paul marson, lombard odier "prevailing winds"
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Prevailing Winds
Paul Marson, Chief Investment Officer, Private BankingMay 2011, Moscow
“Only buy something that you’d be perfectly happy to hold if the market shut down for ten years”
Warren Buffett
De-leveraging and Global Imbalances..
Cumulative Emerging Surpluses = NET Asset accumulation with corresponding, and unsustainable, NET liability accumulation in the West...
De-leveraging implies a reduction in the Western Deficit and a corresponding decline in the Emerging Surplus...
Source: Datastream, LODH Calculation
Cumulative Sum of Current Account Surpluses [ASSETS] / Deficits [LIABILITIES] since 1982 : USA vs China, Japan and Developing / Dynamic Asia, Latam and E Europe [ USD
Trillions ]
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.01982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
China, Japan & Dynamic Asia,Latam & E Europe
USA
Current Account Balance (USDbn): Emerging & Developing versus G7 Developed Economies
273.2
-298.4
-800.0
-600.0
-400.0
-200.0
0.0
200.0
400.0
600.0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Developing & Emerging Economies
G7 bloc
US De-leveraging….incomplete
The extent of excessive leverage growth and the overhang in debt can be seen in the 5 year rolling change in Debt versus Private Gross Domestic investment...the Private Capital Stock supports aggregate National Credit Market Debt
Total US Credit Market Debt outstanding tracked Private Gross Investment in much of the post-war period, diverging in the late 1980’s S&L bubble and the 2006/7 Housing Bubble…there is still too much debt for the private capital stock to support
Source: Datastream, LODH Calculation
Total Credit Market Debt [$trn] versus Total Cumulative Gross PRIVATE Domestic Investment [$trn]
0.0
10.0
20.0
30.0
40.0
50.0
60.0
Q4 1
956
Q1 1
959
Q2 1
961
Q3 1
963
Q4 1
965
Q1 1
968
Q2 1
970
Q3 1
972
Q4 1
974
Q1 1
977
Q2 1
979
Q3 1
981
Q4 1
983
Q1 1
986
Q2 1
988
Q3 1
990
Q4 1
992
Q1 1
995
Q2 1
997
Q3 1
999
Q4 2
001
Q1 2
004
Q2 2
006
Q3 2
008
Q4 2
010
Q1 2
013
Q2 2
015
Debt
Investment
5 Year Change in US Credit Market Debt Outstanding [$trn] versus 5 Year Cumulative Gross Private Domestic Investment [$trn]
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0Q
4 1956
Q1 1959
Q2 1961
Q3 1963
Q4 1965
Q1 1968
Q2 1970
Q3 1972
Q4 1974
Q1 1977
Q2 1979
Q3 1981
Q4 1983
Q1 1986
Q2 1988
Q3 1990
Q4 1992
Q1 1995
Q2 1997
Q3 1999
Q4 2001
Q1 2004
Q2 2006
Q3 2008
Q4 2010
Q1 2013
Q2 2015
Debt
Investment
Global RE-leveraging….!!
Looked at on a rolling 5 year cycle, to eliminate some of the annual volatility, Global Securities debt growth has outpaced Nominal GDP persistently over the last decade, with the exception of the period up to 2008…no hint of de-leveraging here…
The total sum of Global Domestic and International Debt Securities outstanding increased by $20 trillion in the 3 years from the end of 2007! The ratio of Debt Securities / Global GDP increased from 140% to 160%...
Source: BIS, LODH Calculation
Global Domestic and International Debt Securities Outstanding [USD trn] : All Issuers [Government, Financial Institutions and Corporate entities], BIS data
0.0
20.0
40.0
60.0
80.0
100.0
120.0
Mar.1994
Dec.1994
Sep.1995
Jun.1996
Mar.1997
Dec.1997
Sep.1998
Jun.1999
Mar.2000
Dec.2000
Sep.2001
Jun.2002
Mar.2003
Dec.2003
Sep.2004
Jun.2005
Mar.2006
Dec.2006
Sep.2007
Jun.2008
Mar.2009
Dec.2009
Sep.2010
Jun.2011
Mar.2012
Dec.2012
5 Year Annualized Growth Rate for Global Nominal GDP versus Global International & Domestic Debt Securities Outstanding
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Debt Securities
GDP
OECD Lead Indicators....
Developed Country OECD lead indices also point to moderating growth, after a government debt fuelled/inventory driven cyclical rebound...
Lead Indicators in the Emerging Markets point to slower growth..
Source: Datastream, LODH Calculation
-30.0
-20.0
-10.0
0.0
10.0
20.0
30.0
Jan
-91
Jan
-92
Jan
-93
Jan
-94
Jan
-95
Jan
-96
Jan
-97
Jan
-98
Jan
-99
Jan
-00
Jan
-01
Jan
-02
Jan
-03
Jan
-04
Jan
-05
Jan
-06
Jan
-07
Jan
-08
Jan
-09
Jan
-10
Jan
-11
Jan
-12
Jan
-13
Jan
-14
Jan
-15
Indonesia
India
Mexico
China
Brazil
Russia
OECD Leading Indicator (% 3msaar)
-30.0
-20.0
-10.0
0.0
10.0
20.0
30.0
May-05
Sep-05
Jan-06
May-06
Sep-06
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
Jan-12
May-12
Sep-12
Euroland
USA
Japan
Germany
Inflation and Deflation....
China inflating [internal supply very inelastic versus external supply]...money growth slowing. Inflation at 5.3%, 2 year high, Food Inflation at 11.5%...Aggressive tightening necessary…. much slower growth ahead as credit availability evaporates
On balance, over half of US and Japanese core inflation sub-components are deflating…no risk of deflation in the UK and Eurozone
Source: Datastream, Bloomberg, LODH Calculation
Inflation Diffusion Indices [6mm.ave, balance of Core Inflation components inflating versus deflating]
Inflationary pressures
US: 48%
JP: 24%
Deflationary pressures
EZ: 86%
SW: 67%
UK: 100%
0%
20%
40%
60%
80%
100%
120%
72 74 77 80 83 85 88 91 94 96 99 02 05 07 10
Chinese M1 Money Supply Growth [ ADVANCED 6 MONTHS] vs Chinese Consumer Price Inflation
5
10
15
20
25
30
35
40
45Jan-99
Jul-99
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
-5
0
5
10
15
20
Money Supply [%y/y, LHS]
Inflation [RHS]
US – Rolling Sectoral Deficits and MORE Debt...?
Valuation cycles at the extreme in the last decade, and the unquestionably poor performance of the US market, have been driven by rolling deficits and ever increasing levels of aggregate credit market debt…..the end of ALL debt cycles [public or private] necessitates asset price adjustment…
A proxy Price / Sales ratio for the US market and, according to Warren Buffett, the single most important measure of valuation. Above 100% for one quarter between 1900-1995, now at 118%, in the 16th percentile...miserable implied returns!
Driven by record $53trn total US credit market debt..
Source: Datastream, LODH Calculation
Market Value of All US Corporate Equity / GDP [1929 = 87%, 1936 = 100%, 1943 = 35%]
Q4 2008, 84%, Buffett Bullish : "Today my money and my mouth both say equities"
Buffett Bearish : "Investors in stocks these days are expecting far too much"
Buffett Bullish, acquires ABC Stock
Buffett is back & Bullish, acquires Washington Post
Stock
Q1 2000, 185%
Q2 2007, 145%
Q4 1968, 103%, 'Buffett Partnership' Closed in 1969
Q4 2010, 118%
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
Q1 1952
Q2 1954
Q3 1956
Q4 1958
Q1 1961
Q2 1963
Q3 1965
Q4 1967
Q1 1970
Q2 1972
Q3 1974
Q4 1976
Q1 1979
Q2 1981
Q3 1983
Q4 1985
Q1 1988
Q2 1990
Q3 1992
Q4 1994
Q1 1997
Q2 1999
Q3 2001
Q4 2003
Q1 2006
Q2 2008
Q3 2010
Q4 2012
Q1 2015
US Total Equity Market Valuation / GDP ratio [%] vs US Sectoral Financial Balances [% of GDP] : 1995 -
60%
80%
100%
120%
140%
160%
180%
200%
Q1 1995
Q4 1995
Q3 1996
Q2 1997
Q1 1998
Q4 1998
Q3 1999
Q2 2000
Q1 2001
Q4 2001
Q3 2002
Q2 2003
Q1 2004
Q4 2004
Q3 2005
Q2 2006
Q1 2007
Q4 2007
Q3 2008
Q2 2009
Q1 2010
Q4 2010
Q3 2011
Q2 2012
Q1 2013
Q4 2013
Q3 2014
Q2 2015
-11.0%
-9.0%
-7.0%
-5.0%
-3.0%
-1.0%
1.0%
3.0%
Market Value / GDP - LHS
Govt Balance - RHS INVERTED
Household Balance - RHS INVERTED
Corporate Balance - RHS INVERTED
US extreme over-valuation…again..
At the current level of valuation, implied annualized REAL returns are barely 1% over the next decade: there is no margin of safety of note implicit in US market valuation…the market prices US equities akin to a “risk-free” asset ….
The US market is valued at 26.5 * trailing ten year average earnings: if we strip away the tech bubble in 1999/2000 and housing bubble in 2006/7, this is the highest level of valuation since 1929. Current Valuation is in the 10th percentile since 1870 i.e. 90% of the time historically the market has been cheaper…..
Source: Datastream, LODH Calculation
US REAL Annualized 10 Year Holding Period Returns ranked by Valuation Quintile [P / Trailing 10 Yr REPORTED E ] : 1871 -
1.50%
5.30%
6.50%
7.20%
10.90%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
First Second Third Fourth Fifth
S&P500 Price / Trailing 10 Year Average Earnings
0.0
10.0
20.0
30.0
40.0
50.0
60.0
Jan-1
0
Jan-1
5
Jan-2
0
Jan-2
5
Jan-3
0
Jan-3
5
Jan-4
0
Jan-4
5
Jan-5
0
Jan-5
5
Jan-6
0
Jan-6
5
Jan-7
0
Jan-7
5
Jan-8
0
Jan-8
5
Jan-9
0
Jan-9
5
Jan-0
0
Jan-0
5
Jan-1
0
US Risk Premium and Implied Returns..
The very poor level of implied returns is reflected in a wafer thin implied equity risk premium...barely 0.7%, the 13th percentile over 110 years, if valuations revert to the median level. A low level of implied return plus a low margin of safety should be a warning to investors …
The range of implied returns, from current valuation levels, is between -4.7% to +3.1% annualized, assuming median reversion or a historical worst case valuation multiple….implied returns are very poor by historical standards….
Source: Datastream, LODH Calculation
Implied 10 Year S&P500 Equity Risk Premium [Annualized Equity Return, assuming trend 6% EPS Growth and specified Terminal Multiple Valuation Ratio, less Real 10 year Yield] : 1901 -
-20%
-10%
0%
10%
20%
30%
40%
50%
Jan-01Jan-05Jan-09Jan-13Jan-17Jan-21Jan-25Jan-29Jan-33Jan-37Jan-41Jan-45Jan-49Jan-53Jan-57Jan-61Jan-65Jan-69Jan-73Jan-77Jan-81Jan-85Jan-89Jan-93Jan-97Jan-01Jan-05Jan-09Jan-13
terminal multiple = trailing median
terminal multiple = trailing maximum
terminal multiple = trailing minimum
Implied 10 Year S&P500 Holding Period Return [Annualized, assuming trend 6% EPS Growth and specified Terminal Multiple Valuation Ratio]
-20%
-10%
0%
10%
20%
30%
40%
Jan-01
Jan-06
Jan-11
Jan-16
Jan-21
Jan-26
Jan-31
Jan-36
Jan-41
Jan-46
Jan-51
Jan-56
Jan-61
Jan-66
Jan-71
Jan-76
Jan-81
Jan-86
Jan-91
Jan-96
Jan-01
Jan-06
Jan-11
Jan-16
terminal multiple = trailing median
terminal multiple = trailing maximum
terminal multiple = trailing minimum
US Drawdown risk…where the US goes…
When ranked according to US return decile, NON US nominal annualized returns decline in predictable fashion as US returns worsen: at the lower end of the US return distribution, NON US returns are negative…where the US market goes, global markets follow..
The maximum annualized drawdown for the investment holding period increases as the implied equity risk premium declines! ….in the first and second deciles the drawdown exceeds the implied return very substantially...we are currently in the 13th percentile
Source: Datastream, LODH Calculation
Median Annual Total Return for the MSCI World EX USA Index, ranked by US Market Return Decile [1st decile = worst US Market Return Decile]
-20.8
-3.0
4.5
16.014.1 15.3 14.5
16.9
22.2
28.6
-30.0
-20.0
-10.0
0.0
10.0
20.0
30.0
40.0
1st [w orst] 2nd 3rd 4th 5th 6th 7th 8th 9th 10th [best]
Minimum Annualized 10 Year S&P500 Holding Period Return ranked by Implied 10 Year Risk Premium Deciles [1st decile = smallest/WORST risk premium, 10th decile = largest/BEST risk
premium ] : 1874 -
-10%
-8%-7%
-5%
-6%
-4%
-3%
-2%-1%
3%
-12.0%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
1st[WORST]
2nd 3rd 4th 5th 6th 7th 8th 9th 10th [BEST]
US Equities – High Profit Margins = Poor Prospects
The ability of current Margins to predict Profit Growth improves further at the 5 year horizon: over the next 5 years, current elevated margins imply negative nominal net profit growth….margins DO mean revert
Current Profit Margins are a very good predictor of future Profit Growth, at a 3 year horizon: high margins = low implied profit growth [and vice-versa]. An 8.5% net non-financial sector margin implies negative profit growth..
Source: Datastream, LODH Calculation
US Non Financial Sector Profits [NET of Tax, IVA & CCadj] / Non Financial Corporate Sector GDP vs Non Financial Corporate Sector Annualized 5 Year FORWARD Profit Growth [NET of
Tax, IVA & CCadj]
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0% Q1 1970
Q4 1971
Q3 1973
Q2 1975
Q1 1977
Q4 1978
Q3 1980
Q2 1982
Q1 1984
Q4 1985
Q3 1987
Q2 1989
Q1 1991
Q4 1992
Q3 1994
Q2 1996
Q1 1998
Q4 1999
Q3 2001
Q2 2003
Q1 2005
Q4 2006
Q3 2008
Q2 2010
Q1 2012
Q4 2013
Q3 2015
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
30.0
Profit / Corp GDP % - LHS INVERTED
5 Yr FORWARD Profit Grow th - RHS
US Non Financial Sector Profits [NET of Tax, IVA & CCadj] / Non Financial Corporate Sector GDP vs Non Financial Corporate Sector Annualized 3 Year FORWARD Profit Growth [NET of
Tax, IVA & CCadj]
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
Q1 1970
Q4 1971
Q3 1973
Q2 1975
Q1 1977
Q4 1978
Q3 1980
Q2 1982
Q1 1984
Q4 1985
Q3 1987
Q2 1989
Q1 1991
Q4 1992
Q3 1994
Q2 1996
Q1 1998
Q4 1999
Q3 2001
Q2 2003
Q1 2005
Q4 2006
Q3 2008
Q2 2010
Q1 2012
Q4 2013
Q3 2015
-30.0
-20.0
-10.0
0.0
10.0
20.0
30.0
40.0
50.0Profit / Corp GDP % - LHS INVERTED
3 Yr FORWARD Profit Grow th - RHS
US Equities – Corporate De-Leveraging…Really?
Companies have record cash ASSETS, but they correspond to record Credit Market Debt LIABILITIES. Moreover, cash holdings, as a percentage of financial assets, are at the highest level since 1979, but remain low by historical standards..
US Non Farm Non Financial Corporate Businesses have $7.4 trn of Credit Market Debt, a record amount... they have $1.5 trn of cash assets [deposits, money funds, repos], a record amount..
Source: Datastream, LODH Calculation
US Non Farm Non Financial Business Sector Credit Market Debt vs Cash [$bn]
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Q4 1951
Q2 1954
Q4 1956
Q2 1959
Q4 1961
Q2 1964
Q4 1966
Q2 1969
Q4 1971
Q2 1974
Q4 1976
Q2 1979
Q4 1981
Q2 1984
Q4 1986
Q2 1989
Q4 1991
Q2 1994
Q4 1996
Q2 1999
Q4 2001
Q2 2004
Q4 2006
Q2 2009
Q4 2011
Q2 2014
Debt
Cash
US Non Financial Corporate Sector Holdings of Cash Deposits & Money Market Funds as a % of Financial Assets
Q4 2010, 10.4%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%Q
4 1951
Q3 1954
Q2 1957
Q1 1960
Q4 1962
Q3 1965
Q2 1968
Q1 1971
Q4 1973
Q3 1976
Q2 1979
Q1 1982
Q4 1984
Q3 1987
Q2 1990
Q1 1993
Q4 1995
Q3 1998
Q2 2001
Q1 2004
Q4 2006
Q3 2009
Q2 2012
Q1 2015
US Equities – the definition of Cheap…
Besides, even if valuation were historically cheap on this comparable basis… the relationship to forward realized returns is extremely weak..
The S&P500 is valued at 13.5* one-year forward Operating Earnings: the long run median for THAT ratio is 13* [it should not be compared to historical REPORTED earnings valuation multiples]...a 15* multiple is the ceiling in the 1960s, 1987, 1991, 2007 and in 2009..
Source: Datastream, LODH Calculation
S&P500 Price / 12 Months FORWARD Operating Earnings [horiz axis] vs 12 Months FORWARD Total Return [vert axis] : 1987 -
y = -1.70x + 37.68R2 = 0.11
-70.0
-60.0
-50.0
-40.0
-30.0
-20.0
-10.0
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.07.0
9.0
11.0
13.0
15.0
17.0
19.0
21.0
23.0
25.0
27.0
S&P500 Price / Forward Operating EPS [ PRE 1985 data modelled from deviation versus trend for ISM and Peak Reported Earnings per Share ]
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
Dec-59
Dec-61
Dec-63
Dec-65
Dec-67
Dec-69
Dec-71
Dec-73
Dec-75
Dec-77
Dec-79
Dec-81
Dec-83
Dec-85
Dec-87
Dec-89
Dec-91
Dec-93
Dec-95
Dec-97
Dec-99
Dec-01
Dec-03
Dec-05
Dec-07
Dec-09
Dec-11
Dec-13
Dec-15
More than just Growth….…the US case
Even the CHANGE in the annual GDP Growth rate forecast in any 6 month period is negatively correlated with US equity returns over the subsequent 6 month period: actual and expected GDP growth are NOT positively correlated with realized market returns….
The relationship between expected US GDP Growth over the next year and subsequent, realized, Equity Returns is negative! When Growth expectations are strong, it is usually the precursor to lower returns. Actual Growth and Returns are negatively correlated cross sectionally across markets….
Source: Datastream, LODH Calculation
US Nominal GDP Growth Rate Forecast One Year Forward [Philadelphia Fed Livingston Survey, HORIZ AXIS] versus Realized Nominal MSCI US Equity Index Total Return [VERT
AXIS, 1971 - ]
y = -2.7x + 15.7R2 = 0.1
-70.0
-50.0
-30.0
-10.0
10.0
30.0
50.0
70.0
-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0
CHANGE in US One Year Forward GDP Forecast Growth Rate over a 6 month period [Philadelphia Fed Livingston Survey, HORIZ AXIS , 1971- ] versus the Total Return for the
MSCI US Equity Index over the subsequent 6 month period [VERT AXIS]
y = -2.8x + 5.9R2 = 0.1
-50.0
-40.0
-30.0
-20.0
-10.0
0.0
10.0
20.0
30.0
40.0
50.0
-4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 4.0
Quantitative Easing II / III / IV …who cares?
Increases in the supply of money induce a near perfect offsetting reduction in the velocity of circulation of money: if velocity declines proportionally with the rise in money supply, nominal income is unaffected..
Money Supply * Velocity of Circulation of Money = the Price Level * Income [MV=PY]. As rates converge to zero, the velocity of circulation of money collapses…monetary policy pushes on a piece of string at low rate levels…
Source: Datastream, LODH Calculation
US Short Term Interest Rate [VERTICAL AXIS] vs Monetary Velocity [ NOMINAL GDP / Monetary Base] [HORIZONTAL AXIS] : 1959 -
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
5.0 7.0 9.0 11.0 13.0 15.0 17.0 19.0 21.0 23.0
5 Year Annualized Change in the Monetary Base [HORIZONTAL AXIS] vs 5 Year Annualized Change in the Velocity of Circulation of Money [VERTICAL AXIS] : 1959 -
y = -1.0x + 7.0R2 = 0.7
-20.0
-15.0
-10.0
-5.0
0.0
5.0
10.0
0.0 5.0 10.0 15.0 20.0 25.0
Can Equity Price Inflation lift the US Economy ..?
The decline in velocity in Japan has also been proportional to monetary growth, explaining the ineffectiveness of Japanese monetary policy measures since the early 1990s..…..
Real Equity Market Returns have an extremely weak and insignificant impact on forward Real US GDP growth…[+1% S&P = +0.032% GDP one year ahead]…smaller than the error term in the National Accounts
Source: Datastream, LODH Calculation
REAL US Equity Market Total Return [% y/y] vs ONE YEAR FORWARD REAL US GDP [% y/y]
y = 0.0x + 2.7R2 = 0.1
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
-60.0 -40.0 -20.0 0.0 20.0 40.0 60.0 80.0
Japanese Monetary Base ( 5 Year Annualized Growth Rate, VERT axis ) vs Japanese Velocity of Circulation of Money ( 5 Year Annualized Growth Rate, HORIZ axis ) : 1993 -
y = -1.0x + 1.1R2 = 0.9
-8.0
-3.0
2.0
7.0
12.0
17.0
-14.0 -12.0 -10.0 -8.0 -6.0 -4.0 -2.0 0.0 2.0 4.0 6.0
The difficulty in unwinding QE2!
Very low rates imply a very high level of “Liquidity Preference” [ 1 / V = M / PY ]..the relationship is non linear i.e. huge monetary withdrawals are consistent, in the first instance, with a modest rise in rates. Policy reversal must be highly front-loaded..
Money Supply * Velocity of Circulation of Money = the Price Level * Income [MV=PY]. As rates converge to zero, the velocity of circulation of money collapses…monetary policy pushes on a piece of string at low rate levels…
Source: Datastream, LODH Calculation
US Short Term Interest Rate [VERTICAL AXIS] vs Monetary Velocity [ NOMINAL GDP / Monetary Base] [HORIZONTAL AXIS] : 1959 -
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
5.0 7.0 9.0 11.0 13.0 15.0 17.0 19.0 21.0 23.0
US 3 Month Treasury Bill Yield [ VERT AXIS] versus "Liquidity preference": Monetary Base / Nominal GDP [HORIZ AXIS] : 1959-
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
0.04 0.06 0.08 0.10 0.12 0.14 0.16
Japan...preparing for “X-day”…
The household savings rate has fallen to zero in the last 30 years: a structural decline in the level of the population, together with a rising dependency ratio [retirees / workers] implies no increase in net domestic saving levels…in fact, the contrary is to be expected..
Net Savings exceeded the budget deficit over the last 20 years : going forward, that reverses and Japan will have to rely on foreign financing for the budget deficit, as net domestic saving levels for short of the required level…
Source: OECD, Datastream, National Data Sources, LODH Calculation
Japanese General Government Surplus/Deficit [% of GDP, +ve = deficit] vs NET Domestic Saving [% GDP]
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
budget balance [% GDP, +ve = deficit]
NET domestic saving [%GDP]
Japanese NET Household Savings Ratio [% of Disposable Income] vs Japanese Population [millions]
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.01980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
110.0
112.0
114.0
116.0
118.0
120.0
122.0
124.0
126.0
128.0
130.0savings rate [lhs]
population [rhs]
Population decline and Saving behaviour..…
Retirees have a substantially negative savings rate: more retirees relative to workers means a lower level of national savings and a structural inability to finance domestically…Japan is, finally, falling dependent on foreign capital..
The “dependency ratio” increases steadily as the number of retirees increases and the working age population share diminishes : a structurally increasing burden on a shrinking workforce…
Source: NIPSSR, LODH Calculation
Japanese Population Breakdown and Projections [National Institute of Population and Social Security Research]
2020, 0.29
2011, 0.23
2020, 0.60
2011, 0.64
0%
10%
20%
30%
40%
50%
60%
70%
80%
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2020
2025
2030
2035
2040
2045
2050
2055
aged 65 + [% of total population]
aged 15-64 [% of total population]
Savings Rate for All Retired Households [increase after 2000 due to decline in social security benefits and a rise in social insurance premiums and taxes] vs Savings Rate for
Workers aged 29 or younger, 30-39 and 60-64 [Horioka (2009)]
-40.0
-30.0
-20.0
-10.0
0.0
10.0
20.0
30.0
40.0
50.0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
retired households w orkers aged 30-39
w orkers aged 60-64 w orkers aged <29
The scale of Japanese Fiscal irresponsibility....…
Debt service absorbs 21% of Government Revenue: every 100bp increase in the Japanese Government Weighted Average Cost of Capital is estimated to divert 25% of Revenue to debt service !!
The ratio of Government Debt / Tax Revenue is a key sustainability metric: Japan is far beyond any other country and extremely vulnerable to a rise in financing costs…420% is a historical “tipping point” [Reinhart & Rogoff (2008)]
Source: Moodys
General Government Debt / Revenue [2010 data]
1920%
380%320% 300%
195% 190%
0%
500%
1000%
1500%
2000%
2500%
Japan Iceland Greece USA UK France
General Government Interest Expense / Revenue [2010 data]
21%20%
14%
6% 6%5%
0%
5%
10%
15%
20%
25%
Japan Iceland Greece USA UK France
Global Deficits : Sectoral Balances
Current Account countries tend to be burdened with higher net interest servicing costs…especially where current account deficits particularly reflect public sector deficits.
The Current Account Balance is the sum of the Government and Private Financial Balances [Gross Saving – Gross Investment]...Only the Swiss and Norwegians have a “double surplus”…
Source: Datastream, LODH Calculation, See Wynne Godley « Debt and Lending », 2006/4
Current Account / GDP ratio [%, HORIZ AXIS] vs PRIMARY Budget Deficit / GDP ratio [%, VERT AXIS]
Switzerland
Portugal
Italy
France
Canada
Norway
Germany
Japan
UK
Ireland
USA
Spain
Greece
Belgium
-20.0
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
-15.0 -10.0 -5.0 0.0 5.0 10.0 15.0 20.0
Current Account / GDP ratio [%, HORIZ AXIS] vs NET Interest Costs/ GDP ratio [%, VERT AXIS]
Italy
Japan
Greece
Germany
Norway
Ireland
Portugal
Spain
Canada
USA
UK
-5
-3
-1
1
3
5
7
9
-15.0 -10.0 -5.0 0.0 5.0 10.0 15.0 20.0
Simple Notes on Fiscal Policy, Debt and Deficits
• Real Debt Growth = Real Primary Deficit / Real Debt (previous period) + Real Interest Payments / Real Debt (previous period)
Which is equivalent to,
• Real Debt Growth = Real Primary Deficit / Real Debt (previous period ) + Effective Interest Rate on Real Debt
Given this,
The Debt / GDP ratio increases with the ratio of the Primary Deficit / GDP and the difference between the Real Effective Interest Rate and the Real GDP Growth Rate, formally
• Change in Debt / GDP = Primary Deficit / GDP + ( Interest Rate – Growth Rate ) * Debt / GDP
See, for example, Craig Burnside « Fiscal Sustainability in Theory and Practise »
Notes on Fiscal Sustainability
The Arithmetic of the Sustainability of Government Debt is simple and irrevocable:
Define the following variables, d = net Debt / GDP ratio at the start point [ch d = the change in the ratio over one period ]
s = the Primary Budget Balance as a % of GDP [the non interest inclusive balance]
g = the growth rate of Real GDP
r = the Real interest rate on the Outstanding stock of Public Debt
Then,
ch d = -s + [ (r – g ) / ( 1 + g ) ] * d
So, to keep the Government Debt / GDP ratio constant, the Primary Surplus as a percentage of GDP must be,
s = [ ( r – g ) / ( 1 + g ) ] * d
Notes on Fiscal Solvency
The Arithmetic of the Solvency of a Sovereign Borrower is similarly easy to derive:
Define the following variables, D = net Debt / GDP ratio at the start point
S = the expected long run average Primary Budget Balance as a % of GDP
G = the expected long run average growth rate of Real GDP
R = the expected long run average / equilibrium Real interest rate on the Outstanding stock of Public Debt
Then, any sustainable policy must satisfy the constraint that the outstanding debt cannot exceed the discounted present value of the current and future primary balance,
S > or equals [ (R – G ) / ( 1 + G ) ] * D
The minimum value of the Primary Surplus [S min] as a percentage of GDP is
S min = [ ( R – G ) / ( 1 + G ) ] * D
Fiscal Inference
Therefore, if
Real Interest Rate on Debt [ R ] > Long Run Trend Real GDP Growth [ G ]
Then
Any country with a positive outstanding Government Debt MUST run future Primary Budget Surpluses
For example, a country with a 100% net Debt / GDP ratio, trend Real GDP growth of 3% and an expected average Real interest rate on the Stock of Government Debt of 4% will have to run, on average, future Primary Surpluses equal to 1% of GDP.
