ex Japan 38.6 29.8 45.6 25.6
IMA £ High Yield 24.8 18.5 31.5 15.6
IMA China 32.7 26.9 43.0 26.7
Cazenove UK Opportunities Fund 40.5 19.9 0.95
Source: Thomson Datastream
- 5 -
…if you’re riding the cycle
Style grouping exposure driven by business cycle strategy
Avoidance of permanent style bias is key
IndustrialCyclicalsIndustrialCyclicals
Growth Defensives
Growth Defensives
Value Defensives
Value Defensives
ConsumerCyclicals
ConsumerCyclicals
CommodityCyclicals
CommodityCyclicals
FinancialsFinancials
GrowthGrowth
StyleGroupings
StyleGroupings
RecessionRecession
RecoveryRecoveryExpansionExpansion
SlowdownSlowdown
GDPGrowth
GDPGrowth
- 6 -
Business cycle investing
Different stocks do well at different stages of the economic cycle
Companies and share prices do not work in a vacuum
Cyclicals outperform in expansion, defensives in slowdown
Where we are and where are we going in the cycle should be reflected in
investment portfolios
Business cycle investing is a pragmatic approach for achieving consistent returns
Slowdown
Recession Recovery
ExpansionExpansion Slowdown
- 7 -
Horses for courses
Source: Datastream
31.12.99 - 12.03.03 12.03.03 - 15.06.07 15.06.07 - 03.03.09 03.03.09 - 31.12.10
Morgan Crucible Electronic & Electrical Cyclical -74% +272% -42% +67%
Bodycote Industrial Engineering Cyclical -55% +114% -26% +41%
Cookson General Industrials Cyclical -80% +98% -78% +206%
Diageo Beverages Defensive +147% -17% +40% -11%
Unilever Food Producers Defensive +178% -35% +57% -10%
Reed Elsevier Media Defensive +72% -23% +43% -36%
Stock Sector Style
Performance relative to FTSE All Share*
- 8 -
Back from the brink
Inventory rebuild; economies stabilised
Governments and central banks did ‘whatever it took’
Global industrial production - % change year on yearGlobal industrial production - % change year on year
Source: Morgan Stanley, MSCI, Datastream. As at 30th September 2010
-20
-15
-10
-5
0
5
10
15
1985 1990 1995 2000 2005 2010
yy % change
- 9 -
Risk returns
Source: Thomson Datastream
Extreme policy has produced extreme moves
Risk is cyclical, size and emerging
Size group performance relative to FTSE All Share UK cyclicals % PER Premium vs Defensives
1st Jan 1990 = 100
0
50
100
150
200
250
300
350
400
450
500
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
FTSE 100FTSE 250
-60
-40
-20
0
20
40
60
80
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
- 10 -
Bulls in a China shop
Price/Book in Emerging Markets was cheap
Source: Datastream, SG Cross Asset Research
Emerged markets
East beating West on growth …
... but reflected in stock prices
Too much of a good thing
Inflation rising; tightening underway
‘BRIC’ miners and engineers expensive
‘Doing the math’
Middle classes growing in Brazil, India, China
Still value in consumer-facing stocks
Redressing the balance
Growth differentials to narrow as US recovers
Looking for exposure to Western corporate investment
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
MSCI Developed World
MSCI EM
- 11 -
Old fashioned values
‘The new normal’
Subdued economic growth
Cyclical recovery maturing
Growth at a reasonable price
Superior returns on equity
Dividend growth
Case for the defensives
Premium quality
Discount valuation
Source: Deutsche Bank, JP Morgan, Cazenove CapitalSource: Deutsche Bank, JP Morgan, Cazenove Capital
Dividend Yield*2011E
Dividend Growth* 2011E
CashCover* (x)
RoE*2010E
Compass Group 3.3% 14.3% 1.9 22.5
Babcock Intl 3.6% 13.8% 1.8 29.1
Imperial Tobacco Group 5.0% 11.0% 2.1 24.4
GlaxoSmithKline 5.0% 9.5% 1.5 47.5
*Stocks with growing dividend yield above 3%, strong free cash flow and superior return on equity
Defensives as a % FTSE All Share Market Capitalisation
25
30
35
40
45
50
55
1986 1990 1994 1998 2002 2006 2010
% FTSE All Share
- 12 -
Regulatory information and risk warnings
This document is intended for Independent Financial Advisers, Professional Intermediaries and non-private clients only.
Issued by Cazenove Capital Management which is the name under which Cazenove Capital Management Limited and Cazenove Investment Fund Management Limited both authorised and regulated by the Financial Services Authority provide investment products and services.
Past performance should not be seen as an indication of future performance. The value of investments and the income from them can go down as well as up and an investor may not get back the amount originally invested and may be affected by fluctuations in exchange rates. The levels and bases of tax assumptions may change.
This document is for information purposes only and does not constitute an offer to enter into any contract/agreement nor is it a solicitation to buy or sell any investment or to provide any services referred to therein.
This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.