If the Primary Deficit were, say 6% of GDP, then it would have to raise taxes / cut Public Spending by the equivalent of 7% of GDP on average in the future [i.e. permanently]
Fundamental Fiscal Data
Source: OECD, Datastream, LODH calculations, See Willem Buiter « Measuring Fiscal Sustainability », University of Cambridge, 1995
Gross Debt Net Debt Budget Balance Structural Balance Cyclically Adj Primary BalanceGermany 79.9 50.5 -4.0 -3.0 -0.7Spain 72.2 43.4 -9.2 -5.9 -4.7France 92.4 57.1 -7.4 -5.4 -3.2Italy 131.3 103.3 -5.0 -2.1 2.0Ireland 104.9 61.5 -32.3 -26.1 -5.5Greece 129.2 97.3 -8.3 -5.4 -0.3Portugal 92.9 63.2 -7.3 -6.1 -4.3Japan 198.4 114.0 -7.7 -6.7 -5.5UK 81.3 51.3 -9.6 -7.2 -5.0USA 92.8 67.8 -10.5 -8.8 -7.0
2010 [% of GDP]
So, for the USA, assuming trend Real GDP growth at 2.5% and a Real Interest Rate of 3.0% on the outstanding stock of Government Debt and a net Debt / GDP ratio of 68%, a primary surplus of 0.3% of GDP is necessary [1% from estimated 2011 debt levels], requiring a near 8% of GDP swing in the Primary Balance……draconian policy tightening [spending cuts and / or tax increases] required, under very conservative assumptions
US Fiscal Stability Scenarios
Source: Datastream, LODH Calculation
USA
% Prim Bal / GDP Net Debt / GDP The Primary Balance [% of GDP] required to Stabilize the Net Debt / GDP ratio AT 2010 LEVELS, for various combinationsCyc Adj ratio of achievable / sustainable Real GDP Growth and Real Interest Rates
-7.0 0.68
Real Interest rateReal GDP Growth -8 -7.5 -7 -6.5 -6 -5.5 -5 -4.5 -4 -3.5 -3 -2.5 -2 -1.5 -1 -0.5 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6 6.5 7 7.5 8
0.2 -5.5% -5.2% -4.9% -4.5% -4.2% -3.9% -3.5% -3.2% -2.8% -2.5% -2.2% -1.8% -1.5% -1.1% -0.8% -0.5% -0.1% 0.2% 0.5% 0.9% 1.2% 1.6% 1.9% 2.2% 2.6% 2.9% 3.2% 3.6% 3.9% 4.3% 4.6% 4.9% 5.3%0.3 -5.6% -5.3% -4.9% -4.6% -4.3% -3.9% -3.6% -3.2% -2.9% -2.6% -2.2% -1.9% -1.6% -1.2% -0.9% -0.5% -0.2% 0.1% 0.5% 0.8% 1.1% 1.5% 1.8% 2.2% 2.5% 2.8% 3.2% 3.5% 3.9% 4.2% 4.5% 4.9% 5.2%0.4 -5.7% -5.3% -5.0% -4.7% -4.3% -4.0% -3.6% -3.3% -3.0% -2.6% -2.3% -2.0% -1.6% -1.3% -0.9% -0.6% -0.3% 0.1% 0.4% 0.7% 1.1% 1.4% 1.8% 2.1% 2.4% 2.8% 3.1% 3.4% 3.8% 4.1% 4.5% 4.8% 5.1%0.5 -5.7% -5.4% -5.1% -4.7% -4.4% -4.0% -3.7% -3.4% -3.0% -2.7% -2.4% -2.0% -1.7% -1.3% -1.0% -0.7% -0.3% 0.0% 0.3% 0.7% 1.0% 1.3% 1.7% 2.0% 2.4% 2.7% 3.0% 3.4% 3.7% 4.0% 4.4% 4.7% 5.1%0.6 -5.8% -5.5% -5.1% -4.8% -4.4% -4.1% -3.8% -3.4% -3.1% -2.8% -2.4% -2.1% -1.8% -1.4% -1.1% -0.7% -0.4% -0.1% 0.3% 0.6% 0.9% 1.3% 1.6% 2.0% 2.3% 2.6% 3.0% 3.3% 3.6% 4.0% 4.3% 4.6% 5.0%0.7 -5.9% -5.5% -5.2% -4.8% -4.5% -4.2% -3.8% -3.5% -3.2% -2.8% -2.5% -2.2% -1.8% -1.5% -1.1% -0.8% -0.5% -0.1% 0.2% 0.5% 0.9% 1.2% 1.5% 1.9% 2.2% 2.6% 2.9% 3.2% 3.6% 3.9% 4.2% 4.6% 4.9%0.8 -5.9% -5.6% -5.2% -4.9% -4.6% -4.2% -3.9% -3.6% -3.2% -2.9% -2.6% -2.2% -1.9% -1.5% -1.2% -0.9% -0.5% -0.2% 0.1% 0.5% 0.8% 1.1% 1.5% 1.8% 2.2% 2.5% 2.8% 3.2% 3.5% 3.8% 4.2% 4.5% 4.8%0.9 -6.0% -5.6% -5.3% -5.0% -4.6% -4.3% -4.0% -3.6% -3.3% -3.0% -2.6% -2.3% -1.9% -1.6% -1.3% -0.9% -0.6% -0.3% 0.1% 0.4% 0.7% 1.1% 1.4% 1.7% 2.1% 2.4% 2.8% 3.1% 3.4% 3.8% 4.1% 4.4% 4.8%1.0 -6.0% -5.7% -5.4% -5.0% -4.7% -4.4% -4.0% -3.7% -3.4% -3.0% -2.7% -2.3% -2.0% -1.7% -1.3% -1.0% -0.7% -0.3% 0.0% 0.3% 0.7% 1.0% 1.3% 1.7% 2.0% 2.3% 2.7% 3.0% 3.4% 3.7% 4.0% 4.4% 4.7%1.1 -6.1% -5.8% -5.4% -5.1% -4.8% -4.4% -4.1% -3.8% -3.4% -3.1% -2.7% -2.4% -2.1% -1.7% -1.4% -1.1% -0.7% -0.4% -0.1% 0.3% 0.6% 0.9% 1.3% 1.6% 1.9% 2.3% 2.6% 2.9% 3.3% 3.6% 4.0% 4.3% 4.6%1.2 -6.2% -5.8% -5.5% -5.2% -4.8% -4.5% -4.2% -3.8% -3.5% -3.1% -2.8% -2.5% -2.1% -1.8% -1.5% -1.1% -0.8% -0.5% -0.1% 0.2% 0.5% 0.9% 1.2% 1.5% 1.9% 2.2% 2.5% 2.9% 3.2% 3.5% 3.9% 4.2% 4.6%1.3 -6.2% -5.9% -5.6% -5.2% -4.9% -4.5% -4.2% -3.9% -3.5% -3.2% -2.9% -2.5% -2.2% -1.9% -1.5% -1.2% -0.9% -0.5% -0.2% 0.1% 0.5% 0.8% 1.1% 1.5% 1.8% 2.1% 2.5% 2.8% 3.1% 3.5% 3.8% 4.1% 4.5%1.4 -6.3% -5.9% -5.6% -5.3% -4.9% -4.6% -4.3% -3.9% -3.6% -3.3% -2.9% -2.6% -2.3% -1.9% -1.6% -1.3% -0.9% -0.6% -0.3% 0.1% 0.4% 0.7% 1.1% 1.4% 1.7% 2.1% 2.4% 2.7% 3.1% 3.4% 3.7% 4.1% 4.4%1.5 -6.3% -6.0% -5.7% -5.3% -5.0% -4.7% -4.3% -4.0% -3.7% -3.3% -3.0% -2.7% -2.3% -2.0% -1.7% -1.3% -1.0% -0.7% -0.3% 0.0% 0.3% 0.7% 1.0% 1.3% 1.7% 2.0% 2.3% 2.7% 3.0% 3.3% 3.7% 4.0% 4.3%1.6 -6.4% -6.1% -5.7% -5.4% -5.1% -4.7% -4.4% -4.1% -3.7% -3.4% -3.1% -2.7% -2.4% -2.1% -1.7% -1.4% -1.1% -0.7% -0.4% -0.1% 0.3% 0.6% 0.9% 1.3% 1.6% 1.9% 2.3% 2.6% 2.9% 3.3% 3.6% 3.9% 4.3%1.7 -6.5% -6.1% -5.8% -5.5% -5.1% -4.8% -4.5% -4.1% -3.8% -3.5% -3.1% -2.8% -2.5% -2.1% -1.8% -1.5% -1.1% -0.8% -0.5% -0.1% 0.2% 0.5% 0.9% 1.2% 1.5% 1.9% 2.2% 2.5% 2.9% 3.2% 3.5% 3.9% 4.2%1.8 -6.5% -6.2% -5.9% -5.5% -5.2% -4.9% -4.5% -4.2% -3.9% -3.5% -3.2% -2.9% -2.5% -2.2% -1.9% -1.5% -1.2% -0.9% -0.5% -0.2% 0.1% 0.5% 0.8% 1.1% 1.5% 1.8% 2.1% 2.5% 2.8% 3.1% 3.5% 3.8% 4.1%1.9 -6.6% -6.3% -5.9% -5.6% -5.3% -4.9% -4.6% -4.3% -3.9% -3.6% -3.3% -2.9% -2.6% -2.3% -1.9% -1.6% -1.3% -0.9% -0.6% -0.3% 0.1% 0.4% 0.7% 1.1% 1.4% 1.7% 2.1% 2.4% 2.7% 3.1% 3.4% 3.7% 4.1%2.0 -6.6% -6.3% -6.0% -5.6% -5.3% -5.0% -4.7% -4.3% -4.0% -3.7% -3.3% -3.0% -2.7% -2.3% -2.0% -1.7% -1.3% -1.0% -0.7% -0.3% 0.0% 0.3% 0.7% 1.0% 1.3% 1.7% 2.0% 2.3% 2.7% 3.0% 3.3% 3.7% 4.0%2.1 -6.7% -6.4% -6.0% -5.7% -5.4% -5.0% -4.7% -4.4% -4.0% -3.7% -3.4% -3.1% -2.7% -2.4% -2.1% -1.7% -1.4% -1.1% -0.7% -0.4% -0.1% 0.3% 0.6% 0.9% 1.3% 1.6% 1.9% 2.3% 2.6% 2.9% 3.3% 3.6% 3.9%2.2 -6.8% -6.4% -6.1% -5.8% -5.4% -5.1% -4.8% -4.4% -4.1% -3.8% -3.4% -3.1% -2.8% -2.5% -2.1% -1.8% -1.5% -1.1% -0.8% -0.5% -0.1% 0.2% 0.5% 0.9% 1.2% 1.5% 1.9% 2.2% 2.5% 2.9% 3.2% 3.5% 3.8%2.3 -6.8% -6.5% -6.2% -5.8% -5.5% -5.2% -4.8% -4.5% -4.2% -3.8% -3.5% -3.2% -2.8% -2.5% -2.2% -1.9% -1.5% -1.2% -0.9% -0.5% -0.2% 0.1% 0.5% 0.8% 1.1% 1.5% 1.8% 2.1% 2.5% 2.8% 3.1% 3.4% 3.8%2.4 -6.9% -6.6% -6.2% -5.9% -5.6% -5.2% -4.9% -4.6% -4.2% -3.9% -3.6% -3.2% -2.9% -2.6% -2.3% -1.9% -1.6% -1.3% -0.9% -0.6% -0.3% 0.1% 0.4% 0.7% 1.1% 1.4% 1.7% 2.1% 2.4% 2.7% 3.0% 3.4% 3.7%2.5 -6.9% -6.6% -6.3% -6.0% -5.6% -5.3% -5.0% -4.6% -4.3% -4.0% -3.6% -3.3% -3.0% -2.6% -2.3% -2.0% -1.7% -1.3% -1.0% -0.7% -0.3% 0.0% 0.3% 0.7% 1.0% 1.3% 1.7% 2.0% 2.3% 2.6% 3.0% 3.3% 3.6%2.6 -7.0% -6.7% -6.3% -6.0% -5.7% -5.4% -5.0% -4.7% -4.4% -4.0% -3.7% -3.4% -3.0% -2.7% -2.4% -2.0% -1.7% -1.4% -1.1% -0.7% -0.4% -0.1% 0.3% 0.6% 0.9% 1.3% 1.6% 1.9% 2.2% 2.6% 2.9% 3.2% 3.6%2.7 -7.1% -6.7% -6.4% -6.1% -5.7% -5.4% -5.1% -4.8% -4.4% -4.1% -3.8% -3.4% -3.1% -2.8% -2.4% -2.1% -1.8% -1.5% -1.1% -0.8% -0.5% -0.1% 0.2% 0.5% 0.9% 1.2% 1.5% 1.8% 2.2% 2.5% 2.8% 3.2% 3.5%2.8 -7.1% -6.8% -6.5% -6.1% -5.8% -5.5% -5.1% -4.8% -4.5% -4.2% -3.8% -3.5% -3.2% -2.8% -2.5% -2.2% -1.8% -1.5% -1.2% -0.9% -0.5% -0.2% 0.1% 0.5% 0.8% 1.1% 1.5% 1.8% 2.1% 2.4% 2.8% 3.1% 3.4%2.9 -7.2% -6.8% -6.5% -6.2% -5.9% -5.5% -5.2% -4.9% -4.5% -4.2% -3.9% -3.6% -3.2% -2.9% -2.6% -2.2% -1.9% -1.6% -1.3% -0.9% -0.6% -0.3% 0.1% 0.4% 0.7% 1.1% 1.4% 1.7% 2.0% 2.4% 2.7% 3.0% 3.4%3.0 -7.2% -6.9% -6.6% -6.3% -5.9% -5.6% -5.3% -4.9% -4.6% -4.3% -3.9% -3.6% -3.3% -3.0% -2.6% -2.3% -2.0% -1.6% -1.3% -1.0% -0.7% -0.3% 0.0% 0.3% 0.7% 1.0% 1.3% 1.6% 2.0% 2.3% 2.6% 3.0% 3.3%3.1 -7.3% -7.0% -6.6% -6.3% -6.0% -5.7% -5.3% -5.0% -4.7% -4.3% -4.0% -3.7% -3.4% -3.0% -2.7% -2.4% -2.0% -1.7% -1.4% -1.1% -0.7% -0.4% -0.1% 0.3% 0.6% 0.9% 1.2% 1.6% 1.9% 2.2% 2.6% 2.9% 3.2%3.2 -7.4% -7.0% -6.7% -6.4% -6.0% -5.7% -5.4% -5.1% -4.7% -4.4% -4.1% -3.7% -3.4% -3.1% -2.8% -2.4% -2.1% -1.8% -1.4% -1.1% -0.8% -0.5% -0.1% 0.2% 0.5% 0.9% 1.2% 1.5% 1.8% 2.2% 2.5% 2.8% 3.2%3.3 -7.4% -7.1% -6.8% -6.4% -6.1% -5.8% -5.4% -5.1% -4.8% -4.5% -4.1% -3.8% -3.5% -3.1% -2.8% -2.5% -2.2% -1.8% -1.5% -1.2% -0.9% -0.5% -0.2% 0.1% 0.5% 0.8% 1.1% 1.4% 1.8% 2.1% 2.4% 2.8% 3.1%3.4 -7.5% -7.1% -6.8% -6.5% -6.2% -5.8% -5.5% -5.2% -4.9% -4.5% -4.2% -3.9% -3.5% -3.2% -2.9% -2.6% -2.2% -1.9% -1.6% -1.2% -0.9% -0.6% -0.3% 0.1% 0.4% 0.7% 1.0% 1.4% 1.7% 2.0% 2.4% 2.7% 3.0%3.5 -7.5% -7.2% -6.9% -6.5% -6.2% -5.9% -5.6% -5.2% -4.9% -4.6% -4.3% -3.9% -3.6% -3.3% -2.9% -2.6% -2.3% -2.0% -1.6% -1.3% -1.0% -0.7% -0.3% 0.0% 0.3% 0.7% 1.0% 1.3% 1.6% 2.0% 2.3% 2.6% 2.9%3.6 -7.6% -7.3% -6.9% -6.6% -6.3% -6.0% -5.6% -5.3% -5.0% -4.6% -4.3% -4.0% -3.7% -3.3% -3.0% -2.7% -2.4% -2.0% -1.7% -1.4% -1.0% -0.7% -0.4% -0.1% 0.3% 0.6% 0.9% 1.2% 1.6% 1.9% 2.2% 2.6% 2.9%3.7 -7.6% -7.3% -7.0% -6.7% -6.3% -6.0% -5.7% -5.4% -5.0% -4.7% -4.4% -4.1% -3.7% -3.4% -3.1% -2.7% -2.4% -2.1% -1.8% -1.4% -1.1% -0.8% -0.5% -0.1% 0.2% 0.5% 0.8% 1.2% 1.5% 1.8% 2.2% 2.5% 2.8%3.8 -7.7% -7.4% -7.1% -6.7% -6.4% -6.1% -5.7% -5.4% -5.1% -4.8% -4.4% -4.1% -3.8% -3.5% -3.1% -2.8% -2.5% -2.2% -1.8% -1.5% -1.2% -0.8% -0.5% -0.2% 0.1% 0.5% 0.8% 1.1% 1.4% 1.8% 2.1% 2.4% 2.7%3.9 -7.8% -7.4% -7.1% -6.8% -6.5% -6.1% -5.8% -5.5% -5.2% -4.8% -4.5% -4.2% -3.8% -3.5% -3.2% -2.9% -2.5% -2.2% -1.9% -1.6% -1.2% -0.9% -0.6% -0.3% 0.1% 0.4% 0.7% 1.0% 1.4% 1.7% 2.0% 2.3% 2.7%4.0 -7.8% -7.5% -7.2% -6.8% -6.5% -6.2% -5.9% -5.5% -5.2% -4.9% -4.6% -4.2% -3.9% -3.6% -3.3% -2.9% -2.6% -2.3% -2.0% -1.6% -1.3% -1.0% -0.7% -0.3% 0.0% 0.3% 0.7% 1.0% 1.3% 1.6% 2.0% 2.3% 2.6%
s = [ ( r - g ) / ( 1 + g ) ] * d
Japanese Fiscal Stability Scenarios
Source: Datastream, LODH Calculation
JAPAN
% Prim Bal / GDP Net Debt / GDP The Primary Balance [% of GDP] required to Stabilize the Net Debt / GDP ratio AT 2010 LEVELS, for various combinationsCyc Adj ratio of achievable / sustainable Real GDP Growth and Real Interest Rates
-5.5 1.14
Real Interest rateReal GDP Growth -8 -7.5 -7 -6.5 -6 -5.5 -5 -4.5 -4 -3.5 -3 -2.5 -2 -1.5 -1 -0.5 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6 6.5 7 7.5 8
0.2 -9.3% -8.8% -8.2% -7.6% -7.1% -6.5% -5.9% -5.3% -4.8% -4.2% -3.6% -3.1% -2.5% -1.9% -1.4% -0.8% -0.2% 0.3% 0.9% 1.5% 2.0% 2.6% 3.2% 3.8% 4.3% 4.9% 5.5% 6.0% 6.6% 7.2% 7.7% 8.3% 8.9%0.3 -9.4% -8.9% -8.3% -7.7% -7.2% -6.6% -6.0% -5.5% -4.9% -4.3% -3.7% -3.2% -2.6% -2.0% -1.5% -0.9% -0.3% 0.2% 0.8% 1.4% 1.9% 2.5% 3.1% 3.6% 4.2% 4.8% 5.3% 5.9% 6.5% 7.0% 7.6% 8.2% 8.7%0.4 -9.5% -9.0% -8.4% -7.8% -7.3% -6.7% -6.1% -5.6% -5.0% -4.4% -3.9% -3.3% -2.7% -2.2% -1.6% -1.0% -0.5% 0.1% 0.7% 1.2% 1.8% 2.4% 3.0% 3.5% 4.1% 4.7% 5.2% 5.8% 6.4% 6.9% 7.5% 8.1% 8.6%0.5 -9.6% -9.1% -8.5% -7.9% -7.4% -6.8% -6.2% -5.7% -5.1% -4.5% -4.0% -3.4% -2.8% -2.3% -1.7% -1.1% -0.6% 0.0% 0.6% 1.1% 1.7% 2.3% 2.8% 3.4% 4.0% 4.5% 5.1% 5.7% 6.2% 6.8% 7.4% 7.9% 8.5%0.6 -9.7% -9.2% -8.6% -8.0% -7.5% -6.9% -6.3% -5.8% -5.2% -4.6% -4.1% -3.5% -2.9% -2.4% -1.8% -1.2% -0.7% -0.1% 0.5% 1.0% 1.6% 2.2% 2.7% 3.3% 3.9% 4.4% 5.0% 5.6% 6.1% 6.7% 7.3% 7.8% 8.4%0.7 -9.8% -9.3% -8.7% -8.1% -7.6% -7.0% -6.5% -5.9% -5.3% -4.8% -4.2% -3.6% -3.1% -2.5% -1.9% -1.4% -0.8% -0.2% 0.3% 0.9% 1.5% 2.0% 2.6% 3.2% 3.7% 4.3% 4.9% 5.4% 6.0% 6.6% 7.1% 7.7% 8.3%0.8 -9.9% -9.4% -8.8% -8.3% -7.7% -7.1% -6.6% -6.0% -5.4% -4.9% -4.3% -3.7% -3.2% -2.6% -2.0% -1.5% -0.9% -0.3% 0.2% 0.8% 1.4% 1.9% 2.5% 3.1% 3.6% 4.2% 4.7% 5.3% 5.9% 6.4% 7.0% 7.6% 8.1%0.9 -10.1% -9.5% -8.9% -8.4% -7.8% -7.2% -6.7% -6.1% -5.5% -5.0% -4.4% -3.8% -3.3% -2.7% -2.1% -1.6% -1.0% -0.5% 0.1% 0.7% 1.2% 1.8% 2.4% 2.9% 3.5% 4.1% 4.6% 5.2% 5.8% 6.3% 6.9% 7.5% 8.0%1.0 -10.2% -9.6% -9.0% -8.5% -7.9% -7.3% -6.8% -6.2% -5.6% -5.1% -4.5% -3.9% -3.4% -2.8% -2.3% -1.7% -1.1% -0.6% 0.0% 0.6% 1.1% 1.7% 2.3% 2.8% 3.4% 3.9% 4.5% 5.1% 5.6% 6.2% 6.8% 7.3% 7.9%1.1 -10.3% -9.7% -9.1% -8.6% -8.0% -7.4% -6.9% -6.3% -5.7% -5.2% -4.6% -4.1% -3.5% -2.9% -2.4% -1.8% -1.2% -0.7% -0.1% 0.5% 1.0% 1.6% 2.1% 2.7% 3.3% 3.8% 4.4% 5.0% 5.5% 6.1% 6.7% 7.2% 7.8%1.2 -10.4% -9.8% -9.2% -8.7% -8.1% -7.5% -7.0% -6.4% -5.9% -5.3% -4.7% -4.2% -3.6% -3.0% -2.5% -1.9% -1.4% -0.8% -0.2% 0.3% 0.9% 1.5% 2.0% 2.6% 3.2% 3.7% 4.3% 4.8% 5.4% 6.0% 6.5% 7.1% 7.7%1.3 -10.5% -9.9% -9.3% -8.8% -8.2% -7.7% -7.1% -6.5% -6.0% -5.4% -4.8% -4.3% -3.7% -3.2% -2.6% -2.0% -1.5% -0.9% -0.3% 0.2% 0.8% 1.4% 1.9% 2.5% 3.0% 3.6% 4.2% 4.7% 5.3% 5.9% 6.4% 7.0% 7.5%1.4 -10.6% -10.0% -9.4% -8.9% -8.3% -7.8% -7.2% -6.6% -6.1% -5.5% -4.9% -4.4% -3.8% -3.3% -2.7% -2.1% -1.6% -1.0% -0.4% 0.1% 0.7% 1.2% 1.8% 2.4% 2.9% 3.5% 4.0% 4.6% 5.2% 5.7% 6.3% 6.9% 7.4%1.5 -10.7% -10.1% -9.5% -9.0% -8.4% -7.9% -7.3% -6.7% -6.2% -5.6% -5.1% -4.5% -3.9% -3.4% -2.8% -2.2% -1.7% -1.1% -0.6% 0.0% 0.6% 1.1% 1.7% 2.2% 2.8% 3.4% 3.9% 4.5% 5.1% 5.6% 6.2% 6.7% 7.3%1.6 -10.8% -10.2% -9.6% -9.1% -8.5% -8.0% -7.4% -6.8% -6.3% -5.7% -5.2% -4.6% -4.0% -3.5% -2.9% -2.4% -1.8% -1.2% -0.7% -0.1% 0.4% 1.0% 1.6% 2.1% 2.7% 3.3% 3.8% 4.4% 4.9% 5.5% 6.1% 6.6% 7.2%1.7 -10.9% -10.3% -9.7% -9.2% -8.6% -8.1% -7.5% -6.9% -6.4% -5.8% -5.3% -4.7% -4.1% -3.6% -3.0% -2.5% -1.9% -1.3% -0.8% -0.2% 0.3% 0.9% 1.5% 2.0% 2.6% 3.1% 3.7% 4.3% 4.8% 5.4% 5.9% 6.5% 7.1%1.8 -11.0% -10.4% -9.9% -9.3% -8.7% -8.2% -7.6% -7.1% -6.5% -5.9% -5.4% -4.8% -4.3% -3.7% -3.1% -2.6% -2.0% -1.5% -0.9% -0.3% 0.2% 0.8% 1.3% 1.9% 2.5% 3.0% 3.6% 4.1% 4.7% 5.3% 5.8% 6.4% 6.9%1.9 -11.1% -10.5% -10.0% -9.4% -8.8% -8.3% -7.7% -7.2% -6.6% -6.0% -5.5% -4.9% -4.4% -3.8% -3.2% -2.7% -2.1% -1.6% -1.0% -0.4% 0.1% 0.7% 1.2% 1.8% 2.3% 2.9% 3.5% 4.0% 4.6% 5.1% 5.7% 6.3% 6.8%2.0 -11.2% -10.6% -10.1% -9.5% -8.9% -8.4% -7.8% -7.3% -6.7% -6.1% -5.6% -5.0% -4.5% -3.9% -3.4% -2.8% -2.2% -1.7% -1.1% -0.6% 0.0% 0.6% 1.1% 1.7% 2.2% 2.8% 3.4% 3.9% 4.5% 5.0% 5.6% 6.1% 6.7%2.1 -11.3% -10.7% -10.2% -9.6% -9.0% -8.5% -7.9% -7.4% -6.8% -6.3% -5.7% -5.1% -4.6% -4.0% -3.5% -2.9% -2.3% -1.8% -1.2% -0.7% -0.1% 0.4% 1.0% 1.6% 2.1% 2.7% 3.2% 3.8% 4.4% 4.9% 5.5% 6.0% 6.6%2.2 -11.4% -10.8% -10.3% -9.7% -9.1% -8.6% -8.0% -7.5% -6.9% -6.4% -5.8% -5.2% -4.7% -4.1% -3.6% -3.0% -2.5% -1.9% -1.3% -0.8% -0.2% 0.3% 0.9% 1.4% 2.0% 2.6% 3.1% 3.7% 4.2% 4.8% 5.4% 5.9% 6.5%2.3 -11.5% -10.9% -10.4% -9.8% -9.2% -8.7% -8.1% -7.6% -7.0% -6.5% -5.9% -5.3% -4.8% -4.2% -3.7% -3.1% -2.6% -2.0% -1.4% -0.9% -0.3% 0.2% 0.8% 1.3% 1.9% 2.5% 3.0% 3.6% 4.1% 4.7% 5.2% 5.8% 6.3%2.4 -11.6% -11.0% -10.5% -9.9% -9.3% -8.8% -8.2% -7.7% -7.1% -6.6% -6.0% -5.5% -4.9% -4.3% -3.8% -3.2% -2.7% -2.1% -1.6% -1.0% -0.4% 0.1% 0.7% 1.2% 1.8% 2.3% 2.9% 3.5% 4.0% 4.6% 5.1% 5.7% 6.2%2.5 -11.7% -11.1% -10.6% -10.0% -9.5% -8.9% -8.3% -7.8% -7.2% -6.7% -6.1% -5.6% -5.0% -4.4% -3.9% -3.3% -2.8% -2.2% -1.7% -1.1% -0.6% 0.0% 0.6% 1.1% 1.7% 2.2% 2.8% 3.3% 3.9% 4.4% 5.0% 5.6% 6.1%2.6 -11.8% -11.2% -10.7% -10.1% -9.6% -9.0% -8.4% -7.9% -7.3% -6.8% -6.2% -5.7% -5.1% -4.6% -4.0% -3.4% -2.9% -2.3% -1.8% -1.2% -0.7% -0.1% 0.4% 1.0% 1.6% 2.1% 2.7% 3.2% 3.8% 4.3% 4.9% 5.4% 6.0%2.7 -11.9% -11.3% -10.8% -10.2% -9.7% -9.1% -8.5% -8.0% -7.4% -6.9% -6.3% -5.8% -5.2% -4.7% -4.1% -3.6% -3.0% -2.4% -1.9% -1.3% -0.8% -0.2% 0.3% 0.9% 1.4% 2.0% 2.6% 3.1% 3.7% 4.2% 4.8% 5.3% 5.9%2.8 -12.0% -11.4% -10.9% -10.3% -9.8% -9.2% -8.6% -8.1% -7.5% -7.0% -6.4% -5.9% -5.3% -4.8% -4.2% -3.7% -3.1% -2.5% -2.0% -1.4% -0.9% -0.3% 0.2% 0.8% 1.3% 1.9% 2.4% 3.0% 3.5% 4.1% 4.7% 5.2% 5.8%2.9 -12.1% -11.5% -11.0% -10.4% -9.9% -9.3% -8.7% -8.2% -7.6% -7.1% -6.5% -6.0% -5.4% -4.9% -4.3% -3.8% -3.2% -2.7% -2.1% -1.6% -1.0% -0.4% 0.1% 0.7% 1.2% 1.8% 2.3% 2.9% 3.4% 4.0% 4.5% 5.1% 5.6%3.0 -12.2% -11.6% -11.1% -10.5% -10.0% -9.4% -8.9% -8.3% -7.7% -7.2% -6.6% -6.1% -5.5% -5.0% -4.4% -3.9% -3.3% -2.8% -2.2% -1.7% -1.1% -0.6% 0.0% 0.6% 1.1% 1.7% 2.2% 2.8% 3.3% 3.9% 4.4% 5.0% 5.5%3.1 -12.3% -11.7% -11.2% -10.6% -10.1% -9.5% -9.0% -8.4% -7.8% -7.3% -6.7% -6.2% -5.6% -5.1% -4.5% -4.0% -3.4% -2.9% -2.3% -1.8% -1.2% -0.7% -0.1% 0.4% 1.0% 1.5% 2.1% 2.7% 3.2% 3.8% 4.3% 4.9% 5.4%3.2 -12.4% -11.8% -11.3% -10.7% -10.2% -9.6% -9.1% -8.5% -8.0% -7.4% -6.8% -6.3% -5.7% -5.2% -4.6% -4.1% -3.5% -3.0% -2.4% -1.9% -1.3% -0.8% -0.2% 0.3% 0.9% 1.4% 2.0% 2.5% 3.1% 3.6% 4.2% 4.7% 5.3%3.3 -12.5% -11.9% -11.4% -10.8% -10.3% -9.7% -9.2% -8.6% -8.1% -7.5% -7.0% -6.4% -5.8% -5.3% -4.7% -4.2% -3.6% -3.1% -2.5% -2.0% -1.4% -0.9% -0.3% 0.2% 0.8% 1.3% 1.9% 2.4% 3.0% 3.5% 4.1% 4.6% 5.2%3.4 -12.6% -12.0% -11.5% -10.9% -10.4% -9.8% -9.3% -8.7% -8.2% -7.6% -7.1% -6.5% -6.0% -5.4% -4.8% -4.3% -3.7% -3.2% -2.6% -2.1% -1.5% -1.0% -0.4% 0.1% 0.7% 1.2% 1.8% 2.3% 2.9% 3.4% 4.0% 4.5% 5.1%3.5 -12.7% -12.1% -11.6% -11.0% -10.5% -9.9% -9.4% -8.8% -8.3% -7.7% -7.2% -6.6% -6.1% -5.5% -5.0% -4.4% -3.9% -3.3% -2.8% -2.2% -1.7% -1.1% -0.6% 0.0% 0.6% 1.1% 1.7% 2.2% 2.8% 3.3% 3.9% 4.4% 5.0%3.6 -12.8% -12.2% -11.7% -11.1% -10.6% -10.0% -9.5% -8.9% -8.4% -7.8% -7.3% -6.7% -6.2% -5.6% -5.1% -4.5% -4.0% -3.4% -2.9% -2.3% -1.8% -1.2% -0.7% -0.1% 0.4% 1.0% 1.5% 2.1% 2.6% 3.2% 3.7% 4.3% 4.8%3.7 -12.9% -12.3% -11.8% -11.2% -10.7% -10.1% -9.6% -9.0% -8.5% -7.9% -7.4% -6.8% -6.3% -5.7% -5.2% -4.6% -4.1% -3.5% -3.0% -2.4% -1.9% -1.3% -0.8% -0.2% 0.3% 0.9% 1.4% 2.0% 2.5% 3.1% 3.6% 4.2% 4.7%3.8 -13.0% -12.4% -11.9% -11.3% -10.8% -10.2% -9.7% -9.1% -8.6% -8.0% -7.5% -6.9% -6.4% -5.8% -5.3% -4.7% -4.2% -3.6% -3.1% -2.5% -2.0% -1.4% -0.9% -0.3% 0.2% 0.8% 1.3% 1.9% 2.4% 3.0% 3.5% 4.1% 4.6%3.9 -13.1% -12.5% -12.0% -11.4% -10.9% -10.3% -9.8% -9.2% -8.7% -8.1% -7.6% -7.0% -6.5% -5.9% -5.4% -4.8% -4.3% -3.7% -3.2% -2.6% -2.1% -1.5% -1.0% -0.4% 0.1% 0.7% 1.2% 1.8% 2.3% 2.9% 3.4% 3.9% 4.5%4.0 -13.1% -12.6% -12.1% -11.5% -11.0% -10.4% -9.9% -9.3% -8.8% -8.2% -7.7% -7.1% -6.6% -6.0% -5.5% -4.9% -4.4% -3.8% -3.3% -2.7% -2.2% -1.6% -1.1% -0.5% 0.0% 0.5% 1.1% 1.6% 2.2% 2.7% 3.3% 3.8% 4.4%
s = [ ( r - g ) / ( 1 + g ) ] * d
Spanish Fiscal Stability Scenarios
Source: Datastream, LODH Calculation
SPAIN
% Prim Bal / GDP Net Debt / GDP The Primary Balance [% of GDP] required to Stabilize the Net Debt / GDP ratio AT 2010 LEVELS, for various combinationsCyc Adj ratio of achievable / sustainable Real GDP Growth and Real Interest Rates
-4.7 0.43
Real Interest rateReal GDP Growth -8 -7.5 -7 -6.5 -6 -5.5 -5 -4.5 -4 -3.5 -3 -2.5 -2 -1.5 -1 -0.5 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6 6.5 7 7.5 8
0.2 -3.6% -3.3% -3.1% -2.9% -2.7% -2.5% -2.3% -2.0% -1.8% -1.6% -1.4% -1.2% -1.0% -0.7% -0.5% -0.3% -0.1% 0.1% 0.3% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 1.9% 2.1% 2.3% 2.5% 2.7% 2.9% 3.2% 3.4%0.3 -3.6% -3.4% -3.2% -2.9% -2.7% -2.5% -2.3% -2.1% -1.9% -1.6% -1.4% -1.2% -1.0% -0.8% -0.6% -0.3% -0.1% 0.1% 0.3% 0.5% 0.7% 1.0% 1.2% 1.4% 1.6% 1.8% 2.0% 2.3% 2.5% 2.7% 2.9% 3.1% 3.3%0.4 -3.6% -3.4% -3.2% -3.0% -2.8% -2.6% -2.3% -2.1% -1.9% -1.7% -1.5% -1.3% -1.0% -0.8% -0.6% -0.4% -0.2% 0.0% 0.3% 0.5% 0.7% 0.9% 1.1% 1.3% 1.6% 1.8% 2.0% 2.2% 2.4% 2.6% 2.9% 3.1% 3.3%0.5 -3.7% -3.5% -3.2% -3.0% -2.8% -2.6% -2.4% -2.2% -1.9% -1.7% -1.5% -1.3% -1.1% -0.9% -0.6% -0.4% -0.2% 0.0% 0.2% 0.4% 0.6% 0.9% 1.1% 1.3% 1.5% 1.7% 1.9% 2.2% 2.4% 2.6% 2.8% 3.0% 3.2%0.6 -3.7% -3.5% -3.3% -3.1% -2.9% -2.6% -2.4% -2.2% -2.0% -1.8% -1.6% -1.3% -1.1% -0.9% -0.7% -0.5% -0.3% 0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.3% 1.5% 1.7% 1.9% 2.1% 2.3% 2.5% 2.8% 3.0% 3.2%0.7 -3.8% -3.5% -3.3% -3.1% -2.9% -2.7% -2.5% -2.2% -2.0% -1.8% -1.6% -1.4% -1.2% -0.9% -0.7% -0.5% -0.3% -0.1% 0.1% 0.3% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 1.9% 2.1% 2.3% 2.5% 2.7% 2.9% 3.1%0.8 -3.8% -3.6% -3.4% -3.1% -2.9% -2.7% -2.5% -2.3% -2.1% -1.9% -1.6% -1.4% -1.2% -1.0% -0.8% -0.6% -0.3% -0.1% 0.1% 0.3% 0.5% 0.7% 0.9% 1.2% 1.4% 1.6% 1.8% 2.0% 2.2% 2.5% 2.7% 2.9% 3.1%0.9 -3.8% -3.6% -3.4% -3.2% -3.0% -2.8% -2.5% -2.3% -2.1% -1.9% -1.7% -1.5% -1.2% -1.0% -0.8% -0.6% -0.4% -0.2% 0.0% 0.3% 0.5% 0.7% 0.9% 1.1% 1.3% 1.6% 1.8% 2.0% 2.2% 2.4% 2.6% 2.8% 3.1%1.0 -3.9% -3.7% -3.4% -3.2% -3.0% -2.8% -2.6% -2.4% -2.2% -1.9% -1.7% -1.5% -1.3% -1.1% -0.9% -0.6% -0.4% -0.2% 0.0% 0.2% 0.4% 0.6% 0.9% 1.1% 1.3% 1.5% 1.7% 1.9% 2.2% 2.4% 2.6% 2.8% 3.0%1.1 -3.9% -3.7% -3.5% -3.3% -3.1% -2.8% -2.6% -2.4% -2.2% -2.0% -1.8% -1.5% -1.3% -1.1% -0.9% -0.7% -0.5% -0.3% 0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.5% 1.7% 1.9% 2.1% 2.3% 2.5% 2.8% 3.0%1.2 -3.9% -3.7% -3.5% -3.3% -3.1% -2.9% -2.7% -2.4% -2.2% -2.0% -1.8% -1.6% -1.4% -1.2% -0.9% -0.7% -0.5% -0.3% -0.1% 0.1% 0.3% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 1.8% 2.1% 2.3% 2.5% 2.7% 2.9%1.3 -4.0% -3.8% -3.6% -3.3% -3.1% -2.9% -2.7% -2.5% -2.3% -2.1% -1.8% -1.6% -1.4% -1.2% -1.0% -0.8% -0.6% -0.3% -0.1% 0.1% 0.3% 0.5% 0.7% 0.9% 1.2% 1.4% 1.6% 1.8% 2.0% 2.2% 2.4% 2.7% 2.9%1.4 -4.0% -3.8% -3.6% -3.4% -3.2% -3.0% -2.7% -2.5% -2.3% -2.1% -1.9% -1.7% -1.5% -1.2% -1.0% -0.8% -0.6% -0.4% -0.2% 0.0% 0.3% 0.5% 0.7% 0.9% 1.1% 1.3% 1.5% 1.8% 2.0% 2.2% 2.4% 2.6% 2.8%1.5 -4.1% -3.9% -3.6% -3.4% -3.2% -3.0% -2.8% -2.6% -2.4% -2.1% -1.9% -1.7% -1.5% -1.3% -1.1% -0.9% -0.6% -0.4% -0.2% 0.0% 0.2% 0.4% 0.6% 0.9% 1.1% 1.3% 1.5% 1.7% 1.9% 2.1% 2.4% 2.6% 2.8%1.6 -4.1% -3.9% -3.7% -3.5% -3.2% -3.0% -2.8% -2.6% -2.4% -2.2% -2.0% -1.8% -1.5% -1.3% -1.1% -0.9% -0.7% -0.5% -0.3% 0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.5% 1.7% 1.9% 2.1% 2.3% 2.5% 2.7%1.7 -4.1% -3.9% -3.7% -3.5% -3.3% -3.1% -2.9% -2.6% -2.4% -2.2% -2.0% -1.8% -1.6% -1.4% -1.2% -0.9% -0.7% -0.5% -0.3% -0.1% 0.1% 0.3% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 1.8% 2.1% 2.3% 2.5% 2.7%1.8 -4.2% -4.0% -3.8% -3.5% -3.3% -3.1% -2.9% -2.7% -2.5% -2.3% -2.0% -1.8% -1.6% -1.4% -1.2% -1.0% -0.8% -0.6% -0.3% -0.1% 0.1% 0.3% 0.5% 0.7% 0.9% 1.2% 1.4% 1.6% 1.8% 2.0% 2.2% 2.4% 2.6%1.9 -4.2% -4.0% -3.8% -3.6% -3.4% -3.2% -2.9% -2.7% -2.5% -2.3% -2.1% -1.9% -1.7% -1.4% -1.2% -1.0% -0.8% -0.6% -0.4% -0.2% 0.0% 0.3% 0.5% 0.7% 0.9% 1.1% 1.3% 1.5% 1.7% 2.0% 2.2% 2.4% 2.6%2.0 -4.3% -4.0% -3.8% -3.6% -3.4% -3.2% -3.0% -2.8% -2.6% -2.3% -2.1% -1.9% -1.7% -1.5% -1.3% -1.1% -0.9% -0.6% -0.4% -0.2% 0.0% 0.2% 0.4% 0.6% 0.9% 1.1% 1.3% 1.5% 1.7% 1.9% 2.1% 2.3% 2.6%2.1 -4.3% -4.1% -3.9% -3.7% -3.4% -3.2% -3.0% -2.8% -2.6% -2.4% -2.2% -2.0% -1.7% -1.5% -1.3% -1.1% -0.9% -0.7% -0.5% -0.3% 0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 1.7% 1.9% 2.1% 2.3% 2.5%2.2 -4.3% -4.1% -3.9% -3.7% -3.5% -3.3% -3.1% -2.8% -2.6% -2.4% -2.2% -2.0% -1.8% -1.6% -1.4% -1.1% -0.9% -0.7% -0.5% -0.3% -0.1% 0.1% 0.3% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 1.8% 2.0% 2.3% 2.5%2.3 -4.4% -4.2% -3.9% -3.7% -3.5% -3.3% -3.1% -2.9% -2.7% -2.5% -2.3% -2.0% -1.8% -1.6% -1.4% -1.2% -1.0% -0.8% -0.6% -0.3% -0.1% 0.1% 0.3% 0.5% 0.7% 0.9% 1.1% 1.4% 1.6% 1.8% 2.0% 2.2% 2.4%2.4 -4.4% -4.2% -4.0% -3.8% -3.6% -3.4% -3.1% -2.9% -2.7% -2.5% -2.3% -2.1% -1.9% -1.7% -1.4% -1.2% -1.0% -0.8% -0.6% -0.4% -0.2% 0.0% 0.3% 0.5% 0.7% 0.9% 1.1% 1.3% 1.5% 1.7% 2.0% 2.2% 2.4%2.5 -4.5% -4.2% -4.0% -3.8% -3.6% -3.4% -3.2% -3.0% -2.8% -2.5% -2.3% -2.1% -1.9% -1.7% -1.5% -1.3% -1.1% -0.8% -0.6% -0.4% -0.2% 0.0% 0.2% 0.4% 0.6% 0.8% 1.1% 1.3% 1.5% 1.7% 1.9% 2.1% 2.3%2.6 -4.5% -4.3% -4.1% -3.9% -3.6% -3.4% -3.2% -3.0% -2.8% -2.6% -2.4% -2.2% -1.9% -1.7% -1.5% -1.3% -1.1% -0.9% -0.7% -0.5% -0.3% 0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 1.7% 1.9% 2.1% 2.3%2.7 -4.5% -4.3% -4.1% -3.9% -3.7% -3.5% -3.3% -3.0% -2.8% -2.6% -2.4% -2.2% -2.0% -1.8% -1.6% -1.4% -1.1% -0.9% -0.7% -0.5% -0.3% -0.1% 0.1% 0.3% 0.5% 0.8% 1.0% 1.2% 1.4% 1.6% 1.8% 2.0% 2.2%2.8 -4.6% -4.4% -4.1% -3.9% -3.7% -3.5% -3.3% -3.1% -2.9% -2.7% -2.5% -2.2% -2.0% -1.8% -1.6% -1.4% -1.2% -1.0% -0.8% -0.5% -0.3% -0.1% 0.1% 0.3% 0.5% 0.7% 0.9% 1.1% 1.4% 1.6% 1.8% 2.0% 2.2%2.9 -4.6% -4.4% -4.2% -4.0% -3.8% -3.5% -3.3% -3.1% -2.9% -2.7% -2.5% -2.3% -2.1% -1.9% -1.6% -1.4% -1.2% -1.0% -0.8% -0.6% -0.4% -0.2% 0.0% 0.3% 0.5% 0.7% 0.9% 1.1% 1.3% 1.5% 1.7% 1.9% 2.2%3.0 -4.6% -4.4% -4.2% -4.0% -3.8% -3.6% -3.4% -3.2% -3.0% -2.7% -2.5% -2.3% -2.1% -1.9% -1.7% -1.5% -1.3% -1.1% -0.8% -0.6% -0.4% -0.2% 0.0% 0.2% 0.4% 0.6% 0.8% 1.1% 1.3% 1.5% 1.7% 1.9% 2.1%3.1 -4.7% -4.5% -4.3% -4.0% -3.8% -3.6% -3.4% -3.2% -3.0% -2.8% -2.6% -2.4% -2.1% -1.9% -1.7% -1.5% -1.3% -1.1% -0.9% -0.7% -0.5% -0.3% 0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 1.9% 2.1%3.2 -4.7% -4.5% -4.3% -4.1% -3.9% -3.7% -3.5% -3.2% -3.0% -2.8% -2.6% -2.4% -2.2% -2.0% -1.8% -1.6% -1.3% -1.1% -0.9% -0.7% -0.5% -0.3% -0.1% 0.1% 0.3% 0.5% 0.8% 1.0% 1.2% 1.4% 1.6% 1.8% 2.0%3.3 -4.8% -4.5% -4.3% -4.1% -3.9% -3.7% -3.5% -3.3% -3.1% -2.9% -2.6% -2.4% -2.2% -2.0% -1.8% -1.6% -1.4% -1.2% -1.0% -0.8% -0.5% -0.3% -0.1% 0.1% 0.3% 0.5% 0.7% 0.9% 1.1% 1.3% 1.6% 1.8% 2.0%3.4 -4.8% -4.6% -4.4% -4.2% -3.9% -3.7% -3.5% -3.3% -3.1% -2.9% -2.7% -2.5% -2.3% -2.1% -1.8% -1.6% -1.4% -1.2% -1.0% -0.8% -0.6% -0.4% -0.2% 0.0% 0.3% 0.5% 0.7% 0.9% 1.1% 1.3% 1.5% 1.7% 1.9%3.5 -4.8% -4.6% -4.4% -4.2% -4.0% -3.8% -3.6% -3.4% -3.1% -2.9% -2.7% -2.5% -2.3% -2.1% -1.9% -1.7% -1.5% -1.3% -1.0% -0.8% -0.6% -0.4% -0.2% 0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.3% 1.5% 1.7% 1.9%3.6 -4.9% -4.7% -4.4% -4.2% -4.0% -3.8% -3.6% -3.4% -3.2% -3.0% -2.8% -2.6% -2.3% -2.1% -1.9% -1.7% -1.5% -1.3% -1.1% -0.9% -0.7% -0.5% -0.3% 0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 1.8%3.7 -4.9% -4.7% -4.5% -4.3% -4.1% -3.9% -3.6% -3.4% -3.2% -3.0% -2.8% -2.6% -2.4% -2.2% -2.0% -1.8% -1.6% -1.3% -1.1% -0.9% -0.7% -0.5% -0.3% -0.1% 0.1% 0.3% 0.5% 0.8% 1.0% 1.2% 1.4% 1.6% 1.8%3.8 -4.9% -4.7% -4.5% -4.3% -4.1% -3.9% -3.7% -3.5% -3.3% -3.1% -2.8% -2.6% -2.4% -2.2% -2.0% -1.8% -1.6% -1.4% -1.2% -1.0% -0.8% -0.5% -0.3% -0.1% 0.1% 0.3% 0.5% 0.7% 0.9% 1.1% 1.3% 1.5% 1.8%3.9 -5.0% -4.8% -4.6% -4.3% -4.1% -3.9% -3.7% -3.5% -3.3% -3.1% -2.9% -2.7% -2.5% -2.3% -2.0% -1.8% -1.6% -1.4% -1.2% -1.0% -0.8% -0.6% -0.4% -0.2% 0.0% 0.3% 0.5% 0.7% 0.9% 1.1% 1.3% 1.5% 1.7%4.0 -5.0% -4.8% -4.6% -4.4% -4.2% -4.0% -3.8% -3.6% -3.3% -3.1% -2.9% -2.7% -2.5% -2.3% -2.1% -1.9% -1.7% -1.5% -1.3% -1.0% -0.8% -0.6% -0.4% -0.2% 0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.3% 1.5% 1.7%
s = [ ( r - g ) / ( 1 + g ) ] * d
Greek Fiscal Stability Scenarios
Source: Datastream, LODH Calculation
GREECE
% Prim Bal / GDP Net Debt / GDP The Primary Balance [% of GDP] required to Stabilize the Net Debt / GDP ratio AT 2010 LEVELS, for various combinationsCyc Adj ratio of achievable / sustainable Real GDP Growth and Real Interest Rates
-0.3 0.97
Real Interest rateReal GDP Growth -8 -7.5 -7 -6.5 -6 -5.5 -5 -4.5 -4 -3.5 -3 -2.5 -2 -1.5 -1 -0.5 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6 6.5 7 7.5 8
0.2 -8.0% -7.5% -7.0% -6.5% -6.0% -5.5% -5.0% -4.6% -4.1% -3.6% -3.1% -2.6% -2.1% -1.7% -1.2% -0.7% -0.2% 0.3% 0.8% 1.3% 1.7% 2.2% 2.7% 3.2% 3.7% 4.2% 4.7% 5.1% 5.6% 6.1% 6.6% 7.1% 7.6%0.3 -8.0% -7.6% -7.1% -6.6% -6.1% -5.6% -5.1% -4.7% -4.2% -3.7% -3.2% -2.7% -2.2% -1.7% -1.3% -0.8% -0.3% 0.2% 0.7% 1.2% 1.6% 2.1% 2.6% 3.1% 3.6% 4.1% 4.6% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5%0.4 -8.1% -7.7% -7.2% -6.7% -6.2% -5.7% -5.2% -4.7% -4.3% -3.8% -3.3% -2.8% -2.3% -1.8% -1.4% -0.9% -0.4% 0.1% 0.6% 1.1% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 4.9% 5.4% 5.9% 6.4% 6.9% 7.4%0.5 -8.2% -7.7% -7.3% -6.8% -6.3% -5.8% -5.3% -4.8% -4.4% -3.9% -3.4% -2.9% -2.4% -1.9% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 1.9% 2.4% 2.9% 3.4% 3.9% 4.4% 4.8% 5.3% 5.8% 6.3% 6.8% 7.3%0.6 -8.3% -7.8% -7.3% -6.9% -6.4% -5.9% -5.4% -4.9% -4.4% -4.0% -3.5% -3.0% -2.5% -2.0% -1.5% -1.1% -0.6% -0.1% 0.4% 0.9% 1.4% 1.8% 2.3% 2.8% 3.3% 3.8% 4.3% 4.7% 5.2% 5.7% 6.2% 6.7% 7.2%0.7 -8.4% -7.9% -7.4% -7.0% -6.5% -6.0% -5.5% -5.0% -4.5% -4.1% -3.6% -3.1% -2.6% -2.1% -1.6% -1.2% -0.7% -0.2% 0.3% 0.8% 1.3% 1.7% 2.2% 2.7% 3.2% 3.7% 4.2% 4.6% 5.1% 5.6% 6.1% 6.6% 7.1%0.8 -8.5% -8.0% -7.5% -7.0% -6.6% -6.1% -5.6% -5.1% -4.6% -4.1% -3.7% -3.2% -2.7% -2.2% -1.7% -1.3% -0.8% -0.3% 0.2% 0.7% 1.2% 1.6% 2.1% 2.6% 3.1% 3.6% 4.1% 4.5% 5.0% 5.5% 6.0% 6.5% 6.9%0.9 -8.6% -8.1% -7.6% -7.1% -6.7% -6.2% -5.7% -5.2% -4.7% -4.2% -3.8% -3.3% -2.8% -2.3% -1.8% -1.3% -0.9% -0.4% 0.1% 0.6% 1.1% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.4% 4.9% 5.4% 5.9% 6.4% 6.8%1.0 -8.7% -8.2% -7.7% -7.2% -6.7% -6.3% -5.8% -5.3% -4.8% -4.3% -3.9% -3.4% -2.9% -2.4% -1.9% -1.4% -1.0% -0.5% 0.0% 0.5% 1.0% 1.4% 1.9% 2.4% 2.9% 3.4% 3.9% 4.3% 4.8% 5.3% 5.8% 6.3% 6.7%1.1 -8.8% -8.3% -7.8% -7.3% -6.8% -6.3% -5.9% -5.4% -4.9% -4.4% -3.9% -3.5% -3.0% -2.5% -2.0% -1.5% -1.1% -0.6% -0.1% 0.4% 0.9% 1.3% 1.8% 2.3% 2.8% 3.3% 3.8% 4.2% 4.7% 5.2% 5.7% 6.2% 6.6%1.2 -8.8% -8.4% -7.9% -7.4% -6.9% -6.4% -6.0% -5.5% -5.0% -4.5% -4.0% -3.6% -3.1% -2.6% -2.1% -1.6% -1.2% -0.7% -0.2% 0.3% 0.8% 1.2% 1.7% 2.2% 2.7% 3.2% 3.7% 4.1% 4.6% 5.1% 5.6% 6.1% 6.5%1.3 -8.9% -8.4% -8.0% -7.5% -7.0% -6.5% -6.0% -5.6% -5.1% -4.6% -4.1% -3.6% -3.2% -2.7% -2.2% -1.7% -1.2% -0.8% -0.3% 0.2% 0.7% 1.2% 1.6% 2.1% 2.6% 3.1% 3.6% 4.0% 4.5% 5.0% 5.5% 6.0% 6.4%1.4 -9.0% -8.5% -8.1% -7.6% -7.1% -6.6% -6.1% -5.7% -5.2% -4.7% -4.2% -3.7% -3.3% -2.8% -2.3% -1.8% -1.3% -0.9% -0.4% 0.1% 0.6% 1.1% 1.5% 2.0% 2.5% 3.0% 3.5% 3.9% 4.4% 4.9% 5.4% 5.9% 6.3%1.5 -9.1% -8.6% -8.1% -7.7% -7.2% -6.7% -6.2% -5.7% -5.3% -4.8% -4.3% -3.8% -3.4% -2.9% -2.4% -1.9% -1.4% -1.0% -0.5% 0.0% 0.5% 1.0% 1.4% 1.9% 2.4% 2.9% 3.4% 3.8% 4.3% 4.8% 5.3% 5.7% 6.2%1.6 -9.2% -8.7% -8.2% -7.8% -7.3% -6.8% -6.3% -5.8% -5.4% -4.9% -4.4% -3.9% -3.4% -3.0% -2.5% -2.0% -1.5% -1.1% -0.6% -0.1% 0.4% 0.9% 1.3% 1.8% 2.3% 2.8% 3.3% 3.7% 4.2% 4.7% 5.2% 5.6% 6.1%1.7 -9.3% -8.8% -8.3% -7.8% -7.4% -6.9% -6.4% -5.9% -5.5% -5.0% -4.5% -4.0% -3.5% -3.1% -2.6% -2.1% -1.6% -1.1% -0.7% -0.2% 0.3% 0.8% 1.2% 1.7% 2.2% 2.7% 3.2% 3.6% 4.1% 4.6% 5.1% 5.5% 6.0%1.8 -9.4% -8.9% -8.4% -7.9% -7.5% -7.0% -6.5% -6.0% -5.5% -5.1% -4.6% -4.1% -3.6% -3.2% -2.7% -2.2% -1.7% -1.2% -0.8% -0.3% 0.2% 0.7% 1.1% 1.6% 2.1% 2.6% 3.1% 3.5% 4.0% 4.5% 5.0% 5.4% 5.9%1.9 -9.4% -9.0% -8.5% -8.0% -7.5% -7.1% -6.6% -6.1% -5.6% -5.2% -4.7% -4.2% -3.7% -3.2% -2.8% -2.3% -1.8% -1.3% -0.9% -0.4% 0.1% 0.6% 1.0% 1.5% 2.0% 2.5% 3.0% 3.4% 3.9% 4.4% 4.9% 5.3% 5.8%2.0 -9.5% -9.1% -8.6% -8.1% -7.6% -7.2% -6.7% -6.2% -5.7% -5.2% -4.8% -4.3% -3.8% -3.3% -2.9% -2.4% -1.9% -1.4% -1.0% -0.5% 0.0% 0.5% 1.0% 1.4% 1.9% 2.4% 2.9% 3.3% 3.8% 4.3% 4.8% 5.2% 5.7%2.1 -9.6% -9.1% -8.7% -8.2% -7.7% -7.2% -6.8% -6.3% -5.8% -5.3% -4.9% -4.4% -3.9% -3.4% -3.0% -2.5% -2.0% -1.5% -1.0% -0.6% -0.1% 0.4% 0.9% 1.3% 1.8% 2.3% 2.8% 3.2% 3.7% 4.2% 4.7% 5.1% 5.6%2.2 -9.7% -9.2% -8.8% -8.3% -7.8% -7.3% -6.9% -6.4% -5.9% -5.4% -4.9% -4.5% -4.0% -3.5% -3.0% -2.6% -2.1% -1.6% -1.1% -0.7% -0.2% 0.3% 0.8% 1.2% 1.7% 2.2% 2.7% 3.1% 3.6% 4.1% 4.6% 5.0% 5.5%2.3 -9.8% -9.3% -8.8% -8.4% -7.9% -7.4% -6.9% -6.5% -6.0% -5.5% -5.0% -4.6% -4.1% -3.6% -3.1% -2.7% -2.2% -1.7% -1.2% -0.8% -0.3% 0.2% 0.7% 1.1% 1.6% 2.1% 2.6% 3.0% 3.5% 4.0% 4.5% 4.9% 5.4%2.4 -9.9% -9.4% -8.9% -8.5% -8.0% -7.5% -7.0% -6.6% -6.1% -5.6% -5.1% -4.7% -4.2% -3.7% -3.2% -2.8% -2.3% -1.8% -1.3% -0.9% -0.4% 0.1% 0.6% 1.0% 1.5% 2.0% 2.5% 2.9% 3.4% 3.9% 4.4% 4.8% 5.3%2.5 -10.0% -9.5% -9.0% -8.5% -8.1% -7.6% -7.1% -6.6% -6.2% -5.7% -5.2% -4.7% -4.3% -3.8% -3.3% -2.8% -2.4% -1.9% -1.4% -0.9% -0.5% 0.0% 0.5% 0.9% 1.4% 1.9% 2.4% 2.8% 3.3% 3.8% 4.3% 4.7% 5.2%2.6 -10.0% -9.6% -9.1% -8.6% -8.2% -7.7% -7.2% -6.7% -6.3% -5.8% -5.3% -4.8% -4.4% -3.9% -3.4% -2.9% -2.5% -2.0% -1.5% -1.0% -0.6% -0.1% 0.4% 0.9% 1.3% 1.8% 2.3% 2.7% 3.2% 3.7% 4.2% 4.6% 5.1%2.7 -10.1% -9.7% -9.2% -8.7% -8.2% -7.8% -7.3% -6.8% -6.3% -5.9% -5.4% -4.9% -4.5% -4.0% -3.5% -3.0% -2.6% -2.1% -1.6% -1.1% -0.7% -0.2% 0.3% 0.8% 1.2% 1.7% 2.2% 2.7% 3.1% 3.6% 4.1% 4.5% 5.0%2.8 -10.2% -9.7% -9.3% -8.8% -8.3% -7.9% -7.4% -6.9% -6.4% -6.0% -5.5% -5.0% -4.5% -4.1% -3.6% -3.1% -2.6% -2.2% -1.7% -1.2% -0.8% -0.3% 0.2% 0.7% 1.1% 1.6% 2.1% 2.6% 3.0% 3.5% 4.0% 4.4% 4.9%2.9 -10.3% -9.8% -9.4% -8.9% -8.4% -7.9% -7.5% -7.0% -6.5% -6.0% -5.6% -5.1% -4.6% -4.2% -3.7% -3.2% -2.7% -2.3% -1.8% -1.3% -0.9% -0.4% 0.1% 0.6% 1.0% 1.5% 2.0% 2.5% 2.9% 3.4% 3.9% 4.3% 4.8%3.0 -10.4% -9.9% -9.4% -9.0% -8.5% -8.0% -7.6% -7.1% -6.6% -6.1% -5.7% -5.2% -4.7% -4.2% -3.8% -3.3% -2.8% -2.4% -1.9% -1.4% -0.9% -0.5% 0.0% 0.5% 0.9% 1.4% 1.9% 2.4% 2.8% 3.3% 3.8% 4.2% 4.7%3.1 -10.5% -10.0% -9.5% -9.1% -8.6% -8.1% -7.6% -7.2% -6.7% -6.2% -5.8% -5.3% -4.8% -4.3% -3.9% -3.4% -2.9% -2.5% -2.0% -1.5% -1.0% -0.6% -0.1% 0.4% 0.8% 1.3% 1.8% 2.3% 2.7% 3.2% 3.7% 4.2% 4.6%3.2 -10.6% -10.1% -9.6% -9.1% -8.7% -8.2% -7.7% -7.3% -6.8% -6.3% -5.8% -5.4% -4.9% -4.4% -4.0% -3.5% -3.0% -2.5% -2.1% -1.6% -1.1% -0.7% -0.2% 0.3% 0.8% 1.2% 1.7% 2.2% 2.6% 3.1% 3.6% 4.1% 4.5%3.3 -10.6% -10.2% -9.7% -9.2% -8.8% -8.3% -7.8% -7.3% -6.9% -6.4% -5.9% -5.5% -5.0% -4.5% -4.0% -3.6% -3.1% -2.6% -2.2% -1.7% -1.2% -0.8% -0.3% 0.2% 0.7% 1.1% 1.6% 2.1% 2.5% 3.0% 3.5% 4.0% 4.4%3.4 -10.7% -10.3% -9.8% -9.3% -8.8% -8.4% -7.9% -7.4% -7.0% -6.5% -6.0% -5.5% -5.1% -4.6% -4.1% -3.7% -3.2% -2.7% -2.3% -1.8% -1.3% -0.8% -0.4% 0.1% 0.6% 1.0% 1.5% 2.0% 2.4% 2.9% 3.4% 3.9% 4.3%3.5 -10.8% -10.3% -9.9% -9.4% -8.9% -8.5% -8.0% -7.5% -7.0% -6.6% -6.1% -5.6% -5.2% -4.7% -4.2% -3.8% -3.3% -2.8% -2.3% -1.9% -1.4% -0.9% -0.5% 0.0% 0.5% 0.9% 1.4% 1.9% 2.3% 2.8% 3.3% 3.8% 4.2%3.6 -10.9% -10.4% -10.0% -9.5% -9.0% -8.5% -8.1% -7.6% -7.1% -6.7% -6.2% -5.7% -5.3% -4.8% -4.3% -3.8% -3.4% -2.9% -2.4% -2.0% -1.5% -1.0% -0.6% -0.1% 0.4% 0.8% 1.3% 1.8% 2.3% 2.7% 3.2% 3.7% 4.1%3.7 -11.0% -10.5% -10.0% -9.6% -9.1% -8.6% -8.2% -7.7% -7.2% -6.8% -6.3% -5.8% -5.3% -4.9% -4.4% -3.9% -3.5% -3.0% -2.5% -2.1% -1.6% -1.1% -0.7% -0.2% 0.3% 0.8% 1.2% 1.7% 2.2% 2.6% 3.1% 3.6% 4.0%3.8 -11.1% -10.6% -10.1% -9.7% -9.2% -8.7% -8.2% -7.8% -7.3% -6.8% -6.4% -5.9% -5.4% -5.0% -4.5% -4.0% -3.6% -3.1% -2.6% -2.2% -1.7% -1.2% -0.7% -0.3% 0.2% 0.7% 1.1% 1.6% 2.1% 2.5% 3.0% 3.5% 3.9%3.9 -11.1% -10.7% -10.2% -9.7% -9.3% -8.8% -8.3% -7.9% -7.4% -6.9% -6.5% -6.0% -5.5% -5.1% -4.6% -4.1% -3.7% -3.2% -2.7% -2.2% -1.8% -1.3% -0.8% -0.4% 0.1% 0.6% 1.0% 1.5% 2.0% 2.4% 2.9% 3.4% 3.8%4.0 -11.2% -10.8% -10.3% -9.8% -9.4% -8.9% -8.4% -7.9% -7.5% -7.0% -6.5% -6.1% -5.6% -5.1% -4.7% -4.2% -3.7% -3.3% -2.8% -2.3% -1.9% -1.4% -0.9% -0.5% 0.0% 0.5% 0.9% 1.4% 1.9% 2.3% 2.8% 3.3% 3.7%
s = [ ( r - g ) / ( 1 + g ) ] * d
UK Fiscal Stability Scenarios
Source: Datastream, LODH Calculation
UK
% Prim Bal / GDP Net Debt / GDP The Primary Balance [% of GDP] required to Stabilize the Net Debt / GDP ratio AT 2010 LEVELS, for various combinationsCyc Adj ratio of achievable / sustainable Real GDP Growth and Real Interest Rates
-5.0 0.51
Real Interest rateReal GDP Growth -8 -7.5 -7 -6.5 -6 -5.5 -5 -4.5 -4 -3.5 -3 -2.5 -2 -1.5 -1 -0.5 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6 6.5 7 7.5 8
0.2 -4.2% -3.9% -3.7% -3.4% -3.2% -2.9% -2.7% -2.4% -2.1% -1.9% -1.6% -1.4% -1.1% -0.9% -0.6% -0.4% -0.1% 0.2% 0.4% 0.7% 0.9% 1.2% 1.4% 1.7% 1.9% 2.2% 2.5% 2.7% 3.0% 3.2% 3.5% 3.7% 4.0%0.3 -4.2% -4.0% -3.7% -3.5% -3.2% -3.0% -2.7% -2.5% -2.2% -1.9% -1.7% -1.4% -1.2% -0.9% -0.7% -0.4% -0.2% 0.1% 0.4% 0.6% 0.9% 1.1% 1.4% 1.6% 1.9% 2.1% 2.4% 2.7% 2.9% 3.2% 3.4% 3.7% 3.9%0.4 -4.3% -4.0% -3.8% -3.5% -3.3% -3.0% -2.8% -2.5% -2.2% -2.0% -1.7% -1.5% -1.2% -1.0% -0.7% -0.5% -0.2% 0.1% 0.3% 0.6% 0.8% 1.1% 1.3% 1.6% 1.8% 2.1% 2.3% 2.6% 2.9% 3.1% 3.4% 3.6% 3.9%0.5 -4.3% -4.1% -3.8% -3.6% -3.3% -3.1% -2.8% -2.6% -2.3% -2.0% -1.8% -1.5% -1.3% -1.0% -0.8% -0.5% -0.3% 0.0% 0.3% 0.5% 0.8% 1.0% 1.3% 1.5% 1.8% 2.0% 2.3% 2.6% 2.8% 3.1% 3.3% 3.6% 3.8%0.6 -4.4% -4.1% -3.9% -3.6% -3.4% -3.1% -2.9% -2.6% -2.3% -2.1% -1.8% -1.6% -1.3% -1.1% -0.8% -0.6% -0.3% -0.1% 0.2% 0.5% 0.7% 1.0% 1.2% 1.5% 1.7% 2.0% 2.2% 2.5% 2.8% 3.0% 3.3% 3.5% 3.8%0.7 -4.4% -4.2% -3.9% -3.7% -3.4% -3.2% -2.9% -2.6% -2.4% -2.1% -1.9% -1.6% -1.4% -1.1% -0.9% -0.6% -0.4% -0.1% 0.2% 0.4% 0.7% 0.9% 1.2% 1.4% 1.7% 1.9% 2.2% 2.4% 2.7% 3.0% 3.2% 3.5% 3.7%0.8 -4.5% -4.2% -4.0% -3.7% -3.5% -3.2% -3.0% -2.7% -2.4% -2.2% -1.9% -1.7% -1.4% -1.2% -0.9% -0.7% -0.4% -0.2% 0.1% 0.4% 0.6% 0.9% 1.1% 1.4% 1.6% 1.9% 2.1% 2.4% 2.6% 2.9% 3.2% 3.4% 3.7%0.9 -4.5% -4.3% -4.0% -3.8% -3.5% -3.3% -3.0% -2.7% -2.5% -2.2% -2.0% -1.7% -1.5% -1.2% -1.0% -0.7% -0.5% -0.2% 0.1% 0.3% 0.6% 0.8% 1.1% 1.3% 1.6% 1.8% 2.1% 2.3% 2.6% 2.8% 3.1% 3.4% 3.6%1.0 -4.6% -4.3% -4.1% -3.8% -3.6% -3.3% -3.0% -2.8% -2.5% -2.3% -2.0% -1.8% -1.5% -1.3% -1.0% -0.8% -0.5% -0.3% 0.0% 0.3% 0.5% 0.8% 1.0% 1.3% 1.5% 1.8% 2.0% 2.3% 2.5% 2.8% 3.0% 3.3% 3.6%1.1 -4.6% -4.4% -4.1% -3.9% -3.6% -3.3% -3.1% -2.8% -2.6% -2.3% -2.1% -1.8% -1.6% -1.3% -1.1% -0.8% -0.6% -0.3% -0.1% 0.2% 0.5% 0.7% 1.0% 1.2% 1.5% 1.7% 2.0% 2.2% 2.5% 2.7% 3.0% 3.2% 3.5%1.2 -4.7% -4.4% -4.2% -3.9% -3.6% -3.4% -3.1% -2.9% -2.6% -2.4% -2.1% -1.9% -1.6% -1.4% -1.1% -0.9% -0.6% -0.4% -0.1% 0.2% 0.4% 0.7% 0.9% 1.2% 1.4% 1.7% 1.9% 2.2% 2.4% 2.7% 2.9% 3.2% 3.4%1.3 -4.7% -4.5% -4.2% -3.9% -3.7% -3.4% -3.2% -2.9% -2.7% -2.4% -2.2% -1.9% -1.7% -1.4% -1.2% -0.9% -0.7% -0.4% -0.2% 0.1% 0.4% 0.6% 0.9% 1.1% 1.4% 1.6% 1.9% 2.1% 2.4% 2.6% 2.9% 3.1% 3.4%1.4 -4.8% -4.5% -4.2% -4.0% -3.7% -3.5% -3.2% -3.0% -2.7% -2.5% -2.2% -2.0% -1.7% -1.5% -1.2% -1.0% -0.7% -0.5% -0.2% 0.1% 0.3% 0.6% 0.8% 1.1% 1.3% 1.6% 1.8% 2.1% 2.3% 2.6% 2.8% 3.1% 3.3%1.5 -4.8% -4.5% -4.3% -4.0% -3.8% -3.5% -3.3% -3.0% -2.8% -2.5% -2.3% -2.0% -1.8% -1.5% -1.3% -1.0% -0.8% -0.5% -0.3% 0.0% 0.3% 0.5% 0.8% 1.0% 1.3% 1.5% 1.8% 2.0% 2.3% 2.5% 2.8% 3.0% 3.3%1.6 -4.8% -4.6% -4.3% -4.1% -3.8% -3.6% -3.3% -3.1% -2.8% -2.6% -2.3% -2.1% -1.8% -1.6% -1.3% -1.1% -0.8% -0.6% -0.3% -0.1% 0.2% 0.5% 0.7% 1.0% 1.2% 1.5% 1.7% 2.0% 2.2% 2.5% 2.7% 3.0% 3.2%1.7 -4.9% -4.6% -4.4% -4.1% -3.9% -3.6% -3.4% -3.1% -2.9% -2.6% -2.4% -2.1% -1.9% -1.6% -1.4% -1.1% -0.9% -0.6% -0.4% -0.1% 0.2% 0.4% 0.7% 0.9% 1.2% 1.4% 1.7% 1.9% 2.2% 2.4% 2.7% 2.9% 3.2%1.8 -4.9% -4.7% -4.4% -4.2% -3.9% -3.7% -3.4% -3.2% -2.9% -2.7% -2.4% -2.2% -1.9% -1.7% -1.4% -1.2% -0.9% -0.7% -0.4% -0.2% 0.1% 0.4% 0.6% 0.9% 1.1% 1.4% 1.6% 1.9% 2.1% 2.4% 2.6% 2.9% 3.1%1.9 -5.0% -4.7% -4.5% -4.2% -4.0% -3.7% -3.5% -3.2% -3.0% -2.7% -2.5% -2.2% -2.0% -1.7% -1.5% -1.2% -1.0% -0.7% -0.5% -0.2% 0.1% 0.3% 0.6% 0.8% 1.1% 1.3% 1.6% 1.8% 2.1% 2.3% 2.6% 2.8% 3.1%2.0 -5.0% -4.8% -4.5% -4.3% -4.0% -3.8% -3.5% -3.3% -3.0% -2.8% -2.5% -2.3% -2.0% -1.8% -1.5% -1.3% -1.0% -0.8% -0.5% -0.3% 0.0% 0.3% 0.5% 0.8% 1.0% 1.3% 1.5% 1.8% 2.0% 2.3% 2.5% 2.8% 3.0%2.1 -5.1% -4.8% -4.6% -4.3% -4.1% -3.8% -3.6% -3.3% -3.1% -2.8% -2.6% -2.3% -2.1% -1.8% -1.6% -1.3% -1.1% -0.8% -0.6% -0.3% -0.1% 0.2% 0.5% 0.7% 1.0% 1.2% 1.5% 1.7% 2.0% 2.2% 2.5% 2.7% 3.0%2.2 -5.1% -4.9% -4.6% -4.4% -4.1% -3.9% -3.6% -3.4% -3.1% -2.9% -2.6% -2.4% -2.1% -1.9% -1.6% -1.4% -1.1% -0.9% -0.6% -0.4% -0.1% 0.2% 0.4% 0.7% 0.9% 1.2% 1.4% 1.7% 1.9% 2.2% 2.4% 2.7% 2.9%2.3 -5.2% -4.9% -4.7% -4.4% -4.2% -3.9% -3.7% -3.4% -3.2% -2.9% -2.7% -2.4% -2.2% -1.9% -1.7% -1.4% -1.2% -0.9% -0.7% -0.4% -0.2% 0.1% 0.4% 0.6% 0.9% 1.1% 1.4% 1.6% 1.9% 2.1% 2.4% 2.6% 2.9%2.4 -5.2% -5.0% -4.7% -4.5% -4.2% -4.0% -3.7% -3.5% -3.2% -3.0% -2.7% -2.5% -2.2% -2.0% -1.7% -1.5% -1.2% -1.0% -0.7% -0.5% -0.2% 0.1% 0.3% 0.6% 0.8% 1.1% 1.3% 1.6% 1.8% 2.1% 2.3% 2.6% 2.8%2.5 -5.3% -5.0% -4.8% -4.5% -4.3% -4.0% -3.8% -3.5% -3.3% -3.0% -2.8% -2.5% -2.3% -2.0% -1.8% -1.5% -1.3% -1.0% -0.8% -0.5% -0.3% 0.0% 0.3% 0.5% 0.8% 1.0% 1.3% 1.5% 1.8% 2.0% 2.3% 2.5% 2.8%2.6 -5.3% -5.0% -4.8% -4.5% -4.3% -4.0% -3.8% -3.5% -3.3% -3.0% -2.8% -2.5% -2.3% -2.0% -1.8% -1.5% -1.3% -1.0% -0.8% -0.5% -0.3% 0.0% 0.2% 0.4% 0.7% 0.9% 1.2% 1.4% 1.7% 1.9% 2.2% 2.4% 2.7%2.7 -5.3% -5.1% -4.8% -4.6% -4.3% -4.1% -3.8% -3.6% -3.3% -3.1% -2.8% -2.6% -2.3% -2.1% -1.8% -1.6% -1.3% -1.1% -0.8% -0.6% -0.3% -0.1% 0.1% 0.4% 0.6% 0.9% 1.1% 1.4% 1.6% 1.9% 2.1% 2.4% 2.6%2.8 -5.4% -5.1% -4.9% -4.6% -4.4% -4.1% -3.9% -3.6% -3.4% -3.1% -2.9% -2.6% -2.4% -2.1% -1.9% -1.6% -1.4% -1.1% -0.9% -0.6% -0.4% -0.1% 0.1% 0.3% 0.6% 0.8% 1.1% 1.3% 1.6% 1.8% 2.1% 2.3% 2.6%2.9 -5.4% -5.2% -4.9% -4.7% -4.4% -4.2% -3.9% -3.7% -3.4% -3.2% -2.9% -2.7% -2.4% -2.2% -1.9% -1.7% -1.4% -1.2% -0.9% -0.7% -0.4% -0.2% 0.0% 0.3% 0.5% 0.8% 1.0% 1.3% 1.5% 1.8% 2.0% 2.3% 2.5%3.0 -5.5% -5.2% -5.0% -4.7% -4.5% -4.2% -4.0% -3.7% -3.5% -3.2% -3.0% -2.7% -2.5% -2.2% -2.0% -1.7% -1.5% -1.2% -1.0% -0.7% -0.5% -0.2% 0.0% 0.2% 0.5% 0.7% 1.0% 1.2% 1.5% 1.7% 2.0% 2.2% 2.5%3.1 -5.5% -5.3% -5.0% -4.8% -4.5% -4.3% -4.0% -3.8% -3.5% -3.3% -3.0% -2.8% -2.5% -2.3% -2.0% -1.8% -1.5% -1.3% -1.0% -0.8% -0.5% -0.3% 0.0% 0.2% 0.4% 0.7% 0.9% 1.2% 1.4% 1.7% 1.9% 2.2% 2.4%3.2 -5.6% -5.3% -5.1% -4.8% -4.6% -4.3% -4.1% -3.8% -3.6% -3.3% -3.1% -2.8% -2.6% -2.3% -2.1% -1.8% -1.6% -1.3% -1.1% -0.8% -0.6% -0.3% -0.1% 0.1% 0.4% 0.6% 0.9% 1.1% 1.4% 1.6% 1.9% 2.1% 2.4%3.3 -5.6% -5.4% -5.1% -4.9% -4.6% -4.4% -4.1% -3.9% -3.6% -3.4% -3.1% -2.9% -2.6% -2.4% -2.1% -1.9% -1.6% -1.4% -1.1% -0.9% -0.6% -0.4% -0.1% 0.1% 0.3% 0.6% 0.8% 1.1% 1.3% 1.6% 1.8% 2.1% 2.3%3.4 -5.7% -5.4% -5.2% -4.9% -4.7% -4.4% -4.2% -3.9% -3.7% -3.4% -3.2% -2.9% -2.7% -2.4% -2.2% -1.9% -1.7% -1.4% -1.2% -0.9% -0.7% -0.4% -0.2% 0.0% 0.3% 0.5% 0.8% 1.0% 1.3% 1.5% 1.8% 2.0% 2.3%3.5 -5.7% -5.5% -5.2% -5.0% -4.7% -4.5% -4.2% -4.0% -3.7% -3.5% -3.2% -3.0% -2.7% -2.5% -2.2% -2.0% -1.7% -1.5% -1.2% -1.0% -0.7% -0.5% -0.2% 0.0% 0.2% 0.5% 0.7% 1.0% 1.2% 1.5% 1.7% 2.0% 2.2%3.6 -5.7% -5.5% -5.2% -5.0% -4.8% -4.5% -4.3% -4.0% -3.8% -3.5% -3.3% -3.0% -2.8% -2.5% -2.3% -2.0% -1.8% -1.5% -1.3% -1.0% -0.8% -0.5% -0.3% 0.0% 0.2% 0.4% 0.7% 0.9% 1.2% 1.4% 1.7% 1.9% 2.2%3.7 -5.8% -5.5% -5.3% -5.0% -4.8% -4.5% -4.3% -4.1% -3.8% -3.6% -3.3% -3.1% -2.8% -2.6% -2.3% -2.1% -1.8% -1.6% -1.3% -1.1% -0.8% -0.6% -0.3% -0.1% 0.1% 0.4% 0.6% 0.9% 1.1% 1.4% 1.6% 1.9% 2.1%3.8 -5.8% -5.6% -5.3% -5.1% -4.8% -4.6% -4.3% -4.1% -3.9% -3.6% -3.4% -3.1% -2.9% -2.6% -2.4% -2.1% -1.9% -1.6% -1.4% -1.1% -0.9% -0.6% -0.4% -0.1% 0.1% 0.3% 0.6% 0.8% 1.1% 1.3% 1.6% 1.8% 2.1%3.9 -5.9% -5.6% -5.4% -5.1% -4.9% -4.6% -4.4% -4.1% -3.9% -3.7% -3.4% -3.2% -2.9% -2.7% -2.4% -2.2% -1.9% -1.7% -1.4% -1.2% -0.9% -0.7% -0.4% -0.2% 0.0% 0.3% 0.5% 0.8% 1.0% 1.3% 1.5% 1.8% 2.0%4.0 -5.9% -5.7% -5.4% -5.2% -4.9% -4.7% -4.4% -4.2% -3.9% -3.7% -3.5% -3.2% -3.0% -2.7% -2.5% -2.2% -2.0% -1.7% -1.5% -1.2% -1.0% -0.7% -0.5% -0.2% 0.0% 0.2% 0.5% 0.7% 1.0% 1.2% 1.5% 1.7% 2.0%
s = [ ( r - g ) / ( 1 + g ) ] * d
What needs to be done?....Rather a Lot !!
Source: OECD, Datastream, LODH Calculation
EQM % GDPGross Debt Net Debt Budget Balance Structural Balance Cyclically Adj Primary Balance Prim Bal Fiscal Adj
Germany 79.9 50.5 -4.0 -3.0 -0.7Spain 72.2 43.4 -9.2 -5.9 -4.7 0.6 5.4France 92.4 57.1 -7.4 -5.4 -3.2Italy 131.3 103.3 -5.0 -2.1 2.0Ireland 104.9 61.5 -32.3 -26.1 -5.5 0.9 6.4Greece 129.2 97.3 -8.3 -5.4 -0.3 1.4 1.8Portugal 92.9 63.2 -7.3 -6.1 -4.3 0.1 4.4Japan 198.4 114.0 -7.7 -6.7 -5.5 1.6 7.1UK 81.3 51.3 -9.6 -7.2 -5.0 0.3 5.2USA 92.8 67.8 -10.5 -8.8 -7.0 0.3 7.4
2010 [% of GDP]
Given 2010 starting Net Debt ratios, and assuming historical trend Real GDP Growth and Real Interest Rates, the necessary policy tightening is 4.5% -5.5 % in Spain and Portugal, 6.5% in Ireland and in excess of 7% in Japan and the USA.
At TREND GDP Growth and CURRENT Real Yields, the necessary adjustment is 9.7% of GDP in Ireland, 8.8% in Greece and 7.8% in Portugal…larger with inevitably slower Real GDP growth!
Default / Restructuring is both inevitable and unavoidable in those Countries.
Early Warning Signs
Source: IMF
The IMF recently published a “Fiscal Stress Index” and a “Fiscal Vulnerability Index” (see “Measuring Fiscal Vulnerability and Fiscal Stress: A Proposed Set of Indicators”, E Baldacci, J McHugh & I Petrova, IMF WP / 11 / 94, April 2011): the variables monitored are,
10 Year average Interest Rate – GDP Growth Rate gap….”solvency”
General Government Gross / Net debt….”debt burden”
Cyclically Adjusted Primary Balance….”correction for the cycle”
Total Fertility Rate….”population ageing”
Dependency Ratio Projections….”implied burden of ageing population”
Projected Pension and Health Expenditures….”social burden”
Current Gross Financing Needs….”rollover and new borrowing requirement”
Short Term Debt / Total Debt Outstanding….”vulnerability to rollover risk”
Debt Denominated in Foreign Currency….”exposure to Foreign Exchange Risk”
Proportion of Debt held by Non Residents….”non home bias risk”
Weighted Average Debt Maturity….”vulnerability to market sentiment”
Short Term External Debt….”drain, for EM countries, on FX resources”
Implications of Increased Government Leverage
Looking at just the post-War period, the same relationship appears to hold: achievable Real GDP Growth in the Advanced Economies declines materially (with obvious implications for sustainability and solvency) at debt ratios beyond the 90% threshold…
Reinhart & Rogoff [2007] illustrate a relationship [causality?] between Government Leverage and achievable Real GDP Growth rates. In the last 200 or so years, there appears to be a “break” in achievable GDP growth at Debt ratios above 90%..
Source:Reinhart & Rogoff (2008)
Twenty Advanced Economies Average & Median Real GDP Growth rates by Government Debt/GDP band : 1790 - 2009 [Reinhart & Rogoff, 2009]
3.7
3.0
3.4
1.7
3.9
3.1
2.8
1.9
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
<30% 30% - 60% 60% - 90% >90%
average
median
Twenty Advanced Economies Average & Median Real GDP Growth rates by Government Debt/GDP band : 1946 - 2009 [Reinhart & Rogoff, 2010]
3.8
2.9
3.5
-0.2
3.9
3
3.3
2.2
-0.5
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
<30% 30% - 60% 60% - 90% >90%
average
median
How to Tackle the Debt/Deficit problem?
Welfare Systems are under threat, and the evidence suggests those that are least effective will bear the brunt of adjustment ..without severe consequences! Greece, Spain [and Portugal] have particularly expensive and ineffective systems…
Fiscal Policy tightening implemented through cuts in Spending are far more likely to succeed [reduce the cyclically adjusted primary balance by at least 1.5% points of GDP] than are policies focussed upon increasing Revenue…
Source: Alberto Alesina « Fiscal Adjustments: Lessons from Recent History », Harvard, April 2010, Eurostat 2003
The Contribution of Expenditure versus Revenue Based Policy Measures to Fiscal Consolidation [ A Alesina, April 2010, Harvard, 107 adjustment periods from 1980- ]
67.4
56.0
38.9 37.3
32.6
44.0
61.162.7
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
Successful Expansionary Unsuccessful Contractionary
Primary Exp [cycl adj ]
Total Revenue [cycl adj ]
Percent of Households at Risk of Poverty BEFORE and AFTER Social Transfers [Eurostat, 2003]
32
29 2928
26 26
24 24
22 22 22
12
16
11 1112
18
21
16
19 19
12
0
5
10
15
20
25
30
35
40
Denmark Belgium Sw eden Finland France UK Greece Germany Italy Spain Holland
Before
After
Exposure to the Fiscal Problem Countries
US Banks are particularly exposed in Japan, with European banks having $3.4 trn in exposure to the US…
German and French banks are most exposed to the PIGS bloc : they account for one-third of TOTAL foreign bank exposure. They have approximately $305bn in exposure to Portugal, Ireland and Greece alone (30% of the total), with Spain another $320bn (38% of the total)!
Source: BIS, LODH Calculation
Total Bank Exposure to Spain, Greece and the PIGS [Portugal, Ireland, Greece & Spain] Bloc by Individual Country : $bn [BIS Q410 data]
53.034.0
2.713.1 7.4
258.3
370.5
35.0
302.0
119.3
0.0
50.0
100.0
150.0
200.0
250.0
300.0
350.0
400.0
450.0
France Germany Sw iss UK USA
Greece
PIGS
Total Bank Exposure to Japan : $bn [BIS Q410 data]
139.4
57.1
103.4
137.4
306.8
0
50
100
150
200
250
300
350
400
France Germany Sw iss UK USA
Japanese Equity Valuation....cheap at last!
This gives a range of implied annualized holding period returns from +5% to +14%, consistent with a substantial and positive implied equity risk premium, even under conditions where valuation multiples fall to record lows, for the first time in 40 years…
Japanese valuation is exceptionally low, by historical standards, in fact over half of listed Japanese companies trade at valuation below their book [or liquidation] value, balance sheet cash is one-third of the market cap [depresses RoE]..
Source: Datastream, LODH Calculation
Japan Equity Index Price / Trailing 10 year Reported Earnings
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
100.0
Jan-80
Jan-82
Jan-84
Jan-86
Jan-88
Jan-90
Jan-92
Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Jan-12
Jan-14
Japanese Equity Index Projected 10 Year Holding Period Return with Trend 4% EPS Growth, Given Dividend Yield and Specified Terminal P / 10Yr E Ratio
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
Jan-87
Jan-88
Jan-89
Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
trailing median P / 10yr E trailing minimum trailing maximum
Attractive European ex UK Equity Valuation....…
This gives a range of implied annualized holding period returns from +3.5% to +10%, consistent with a substantial and positive implied equity risk premium, even under conditions where valuation multiples fall to record lows…
In contrast with the US market, Europe ex UK valuation levels remain depressed and attractive, still substantially below bubble-like levels..
Source: Datastream, LODH Calculation
MSCI Europe ex UK Equity Index : Price / Trailing 10 Year EPS
0.0
10.0
20.0
30.0
40.0
50.0
60.0
Jan-80
Jan-82
Jan-84
Jan-86
Jan-88
Jan-90
Jan-92
Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Jan-12
Jan-14
MSCI Europe ex UK Equity Index Projected 10 Year Holding Period Return w ith Trend 4% EPS Growth, Given Dividend Yield and Specified Terminal P / Trailing 10 year E Ratio
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%Sep-86
Sep-87
Sep-88
Sep-89
Sep-90
Sep-91
Sep-92
Sep-93
Sep-94
Sep-95
Sep-96
Sep-97
Sep-98
Sep-99
Sep-00
Sep-01
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
trailing median P / Peak E trailing minimum trailing maximum
UK Equity Valuation....still undervalued
This gives a range of implied annualized holding period returns from +5% to +11%, consistent with a substantial and positive implied equity risk premium, even under conditions where valuation multiples fall to record lows…
UK equity market valuation remains attractive, even after the marked rally from the 2009 low: at levels observed in the early 1980s..
Source: Datastream, LODH Calculation
UK Equity Index : Price / Trailing 10yr Reported EPS
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
Jan-80
Jan-82
Jan-84
Jan-86
Jan-88
Jan-90
Jan-92
Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Jan-12
Jan-14
UK Equity Index Projected 10 Year Holding Period Return with Trend 6% EPS Growth, Given Dividend Yield and Specified Terminal P / 10yr E Ratio
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%Dec-86
Dec-87
Dec-88
Dec-89
Dec-90
Dec-91
Dec-92
Dec-93
Dec-94
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
trailing median trailing minimum trailing maximum
Emerging Markets...Imbalances
Emerging Market Equity returns are modestly positively correlated with Western Advanced Country growth rates, but not significantly…..
Emerging Market growth is a function of the willingness of the West to leverage [increase it’s debt] and no more!...the growth differential between developing and emerging countries is a direct consequence of a widening developed country current account deficit..
Source: Datastream, LODH Calculation
IMF Emerging Markets Bloc MINUS Advanced Economies bloc Real GDP Growth [%y/y] versus Advanced Economies Current Account Balance [$bn], 3 Year Moving Average
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
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
-550.0
-450.0
-350.0
-250.0
-150.0
-50.0
50.0
Emerging - Developed GDP % y/y Grow th
Advanced Economies Current Account , RHS INVERTED
Advanced Economies GDP Growth [IMF Data, %y/y, HORIZ AXIS] vs MSCI Emerging Market Index Total Return [%y/y, VERT AXIS] : 1988 - 2010
y = 19.3x + 3.5R2 = 0.2
-150.0
-100.0
-50.0
0.0
50.0
100.0
150.0
200.0
250.0
300.0
-4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 4.0 5.0
Emerging Markets...Imbalances and Equity valuation
The “apparently” low valuation multiple versus forward earnings [which are always forecast to be strong in Emerging Markets!] has no ability to predict one year forward index returns…..
As the US Current Account deficit expanded, and the share of the BRIC surplus rose correspondingly, the valuation discount of Emerging Equities evaporated and moved into premium….Emerging Equity valuation reflects an unsustainable external balance position
Source: Datastream, LODH Calculation
BRICs Current Account Surplus as a Percentage of the US Current Account Deficit versus the MSCI EM Equity Index Price / Book valuation premium / discount to the MSCI
World Index valuation : 1997-
y = 0.8x - 0.5R2 = 0.9
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
-10%
0% 10%
20%
30%
40%
50%
60%
70%
80%
MSCI Emerging Market Index Price / 12 Month FORWARD Operating Earnings [horiz axis] vs MSCI Emerging Markets Index Total Return 12 Months FORWARD [vert axis] : 1990-
y = 0.4x + 24.7R2 = 0.0
-100
-80
-60
-40
-20
0
20
40
60
80
100
120
140
160
180
200
220
5.0 7.0 9.0 11.0 13.0 15.0 17.0 19.0 21.0 23.0 25.0
Russian Equity Valuation …
Assuming long run trend earnings per share growth, and a range of alternative terminal valuation multiples [trailing minimum, median and maximum], implied Russian Index returns are in the range -7% [assuming historically low valuation] to +8%…..
The Russian market is near equilibrium valuation at 6 * trailing peak reported earnings per share and 1.3 * book value..
Source: Datastream, LODH Calculation
MSCI Russia Price / Trailing Peak Reported Earnings
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
P / Peak E
trailing median
MSCI Russia Equity Index Projected 10 Year Holding Period Annualized Return, Assuming Normalized 5% per annum EPS Growth and Reversion to Given Terminal Price / Trailing
Peak Earnings Level
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Trailing Median [ 7.0 * peak earnings]
Trailing Maximum [ 17.2 * peak earnings ]
Trailing Minimum [ 1.1 * peak earnings ]
Russian Issues
The challenges facing Russia are :
• Inflation and Monetary Policy
• Fiscal Policy and Reform e.g. pensions, health and welfare
• Improving the “Investment Climate” with structural reform
• Potential GDP growth with a declining population : Productivity
• A “Rules Based” versus “Discretionary” policy environment
• Banking Supervision
• Avoiding the “Dutch Disease”
Emerging Markets...more than just Growth....
From current valuation levels, implied returns are very modest in the BIC bloc: for example, in India, assuming peak eps growth, implied holding period returns lie in the range of just 0% to +7%..that provides a negligible implied risk premium.
Emerging Market Growth and Equity Returns are negatively correlated [insignificantly]……the Tortoise beats the Hare!...strong growth is NOT a positive for relative equity returns
Source: Datastream, LODH Calculation, see P B Henry & P Kannan (2006) « Growth & Returns in Emerging Markets »
Emerging & Developing Economies GDP Growth [IMF Data, %y/y, HORIZ AXIS] vs MSCI Emerging Market Index Total Return [%y/y, VERT AXIS] : 1988 - 2010
y = -7.3x + 84.7R2 = 0.0
-100.0
-50.0
0.0
50.0
100.0
150.0
200.0
250.0
300.0
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
MSCI India Equity Index Projected 10 Year Holding Period Annualized Return, Assuming Normalized 6% per annum EPS Growth and Reversion to Given Terminal Price / Trailing
Peak Earnings Level
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Trailing Median [ 13.9 * peak earnings]
Trailing Maximum [ 30.6 * peak earnings ]
Trailing Minimum [ 7.0 * peak earnings ]
Global Countries Ranking – May 2011
c Final Rank Valuation Risk Growth MoIT 1.0 1.0 12.0 17.0 8.0FR 2.0 5.0 10.0 12.0 5.0GR 3.0 9.0 4.0 9.0 4.0TU 4.0 4.0 3.0 14.0 7.0JP 5.0 2.0 16.0 1.0 20.0SP 6.0 3.0 15.0 16.0 10.0UK 7.0 8.0 6.0 18.0 3.0RU 8.0 6.0 20.0 2.0 11.0KO 9.0 14.0 1.0 5.0 1.0SW 10.0 7.0 18.0 3.0 13.0US 11.0 17.0 4.0 10.0 1.0CA 12.0 19.0 11.0 6.0 6.0SA 13.0 18.0 14.0 4.0 9.0MX 14.0 10.0 8.0 8.0 19.0HK 15.0 16.0 2.0 19.0 12.0TA 16.0 20.0 9.0 7.0 13.0AU 17.0 13.0 17.0 11.0 15.0CH 18.0 15.0 7.0 13.0 16.0BR 19.0 11.0 19.0 15.0 18.0IN 20.0 12.0 13.0 20.0 17.0
Country and Sector preferences
Rankings and change from previous month
Neutral
Positive
Negative
Turkey
Korea
Russia
South Africa
Mexico
Hong Kong
Taiwan
China
Brazil
India
BRIC bias
Neutral BRIC vs. other Emerging
Non-BRIC bias
Emerging Country RankingDeveloped Country Ranking
Italy
France
Germany
Japan
Spain
UK
Switzerland
US
Canada
Australia
European bias
Neutral Europe vs. US
US bias
Healthcare
Consumer Discretionary
Telecom
Consumer Staples
Energy
Industrials
Materials
Information Technology
Utilities
Financials
Defensive bias
Neutral Defensives vs. Cyclicals
Cyclical bias
Sector Ranking
Source: Lombard Odier
Consistent Yearly Out Performance (Fully Invested Strategy)
MSCI EW 20 countries Portfolio Portfolio19961997 20.2% 29.4% 62.8% 62.8%1998 16.9% -1.8% 19.2% 19.2%1999 27.5% 67.0% 133.5% 133.5%2000 -11.4% -10.6% 4.0% 4.0%2001 -14.4% 1.1% 33.7% 33.7%2002 -24.6% -16.2% -5.7% -5.7%2003 23.5% 37.7% 73.1% 73.1%2004 9.4% 13.9% 4.2% 4.2%2005 15.2% 27.8% 34.8% 34.8%2006 14.3% 23.8% 17.4% 17.4%2007 5.2% 16.3% 23.0% 23.0%2008 -40.9% -43.2% -43.5% -43.5%2009 26.2% 43.5% 46.7% 46.7%2010 9.3% 8.4% 15.3% 15.3%
YTD 2011 3.8% 2.7% 8.3% 8.3%
Back Testing the Strategy (fully invested) since Dec-96, log scale
Portfolio MSCI World% of Positive Months 65% 59%% of Months Out Performing the MSCI 66%
1.8
2.0
2.2
2.4
2.6
2.8
3.0
3.2
3.4
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Perf PortfolioPerf MSCI AC WldPerf EW 20 countries
Bull Market late 90’s Dot-com BubbleDec-96 Portfolio MSCI World May-00 Portfolio MSCI WorldApr-00 Mar-03
Annualized Return 58.9% 19.6% Annualized Return 12.4% -19.7%Avg Mo perf + 8.1% 4.4% Avg Mo perf + 6.4% 3.6%Avg Mo perf - -4.8% -4.1% Avg Mo perf - -4.6% -4.6%Vol 27.4% 16.5% Vol 24.1% 16.5%Beta 1.14 1.00 Beta 1.14 1.00Track Er vs MSCI AC 21.7% Track Er vs MSCI AC 18.1%Track Er vs EW 15.5% Track Er vs EW 12.5%Info ratio vs MSCI AC 1.81 Info ratio vs MSCI AC 1.78Info ratio vs EW 2.05 Info ratio vs EW 1.84Max Drawdown -30.6% -18.5% Max Drawdown -26.5% -46.9%Sharpe R (over 4% risk free rate) 2.00 0.94 Sharpe R (over 4% risk free rate) 0.35 -1.44 Bull Market mid-2000’s Sub prime Mortgage Crisis
Apr-03 Portfolio MSCI World Dec-07 Portfolio MSCI WorldNov-07 Mar-09
Annualized Return 32.3% 17.0% Annualized Return -44.4% -44.5%Avg Mo perf + 3.9% 2.5% Avg Mo perf + 3.4% 3.4%Avg Mo perf - -3.4% -1.6% Avg Mo perf - -7.5% -7.5%Vol 14.0% 8.2% Vol 22.5% 23.9%Beta 1.31 1.00 Beta 0.87 1.00Track Er vs MSCI AC 10.0% Track Er vs MSCI AC 8.9%Track Er vs EW 6.7% Track Er vs EW 5.6%Info ratio vs MSCI AC 1.53 Info ratio vs MSCI AC 0.01Info ratio vs EW 0.49 Info ratio vs EW 0.00Max Drawdown -15.1% -4.5% Max Drawdown -52.5% -51.9%Sharpe R (over 4% risk free rate) 2.02 1.59 Sharpe R (over 4% risk free rate) -2.15 -2.03 Recovery since the Sub prime Crisis Entire Period
Mar-09 Portfolio MSCI World Dec-96 Portfolio MSCI WorldMay-10 May-11
Annualized Return 69.7% 51.0% Annualized Return 23.9% 3.3%Avg Mo perf + 7.6% 5.6% Avg Mo perf + 5.7% 3.4%Avg Mo perf - -2.4% -1.4% Avg Mo perf - -4.7% -4.1%Vol 24.1% 16.4% Vol 22.9% 16.5%Beta 1.35 1.00 Beta 1.10 1.00Track Er vs MSCI AC 11.5% Track Er vs MSCI AC 15.1% 0%Track Er vs EW 7.5% Track Er vs EW 10.7% 0%Info ratio vs MSCI AC 1.63 Info ratio vs MSCI AC 1.36 0.0Info ratio vs EW 1.65 Info ratio vs EW 1.25 0.0Max Drawdown -10.0% -9.5% Max Drawdown -53.8% -53.8%Sharpe R (over 4% risk free rate) 2.73 2.86 Sharpe R (over 4% risk free rate) 0.87 -0.04
Out Performance over Various Time Periods
Investors will appreciate that past performance is not a reliable indicator of future performance
Valuation & Risk Premia Price to Book Price to Reported Earnings Price to Forward Earnings Market Cap to historical mean
Risk Beta
Growth / Economic Disequilibrium Sales Growth Reported Earnings Growth Forward Earnings Growth
Momentum Up revisions Momentum 6mnth Momentum 10mnth
Country and Sector Ranking Factors
The core drivers of investment returns
Country Model
Valuation & Risk Premia Price to Book Price to Reported Earnings Risk Premia Market Cap to GDP
Risk Beta Real Exchange Rate
Growth / Economic Disequilibrium Leading Economic Indicator Industrial Production Trade Balance
Momentum Up revisions Momentum 6mnth Momentum 10mnth
Sector Model
Developed Market bias
Neutral Emerging vs. Developed
Emerging Market bias
Defensive bias
Neutral Defensives vs. Cyclicals
Cyclical bias
Currencies…..Dollar, Sterling and the Euro
Sterling is undervalued, by approximately 5-10%, with interest differentials and capital flows consistent with 1.73 versus the USD…PPP at 1.65
Euro is overvalued, by approximately 10 -15%, with interest differentials and capital flows consistent with 1.24 versus the USD…PPP at 1.27
Source: Datastream, LODH Calculation
Actual Euro/US Dollar Exchange Rate vs MODELLED Exchange Rate [ derived from Euro interest differential vs BRIC countries and Euro weight in Developing Country FX
Reserves] : out of sample after 2007 , Rsq=93%
0.60
0.80
1.00
1.20
1.40
1.60
1.80
Q3 2
000
Q2 2
001
Q1 2
002
Q4 2
002
Q3 2
003
Q2 2
004
Q1 2
005
Q4 2
005
Q3 2
006
Q2 2
007
Q1 2
008
Q4 2
008
Q3 2
009
Q2 2
010
Q1 2
011
Q4 2
011
Q3 2
012
Q2 2
013
Q1 2
014
Q4 2
014
Q3 2
015
Actual
Modelled
Actual Sterling / Dollar Exchange Rate vs MODELLED Exchange Rate [ as a Function of the BRIC / UK Short Term Interest Rate Differential & the Sterling Weight in Developing
Country Foreign Exchange Reserves] : out of sample after 2007, Rsq = 82%
1.20
1.30
1.40
1.50
1.60
1.70
1.80
1.90
2.00
2.10
Q3 2000
Q2 2001
Q1 2002
Q4 2002
Q3 2003
Q2 2004
Q1 2005
Q4 2005
Q3 2006
Q2 2007
Q1 2008
Q4 2008
Q3 2009
Q2 2010
Q1 2011
Q4 2011
Q3 2012
Q2 2013
Q1 2014
Q4 2014
Q3 2015
Actual
Modelled
Currencies…..the Swiss Franc
The Swiss Franc is a Greek/Portuguese/Irish/Spanish default hedge, as shown in the correlation between the Greek CDS spread and the Euro / Swiss Franc exchange rate...the 20-25% valuation premium appears to reflect default risk, by and large..
Euro is undervalued, by approximately 20 -25% versus the Swiss Franc, with interest differentials and capital flows consistent with 0.63 cents..
Source: Datastream, Bloomberg, LODH Calculation
Actual Euro / Sw iss Franc vs MODELLED Swiss Franc / Euro [as a function of the BRIC vs Swiss interest differential and the Swiss Franc weight in Developing Country FX Reserves]
: out of sample after 2007, Rsq = 81%
0.60
0.65
0.70
0.75
0.80
Q3 2000
Q2 2001
Q1 2002
Q4 2002
Q3 2003
Q2 2004
Q1 2005
Q4 2005
Q3 2006
Q2 2007
Q1 2008
Q4 2008
Q3 2009
Q2 2010
Q1 2011
Q4 2011
Q3 2012
Q2 2013
Q1 2014
Q4 2014
Q3 2015
Actual
Modelled
Greek Government 5 Year Credit Default Swap Spread versus CHF/EUR Exchange Rate
-100.0
100.0
300.0
500.0
700.0
900.0
1100.0
1300.0
1500.008/08/2008
08/10/2008
08/12/2008
08/02/2009
08/04/2009
08/06/2009
08/08/2009
08/10/2009
08/12/2009
08/02/2010
08/04/2010
08/06/2010
08/08/2010
08/10/2010
08/12/2010
08/02/2011
08/04/2011
0.63
0.65
0.67
0.69
0.71
0.73
0.75
0.77
0.79
0.81
0.83
CDS Spread
CHF/Euro Exchange Rate - RHS
AppendixAppendix
A 3-factor model on commodities
• We developed a multi-factor model on commodities that provides us with timely buy signals on each of the 4 commodity segments (Agriculture, Energy, Industrial and Precious Metals)
• Our 3-factor model is based on
1. an economic/risk indicator (US recession barometer)
2. a price momentum component
3. a valuation proxy (deviation from a long-term mean of the relative roll yield of the commodity segment versus that of the commodity global index)
• The net signal on a commodity segment is positive only when ALL 3 factors are positive
• Monthly update of the signals• Backtested results are based on out-of-sample optimized parameters
3-factor model Commodity Model recommendations
Agriculture
Energy
Industrial Metals
Precious Metals
+
+
Net signal
-
-
+
Valuation proxy
+
-
-
+
Momentum
+
+
+
+
Economic cycle
+
+
+
April 2011
Source: Lombard Odier
Favor Energy and Agriculture. Negative Industrial Metals.Negative Precious Metals for 6th months (following 18 consecutive months of positive signal)
Performance of relative bets since last signal changeEnergy outperforms all segments, whilst Agriculture lags Precious Metals (using EXR indices)
Last signal change
Source: Datastream, Lombard Odier calculation
+
+
-
-Current signal
Performance since last signal change (as of May 2011)
12%
43%
19%
3%
11%
34%
19%
12%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
AG PM EN IM AG PM EN IM
Excess return index Spot index
Factor 1: Economic / Risk indicator
• Our US recession barometer is a good proxy for the economic and risk environment for commodities
• It is based on the levels and dynamics of 5 variables: 1) S&P 500, 2) T-Bill vs. CP spread, 3) 3m T-Bills vs. 10y yield spread, 4) payroll growth, 5) ISM manufacturing
• The indicator is reliable, with 89% correct signals (in or out of recession) since 1960Source: Bloomberg, Datastream, Lombard Odier calculation
US recession barometer
062 66 70 74 78 82 86 90 94 98 02 06 10
Recession signal (when all factors are "negative")
NBERofficial recessionperiods
As of May 2011, the
probability of recession in
the US is 20% (with only
payroll growth flashing red)
20%
100%
Signal is POSITIVE for all commodities when there is no recession
Factor 2: Price Momentum
Signal is POSITIVE when index level > optimal moving average
Source: Datastream, Lombard Odier calculation
Agriculture: Price index (GSCI Excess Return) and optimal moving average
Energy: Price index (GSCI Excess Return) and optimal moving average
Precious Metals: Price index (GSCI Excess Return) and optimal moving average
Industrial Metals: Price index (GSCI Excess Return) and optimal moving average
Price index (GSCI EN EXR) Optimal movav
Price index (GSCI IM EXR)Optimal movav
Price index (GSCI PM EXR)Optimal movav
250
0
50
100
150
200
88 90 92 94 96 98 00 02 04 06 08 10
Price index (GSCI AG EXR) Optimal movav (44M)
0100200300400500600700800900
88 90 92 94 96 98 00 02 04 06 08 10
0
50
100
150
200
250
300
350
400
88 90 92 94 96 98 00 02 04 06 08 100
50
100
150
200
250
300
88 90 92 94 96 98 00 02 04 06 08 10
Factor 3: Relative roll yield as a valuation proxy
Signal is POSITIVE when relative roll deviation > 0
Source: Datastream, Lombard Odier calculation
Agriculture: Deviation of the relative roll (segment vs. overall) from LT trend (z-score)
Energy: Deviation of the relative roll (segment vs. overall) from LT trend (z-score)
Industrial Metals: Deviation of the relative roll (segment vs. overall) from LT trend (z-score)
Rel roll deviation GSCI AGEXR index Rel roll deviation GSCI ENEXR index
Rel roll deviation
GSCI IM EXR index
Precious Metals: Deviation of the relative roll (segment vs. overall) from LT trend (z-score)
Rel roll deviation GSCI PM EXR index88 90 92 94 96 98 00 02 04 06 08 10
roll favorable to Precious Metals = POSITIVE
roll unfavorable toPrecious Metals = NEGATIVE
roll favorable to PM = POSITIVE
roll not fav to PM = NEGATIVE-2.00
-1.50
-1.00
-0.50
0.00
0.50
1.00
1.50
2.00
0
50
100
150
200
250
300
88 90 92 94 96 98 00 02 04 06 08 10
roll unfavorable to Energy =
NEGATIVE
roll favorable to Energy = POSITIVE
-2.00
-1.50
-1.00
-0.500.00
0.50
1.00
1.50
2.00
0100200300400500600700800900
roll unfavorable to Agriculture = NEGATIVE
roll favorable to Agriculture = POSITIVE
-2.00
-1.50
-1.00
-0.50
0.00
0.50
1.00
1.50
2.00
88 90 92 94 96 98 00 02 04 06 08 100
50
100
150
200
250
roll favorable to Industrial Metals =
POSITIVE
roll unfavorable to Industrial Metals =
NEGATIVE-2.00
-1.50
-1.00
-0.500.00
0.50
1.00
1.50
2.00
88 90 92 94 96 98 00 02 04 06 08 100
50
100
150200
250
300
350
400
Backtested results of the model strategy since 1988
Higher returns, lower volatility, more limited DD than benchmark
Source: Datastream, Lombard Odier calculation
Model strategy (4 commodity segments) vs benchmark (GSCI)
The model strategy has a clear ABSOLUTE RETURN bias:
it participates on the upside with a lag, but tends to successfully avoid the drawdowns
Model Strategy(4 segments)
Annualized return5.67%
Annualized volatility6.38%
Sharpe Ratio (net)0.89
Max DD12.95%
GSCI EXR indexAnnualized return
3.08%Annualized volatility
21.39%Sharpe Ratio (net)
0.14Max DD70.11%
0
200
400
600
800
1000
1200
88 90 92 94 96 98 00 02 04 06 08 10
Benchmark (GSCI Excess Return Index) Model Strategy (4 segments)
Cross Asset Class SignalsMarket Timing Portfolios
US Equity Euro Equity US 10-yrs Gvt Bond Global REITs CommodityReturn 18.5% 17.2% 10.2% 25.6% 19.5%Volatility 10.0% 10.8% 6.1% 12.3% 14.4%Sharpe (4%) 1.45 1.22 1.02 1.76 1.08Best 12-Months Return 52.1% 42.5% 23.7% 72.9% 70.7%Worst 12-Month Return -0.6% -0.9% -3.6% -1.7% -16.6%
BenchmarksUS Equity Euro Equity US 10-yrs Gvt Bond Global REITs Commodity
Return 9.7% 1.8% 6.5% 15.2% 3.8%Volatility 14.9% 19.6% 7.4% 20.4% 20.6%Sharpe (4%) 0.38 -0.11 0.34 0.55 -0.01Best 12-Months Return 53.6% 49.1% 23.7% 110.8% 70.7%Worst 12-Month Return -43.3% -45.8% -10.5% -60.1% -60.4%
Buy signalTime in months US Equity Euro Equity US 10-yrs Gvt Bond Global REITs CommodityMedian 11 10 8 15 4Average 15 11 12 19 7min 1 1 1 1 1Max 49 40 45 45 20
Sell signalTime in months US Equity Euro Equity US 10-yrs Gvt Bond Global REITs CommodityMedian 2 13 2 7 2Average 6 9 4 6 4min 1 1 1 1 1Max 18 16 13 13 17
28.02.2011 US Equity Euro Equity US 10-yrs Gvt Bond Global REITs CommoditySignal hold hold sell hold hold% difference with the SMA 14.8% 10.0% -2.2% 14.4% 17.4%
31.03.2011 US Equity Euro Equity US 10-yrs Gvt Bond Global REITs CommoditySignal hold hold sell hold hold% difference with the SMA 12.4% 5.4% -2.5% 10.3% 18.6%
29.04.2011 US Equity Euro Equity US 10-yrs Gvt Bond Global REITs CommoditySignal hold hold sell hold hold% difference with the SMA 12.4% 7.7% -1.0% 13.0% 19.4%
Equity Markets
Market Timing Portfolios WRLD AC US JP UK GR FR SW BR CH IN RUReturn 17.4% 20.0% 19.0% 21.4% 22.8% 23.4% 20.5% 36.1% 32.9% 31.3% 58.9%Volatility 9.2% 10.7% 12.2% 11.4% 13.5% 13.6% 11.2% 21.0% 25.6% 21.7% 37.2%Sharpe (4%) 1.45 1.49 1.23 1.53 1.39 1.43 1.47 1.53 1.13 1.26 1.47Best 12-Months Return 41.0% 62.5% 79.9% 68.8% 85.2% 104.0% 69.7% 149.8% 156.5% 131.9% 332.6%Worst 12-Month Return -0.8% -0.6% -2.0% -0.9% -6.2% -2.5% -8.9% -0.4% -19.0% -13.9% -4.0%
Benchmarks WRLD AC US JP UK GR FR SW BR CH IN RUReturn 7.3% 11.1% 3.3% 11.7% 9.9% 11.1% 9.9% 21.1% 12.3% 13.6% 20.1%Volatility 14.5% 15.5% 19.3% 16.2% 21.2% 20.1% 16.5% 28.6% 37.2% 28.5% 54.7%Sharpe (4%) 0.23 0.46 -0.03 0.47 0.28 0.35 0.36 0.60 0.22 0.34 0.29Best 12-Months Return 48.8% 59.4% 79.9% 59.3% 85.2% 92.4% 69.7% 149.8% 156.5% 131.9% 350.6%Worst 12-Month Return -42.4% -43.1% -46.6% -32.7% -53.9% -43.7% -36.5% -44.5% -77.6% -56.3% -91.7%
BUYTime in months WRLD AC US JP UK GR FR SW BR CH IN RUMedian 9 11 4 10 5 8 5 6 8 6 5Average 15 14 7 13 11 10 10 12 8 10 7min 1 1 1 1 1 1 1 1 1 1 1Max 56 49 24 57 39 54 40 45 26 42 28Mode 1 1 1 10 1 1 3 1 8 1 1
SELLTime in months WRLD AC US JP UK GR FR SW BR CH IN RUMedian 5 2 6 2 3 2 3 5 5 5 2Average 6 5 6 3 5 4 4 4 7 6 4min 1 1 1 1 1 1 1 1 1 1 1Max 18 18 21 16 19 18 22 9 18 15 14Mode 3 1 1 2 2 1 1 2 1 1 1
28.02.2011 WRLD AC US JP UK GR FR SW BR CH IN RUSignal hold hold hold hold hold hold hold hold hold sell hold% difference with the SMA 11.0% 14.9% 10.8% 10.0% 12.5% 11.2% 4.7% 3.2% 2.9% -5.8% 17.3%
31.03.2011 WRLD AC US JP UK GR FR SW BR CH IN RUSignal hold hold hold hold hold hold hold hold hold hold hold% difference with the SMA 8.6% 12.6% 1.7% 7.2% 7.2% 6.6% 1.3% 4.2% 8.0% 2.0% 17.9%
29.04.2011 WRLD AC US JP UK GR FR SW BR CH IN RUSignal hold hold sell hold hold hold hold sell hold sell hold% difference with the SMA 8.5% 12.6% -0.4% 7.8% 11.5% 8.0% 4.7% -1.0% 6.6% -0.5% 11.2%
Equity Markets (continued)Market Timing Portfolios CD IT SP AU KO HK TW SA TU MXReturn 19.4% 25.5% 27.8% 20.7% 33.2% 28.5% 27.0% 25.4% 48.4% 40.1%Volatility 11.3% 19.0% 16.0% 11.7% 23.6% 21.1% 24.3% 14.9% 30.6% 21.7%Sharpe (4%) 1.36 1.13 1.49 1.43 1.24 1.16 0.95 1.44 1.45 1.66Best 12-Months Return 80.0% 181.7% 119.8% 95.3% 247.0% 117.5% 117.0% 71.3% 168.1% 189.5%Worst 12-Month Return -10.8% -8.6% -7.0% -2.7% -14.8% -12.1% -10.6% -3.7% -1.7% -9.1%
Benchmarks CD IT SP AU KO HK TW SA TU MXReturn 9.5% 9.7% 15.3% 10.9% 8.8% 12.8% 2.7% 15.1% 19.3% 29.1%Volatility 16.3% 24.3% 22.3% 17.5% 32.3% 29.2% 34.2% 20.7% 42.6% 26.8%Sharpe (4%) 0.34 0.24 0.51 0.39 0.15 0.30 -0.04 0.54 0.36 0.93Best 12-Months Return 84.8% 181.7% 119.8% 95.3% 244.8% 117.5% 97.4% 71.3% 122.8% 189.5%Worst 12-Month Return -39.4% -50.0% -40.7% -38.3% -51.2% -55.0% -71.9% -34.6% -51.2% -38.8%
BUYTime in months CD IT SP AU KO HK TW SA TU MXMedian 12 3 8 9 4 9 6 8 3 6Average 12 8 12 12 7 11 8 10 7 15min 1 1 1 1 1 1 1 1 1 1Max 42 51 57 57 25 42 19 41 21 56Mode 13 1 1 1 2 1 6 1 1 1
SELLTime in months CD IT SP AU KO HK TW SA TU MXMedian 4 4 3 2 4 4 8 2 1 4Average 5 5 5 4 5 5 8 3 2 4min 1 1 1 1 1 1 1 1 1 1Max 13 22 16 17 12 14 18 12 15 11Mode 1 1 1 2 4 2 1 1 1 1
28.02.2011 CD IT SP AU KO HK TW SA TU MXSignal hold hold hold hold hold hold hold hold sell hold% difference with the SMA 12.9% 10.3% 7.8% 7.0% 6.8% 7.9% 6.4% 7.1% -3.7% 7.2%
31.03.2011 CD IT SP AU KO HK TW SA TU MXSignal hold hold hold hold hold hold hold hold sell hold% difference with the SMA 10.6% 5.5% 2.7% 6.4% 12.8% 6.4% 5.0% 7.8% -1.1% 6.6%
29.04.2011 CD IT SP AU KO HK TW SA TU MXSignal hold hold hold hold hold hold hold hold hold hold% difference with the SMA 6.9% 7.6% 4.4% 4.9% 14.2% 6.2% 6.5% 8.1% 5.5% 3.4%
US Equity Market since 1870 (Shiller, Log Scale)
0.0
2.0
4.0
6.0
8.0
10.0
12.0
1871
1875
1880
1884
1888
1892
1896
1900
1905
1909
1913
1917
1921
1925
1930
1934
1938
1942
1946
1950
1955
1959
1963
1967
1971
1975
1980
1984
1988
1992
1996
2000
2005
2009
Market Timing Portfolio Benchmark Portfolio
Market Timing Portfolio Benchmark PortfolioReturn 16.1% 8.8%Volatility 10.4% 14.3%Sharpe (4%) 1.17 0.34Best 12-Months Return 169.9% 140.3%Worst 12-Month Return -5.6% -62.2%Frequency fully invested 69.4% 100%
Emerging Markets...Expected EPS Growth is Identical
Anyway….Ignore analysts who talk about the Price versus NEXT YEAR’S earnings ….it is irrelevant, it has NO predictive power at all! The price versus 12-month forward earnings tells you nothing at all about prospective EME returns...
Expected Earnings PER SHARE growth in the next year is identical in EM and Developed Markets…why pay a premium for the same growth rate, with a lower dividend yield?
Source: Datastream, LODH Calculation
MSCI Emerging Market Index Price / 12 Month FORWARD Operating Earnings [horiz axis] vs MSCI Emerging Markets Index Total Return 12 Months FORWARD [vert axis] : 1990-
y = 0.3x + 25.4R2 = 0.0
-100
-80
-60
-40
-20
0
20
40
60
80
100
120
140
160
180
200
220
5.0 7.0 9.0 11.0 13.0 15.0 17.0 19.0 21.0 23.0 25.0
12 Month FORWARD Consensus Earnings per Share Growth Expectations [% y/y] : Global Developed versus Emerging Markets
-10.0
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
Jan-8
8
Jan-9
0
Jan-9
2
Jan-9
4
Jan-9
6
Jan-9
8
Jan-0
0
Jan-0
2
Jan-0
4
Jan-0
6
Jan-0
8
Jan-1
0
Jan-1
2
Jan-1
4
Emerging Markets
Developed Markets
Large versus Small and Mid Cap…
Small Cap valuation is at extremes versus Large Cap stocks: given that Small Cap is a good proxy for Private Equity valuation, it signifies a high price for illiquidity and market risk and a low price for defensiveness…
Large Cap stocks have lagged badly in the rally since 2009 and are unusually cheap against Small and Mid Cap stocks: they are attractively valued and defensive at aggregate US market levels which are meaningfully overvalued…
Source: Datastream, LODH Calculation
MSCI USA Price / Trailing Peak Reported Earnings : Small Cap / Mid Cap and Large Cap
5.0
10.0
15.0
20.0
25.0
30.0
35.0
May-9
2
May-9
3
May-9
4
May-9
5
May-9
6
May-9
7
May-9
8
May-9
9
May-0
0
May-0
1
May-0
2
May-0
3
May-0
4
May-0
5
May-0
6
May-0
7
May-0
8
May-0
9
May-1
0
May-1
1
May-1
2
May-1
3
May-1
4
May-1
5
Mid
Small
Large
MSCI USA Price / Trailing Peak Reported Earnings : Small Cap / Large Cap
0.4
0.6
0.8
1.0
1.2
1.4
1.6
May-92
May-93
May-94
May-95
May-96
May-97
May-98
May-99
May-00
May-01
May-02
May-03
May-04
May-05
May-06
May-07
May-08
May-09
May-10
May-11
May-12
May-13
May-14
May-15
Small Cap as a Private Equity Proxy…
This implies comparatively low implied annualized holding period returns between -1% to 5%, with an implied risk premium from -3% to +4%…you don’t get early 1980s “Swenson PE returns” from current valuations and financing constraints…
Small Cap stocks are a highly correlated proxy for Private Equity Valuations / Returns: current Small Cap valuation is at elevated and unattractive levels..
Source: Datastream, LODH Calculation
US S&P600 SMALL CAP Equity Index Projected 10 Year Holding Period Return w ith Trend 6% EPS Growth, Given Dividend Yield and Specified Terminal P / 10 Yr E Ratio
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%O
ct-79
Oct-81
Oct-83
Oct-85
Oct-87
Oct-89
Oct-91
Oct-93
Oct-95
Oct-97
Oct-99
Oct-01
Oct-03
Oct-05
Oct-07
Oct-09
Oct-11
Oct-13
Oct-15
trailing median P / 10 yr E trailing minimum trailing maximum
USA S&P600 SMALL CAP Equity Index : Price / Trailing 10 Year EPS
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
Jan-80
Jan-82
Jan-84
Jan-86
Jan-88
Jan-90
Jan-92
Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Jan-12
Jan-14
Corporate Credit…..Fair Value
However, the Debt/Profit ratio and the Financing Gap [Free Cash Flow surplus / deficit], are consistent with narrower credit spreads…
Corporate Spreads at fair value, on the basis of Altman Z-Score variables…
Source: Datastream, LODH Calculation
Actual Long Dated Baa Credit Spread [FRB Quarterly Data] vs MODELLED Long Dated Baa Credit Spread [ using an Altman Z-Score Factor Model, out of sample after 2000 ]
0.00
1.00
2.00
3.00
4.00
5.00
6.00
Q1 1
955
Q2 1
957
Q3 1
959
Q4 1
961
Q1 1
964
Q2 1
966
Q3 1
968
Q4 1
970
Q1 1
973
Q2 1
975
Q3 1
977
Q4 1
979
Q1 1
982
Q2 1
984
Q3 1
986
Q4 1
988
Q1 1
991
Q2 1
993
Q3 1
995
Q4 1
997
Q1 2
000
Q2 2
002
Q3 2
004
Q4 2
006
Q1 2
009
Q2 2
011
Q3 2
013
Q4 2
015
Modelled
Actual
Actual Long Dated Baa Credit Spread [FRB Quarterly Data] vs MODELLED Long Dated Baa Credit Spread [ using the Debt / Profit ratio and Lagged Financing Gap ]
0.00
1.00
2.00
3.00
4.00
5.00
6.00Q
1 1955
Q2 1957
Q3 1959
Q4 1961
Q1 1964
Q2 1966
Q3 1968
Q4 1970
Q1 1973
Q2 1975
Q3 1977
Q4 1979
Q1 1982
Q2 1984
Q3 1986
Q4 1988
Q1 1991
Q2 1993
Q3 1995
Q4 1997
Q1 2000
Q2 2002
Q3 2004
Q4 2006
Q1 2009
Q2 2011
Q3 2013
Q4 2015
Modelled
Actual
Ten Year US Treasury Yield…Fair Value
Approximately 14.5% of Commercial Bank assets are held in Government Securities, still well below the level prevailing after the 1991 recession…
We have modelled, and can explain 78% of the variation in, US 10 Year Treasury Yields using just short rates and trailing inflation…the level of yields is currently in equilibrium on this basis….
Source: Datastream, LODH Calculation
US 10 Year Treasury Yield: Actual versus Modelled [based upon short rates and the inflation rate, Rsq = 78%]
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Apr-71
Apr-73
Apr-75
Apr-77
Apr-79
Apr-81
Apr-83
Apr-85
Apr-87
Apr-89
Apr-91
Apr-93
Apr-95
Apr-97
Apr-99
Apr-01
Apr-03
Apr-05
Apr-07
Apr-09
Govt Yield Modelled Yield
US Government Securities / Total Assets (%) : US Domestic Commercial Banks
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
22.0%
24.0%
08/01/1973
08/01/1975
08/01/1977
08/01/1979
08/01/1981
08/01/1983
08/01/1985
08/01/1987
08/01/1989
08/01/1991
08/01/1993
08/01/1995
08/01/1997
08/01/1999
08/01/2001
08/01/2003
08/01/2005
08/01/2007
08/01/2009
08/01/2011
Gold as an Inflation hedge …forget it..
A regression of Gold Inflation on UNEXPECTED Consumer Price Inflation shows much the same picture : a very ineffective, very modest hedge against inflation surprises….Gold is a very poor hedge against both realized and surprise inflation, confirming Prof Roy Jastram’s conclusion in “The Gold Constant”…
A regression of Gold Inflation on REALIZED Consumer Price Inflation shows Gold to be a very ineffective hedge : less than one fifth of the variation in Gold Inflation is explainable by Consumer Inflation and the coefficient is low
Source: Datastream, LODH Calculation
Gold Price (%y/y, horiz axis) vs Realized Inflation (%y/y, vert axis) : 1978 -
y = 0.05x + 3.47R2 = 0.19
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
-75.0 -25.0 25.0 75.0 125.0 175.0 225.0
Gold Price (%y/y, horiz axis) vs Unexpected Inflation (%y/y, vert axis, unexpected inflation = actual inflation - median one year expected inflation) : 1978 -
y = 0.03x - 0.12R2 = 0.18
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
-50.0 0.0 50.0 100.0 150.0 200.0 250.0
Gold….sell Physical and buy a Mine
Silver / Gold price ratio at extremes …sell Silver / buy Gold [miners]…
The ratio of Gold Bullion / Miners is the yield on a Gold Mine….short physical / long the producer..$/Ounce of Gold = $/FC * FC/ounce of Gold. So higher Gold = lower dollar and/or higher foreign currency price of Gold..
Source: Datastream, LODH Calculation
Spot Gold Bullion Price (US$/Ounce) / Philadelphia Gold & Silver Index
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
Jan-84
Jan-86
Jan-88
Jan-90
Jan-92
Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Jan-12
Jan-14
Spot Silver Bullion Price (US$/Ounce) / Spot Gold Price (US$/Ounce)
01/01/2009, 1.301/06/2003, 1.2
01/03/1991, 1.0
01/03/1998, 2.2 01/03/2007, 2.1
0.5
1.0
1.5
2.0
2.5
3.0
Jan-84
Jan-86
Jan-88
Jan-90
Jan-92
Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Jan-12
Jan-14
“PIGS” Need to Turn German ..
Unit Labour Cost restraint implies absolute and relative cost / price deflation …unless Germany agrees to inflate?! The peripheral countries need to deflate nominal income in excess of 20%...unprecedented
Germany in the decade after the introduction of the Euro is the model PIGS need to follow…de-leveraging and cost discipline, the lost art of saving!
Source: Datastream, LODH Calculation
German Current Account / GDP [%] vs German Total Bank Lending to Individuals [% y/y]
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Current Account / GDP [%]
Lending to Individuals [% y/y]
median debt grow th rate, 1990s
median debt grow th rate, 2000s
All Economy Unit Labour Costs [ 1999Q1 = 1 ]
0.90
0.95
1.00
1.05
1.10
1.15
1.20
1.25
1.30
1.35
1.40
Q1 1999
Q3 1999
Q1 2000
Q3 2000
Q1 2001
Q3 2001
Q1 2002
Q3 2002
Q1 2003
Q3 2003
Q1 2004
Q3 2004
Q1 2005
Q3 2005
Q1 2006
Q3 2006
Q1 2007
Q3 2007
Q1 2008
Q3 2008
Q1 2009
Q3 2009
Q1 2010
Q3 2010
Q1 2011
Q3 2011
Eurozone UK Germany
France Spain Ireland
China…Don’t Rely on the Consumer….
…China is already urbanized, overrun with capacity and with investment at 55% of GDP….and with bubbles in housing and equity
Consumers cannot spend what they do not have!...the Household share of National Income has declined markedly in the last decade..
Source: UN, IMF, National Data Sources
Chinese Household Income and Consumption as a % of GDP
46%
36%
90%
67%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Consumption
Income
96% of Chinese population lives in 46% of land mass
96% of US population lives on 66% of US land mass
USA has 4.2 mn km of Paved Roads / 80,000 km of Highways
China has 2.7 mn km of Paved Roads / 60,000 km of Highways
China uses per Capita Energy 6 * that for Italy / 3* that for the USA
Chinese Homeownership rate = 86%
US Homeownership rate = 67%
US Implied Index Returns: 2009 Low
Source: Datastream, LODH Calculation
Time Dividend Starting Implied Equity Holding Period Annualized ReturnHorizon (t) Yield P / 10yr E
10 3.2 14.4 2009 Market low
Terminal EPS %cagr (g)P / Peak E -8 -7.5 -7 -6.5 -6 -5.5 -5 -4.5 -4 -3.5 -3 -2.5 -2 -1.5 -1 -0.5 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6 6.5 7 7.5 8
2 -11.4% -11.0% -10.5% -10.1% -9.7% -9.3% -8.9% -8.5% -8.1% -7.7% -7.3% -6.8% -6.4% -6.0% -5.6% -5.2% -4.8% -4.4% -4.0% -3.6% -3.2% -2.7% -2.3% -1.9% -1.5% -1.1% -0.7% -0.3% 0.1% 0.5% 1.0% 1.4% 1.8%3 -12.1% -11.6% -11.2% -10.8% -10.4% -9.9% -9.5% -9.1% -8.7% -8.2% -7.8% -7.4% -6.9% -6.5% -6.1% -5.7% -5.2% -4.8% -4.4% -4.0% -3.5% -3.1% -2.7% -2.2% -1.8% -1.4% -1.0% -0.5% -0.1% 0.3% 0.7% 1.2% 1.6%4 -11.7% -11.3% -10.8% -10.4% -9.9% -9.5% -9.1% -8.6% -8.2% -7.7% -7.3% -6.9% -6.4% -6.0% -5.5% -5.1% -4.7% -4.2% -3.8% -3.3% -2.9% -2.5% -2.0% -1.6% -1.1% -0.7% -0.3% 0.2% 0.6% 1.1% 1.5% 1.9% 2.4%5 -11.0% -10.6% -10.1% -9.7% -9.2% -8.8% -8.3% -7.9% -7.4% -7.0% -6.5% -6.1% -5.6% -5.2% -4.7% -4.3% -3.8% -3.4% -2.9% -2.5% -2.0% -1.6% -1.1% -0.7% -0.2% 0.2% 0.7% 1.1% 1.6% 2.0% 2.5% 2.9% 3.4%6 -10.3% -9.8% -9.4% -8.9% -8.4% -8.0% -7.5% -7.1% -6.6% -6.1% -5.7% -5.2% -4.8% -4.3% -3.9% -3.4% -2.9% -2.5% -2.0% -1.6% -1.1% -0.7% -0.2% 0.3% 0.7% 1.2% 1.6% 2.1% 2.6% 3.0% 3.5% 3.9% 4.4%7 -9.5% -9.0% -8.6% -8.1% -7.7% -7.2% -6.7% -6.3% -5.8% -5.3% -4.9% -4.4% -3.9% -3.5% -3.0% -2.5% -2.1% -1.6% -1.1% -0.7% -0.2% 0.3% 0.7% 1.2% 1.7% 2.1% 2.6% 3.0% 3.5% 4.0% 4.4% 4.9% 5.4%8 -8.8% -8.3% -7.8% -7.4% -6.9% -6.4% -5.9% -5.5% -5.0% -4.5% -4.1% -3.6% -3.1% -2.6% -2.2% -1.7% -1.2% -0.8% -0.3% 0.2% 0.7% 1.1% 1.6% 2.1% 2.5% 3.0% 3.5% 4.0% 4.4% 4.9% 5.4% 5.8% 6.3%9 -8.1% -7.6% -7.1% -6.6% -6.2% -5.7% -5.2% -4.7% -4.2% -3.8% -3.3% -2.8% -2.3% -1.9% -1.4% -0.9% -0.4% 0.0% 0.5% 1.0% 1.5% 2.0% 2.4% 2.9% 3.4% 3.9% 4.3% 4.8% 5.3% 5.8% 6.2% 6.7% 7.2%
10 -7.4% -6.9% -6.4% -5.9% -5.5% -5.0% -4.5% -4.0% -3.5% -3.1% -2.6% -2.1% -1.6% -1.1% -0.6% -0.2% 0.3% 0.8% 1.3% 1.8% 2.3% 2.7% 3.2% 3.7% 4.2% 4.7% 5.1% 5.6% 6.1% 6.6% 7.1% 7.6% 8.0%11 -6.8% -6.3% -5.8% -5.3% -4.8% -4.3% -3.8% -3.3% -2.9% -2.4% -1.9% -1.4% -0.9% -0.4% 0.1% 0.6% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.4% 4.9% 5.4% 5.9% 6.4% 6.9% 7.4% 7.9% 8.3% 8.8%12 -6.1% -5.7% -5.2% -4.7% -4.2% -3.7% -3.2% -2.7% -2.2% -1.7% -1.2% -0.7% -0.3% 0.2% 0.7% 1.2% 1.7% 2.2% 2.7% 3.2% 3.7% 4.2% 4.7% 5.2% 5.6% 6.1% 6.6% 7.1% 7.6% 8.1% 8.6% 9.1% 9.6%13 -5.6% -5.1% -4.6% -4.1% -3.6% -3.1% -2.6% -2.1% -1.6% -1.1% -0.6% -0.1% 0.4% 0.9% 1.4% 1.9% 2.4% 2.8% 3.3% 3.8% 4.3% 4.8% 5.3% 5.8% 6.3% 6.8% 7.3% 7.8% 8.3% 8.8% 9.3% 9.8% 10.3%14 -5.0% -4.5% -4.0% -3.5% -3.0% -2.5% -2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 8.4% 8.9% 9.4% 9.9% 10.4% 10.9%15 -4.5% -4.0% -3.5% -3.0% -2.5% -2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.1% 5.6% 6.1% 6.6% 7.1% 7.6% 8.1% 8.6% 9.1% 9.6% 10.1% 10.6% 11.1% 11.6%16 -4.0% -3.5% -3.0% -2.5% -2.0% -1.5% -1.0% -0.4% 0.1% 0.6% 1.1% 1.6% 2.1% 2.6% 3.1% 3.6% 4.1% 4.6% 5.1% 5.6% 6.1% 6.6% 7.1% 7.6% 8.1% 8.6% 9.2% 9.7% 10.2% 10.7% 11.2% 11.7% 12.2%17 -3.5% -3.0% -2.5% -2.0% -1.5% -1.0% -0.5% 0.1% 0.6% 1.1% 1.6% 2.1% 2.6% 3.1% 3.6% 4.1% 4.6% 5.1% 5.6% 6.2% 6.7% 7.2% 7.7% 8.2% 8.7% 9.2% 9.7% 10.2% 10.7% 11.2% 11.7% 12.3% 12.8%18 -3.0% -2.5% -2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.6% 2.1% 2.6% 3.1% 3.6% 4.1% 4.6% 5.1% 5.6% 6.2% 6.7% 7.2% 7.7% 8.2% 8.7% 9.2% 9.7% 10.2% 10.8% 11.3% 11.8% 12.3% 12.8% 13.3%19 -2.6% -2.1% -1.6% -1.1% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.1% 3.6% 4.1% 4.6% 5.1% 5.6% 6.1% 6.7% 7.2% 7.7% 8.2% 8.7% 9.2% 9.7% 10.3% 10.8% 11.3% 11.8% 12.3% 12.8% 13.3% 13.8%20 -2.2% -1.7% -1.1% -0.6% -0.1% 0.4% 0.9% 1.4% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.1% 5.6% 6.1% 6.6% 7.1% 7.6% 8.2% 8.7% 9.2% 9.7% 10.2% 10.7% 11.3% 11.8% 12.3% 12.8% 13.3% 13.8% 14.4%21 -1.8% -1.2% -0.7% -0.2% 0.3% 0.8% 1.3% 1.9% 2.4% 2.9% 3.4% 3.9% 4.5% 5.0% 5.5% 6.0% 6.5% 7.1% 7.6% 8.1% 8.6% 9.1% 9.7% 10.2% 10.7% 11.2% 11.7% 12.3% 12.8% 13.3% 13.8% 14.3% 14.8%22 -1.4% -0.8% -0.3% 0.2% 0.7% 1.2% 1.8% 2.3% 2.8% 3.3% 3.8% 4.4% 4.9% 5.4% 5.9% 6.5% 7.0% 7.5% 8.0% 8.5% 9.1% 9.6% 10.1% 10.6% 11.1% 11.7% 12.2% 12.7% 13.2% 13.8% 14.3% 14.8% 15.3%23 -1.0% -0.5% 0.1% 0.6% 1.1% 1.6% 2.2% 2.7% 3.2% 3.7% 4.3% 4.8% 5.3% 5.8% 6.3% 6.9% 7.4% 7.9% 8.4% 9.0% 9.5% 10.0% 10.5% 11.1% 11.6% 12.1% 12.6% 13.2% 13.7% 14.2% 14.7% 15.3% 15.8%24 -0.6% -0.1% 0.4% 1.0% 1.5% 2.0% 2.5% 3.1% 3.6% 4.1% 4.6% 5.2% 5.7% 6.2% 6.7% 7.3% 7.8% 8.3% 8.9% 9.4% 9.9% 10.4% 11.0% 11.5% 12.0% 12.5% 13.1% 13.6% 14.1% 14.6% 15.2% 15.7% 16.2%25 -0.3% 0.3% 0.8% 1.3% 1.9% 2.4% 2.9% 3.4% 4.0% 4.5% 5.0% 5.6% 6.1% 6.6% 7.1% 7.7% 8.2% 8.7% 9.2% 9.8% 10.3% 10.8% 11.4% 11.9% 12.4% 12.9% 13.5% 14.0% 14.5% 15.1% 15.6% 16.1% 16.6%26 0.1% 0.6% 1.1% 1.7% 2.2% 2.7% 3.3% 3.8% 4.3% 4.9% 5.4% 5.9% 6.5% 7.0% 7.5% 8.0% 8.6% 9.1% 9.6% 10.2% 10.7% 11.2% 11.8% 12.3% 12.8% 13.3% 13.9% 14.4% 14.9% 15.5% 16.0% 16.5% 17.1%27 0.4% 1.0% 1.5% 2.0% 2.6% 3.1% 3.6% 4.1% 4.7% 5.2% 5.7% 6.3% 6.8% 7.3% 7.9% 8.4% 8.9% 9.5% 10.0% 10.5% 11.1% 11.6% 12.1% 12.7% 13.2% 13.7% 14.3% 14.8% 15.3% 15.9% 16.4% 16.9% 17.5%28 0.7% 1.3% 1.8% 2.4% 2.9% 3.4% 4.0% 4.5% 5.0% 5.6% 6.1% 6.6% 7.2% 7.7% 8.2% 8.8% 9.3% 9.8% 10.4% 10.9% 11.4% 12.0% 12.5% 13.0% 13.6% 14.1% 14.6% 15.2% 15.7% 16.2% 16.8% 17.3% 17.8%29 1.1% 1.6% 2.1% 2.7% 3.2% 3.7% 4.3% 4.8% 5.4% 5.9% 6.4% 7.0% 7.5% 8.0% 8.6% 9.1% 9.6% 10.2% 10.7% 11.3% 11.8% 12.3% 12.9% 13.4% 13.9% 14.5% 15.0% 15.5% 16.1% 16.6% 17.2% 17.7% 18.2%30 1.4% 1.9% 2.5% 3.0% 3.5% 4.1% 4.6% 5.1% 5.7% 6.2% 6.8% 7.3% 7.8% 8.4% 8.9% 9.4% 10.0% 10.5% 11.1% 11.6% 12.1% 12.7% 13.2% 13.8% 14.3% 14.8% 15.4% 15.9% 16.4% 17.0% 17.5% 18.1% 18.6%31 1.7% 2.2% 2.8% 3.3% 3.8% 4.4% 4.9% 5.5% 6.0% 6.5% 7.1% 7.6% 8.2% 8.7% 9.2% 9.8% 10.3% 10.9% 11.4% 11.9% 12.5% 13.0% 13.6% 14.1% 14.6% 15.2% 15.7% 16.3% 16.8% 17.3% 17.9% 18.4% 18.9%32 2.0% 2.5% 3.1% 3.6% 4.1% 4.7% 5.2% 5.8% 6.3% 6.8% 7.4% 7.9% 8.5% 9.0% 9.5% 10.1% 10.6% 11.2% 11.7% 12.3% 12.8% 13.3% 13.9% 14.4% 15.0% 15.5% 16.0% 16.6% 17.1% 17.7% 18.2% 18.8% 19.3%33 2.3% 2.8% 3.3% 3.9% 4.4% 5.0% 5.5% 6.1% 6.6% 7.1% 7.7% 8.2% 8.8% 9.3% 9.9% 10.4% 10.9% 11.5% 12.0% 12.6% 13.1% 13.7% 14.2% 14.7% 15.3% 15.8% 16.4% 16.9% 17.5% 18.0% 18.5% 19.1% 19.6%34 2.5% 3.1% 3.6% 4.2% 4.7% 5.3% 5.8% 6.3% 6.9% 7.4% 8.0% 8.5% 9.1% 9.6% 10.2% 10.7% 11.2% 11.8% 12.3% 12.9% 13.4% 14.0% 14.5% 15.1% 15.6% 16.2% 16.7% 17.2% 17.8% 18.3% 18.9% 19.4% 20.0%35 2.8% 3.3% 3.9% 4.4% 5.0% 5.5% 6.1% 6.6% 7.2% 7.7% 8.3% 8.8% 9.4% 9.9% 10.5% 11.0% 11.5% 12.1% 12.6% 13.2% 13.7% 14.3% 14.8% 15.4% 15.9% 16.5% 17.0% 17.6% 18.1% 18.6% 19.2% 19.7% 20.3%36 3.1% 3.6% 4.2% 4.7% 5.3% 5.8% 6.4% 6.9% 7.5% 8.0% 8.5% 9.1% 9.6% 10.2% 10.7% 11.3% 11.8% 12.4% 12.9% 13.5% 14.0% 14.6% 15.1% 15.7% 16.2% 16.8% 17.3% 17.9% 18.4% 19.0% 19.5% 20.1% 20.6%37 3.3% 3.9% 4.4% 5.0% 5.5% 6.1% 6.6% 7.2% 7.7% 8.3% 8.8% 9.4% 9.9% 10.5% 11.0% 11.6% 12.1% 12.7% 13.2% 13.8% 14.3% 14.9% 15.4% 16.0% 16.5% 17.1% 17.6% 18.2% 18.7% 19.3% 19.8% 20.4% 20.9%38 3.6% 4.1% 4.7% 5.2% 5.8% 6.3% 6.9% 7.4% 8.0% 8.5% 9.1% 9.6% 10.2% 10.7% 11.3% 11.8% 12.4% 12.9% 13.5% 14.0% 14.6% 15.2% 15.7% 16.3% 16.8% 17.4% 17.9% 18.5% 19.0% 19.6% 20.1% 20.7% 21.2%39 3.8% 4.4% 4.9% 5.5% 6.0% 6.6% 7.1% 7.7% 8.2% 8.8% 9.4% 9.9% 10.5% 11.0% 11.6% 12.1% 12.7% 13.2% 13.8% 14.3% 14.9% 15.4% 16.0% 16.5% 17.1% 17.6% 18.2% 18.7% 19.3% 19.8% 20.4% 21.0% 21.5%40 4.1% 4.6% 5.2% 5.7% 6.3% 6.8% 7.4% 7.9% 8.5% 9.1% 9.6% 10.2% 10.7% 11.3% 11.8% 12.4% 12.9% 13.5% 14.0% 14.6% 15.1% 15.7% 16.3% 16.8% 17.4% 17.9% 18.5% 19.0% 19.6% 20.1% 20.7% 21.2% 21.8%
Implied Equity Return = (1+g) * ((Terminal PE / Start PE) ^ (1/t)) -1 + div yld * ((Start PE / Term PE +1) / 2)Implied Equity Risk Premium = Implied Equity Return - Real Government Bond Yield
US Implied Index Returns: May 2011
Source: Datastream, LODH Calculation
Time Dividend Starting Implied Equity Holding Period Annualized ReturnHorizon (t) Yield P / 10yr E
10 1.8 26.5
Terminal EPS %cagr (g)P / Peak E -8 -7.5 -7 -6.5 -6 -5.5 -5 -4.5 -4 -3.5 -3 -2.5 -2 -1.5 -1 -0.5 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6 6.5 7 7.5 8
2 -15.9% -15.6% -15.2% -14.8% -14.4% -14.0% -13.6% -13.2% -12.9% -12.5% -12.1% -11.7% -11.3% -10.9% -10.5% -10.2% -9.8% -9.4% -9.0% -8.6% -8.2% -7.8% -7.5% -7.1% -6.7% -6.3% -5.9% -5.5% -5.1% -4.7% -4.4% -4.0% -3.6%3 -17.0% -16.6% -16.2% -15.8% -15.4% -15.0% -14.6% -14.2% -13.8% -13.4% -13.0% -12.6% -12.2% -11.8% -11.4% -11.0% -10.6% -10.2% -9.8% -9.4% -9.0% -8.6% -8.2% -7.8% -7.4% -7.0% -6.6% -6.2% -5.8% -5.4% -5.0% -4.6% -4.2%4 -16.9% -16.5% -16.1% -15.7% -15.2% -14.8% -14.4% -14.0% -13.6% -13.2% -12.8% -12.3% -11.9% -11.5% -11.1% -10.7% -10.3% -9.9% -9.4% -9.0% -8.6% -8.2% -7.8% -7.4% -7.0% -6.5% -6.1% -5.7% -5.3% -4.9% -4.5% -4.1% -3.6%5 -16.4% -16.0% -15.5% -15.1% -14.7% -14.3% -13.8% -13.4% -13.0% -12.6% -12.2% -11.7% -11.3% -10.9% -10.5% -10.0% -9.6% -9.2% -8.8% -8.3% -7.9% -7.5% -7.1% -6.6% -6.2% -5.8% -5.4% -5.0% -4.5% -4.1% -3.7% -3.3% -2.8%6 -15.8% -15.3% -14.9% -14.5% -14.0% -13.6% -13.2% -12.7% -12.3% -11.9% -11.4% -11.0% -10.6% -10.2% -9.7% -9.3% -8.9% -8.4% -8.0% -7.6% -7.1% -6.7% -6.3% -5.8% -5.4% -5.0% -4.6% -4.1% -3.7% -3.3% -2.8% -2.4% -2.0%7 -15.1% -14.7% -14.2% -13.8% -13.3% -12.9% -12.5% -12.0% -11.6% -11.2% -10.7% -10.3% -9.8% -9.4% -9.0% -8.5% -8.1% -7.7% -7.2% -6.8% -6.3% -5.9% -5.5% -5.0% -4.6% -4.2% -3.7% -3.3% -2.8% -2.4% -2.0% -1.5% -1.1%8 -14.4% -14.0% -13.6% -13.1% -12.7% -12.2% -11.8% -11.3% -10.9% -10.5% -10.0% -9.6% -9.1% -8.7% -8.2% -7.8% -7.4% -6.9% -6.5% -6.0% -5.6% -5.1% -4.7% -4.2% -3.8% -3.4% -2.9% -2.5% -2.0% -1.6% -1.1% -0.7% -0.3%9 -13.8% -13.4% -12.9% -12.5% -12.0% -11.6% -11.1% -10.7% -10.2% -9.8% -9.3% -8.9% -8.4% -8.0% -7.5% -7.1% -6.6% -6.2% -5.7% -5.3% -4.8% -4.4% -3.9% -3.5% -3.0% -2.6% -2.1% -1.7% -1.3% -0.8% -0.4% 0.1% 0.5%
10 -13.2% -12.8% -12.3% -11.9% -11.4% -10.9% -10.5% -10.0% -9.6% -9.1% -8.7% -8.2% -7.8% -7.3% -6.9% -6.4% -6.0% -5.5% -5.0% -4.6% -4.1% -3.7% -3.2% -2.8% -2.3% -1.9% -1.4% -1.0% -0.5% -0.1% 0.4% 0.8% 1.3%11 -12.6% -12.2% -11.7% -11.3% -10.8% -10.3% -9.9% -9.4% -9.0% -8.5% -8.1% -7.6% -7.1% -6.7% -6.2% -5.8% -5.3% -4.8% -4.4% -3.9% -3.5% -3.0% -2.6% -2.1% -1.6% -1.2% -0.7% -0.3% 0.2% 0.6% 1.1% 1.6% 2.0%12 -12.1% -11.6% -11.2% -10.7% -10.2% -9.8% -9.3% -8.8% -8.4% -7.9% -7.5% -7.0% -6.5% -6.1% -5.6% -5.2% -4.7% -4.2% -3.8% -3.3% -2.8% -2.4% -1.9% -1.5% -1.0% -0.5% -0.1% 0.4% 0.9% 1.3% 1.8% 2.2% 2.7%13 -11.6% -11.1% -10.6% -10.2% -9.7% -9.2% -8.8% -8.3% -7.8% -7.4% -6.9% -6.4% -6.0% -5.5% -5.0% -4.6% -4.1% -3.6% -3.2% -2.7% -2.2% -1.8% -1.3% -0.8% -0.4% 0.1% 0.6% 1.0% 1.5% 2.0% 2.4% 2.9% 3.3%14 -11.0% -10.6% -10.1% -9.6% -9.2% -8.7% -8.2% -7.8% -7.3% -6.8% -6.4% -5.9% -5.4% -4.9% -4.5% -4.0% -3.5% -3.1% -2.6% -2.1% -1.7% -1.2% -0.7% -0.3% 0.2% 0.7% 1.1% 1.6% 2.1% 2.6% 3.0% 3.5% 4.0%15 -10.6% -10.1% -9.6% -9.1% -8.7% -8.2% -7.7% -7.3% -6.8% -6.3% -5.8% -5.4% -4.9% -4.4% -4.0% -3.5% -3.0% -2.5% -2.1% -1.6% -1.1% -0.6% -0.2% 0.3% 0.8% 1.2% 1.7% 2.2% 2.7% 3.1% 3.6% 4.1% 4.5%16 -10.1% -9.6% -9.2% -8.7% -8.2% -7.7% -7.3% -6.8% -6.3% -5.8% -5.3% -4.9% -4.4% -3.9% -3.4% -3.0% -2.5% -2.0% -1.5% -1.1% -0.6% -0.1% 0.4% 0.8% 1.3% 1.8% 2.3% 2.7% 3.2% 3.7% 4.2% 4.6% 5.1%17 -9.7% -9.2% -8.7% -8.2% -7.7% -7.3% -6.8% -6.3% -5.8% -5.4% -4.9% -4.4% -3.9% -3.4% -3.0% -2.5% -2.0% -1.5% -1.1% -0.6% -0.1% 0.4% 0.9% 1.3% 1.8% 2.3% 2.8% 3.3% 3.7% 4.2% 4.7% 5.2% 5.6%18 -9.2% -8.8% -8.3% -7.8% -7.3% -6.8% -6.3% -5.9% -5.4% -4.9% -4.4% -3.9% -3.5% -3.0% -2.5% -2.0% -1.5% -1.1% -0.6% -0.1% 0.4% 0.9% 1.3% 1.8% 2.3% 2.8% 3.3% 3.8% 4.2% 4.7% 5.2% 5.7% 6.2%19 -8.8% -8.3% -7.9% -7.4% -6.9% -6.4% -5.9% -5.4% -5.0% -4.5% -4.0% -3.5% -3.0% -2.5% -2.1% -1.6% -1.1% -0.6% -0.1% 0.4% 0.8% 1.3% 1.8% 2.3% 2.8% 3.3% 3.7% 4.2% 4.7% 5.2% 5.7% 6.2% 6.7%20 -8.4% -7.9% -7.5% -7.0% -6.5% -6.0% -5.5% -5.0% -4.5% -4.1% -3.6% -3.1% -2.6% -2.1% -1.6% -1.1% -0.7% -0.2% 0.3% 0.8% 1.3% 1.8% 2.3% 2.7% 3.2% 3.7% 4.2% 4.7% 5.2% 5.7% 6.2% 6.6% 7.1%21 -8.1% -7.6% -7.1% -6.6% -6.1% -5.6% -5.1% -4.6% -4.1% -3.7% -3.2% -2.7% -2.2% -1.7% -1.2% -0.7% -0.2% 0.3% 0.7% 1.2% 1.7% 2.2% 2.7% 3.2% 3.7% 4.2% 4.6% 5.1% 5.6% 6.1% 6.6% 7.1% 7.6%22 -7.7% -7.2% -6.7% -6.2% -5.7% -5.2% -4.7% -4.2% -3.8% -3.3% -2.8% -2.3% -1.8% -1.3% -0.8% -0.3% 0.2% 0.7% 1.1% 1.6% 2.1% 2.6% 3.1% 3.6% 4.1% 4.6% 5.1% 5.6% 6.1% 6.5% 7.0% 7.5% 8.0%23 -7.3% -6.8% -6.3% -5.9% -5.4% -4.9% -4.4% -3.9% -3.4% -2.9% -2.4% -1.9% -1.4% -0.9% -0.4% 0.1% 0.6% 1.1% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 8.4%24 -7.0% -6.5% -6.0% -5.5% -5.0% -4.5% -4.0% -3.5% -3.0% -2.5% -2.0% -1.5% -1.0% -0.6% -0.1% 0.4% 0.9% 1.4% 1.9% 2.4% 2.9% 3.4% 3.9% 4.4% 4.9% 5.4% 5.9% 6.4% 6.9% 7.4% 7.9% 8.4% 8.9%25 -6.7% -6.2% -5.7% -5.2% -4.7% -4.2% -3.7% -3.2% -2.7% -2.2% -1.7% -1.2% -0.7% -0.2% 0.3% 0.8% 1.3% 1.8% 2.3% 2.8% 3.3% 3.8% 4.3% 4.8% 5.3% 5.8% 6.3% 6.8% 7.3% 7.8% 8.3% 8.8% 9.3%26 -6.3% -5.8% -5.3% -4.8% -4.3% -3.8% -3.3% -2.8% -2.3% -1.8% -1.3% -0.8% -0.3% 0.2% 0.7% 1.2% 1.7% 2.2% 2.7% 3.1% 3.6% 4.1% 4.6% 5.1% 5.6% 6.1% 6.6% 7.1% 7.6% 8.1% 8.6% 9.1% 9.6%27 -6.0% -5.5% -5.0% -4.5% -4.0% -3.5% -3.0% -2.5% -2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 8.5% 9.0% 9.5% 10.0%28 -5.7% -5.2% -4.7% -4.2% -3.7% -3.2% -2.7% -2.2% -1.7% -1.2% -0.7% -0.2% 0.3% 0.8% 1.3% 1.8% 2.3% 2.8% 3.3% 3.8% 4.3% 4.8% 5.3% 5.8% 6.4% 6.9% 7.4% 7.9% 8.4% 8.9% 9.4% 9.9% 10.4%29 -5.4% -4.9% -4.4% -3.9% -3.4% -2.9% -2.4% -1.9% -1.4% -0.9% -0.4% 0.1% 0.6% 1.1% 1.6% 2.1% 2.7% 3.2% 3.7% 4.2% 4.7% 5.2% 5.7% 6.2% 6.7% 7.2% 7.7% 8.2% 8.7% 9.2% 9.7% 10.2% 10.7%30 -5.1% -4.6% -4.1% -3.6% -3.1% -2.6% -2.1% -1.6% -1.1% -0.6% -0.1% 0.4% 0.9% 1.4% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 8.5% 9.0% 9.5% 10.1% 10.6% 11.1%31 -4.9% -4.3% -3.8% -3.3% -2.8% -2.3% -1.8% -1.3% -0.8% -0.3% 0.2% 0.7% 1.2% 1.7% 2.3% 2.8% 3.3% 3.8% 4.3% 4.8% 5.3% 5.8% 6.3% 6.8% 7.3% 7.8% 8.4% 8.9% 9.4% 9.9% 10.4% 10.9% 11.4%32 -4.6% -4.1% -3.6% -3.1% -2.5% -2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.6% 3.1% 3.6% 4.1% 4.6% 5.1% 5.6% 6.1% 6.6% 7.1% 7.6% 8.2% 8.7% 9.2% 9.7% 10.2% 10.7% 11.2% 11.7%33 -4.3% -3.8% -3.3% -2.8% -2.3% -1.8% -1.2% -0.7% -0.2% 0.3% 0.8% 1.3% 1.8% 2.3% 2.8% 3.4% 3.9% 4.4% 4.9% 5.4% 5.9% 6.4% 6.9% 7.4% 8.0% 8.5% 9.0% 9.5% 10.0% 10.5% 11.0% 11.5% 12.0%34 -4.1% -3.5% -3.0% -2.5% -2.0% -1.5% -1.0% -0.5% 0.0% 0.6% 1.1% 1.6% 2.1% 2.6% 3.1% 3.6% 4.1% 4.7% 5.2% 5.7% 6.2% 6.7% 7.2% 7.7% 8.2% 8.8% 9.3% 9.8% 10.3% 10.8% 11.3% 11.8% 12.3%35 -3.8% -3.3% -2.8% -2.3% -1.7% -1.2% -0.7% -0.2% 0.3% 0.8% 1.3% 1.9% 2.4% 2.9% 3.4% 3.9% 4.4% 4.9% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 8.5% 9.1% 9.6% 10.1% 10.6% 11.1% 11.6% 12.1% 12.7%36 -3.6% -3.0% -2.5% -2.0% -1.5% -1.0% -0.5% 0.1% 0.6% 1.1% 1.6% 2.1% 2.6% 3.1% 3.7% 4.2% 4.7% 5.2% 5.7% 6.2% 6.8% 7.3% 7.8% 8.3% 8.8% 9.3% 9.9% 10.4% 10.9% 11.4% 11.9% 12.4% 12.9%37 -3.3% -2.8% -2.3% -1.8% -1.2% -0.7% -0.2% 0.3% 0.8% 1.3% 1.9% 2.4% 2.9% 3.4% 3.9% 4.4% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.1% 8.6% 9.1% 9.6% 10.1% 10.6% 11.2% 11.7% 12.2% 12.7% 13.2%38 -3.1% -2.6% -2.0% -1.5% -1.0% -0.5% 0.0% 0.6% 1.1% 1.6% 2.1% 2.6% 3.1% 3.7% 4.2% 4.7% 5.2% 5.7% 6.3% 6.8% 7.3% 7.8% 8.3% 8.8% 9.4% 9.9% 10.4% 10.9% 11.4% 12.0% 12.5% 13.0% 13.5%39 -2.8% -2.3% -1.8% -1.3% -0.8% -0.2% 0.3% 0.8% 1.3% 1.8% 2.4% 2.9% 3.4% 3.9% 4.4% 5.0% 5.5% 6.0% 6.5% 7.0% 7.6% 8.1% 8.6% 9.1% 9.6% 10.1% 10.7% 11.2% 11.7% 12.2% 12.7% 13.3% 13.8%40 -2.6% -2.1% -1.6% -1.1% -0.5% 0.0% 0.5% 1.0% 1.6% 2.1% 2.6% 3.1% 3.6% 4.2% 4.7% 5.2% 5.7% 6.2% 6.8% 7.3% 7.8% 8.3% 8.8% 9.4% 9.9% 10.4% 10.9% 11.5% 12.0% 12.5% 13.0% 13.5% 14.1%
Implied Equity Return = (1+g) * ((Terminal PE / Start PE) ^ (1/t)) -1 + div yld * ((Start PE / Term PE +1) / 2)Implied Equity Risk Premium = Implied Equity Return - Real Government Bond Yield
US Implied Index Returns: 2000 Bull Market Peak
Source: Datastream, LODH Calculation
Time Dividend Starting Implied Equity Holding Period Annualized ReturnHorizon (t) Yield P / 10yr E
10 1.1 49.9 2000 Bubble Peak
Terminal EPS %cagr (g)P / Peak E -8 -7.5 -7 -6.5 -6 -5.5 -5 -4.5 -4 -3.5 -3 -2.5 -2 -1.5 -1 -0.5 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6 6.5 7 7.5 8
2 -19.0% -18.7% -18.3% -17.9% -17.6% -17.2% -16.9% -16.5% -16.1% -15.8% -15.4% -15.0% -14.7% -14.3% -14.0% -13.6% -13.2% -12.9% -12.5% -12.1% -11.8% -11.4% -11.1% -10.7% -10.3% -10.0% -9.6% -9.2% -8.9% -8.5% -8.2% -7.8% -7.4%3 -20.8% -20.5% -20.1% -19.7% -19.3% -19.0% -18.6% -18.2% -17.8% -17.5% -17.1% -16.7% -16.3% -15.9% -15.6% -15.2% -14.8% -14.4% -14.1% -13.7% -13.3% -12.9% -12.5% -12.2% -11.8% -11.4% -11.0% -10.7% -10.3% -9.9% -9.5% -9.1% -8.8%4 -21.1% -20.7% -20.3% -19.9% -19.6% -19.2% -18.8% -18.4% -18.0% -17.6% -17.2% -16.8% -16.4% -16.1% -15.7% -15.3% -14.9% -14.5% -14.1% -13.7% -13.3% -13.0% -12.6% -12.2% -11.8% -11.4% -11.0% -10.6% -10.2% -9.8% -9.5% -9.1% -8.7%5 -20.9% -20.5% -20.1% -19.7% -19.3% -18.9% -18.5% -18.1% -17.7% -17.3% -16.9% -16.5% -16.1% -15.7% -15.3% -14.9% -14.5% -14.1% -13.7% -13.3% -12.9% -12.5% -12.1% -11.7% -11.3% -10.9% -10.5% -10.1% -9.7% -9.3% -9.0% -8.6% -8.2%6 -20.4% -20.0% -19.6% -19.2% -18.8% -18.4% -18.0% -17.6% -17.2% -16.8% -16.4% -16.0% -15.6% -15.2% -14.8% -14.4% -14.0% -13.6% -13.2% -12.8% -12.3% -11.9% -11.5% -11.1% -10.7% -10.3% -9.9% -9.5% -9.1% -8.7% -8.3% -7.9% -7.5%7 -19.9% -19.5% -19.1% -18.7% -18.3% -17.9% -17.5% -17.1% -16.6% -16.2% -15.8% -15.4% -15.0% -14.6% -14.2% -13.8% -13.4% -13.0% -12.5% -12.1% -11.7% -11.3% -10.9% -10.5% -10.1% -9.7% -9.3% -8.8% -8.4% -8.0% -7.6% -7.2% -6.8%8 -19.4% -19.0% -18.6% -18.2% -17.7% -17.3% -16.9% -16.5% -16.1% -15.7% -15.2% -14.8% -14.4% -14.0% -13.6% -13.2% -12.7% -12.3% -11.9% -11.5% -11.1% -10.7% -10.2% -9.8% -9.4% -9.0% -8.6% -8.2% -7.8% -7.3% -6.9% -6.5% -6.1%9 -18.9% -18.5% -18.0% -17.6% -17.2% -16.8% -16.4% -15.9% -15.5% -15.1% -14.7% -14.2% -13.8% -13.4% -13.0% -12.6% -12.1% -11.7% -11.3% -10.9% -10.5% -10.0% -9.6% -9.2% -8.8% -8.4% -7.9% -7.5% -7.1% -6.7% -6.2% -5.8% -5.4%
10 -18.4% -17.9% -17.5% -17.1% -16.7% -16.2% -15.8% -15.4% -15.0% -14.5% -14.1% -13.7% -13.3% -12.8% -12.4% -12.0% -11.6% -11.1% -10.7% -10.3% -9.9% -9.4% -9.0% -8.6% -8.1% -7.7% -7.3% -6.9% -6.4% -6.0% -5.6% -5.2% -4.7%11 -17.9% -17.4% -17.0% -16.6% -16.1% -15.7% -15.3% -14.9% -14.4% -14.0% -13.6% -13.1% -12.7% -12.3% -11.8% -11.4% -11.0% -10.6% -10.1% -9.7% -9.3% -8.8% -8.4% -8.0% -7.5% -7.1% -6.7% -6.3% -5.8% -5.4% -5.0% -4.5% -4.1%12 -17.4% -16.9% -16.5% -16.1% -15.6% -15.2% -14.8% -14.3% -13.9% -13.5% -13.0% -12.6% -12.2% -11.7% -11.3% -10.9% -10.4% -10.0% -9.6% -9.1% -8.7% -8.3% -7.8% -7.4% -7.0% -6.5% -6.1% -5.7% -5.2% -4.8% -4.4% -3.9% -3.5%13 -16.9% -16.5% -16.0% -15.6% -15.2% -14.7% -14.3% -13.9% -13.4% -13.0% -12.5% -12.1% -11.7% -11.2% -10.8% -10.4% -9.9% -9.5% -9.1% -8.6% -8.2% -7.7% -7.3% -6.9% -6.4% -6.0% -5.6% -5.1% -4.7% -4.2% -3.8% -3.4% -2.9%14 -16.5% -16.0% -15.6% -15.1% -14.7% -14.3% -13.8% -13.4% -12.9% -12.5% -12.1% -11.6% -11.2% -10.7% -10.3% -9.9% -9.4% -9.0% -8.5% -8.1% -7.7% -7.2% -6.8% -6.3% -5.9% -5.5% -5.0% -4.6% -4.1% -3.7% -3.3% -2.8% -2.4%15 -16.0% -15.6% -15.2% -14.7% -14.3% -13.8% -13.4% -12.9% -12.5% -12.0% -11.6% -11.2% -10.7% -10.3% -9.8% -9.4% -8.9% -8.5% -8.1% -7.6% -7.2% -6.7% -6.3% -5.8% -5.4% -5.0% -4.5% -4.1% -3.6% -3.2% -2.7% -2.3% -1.9%16 -15.6% -15.2% -14.7% -14.3% -13.8% -13.4% -12.9% -12.5% -12.1% -11.6% -11.2% -10.7% -10.3% -9.8% -9.4% -8.9% -8.5% -8.0% -7.6% -7.1% -6.7% -6.3% -5.8% -5.4% -4.9% -4.5% -4.0% -3.6% -3.1% -2.7% -2.2% -1.8% -1.3%17 -15.2% -14.8% -14.3% -13.9% -13.4% -13.0% -12.5% -12.1% -11.6% -11.2% -10.7% -10.3% -9.8% -9.4% -8.9% -8.5% -8.0% -7.6% -7.1% -6.7% -6.2% -5.8% -5.4% -4.9% -4.5% -4.0% -3.6% -3.1% -2.7% -2.2% -1.8% -1.3% -0.9%18 -14.8% -14.4% -13.9% -13.5% -13.0% -12.6% -12.1% -11.7% -11.2% -10.8% -10.3% -9.9% -9.4% -9.0% -8.5% -8.1% -7.6% -7.2% -6.7% -6.3% -5.8% -5.4% -4.9% -4.5% -4.0% -3.6% -3.1% -2.7% -2.2% -1.7% -1.3% -0.8% -0.4%19 -14.5% -14.0% -13.6% -13.1% -12.7% -12.2% -11.7% -11.3% -10.8% -10.4% -9.9% -9.5% -9.0% -8.6% -8.1% -7.7% -7.2% -6.8% -6.3% -5.8% -5.4% -4.9% -4.5% -4.0% -3.6% -3.1% -2.7% -2.2% -1.8% -1.3% -0.9% -0.4% 0.1%20 -14.1% -13.7% -13.2% -12.7% -12.3% -11.8% -11.4% -10.9% -10.5% -10.0% -9.6% -9.1% -8.6% -8.2% -7.7% -7.3% -6.8% -6.4% -5.9% -5.4% -5.0% -4.5% -4.1% -3.6% -3.2% -2.7% -2.3% -1.8% -1.3% -0.9% -0.4% 0.0% 0.5%21 -13.8% -13.3% -12.9% -12.4% -11.9% -11.5% -11.0% -10.6% -10.1% -9.6% -9.2% -8.7% -8.3% -7.8% -7.4% -6.9% -6.4% -6.0% -5.5% -5.1% -4.6% -4.1% -3.7% -3.2% -2.8% -2.3% -1.8% -1.4% -0.9% -0.5% 0.0% 0.4% 0.9%22 -13.4% -13.0% -12.5% -12.1% -11.6% -11.1% -10.7% -10.2% -9.8% -9.3% -8.8% -8.4% -7.9% -7.4% -7.0% -6.5% -6.1% -5.6% -5.1% -4.7% -4.2% -3.8% -3.3% -2.8% -2.4% -1.9% -1.5% -1.0% -0.5% -0.1% 0.4% 0.8% 1.3%23 -13.1% -12.7% -12.2% -11.7% -11.3% -10.8% -10.3% -9.9% -9.4% -8.9% -8.5% -8.0% -7.6% -7.1% -6.6% -6.2% -5.7% -5.2% -4.8% -4.3% -3.9% -3.4% -2.9% -2.5% -2.0% -1.5% -1.1% -0.6% -0.2% 0.3% 0.8% 1.2% 1.7%24 -12.8% -12.3% -11.9% -11.4% -10.9% -10.5% -10.0% -9.5% -9.1% -8.6% -8.2% -7.7% -7.2% -6.8% -6.3% -5.8% -5.4% -4.9% -4.4% -4.0% -3.5% -3.0% -2.6% -2.1% -1.6% -1.2% -0.7% -0.3% 0.2% 0.7% 1.1% 1.6% 2.1%25 -12.5% -12.0% -11.6% -11.1% -10.6% -10.2% -9.7% -9.2% -8.8% -8.3% -7.8% -7.4% -6.9% -6.4% -6.0% -5.5% -5.0% -4.6% -4.1% -3.6% -3.2% -2.7% -2.2% -1.8% -1.3% -0.8% -0.4% 0.1% 0.6% 1.0% 1.5% 2.0% 2.4%26 -12.2% -11.7% -11.3% -10.8% -10.3% -9.9% -9.4% -8.9% -8.5% -8.0% -7.5% -7.0% -6.6% -6.1% -5.6% -5.2% -4.7% -4.2% -3.8% -3.3% -2.8% -2.4% -1.9% -1.4% -1.0% -0.5% 0.0% 0.4% 0.9% 1.4% 1.9% 2.3% 2.8%27 -11.9% -11.4% -11.0% -10.5% -10.0% -9.6% -9.1% -8.6% -8.2% -7.7% -7.2% -6.7% -6.3% -5.8% -5.3% -4.9% -4.4% -3.9% -3.5% -3.0% -2.5% -2.0% -1.6% -1.1% -0.6% -0.2% 0.3% 0.8% 1.3% 1.7% 2.2% 2.7% 3.1%28 -11.6% -11.2% -10.7% -10.2% -9.7% -9.3% -8.8% -8.3% -7.9% -7.4% -6.9% -6.4% -6.0% -5.5% -5.0% -4.6% -4.1% -3.6% -3.1% -2.7% -2.2% -1.7% -1.3% -0.8% -0.3% 0.2% 0.6% 1.1% 1.6% 2.1% 2.5% 3.0% 3.5%29 -11.4% -10.9% -10.4% -9.9% -9.5% -9.0% -8.5% -8.0% -7.6% -7.1% -6.6% -6.2% -5.7% -5.2% -4.7% -4.3% -3.8% -3.3% -2.8% -2.4% -1.9% -1.4% -0.9% -0.5% 0.0% 0.5% 0.9% 1.4% 1.9% 2.4% 2.8% 3.3% 3.8%30 -11.1% -10.6% -10.1% -9.7% -9.2% -8.7% -8.2% -7.8% -7.3% -6.8% -6.3% -5.9% -5.4% -4.9% -4.4% -4.0% -3.5% -3.0% -2.5% -2.1% -1.6% -1.1% -0.6% -0.2% 0.3% 0.8% 1.3% 1.7% 2.2% 2.7% 3.2% 3.6% 4.1%31 -10.8% -10.4% -9.9% -9.4% -8.9% -8.5% -8.0% -7.5% -7.0% -6.6% -6.1% -5.6% -5.1% -4.6% -4.2% -3.7% -3.2% -2.7% -2.3% -1.8% -1.3% -0.8% -0.4% 0.1% 0.6% 1.1% 1.6% 2.0% 2.5% 3.0% 3.5% 3.9% 4.4%32 -10.6% -10.1% -9.6% -9.2% -8.7% -8.2% -7.7% -7.2% -6.8% -6.3% -5.8% -5.3% -4.9% -4.4% -3.9% -3.4% -2.9% -2.5% -2.0% -1.5% -1.0% -0.5% -0.1% 0.4% 0.9% 1.4% 1.8% 2.3% 2.8% 3.3% 3.8% 4.2% 4.7%33 -10.3% -9.9% -9.4% -8.9% -8.4% -7.9% -7.5% -7.0% -6.5% -6.0% -5.5% -5.1% -4.6% -4.1% -3.6% -3.1% -2.7% -2.2% -1.7% -1.2% -0.8% -0.3% 0.2% 0.7% 1.2% 1.6% 2.1% 2.6% 3.1% 3.6% 4.0% 4.5% 5.0%34 -10.1% -9.6% -9.1% -8.7% -8.2% -7.7% -7.2% -6.7% -6.3% -5.8% -5.3% -4.8% -4.3% -3.9% -3.4% -2.9% -2.4% -1.9% -1.4% -1.0% -0.5% 0.0% 0.5% 1.0% 1.4% 1.9% 2.4% 2.9% 3.4% 3.8% 4.3% 4.8% 5.3%35 -9.9% -9.4% -8.9% -8.4% -7.9% -7.5% -7.0% -6.5% -6.0% -5.5% -5.0% -4.6% -4.1% -3.6% -3.1% -2.6% -2.2% -1.7% -1.2% -0.7% -0.2% 0.3% 0.7% 1.2% 1.7% 2.2% 2.7% 3.2% 3.6% 4.1% 4.6% 5.1% 5.6%36 -9.6% -9.2% -8.7% -8.2% -7.7% -7.2% -6.7% -6.3% -5.8% -5.3% -4.8% -4.3% -3.8% -3.4% -2.9% -2.4% -1.9% -1.4% -0.9% -0.4% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 2.9% 3.4% 3.9% 4.4% 4.9% 5.4% 5.8%37 -9.4% -8.9% -8.4% -8.0% -7.5% -7.0% -6.5% -6.0% -5.5% -5.1% -4.6% -4.1% -3.6% -3.1% -2.6% -2.1% -1.7% -1.2% -0.7% -0.2% 0.3% 0.8% 1.3% 1.7% 2.2% 2.7% 3.2% 3.7% 4.2% 4.7% 5.1% 5.6% 6.1%38 -9.2% -8.7% -8.2% -7.7% -7.3% -6.8% -6.3% -5.8% -5.3% -4.8% -4.3% -3.8% -3.4% -2.9% -2.4% -1.9% -1.4% -0.9% -0.4% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 3.9% 4.4% 4.9% 5.4% 5.9% 6.4%39 -9.0% -8.5% -8.0% -7.5% -7.0% -6.5% -6.1% -5.6% -5.1% -4.6% -4.1% -3.6% -3.1% -2.6% -2.2% -1.7% -1.2% -0.7% -0.2% 0.3% 0.8% 1.3% 1.7% 2.2% 2.7% 3.2% 3.7% 4.2% 4.7% 5.2% 5.6% 6.1% 6.6%40 -8.8% -8.3% -7.8% -7.3% -6.8% -6.3% -5.8% -5.4% -4.9% -4.4% -3.9% -3.4% -2.9% -2.4% -1.9% -1.4% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 3.9% 4.4% 4.9% 5.4% 5.9% 6.4% 6.9%
Implied Equity Return = (1+g) * ((Terminal PE / Start PE) ^ (1/t)) -1 + div yld * ((Start PE / Term PE +1) / 2)Implied Equity Risk Premium = Implied Equity Return - Real Government Bond Yield
UK Implied Index Returns: 2009 Low
Source: Datastream, LODH Calculation
Time Dividend Starting MSCI UK Equity IndexHorizon (t) Yield P / 10yr E March 2009 Low
10 6.0 10.1
Terminal EPS %cagr (g)P / Peak E -8 -7.5 -7 -6.5 -6 -5.5 -5 -4.5 -4 -3.5 -3 -2.5 -2 -1.5 -1 -0.5 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6 6.5 7 7.5 8
2 -3.6% -3.2% -2.8% -2.3% -1.9% -1.5% -1.1% -0.6% -0.2% 0.2% 0.6% 1.1% 1.5% 1.9% 2.3% 2.8% 3.2% 3.6% 4.0% 4.5% 4.9% 5.3% 5.8% 6.2% 6.6% 7.0% 7.5% 7.9% 8.3% 8.7% 9.2% 9.6% 10.0%3 -5.4% -5.0% -4.5% -4.1% -3.6% -3.2% -2.8% -2.3% -1.9% -1.4% -1.0% -0.5% -0.1% 0.3% 0.8% 1.2% 1.7% 2.1% 2.6% 3.0% 3.4% 3.9% 4.3% 4.8% 5.2% 5.7% 6.1% 6.5% 7.0% 7.4% 7.9% 8.3% 8.8%4 -5.6% -5.1% -4.7% -4.2% -3.7% -3.3% -2.8% -2.4% -1.9% -1.5% -1.0% -0.6% -0.1% 0.4% 0.8% 1.3% 1.7% 2.2% 2.6% 3.1% 3.6% 4.0% 4.5% 4.9% 5.4% 5.8% 6.3% 6.7% 7.2% 7.7% 8.1% 8.6% 9.0%5 -5.2% -4.7% -4.3% -3.8% -3.3% -2.9% -2.4% -1.9% -1.5% -1.0% -0.5% -0.1% 0.4% 0.9% 1.3% 1.8% 2.3% 2.7% 3.2% 3.7% 4.1% 4.6% 5.1% 5.5% 6.0% 6.5% 6.9% 7.4% 7.9% 8.3% 8.8% 9.3% 9.7%6 -4.6% -4.1% -3.7% -3.2% -2.7% -2.2% -1.8% -1.3% -0.8% -0.3% 0.1% 0.6% 1.1% 1.6% 2.0% 2.5% 3.0% 3.5% 3.9% 4.4% 4.9% 5.3% 5.8% 6.3% 6.8% 7.2% 7.7% 8.2% 8.7% 9.1% 9.6% 10.1% 10.6%7 -4.0% -3.5% -3.0% -2.5% -2.1% -1.6% -1.1% -0.6% -0.1% 0.4% 0.8% 1.3% 1.8% 2.3% 2.8% 3.2% 3.7% 4.2% 4.7% 5.2% 5.7% 6.1% 6.6% 7.1% 7.6% 8.1% 8.5% 9.0% 9.5% 10.0% 10.5% 11.0% 11.4%8 -3.3% -2.8% -2.4% -1.9% -1.4% -0.9% -0.4% 0.1% 0.6% 1.1% 1.6% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 5.9% 6.4% 6.9% 7.4% 7.9% 8.4% 8.9% 9.4% 9.9% 10.3% 10.8% 11.3% 11.8% 12.3%9 -2.7% -2.2% -1.7% -1.2% -0.7% -0.2% 0.3% 0.8% 1.3% 1.8% 2.3% 2.7% 3.2% 3.7% 4.2% 4.7% 5.2% 5.7% 6.2% 6.7% 7.2% 7.7% 8.2% 8.7% 9.2% 9.7% 10.2% 10.7% 11.2% 11.6% 12.1% 12.6% 13.1%
10 -2.1% -1.6% -1.1% -0.6% -0.1% 0.4% 0.9% 1.4% 1.9% 2.4% 2.9% 3.4% 3.9% 4.4% 4.9% 5.4% 5.9% 6.4% 6.9% 7.4% 7.9% 8.4% 8.9% 9.4% 9.9% 10.4% 10.9% 11.4% 11.9% 12.4% 12.9% 13.4% 13.9%11 -1.5% -1.0% -0.4% 0.1% 0.6% 1.1% 1.6% 2.1% 2.6% 3.1% 3.6% 4.1% 4.6% 5.1% 5.6% 6.1% 6.6% 7.1% 7.6% 8.1% 8.6% 9.1% 9.6% 10.1% 10.6% 11.2% 11.7% 12.2% 12.7% 13.2% 13.7% 14.2% 14.7%12 -0.9% -0.4% 0.1% 0.7% 1.2% 1.7% 2.2% 2.7% 3.2% 3.7% 4.2% 4.7% 5.2% 5.7% 6.2% 6.8% 7.3% 7.8% 8.3% 8.8% 9.3% 9.8% 10.3% 10.8% 11.3% 11.8% 12.4% 12.9% 13.4% 13.9% 14.4% 14.9% 15.4%13 -0.3% 0.2% 0.7% 1.2% 1.7% 2.2% 2.8% 3.3% 3.8% 4.3% 4.8% 5.3% 5.8% 6.3% 6.9% 7.4% 7.9% 8.4% 8.9% 9.4% 9.9% 10.5% 11.0% 11.5% 12.0% 12.5% 13.0% 13.5% 14.0% 14.6% 15.1% 15.6% 16.1%14 0.2% 0.7% 1.3% 1.8% 2.3% 2.8% 3.3% 3.8% 4.4% 4.9% 5.4% 5.9% 6.4% 6.9% 7.5% 8.0% 8.5% 9.0% 9.5% 10.0% 10.5% 11.1% 11.6% 12.1% 12.6% 13.1% 13.6% 14.2% 14.7% 15.2% 15.7% 16.2% 16.7%15 0.7% 1.3% 1.8% 2.3% 2.8% 3.3% 3.9% 4.4% 4.9% 5.4% 5.9% 6.5% 7.0% 7.5% 8.0% 8.5% 9.1% 9.6% 10.1% 10.6% 11.1% 11.7% 12.2% 12.7% 13.2% 13.7% 14.3% 14.8% 15.3% 15.8% 16.3% 16.9% 17.4%16 1.2% 1.7% 2.3% 2.8% 3.3% 3.8% 4.4% 4.9% 5.4% 5.9% 6.5% 7.0% 7.5% 8.0% 8.6% 9.1% 9.6% 10.1% 10.6% 11.2% 11.7% 12.2% 12.7% 13.3% 13.8% 14.3% 14.8% 15.4% 15.9% 16.4% 16.9% 17.5% 18.0%17 1.7% 2.2% 2.8% 3.3% 3.8% 4.3% 4.9% 5.4% 5.9% 6.4% 7.0% 7.5% 8.0% 8.5% 9.1% 9.6% 10.1% 10.7% 11.2% 11.7% 12.2% 12.8% 13.3% 13.8% 14.3% 14.9% 15.4% 15.9% 16.4% 17.0% 17.5% 18.0% 18.6%18 2.2% 2.7% 3.2% 3.7% 4.3% 4.8% 5.3% 5.9% 6.4% 6.9% 7.5% 8.0% 8.5% 9.0% 9.6% 10.1% 10.6% 11.2% 11.7% 12.2% 12.8% 13.3% 13.8% 14.3% 14.9% 15.4% 15.9% 16.5% 17.0% 17.5% 18.0% 18.6% 19.1%19 2.6% 3.1% 3.7% 4.2% 4.7% 5.3% 5.8% 6.3% 6.9% 7.4% 7.9% 8.5% 9.0% 9.5% 10.1% 10.6% 11.1% 11.7% 12.2% 12.7% 13.2% 13.8% 14.3% 14.8% 15.4% 15.9% 16.4% 17.0% 17.5% 18.0% 18.6% 19.1% 19.6%20 3.0% 3.6% 4.1% 4.6% 5.2% 5.7% 6.2% 6.8% 7.3% 7.8% 8.4% 8.9% 9.4% 10.0% 10.5% 11.1% 11.6% 12.1% 12.7% 13.2% 13.7% 14.3% 14.8% 15.3% 15.9% 16.4% 16.9% 17.5% 18.0% 18.5% 19.1% 19.6% 20.2%21 3.4% 4.0% 4.5% 5.0% 5.6% 6.1% 6.7% 7.2% 7.7% 8.3% 8.8% 9.3% 9.9% 10.4% 11.0% 11.5% 12.0% 12.6% 13.1% 13.7% 14.2% 14.7% 15.3% 15.8% 16.3% 16.9% 17.4% 18.0% 18.5% 19.0% 19.6% 20.1% 20.6%22 3.8% 4.4% 4.9% 5.4% 6.0% 6.5% 7.1% 7.6% 8.1% 8.7% 9.2% 9.8% 10.3% 10.9% 11.4% 11.9% 12.5% 13.0% 13.6% 14.1% 14.6% 15.2% 15.7% 16.3% 16.8% 17.3% 17.9% 18.4% 19.0% 19.5% 20.0% 20.6% 21.1%23 4.2% 4.8% 5.3% 5.8% 6.4% 6.9% 7.5% 8.0% 8.6% 9.1% 9.6% 10.2% 10.7% 11.3% 11.8% 12.4% 12.9% 13.4% 14.0% 14.5% 15.1% 15.6% 16.2% 16.7% 17.2% 17.8% 18.3% 18.9% 19.4% 20.0% 20.5% 21.0% 21.6%24 4.6% 5.1% 5.7% 6.2% 6.8% 7.3% 7.9% 8.4% 8.9% 9.5% 10.0% 10.6% 11.1% 11.7% 12.2% 12.8% 13.3% 13.8% 14.4% 14.9% 15.5% 16.0% 16.6% 17.1% 17.7% 18.2% 18.8% 19.3% 19.8% 20.4% 20.9% 21.5% 22.0%25 4.9% 5.5% 6.0% 6.6% 7.1% 7.7% 8.2% 8.8% 9.3% 9.9% 10.4% 11.0% 11.5% 12.1% 12.6% 13.2% 13.7% 14.2% 14.8% 15.3% 15.9% 16.4% 17.0% 17.5% 18.1% 18.6% 19.2% 19.7% 20.3% 20.8% 21.4% 21.9% 22.5%26 5.3% 5.8% 6.4% 6.9% 7.5% 8.0% 8.6% 9.1% 9.7% 10.2% 10.8% 11.3% 11.9% 12.4% 13.0% 13.5% 14.1% 14.6% 15.2% 15.7% 16.3% 16.8% 17.4% 17.9% 18.5% 19.0% 19.6% 20.1% 20.7% 21.2% 21.8% 22.3% 22.9%27 5.6% 6.2% 6.7% 7.3% 7.8% 8.4% 8.9% 9.5% 10.0% 10.6% 11.1% 11.7% 12.2% 12.8% 13.4% 13.9% 14.5% 15.0% 15.6% 16.1% 16.7% 17.2% 17.8% 18.3% 18.9% 19.4% 20.0% 20.5% 21.1% 21.6% 22.2% 22.7% 23.3%28 6.0% 6.5% 7.1% 7.6% 8.2% 8.7% 9.3% 9.8% 10.4% 10.9% 11.5% 12.0% 12.6% 13.2% 13.7% 14.3% 14.8% 15.4% 15.9% 16.5% 17.0% 17.6% 18.1% 18.7% 19.2% 19.8% 20.4% 20.9% 21.5% 22.0% 22.6% 23.1% 23.7%29 6.3% 6.8% 7.4% 7.9% 8.5% 9.1% 9.6% 10.2% 10.7% 11.3% 11.8% 12.4% 12.9% 13.5% 14.1% 14.6% 15.2% 15.7% 16.3% 16.8% 17.4% 17.9% 18.5% 19.1% 19.6% 20.2% 20.7% 21.3% 21.8% 22.4% 22.9% 23.5% 24.1%30 6.6% 7.1% 7.7% 8.3% 8.8% 9.4% 9.9% 10.5% 11.1% 11.6% 12.2% 12.7% 13.3% 13.8% 14.4% 15.0% 15.5% 16.1% 16.6% 17.2% 17.7% 18.3% 18.9% 19.4% 20.0% 20.5% 21.1% 21.6% 22.2% 22.8% 23.3% 23.9% 24.4%31 6.9% 7.5% 8.0% 8.6% 9.1% 9.7% 10.3% 10.8% 11.4% 11.9% 12.5% 13.0% 13.6% 14.2% 14.7% 15.3% 15.8% 16.4% 17.0% 17.5% 18.1% 18.6% 19.2% 19.8% 20.3% 20.9% 21.4% 22.0% 22.6% 23.1% 23.7% 24.2% 24.8%32 7.2% 7.8% 8.3% 8.9% 9.4% 10.0% 10.6% 11.1% 11.7% 12.2% 12.8% 13.4% 13.9% 14.5% 15.0% 15.6% 16.2% 16.7% 17.3% 17.9% 18.4% 19.0% 19.5% 20.1% 20.7% 21.2% 21.8% 22.3% 22.9% 23.5% 24.0% 24.6% 25.1%33 7.5% 8.0% 8.6% 9.2% 9.7% 10.3% 10.9% 11.4% 12.0% 12.5% 13.1% 13.7% 14.2% 14.8% 15.4% 15.9% 16.5% 17.1% 17.6% 18.2% 18.7% 19.3% 19.9% 20.4% 21.0% 21.6% 22.1% 22.7% 23.2% 23.8% 24.4% 24.9% 25.5%34 7.8% 8.3% 8.9% 9.5% 10.0% 10.6% 11.2% 11.7% 12.3% 12.8% 13.4% 14.0% 14.5% 15.1% 15.7% 16.2% 16.8% 17.4% 17.9% 18.5% 19.1% 19.6% 20.2% 20.7% 21.3% 21.9% 22.4% 23.0% 23.6% 24.1% 24.7% 25.3% 25.8%35 8.0% 8.6% 9.2% 9.7% 10.3% 10.9% 11.4% 12.0% 12.6% 13.1% 13.7% 14.3% 14.8% 15.4% 16.0% 16.5% 17.1% 17.7% 18.2% 18.8% 19.4% 19.9% 20.5% 21.1% 21.6% 22.2% 22.8% 23.3% 23.9% 24.5% 25.0% 25.6% 26.2%36 8.3% 8.9% 9.4% 10.0% 10.6% 11.1% 11.7% 12.3% 12.9% 13.4% 14.0% 14.6% 15.1% 15.7% 16.3% 16.8% 17.4% 18.0% 18.5% 19.1% 19.7% 20.2% 20.8% 21.4% 21.9% 22.5% 23.1% 23.6% 24.2% 24.8% 25.3% 25.9% 26.5%37 8.6% 9.1% 9.7% 10.3% 10.9% 11.4% 12.0% 12.6% 13.1% 13.7% 14.3% 14.8% 15.4% 16.0% 16.5% 17.1% 17.7% 18.3% 18.8% 19.4% 20.0% 20.5% 21.1% 21.7% 22.2% 22.8% 23.4% 23.9% 24.5% 25.1% 25.7% 26.2% 26.8%38 8.8% 9.4% 10.0% 10.5% 11.1% 11.7% 12.3% 12.8% 13.4% 14.0% 14.5% 15.1% 15.7% 16.3% 16.8% 17.4% 18.0% 18.5% 19.1% 19.7% 20.2% 20.8% 21.4% 22.0% 22.5% 23.1% 23.7% 24.2% 24.8% 25.4% 26.0% 26.5% 27.1%39 9.1% 9.7% 10.2% 10.8% 11.4% 11.9% 12.5% 13.1% 13.7% 14.2% 14.8% 15.4% 16.0% 16.5% 17.1% 17.7% 18.2% 18.8% 19.4% 20.0% 20.5% 21.1% 21.7% 22.2% 22.8% 23.4% 24.0% 24.5% 25.1% 25.7% 26.3% 26.8% 27.4%40 9.3% 9.9% 10.5% 11.1% 11.6% 12.2% 12.8% 13.3% 13.9% 14.5% 15.1% 15.6% 16.2% 16.8% 17.4% 17.9% 18.5% 19.1% 19.7% 20.2% 20.8% 21.4% 22.0% 22.5% 23.1% 23.7% 24.3% 24.8% 25.4% 26.0% 26.5% 27.1% 27.7%
Return = (1+g) * ((Terminal PE / Start PE) ^ (1/t)) -1 + div yld * ((Start PE / Term PE +1) / 2)Risk Premium = Implied Return - Real Bond Yield
UK Implied Index Returns: May 2011
Source: Datastream, LODH Calculation
Time Dividend Starting MSCI UK Equity IndexHorizon (t) Yield P / 10yr E
10 3.1 15.6
Terminal EPS %cagr (g)P / Peak E -8 -7.5 -7 -6.5 -6 -5.5 -5 -4.5 -4 -3.5 -3 -2.5 -2 -1.5 -1 -0.5 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6 6.5 7 7.5 8
2 -11.6% -11.2% -10.8% -10.4% -10.0% -9.6% -9.2% -8.8% -8.4% -8.0% -7.6% -7.2% -6.8% -6.4% -5.9% -5.5% -5.1% -4.7% -4.3% -3.9% -3.5% -3.1% -2.7% -2.3% -1.9% -1.5% -1.1% -0.7% -0.2% 0.2% 0.6% 1.0% 1.4%3 -12.5% -12.1% -11.7% -11.2% -10.8% -10.4% -10.0% -9.5% -9.1% -8.7% -8.3% -7.9% -7.4% -7.0% -6.6% -6.2% -5.7% -5.3% -4.9% -4.5% -4.0% -3.6% -3.2% -2.8% -2.3% -1.9% -1.5% -1.1% -0.6% -0.2% 0.2% 0.6% 1.1%4 -12.2% -11.8% -11.3% -10.9% -10.5% -10.0% -9.6% -9.2% -8.7% -8.3% -7.9% -7.4% -7.0% -6.5% -6.1% -5.7% -5.2% -4.8% -4.4% -3.9% -3.5% -3.1% -2.6% -2.2% -1.7% -1.3% -0.9% -0.4% 0.0% 0.4% 0.9% 1.3% 1.7%5 -11.6% -11.2% -10.7% -10.3% -9.8% -9.4% -8.9% -8.5% -8.0% -7.6% -7.1% -6.7% -6.2% -5.8% -5.4% -4.9% -4.5% -4.0% -3.6% -3.1% -2.7% -2.2% -1.8% -1.3% -0.9% -0.4% 0.0% 0.4% 0.9% 1.3% 1.8% 2.2% 2.7%6 -10.9% -10.4% -10.0% -9.5% -9.1% -8.6% -8.2% -7.7% -7.2% -6.8% -6.3% -5.9% -5.4% -5.0% -4.5% -4.1% -3.6% -3.2% -2.7% -2.2% -1.8% -1.3% -0.9% -0.4% 0.0% 0.5% 0.9% 1.4% 1.8% 2.3% 2.8% 3.2% 3.7%7 -10.2% -9.7% -9.2% -8.8% -8.3% -7.8% -7.4% -6.9% -6.5% -6.0% -5.5% -5.1% -4.6% -4.2% -3.7% -3.2% -2.8% -2.3% -1.8% -1.4% -0.9% -0.5% 0.0% 0.5% 0.9% 1.4% 1.8% 2.3% 2.8% 3.2% 3.7% 4.2% 4.6%8 -9.4% -9.0% -8.5% -8.0% -7.6% -7.1% -6.6% -6.2% -5.7% -5.2% -4.8% -4.3% -3.8% -3.4% -2.9% -2.4% -1.9% -1.5% -1.0% -0.5% -0.1% 0.4% 0.9% 1.3% 1.8% 2.3% 2.7% 3.2% 3.7% 4.1% 4.6% 5.1% 5.5%9 -8.7% -8.3% -7.8% -7.3% -6.9% -6.4% -5.9% -5.4% -5.0% -4.5% -4.0% -3.5% -3.1% -2.6% -2.1% -1.6% -1.2% -0.7% -0.2% 0.2% 0.7% 1.2% 1.7% 2.1% 2.6% 3.1% 3.6% 4.0% 4.5% 5.0% 5.5% 5.9% 6.4%
10 -8.1% -7.6% -7.1% -6.7% -6.2% -5.7% -5.2% -4.7% -4.3% -3.8% -3.3% -2.8% -2.3% -1.9% -1.4% -0.9% -0.4% 0.0% 0.5% 1.0% 1.5% 2.0% 2.4% 2.9% 3.4% 3.9% 4.3% 4.8% 5.3% 5.8% 6.3% 6.7% 7.2%11 -7.5% -7.0% -6.5% -6.0% -5.5% -5.0% -4.6% -4.1% -3.6% -3.1% -2.6% -2.1% -1.7% -1.2% -0.7% -0.2% 0.3% 0.7% 1.2% 1.7% 2.2% 2.7% 3.2% 3.6% 4.1% 4.6% 5.1% 5.6% 6.1% 6.5% 7.0% 7.5% 8.0%12 -6.9% -6.4% -5.9% -5.4% -4.9% -4.4% -3.9% -3.5% -3.0% -2.5% -2.0% -1.5% -1.0% -0.5% 0.0% 0.4% 0.9% 1.4% 1.9% 2.4% 2.9% 3.4% 3.9% 4.3% 4.8% 5.3% 5.8% 6.3% 6.8% 7.3% 7.7% 8.2% 8.7%13 -6.3% -5.8% -5.3% -4.8% -4.3% -3.8% -3.4% -2.9% -2.4% -1.9% -1.4% -0.9% -0.4% 0.1% 0.6% 1.1% 1.6% 2.1% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 7.9% 8.4% 8.9% 9.4%14 -5.8% -5.3% -4.8% -4.3% -3.8% -3.3% -2.8% -2.3% -1.8% -1.3% -0.8% -0.3% 0.2% 0.7% 1.2% 1.7% 2.2% 2.7% 3.1% 3.6% 4.1% 4.6% 5.1% 5.6% 6.1% 6.6% 7.1% 7.6% 8.1% 8.6% 9.1% 9.6% 10.1%15 -5.2% -4.7% -4.2% -3.7% -3.2% -2.7% -2.2% -1.8% -1.3% -0.8% -0.3% 0.2% 0.7% 1.2% 1.7% 2.2% 2.7% 3.2% 3.7% 4.2% 4.7% 5.2% 5.7% 6.2% 6.7% 7.2% 7.7% 8.2% 8.7% 9.2% 9.7% 10.2% 10.7%16 -4.7% -4.2% -3.7% -3.2% -2.7% -2.2% -1.7% -1.2% -0.7% -0.2% 0.3% 0.8% 1.3% 1.8% 2.3% 2.8% 3.3% 3.8% 4.3% 4.8% 5.3% 5.8% 6.3% 6.8% 7.3% 7.8% 8.3% 8.8% 9.3% 9.8% 10.3% 10.8% 11.3%17 -4.3% -3.8% -3.3% -2.8% -2.3% -1.7% -1.2% -0.7% -0.2% 0.3% 0.8% 1.3% 1.8% 2.3% 2.8% 3.3% 3.8% 4.3% 4.8% 5.3% 5.8% 6.3% 6.8% 7.3% 7.8% 8.3% 8.8% 9.3% 9.9% 10.4% 10.9% 11.4% 11.9%18 -3.8% -3.3% -2.8% -2.3% -1.8% -1.3% -0.8% -0.3% 0.2% 0.7% 1.3% 1.8% 2.3% 2.8% 3.3% 3.8% 4.3% 4.8% 5.3% 5.8% 6.3% 6.8% 7.3% 7.9% 8.4% 8.9% 9.4% 9.9% 10.4% 10.9% 11.4% 11.9% 12.4%19 -3.4% -2.9% -2.4% -1.8% -1.3% -0.8% -0.3% 0.2% 0.7% 1.2% 1.7% 2.2% 2.7% 3.3% 3.8% 4.3% 4.8% 5.3% 5.8% 6.3% 6.8% 7.3% 7.8% 8.4% 8.9% 9.4% 9.9% 10.4% 10.9% 11.4% 11.9% 12.4% 12.9%20 -3.0% -2.4% -1.9% -1.4% -0.9% -0.4% 0.1% 0.6% 1.1% 1.7% 2.2% 2.7% 3.2% 3.7% 4.2% 4.7% 5.2% 5.8% 6.3% 6.8% 7.3% 7.8% 8.3% 8.8% 9.3% 9.9% 10.4% 10.9% 11.4% 11.9% 12.4% 12.9% 13.4%21 -2.6% -2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.1% 1.6% 2.1% 2.6% 3.1% 3.6% 4.1% 4.7% 5.2% 5.7% 6.2% 6.7% 7.2% 7.7% 8.3% 8.8% 9.3% 9.8% 10.3% 10.8% 11.4% 11.9% 12.4% 12.9% 13.4% 13.9%22 -2.2% -1.6% -1.1% -0.6% -0.1% 0.4% 0.9% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.6% 5.1% 5.6% 6.1% 6.6% 7.2% 7.7% 8.2% 8.7% 9.2% 9.7% 10.3% 10.8% 11.3% 11.8% 12.3% 12.8% 13.4% 13.9% 14.4%23 -1.8% -1.3% -0.7% -0.2% 0.3% 0.8% 1.3% 1.9% 2.4% 2.9% 3.4% 3.9% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.6% 8.1% 8.6% 9.1% 9.6% 10.2% 10.7% 11.2% 11.7% 12.2% 12.8% 13.3% 13.8% 14.3% 14.8%24 -1.4% -0.9% -0.4% 0.1% 0.7% 1.2% 1.7% 2.2% 2.8% 3.3% 3.8% 4.3% 4.8% 5.4% 5.9% 6.4% 6.9% 7.5% 8.0% 8.5% 9.0% 9.5% 10.1% 10.6% 11.1% 11.6% 12.2% 12.7% 13.2% 13.7% 14.2% 14.8% 15.3%25 -1.1% -0.5% 0.0% 0.5% 1.0% 1.6% 2.1% 2.6% 3.1% 3.6% 4.2% 4.7% 5.2% 5.7% 6.3% 6.8% 7.3% 7.8% 8.4% 8.9% 9.4% 9.9% 10.5% 11.0% 11.5% 12.0% 12.6% 13.1% 13.6% 14.1% 14.7% 15.2% 15.7%26 -0.7% -0.2% 0.3% 0.9% 1.4% 1.9% 2.4% 3.0% 3.5% 4.0% 4.5% 5.1% 5.6% 6.1% 6.6% 7.2% 7.7% 8.2% 8.7% 9.3% 9.8% 10.3% 10.9% 11.4% 11.9% 12.4% 13.0% 13.5% 14.0% 14.5% 15.1% 15.6% 16.1%27 -0.4% 0.1% 0.7% 1.2% 1.7% 2.2% 2.8% 3.3% 3.8% 4.4% 4.9% 5.4% 5.9% 6.5% 7.0% 7.5% 8.1% 8.6% 9.1% 9.6% 10.2% 10.7% 11.2% 11.8% 12.3% 12.8% 13.3% 13.9% 14.4% 14.9% 15.5% 16.0% 16.5%28 -0.1% 0.5% 1.0% 1.5% 2.0% 2.6% 3.1% 3.6% 4.2% 4.7% 5.2% 5.8% 6.3% 6.8% 7.4% 7.9% 8.4% 8.9% 9.5% 10.0% 10.5% 11.1% 11.6% 12.1% 12.7% 13.2% 13.7% 14.2% 14.8% 15.3% 15.8% 16.4% 16.9%29 0.2% 0.8% 1.3% 1.8% 2.4% 2.9% 3.4% 4.0% 4.5% 5.0% 5.6% 6.1% 6.6% 7.2% 7.7% 8.2% 8.8% 9.3% 9.8% 10.4% 10.9% 11.4% 11.9% 12.5% 13.0% 13.5% 14.1% 14.6% 15.1% 15.7% 16.2% 16.7% 17.3%30 0.5% 1.1% 1.6% 2.1% 2.7% 3.2% 3.7% 4.3% 4.8% 5.4% 5.9% 6.4% 7.0% 7.5% 8.0% 8.6% 9.1% 9.6% 10.2% 10.7% 11.2% 11.8% 12.3% 12.8% 13.4% 13.9% 14.4% 15.0% 15.5% 16.0% 16.6% 17.1% 17.6%31 0.8% 1.4% 1.9% 2.5% 3.0% 3.5% 4.1% 4.6% 5.1% 5.7% 6.2% 6.7% 7.3% 7.8% 8.3% 8.9% 9.4% 9.9% 10.5% 11.0% 11.6% 12.1% 12.6% 13.2% 13.7% 14.2% 14.8% 15.3% 15.8% 16.4% 16.9% 17.4% 18.0%32 1.1% 1.7% 2.2% 2.7% 3.3% 3.8% 4.4% 4.9% 5.4% 6.0% 6.5% 7.0% 7.6% 8.1% 8.7% 9.2% 9.7% 10.3% 10.8% 11.3% 11.9% 12.4% 13.0% 13.5% 14.0% 14.6% 15.1% 15.6% 16.2% 16.7% 17.3% 17.8% 18.3%33 1.4% 2.0% 2.5% 3.0% 3.6% 4.1% 4.6% 5.2% 5.7% 6.3% 6.8% 7.3% 7.9% 8.4% 9.0% 9.5% 10.0% 10.6% 11.1% 11.7% 12.2% 12.7% 13.3% 13.8% 14.3% 14.9% 15.4% 16.0% 16.5% 17.0% 17.6% 18.1% 18.7%34 1.7% 2.2% 2.8% 3.3% 3.9% 4.4% 4.9% 5.5% 6.0% 6.6% 7.1% 7.6% 8.2% 8.7% 9.3% 9.8% 10.3% 10.9% 11.4% 12.0% 12.5% 13.0% 13.6% 14.1% 14.7% 15.2% 15.7% 16.3% 16.8% 17.4% 17.9% 18.4% 19.0%35 2.0% 2.5% 3.0% 3.6% 4.1% 4.7% 5.2% 5.8% 6.3% 6.8% 7.4% 7.9% 8.5% 9.0% 9.5% 10.1% 10.6% 11.2% 11.7% 12.3% 12.8% 13.3% 13.9% 14.4% 15.0% 15.5% 16.1% 16.6% 17.1% 17.7% 18.2% 18.8% 19.3%36 2.2% 2.8% 3.3% 3.9% 4.4% 4.9% 5.5% 6.0% 6.6% 7.1% 7.7% 8.2% 8.7% 9.3% 9.8% 10.4% 10.9% 11.5% 12.0% 12.6% 13.1% 13.6% 14.2% 14.7% 15.3% 15.8% 16.4% 16.9% 17.4% 18.0% 18.5% 19.1% 19.6%37 2.5% 3.0% 3.6% 4.1% 4.7% 5.2% 5.7% 6.3% 6.8% 7.4% 7.9% 8.5% 9.0% 9.6% 10.1% 10.7% 11.2% 11.7% 12.3% 12.8% 13.4% 13.9% 14.5% 15.0% 15.6% 16.1% 16.7% 17.2% 17.7% 18.3% 18.8% 19.4% 19.9%38 2.7% 3.3% 3.8% 4.4% 4.9% 5.5% 6.0% 6.6% 7.1% 7.6% 8.2% 8.7% 9.3% 9.8% 10.4% 10.9% 11.5% 12.0% 12.6% 13.1% 13.7% 14.2% 14.8% 15.3% 15.8% 16.4% 16.9% 17.5% 18.0% 18.6% 19.1% 19.7% 20.2%39 3.0% 3.5% 4.1% 4.6% 5.2% 5.7% 6.3% 6.8% 7.4% 7.9% 8.5% 9.0% 9.6% 10.1% 10.6% 11.2% 11.7% 12.3% 12.8% 13.4% 13.9% 14.5% 15.0% 15.6% 16.1% 16.7% 17.2% 17.8% 18.3% 18.9% 19.4% 20.0% 20.5%40 3.2% 3.8% 4.3% 4.9% 5.4% 6.0% 6.5% 7.1% 7.6% 8.2% 8.7% 9.3% 9.8% 10.4% 10.9% 11.5% 12.0% 12.6% 13.1% 13.7% 14.2% 14.8% 15.3% 15.9% 16.4% 17.0% 17.5% 18.0% 18.6% 19.1% 19.7% 20.2% 20.8%
Return = (1+g) * ((Terminal PE / Start PE) ^ (1/t)) -1 + div yld * ((Start PE / Term PE +1) / 2)Risk Premium = Implied Return - Real Bond Yield
UK Implied Index Returns: 2000 Bull Market Peak
Source: Datastream, LODH Calculation
Time Dividend Starting MSCI UK Equity IndexHorizon (t) Yield P / 10yr E 2000 Bull Market peak
10 2.2 29.5
Terminal EPS %cagr (g)P / Peak E -8 -7.5 -7 -6.5 -6 -5.5 -5 -4.5 -4 -3.5 -3 -2.5 -2 -1.5 -1 -0.5 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6 6.5 7 7.5 8
2 -12.4% -12.0% -11.6% -11.2% -10.9% -10.5% -10.1% -9.7% -9.3% -8.9% -8.6% -8.2% -7.8% -7.4% -7.0% -6.7% -6.3% -5.9% -5.5% -5.1% -4.7% -4.4% -4.0% -3.6% -3.2% -2.8% -2.4% -2.1% -1.7% -1.3% -0.9% -0.5% -0.2%3 -14.9% -14.5% -14.1% -13.7% -13.3% -12.9% -12.5% -12.1% -11.7% -11.3% -10.9% -10.5% -10.1% -9.7% -9.3% -8.9% -8.5% -8.1% -7.7% -7.3% -6.9% -6.5% -6.1% -5.7% -5.3% -4.9% -4.5% -4.1% -3.7% -3.3% -2.9% -2.5% -2.2%4 -15.4% -15.0% -14.6% -14.2% -13.8% -13.4% -13.0% -12.6% -12.2% -11.8% -11.4% -10.9% -10.5% -10.1% -9.7% -9.3% -8.9% -8.5% -8.1% -7.7% -7.3% -6.9% -6.4% -6.0% -5.6% -5.2% -4.8% -4.4% -4.0% -3.6% -3.2% -2.8% -2.3%5 -15.4% -15.0% -14.5% -14.1% -13.7% -13.3% -12.9% -12.4% -12.0% -11.6% -11.2% -10.8% -10.3% -9.9% -9.5% -9.1% -8.7% -8.3% -7.8% -7.4% -7.0% -6.6% -6.2% -5.7% -5.3% -4.9% -4.5% -4.1% -3.6% -3.2% -2.8% -2.4% -2.0%6 -15.0% -14.6% -14.2% -13.8% -13.3% -12.9% -12.5% -12.1% -11.6% -11.2% -10.8% -10.3% -9.9% -9.5% -9.1% -8.6% -8.2% -7.8% -7.4% -6.9% -6.5% -6.1% -5.7% -5.2% -4.8% -4.4% -4.0% -3.5% -3.1% -2.7% -2.2% -1.8% -1.4%7 -14.6% -14.2% -13.7% -13.3% -12.9% -12.4% -12.0% -11.6% -11.1% -10.7% -10.3% -9.8% -9.4% -9.0% -8.5% -8.1% -7.7% -7.2% -6.8% -6.4% -5.9% -5.5% -5.1% -4.6% -4.2% -3.8% -3.3% -2.9% -2.5% -2.0% -1.6% -1.2% -0.7%8 -14.1% -13.7% -13.2% -12.8% -12.3% -11.9% -11.5% -11.0% -10.6% -10.1% -9.7% -9.3% -8.8% -8.4% -8.0% -7.5% -7.1% -6.6% -6.2% -5.8% -5.3% -4.9% -4.4% -4.0% -3.6% -3.1% -2.7% -2.3% -1.8% -1.4% -0.9% -0.5% -0.1%9 -13.6% -13.1% -12.7% -12.3% -11.8% -11.4% -10.9% -10.5% -10.0% -9.6% -9.2% -8.7% -8.3% -7.8% -7.4% -6.9% -6.5% -6.0% -5.6% -5.2% -4.7% -4.3% -3.8% -3.4% -2.9% -2.5% -2.0% -1.6% -1.2% -0.7% -0.3% 0.2% 0.6%
10 -13.1% -12.6% -12.2% -11.7% -11.3% -10.8% -10.4% -9.9% -9.5% -9.0% -8.6% -8.2% -7.7% -7.3% -6.8% -6.4% -5.9% -5.5% -5.0% -4.6% -4.1% -3.7% -3.2% -2.8% -2.3% -1.9% -1.4% -1.0% -0.5% -0.1% 0.4% 0.8% 1.3%11 -12.6% -12.1% -11.7% -11.2% -10.8% -10.3% -9.9% -9.4% -9.0% -8.5% -8.1% -7.6% -7.2% -6.7% -6.3% -5.8% -5.3% -4.9% -4.4% -4.0% -3.5% -3.1% -2.6% -2.2% -1.7% -1.3% -0.8% -0.4% 0.1% 0.5% 1.0% 1.5% 1.9%12 -12.1% -11.7% -11.2% -10.7% -10.3% -9.8% -9.4% -8.9% -8.5% -8.0% -7.5% -7.1% -6.6% -6.2% -5.7% -5.3% -4.8% -4.3% -3.9% -3.4% -3.0% -2.5% -2.1% -1.6% -1.1% -0.7% -0.2% 0.2% 0.7% 1.1% 1.6% 2.1% 2.5%13 -11.6% -11.2% -10.7% -10.3% -9.8% -9.3% -8.9% -8.4% -8.0% -7.5% -7.0% -6.6% -6.1% -5.7% -5.2% -4.7% -4.3% -3.8% -3.4% -2.9% -2.4% -2.0% -1.5% -1.0% -0.6% -0.1% 0.3% 0.8% 1.3% 1.7% 2.2% 2.6% 3.1%14 -11.2% -10.7% -10.3% -9.8% -9.3% -8.9% -8.4% -7.9% -7.5% -7.0% -6.5% -6.1% -5.6% -5.2% -4.7% -4.2% -3.8% -3.3% -2.8% -2.4% -1.9% -1.4% -1.0% -0.5% -0.1% 0.4% 0.9% 1.3% 1.8% 2.3% 2.7% 3.2% 3.7%15 -10.8% -10.3% -9.8% -9.4% -8.9% -8.4% -7.9% -7.5% -7.0% -6.5% -6.1% -5.6% -5.1% -4.7% -4.2% -3.7% -3.3% -2.8% -2.3% -1.9% -1.4% -0.9% -0.5% 0.0% 0.5% 0.9% 1.4% 1.9% 2.3% 2.8% 3.3% 3.7% 4.2%16 -10.3% -9.9% -9.4% -8.9% -8.5% -8.0% -7.5% -7.0% -6.6% -6.1% -5.6% -5.2% -4.7% -4.2% -3.7% -3.3% -2.8% -2.3% -1.9% -1.4% -0.9% -0.5% 0.0% 0.5% 1.0% 1.4% 1.9% 2.4% 2.8% 3.3% 3.8% 4.2% 4.7%17 -9.9% -9.5% -9.0% -8.5% -8.0% -7.6% -7.1% -6.6% -6.1% -5.7% -5.2% -4.7% -4.2% -3.8% -3.3% -2.8% -2.4% -1.9% -1.4% -0.9% -0.5% 0.0% 0.5% 1.0% 1.4% 1.9% 2.4% 2.9% 3.3% 3.8% 4.3% 4.7% 5.2%18 -9.5% -9.1% -8.6% -8.1% -7.6% -7.2% -6.7% -6.2% -5.7% -5.2% -4.8% -4.3% -3.8% -3.3% -2.9% -2.4% -1.9% -1.4% -1.0% -0.5% 0.0% 0.5% 0.9% 1.4% 1.9% 2.4% 2.8% 3.3% 3.8% 4.3% 4.7% 5.2% 5.7%19 -9.2% -8.7% -8.2% -7.7% -7.2% -6.8% -6.3% -5.8% -5.3% -4.8% -4.4% -3.9% -3.4% -2.9% -2.5% -2.0% -1.5% -1.0% -0.5% -0.1% 0.4% 0.9% 1.4% 1.9% 2.3% 2.8% 3.3% 3.8% 4.2% 4.7% 5.2% 5.7% 6.2%20 -8.8% -8.3% -7.8% -7.3% -6.9% -6.4% -5.9% -5.4% -4.9% -4.5% -4.0% -3.5% -3.0% -2.5% -2.1% -1.6% -1.1% -0.6% -0.1% 0.4% 0.8% 1.3% 1.8% 2.3% 2.8% 3.2% 3.7% 4.2% 4.7% 5.2% 5.6% 6.1% 6.6%21 -8.4% -7.9% -7.5% -7.0% -6.5% -6.0% -5.5% -5.0% -4.6% -4.1% -3.6% -3.1% -2.6% -2.1% -1.7% -1.2% -0.7% -0.2% 0.3% 0.8% 1.2% 1.7% 2.2% 2.7% 3.2% 3.7% 4.1% 4.6% 5.1% 5.6% 6.1% 6.6% 7.0%22 -8.1% -7.6% -7.1% -6.6% -6.1% -5.7% -5.2% -4.7% -4.2% -3.7% -3.2% -2.7% -2.3% -1.8% -1.3% -0.8% -0.3% 0.2% 0.7% 1.1% 1.6% 2.1% 2.6% 3.1% 3.6% 4.1% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5%23 -7.8% -7.3% -6.8% -6.3% -5.8% -5.3% -4.8% -4.3% -3.8% -3.4% -2.9% -2.4% -1.9% -1.4% -0.9% -0.4% 0.1% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.4% 4.9% 5.4% 5.9% 6.4% 6.9% 7.4% 7.9%24 -7.4% -6.9% -6.4% -6.0% -5.5% -5.0% -4.5% -4.0% -3.5% -3.0% -2.5% -2.0% -1.5% -1.1% -0.6% -0.1% 0.4% 0.9% 1.4% 1.9% 2.4% 2.9% 3.3% 3.8% 4.3% 4.8% 5.3% 5.8% 6.3% 6.8% 7.3% 7.8% 8.2%25 -7.1% -6.6% -6.1% -5.6% -5.1% -4.7% -4.2% -3.7% -3.2% -2.7% -2.2% -1.7% -1.2% -0.7% -0.2% 0.3% 0.8% 1.2% 1.7% 2.2% 2.7% 3.2% 3.7% 4.2% 4.7% 5.2% 5.7% 6.2% 6.7% 7.1% 7.6% 8.1% 8.6%26 -6.8% -6.3% -5.8% -5.3% -4.8% -4.3% -3.8% -3.4% -2.9% -2.4% -1.9% -1.4% -0.9% -0.4% 0.1% 0.6% 1.1% 1.6% 2.1% 2.6% 3.1% 3.6% 4.1% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 8.5% 9.0%27 -6.5% -6.0% -5.5% -5.0% -4.5% -4.0% -3.5% -3.0% -2.5% -2.0% -1.6% -1.1% -0.6% -0.1% 0.4% 0.9% 1.4% 1.9% 2.4% 2.9% 3.4% 3.9% 4.4% 4.9% 5.4% 5.9% 6.4% 6.9% 7.4% 7.9% 8.4% 8.9% 9.3%28 -6.2% -5.7% -5.2% -4.7% -4.2% -3.7% -3.2% -2.7% -2.2% -1.7% -1.2% -0.7% -0.3% 0.2% 0.7% 1.2% 1.7% 2.2% 2.7% 3.2% 3.7% 4.2% 4.7% 5.2% 5.7% 6.2% 6.7% 7.2% 7.7% 8.2% 8.7% 9.2% 9.7%29 -5.9% -5.4% -4.9% -4.4% -3.9% -3.4% -2.9% -2.4% -1.9% -1.4% -0.9% -0.4% 0.1% 0.6% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 8.5% 9.0% 9.5% 10.0%30 -5.7% -5.2% -4.7% -4.2% -3.7% -3.2% -2.7% -2.2% -1.7% -1.2% -0.7% -0.2% 0.3% 0.8% 1.3% 1.8% 2.3% 2.9% 3.4% 3.9% 4.4% 4.9% 5.4% 5.9% 6.4% 6.9% 7.4% 7.9% 8.4% 8.9% 9.4% 9.9% 10.4%31 -5.4% -4.9% -4.4% -3.9% -3.4% -2.9% -2.4% -1.9% -1.4% -0.9% -0.4% 0.1% 0.6% 1.1% 1.6% 2.1% 2.6% 3.1% 3.6% 4.2% 4.7% 5.2% 5.7% 6.2% 6.7% 7.2% 7.7% 8.2% 8.7% 9.2% 9.7% 10.2% 10.7%32 -5.1% -4.6% -4.1% -3.6% -3.1% -2.6% -2.1% -1.6% -1.1% -0.6% -0.1% 0.4% 0.9% 1.4% 1.9% 2.4% 2.9% 3.4% 3.9% 4.4% 4.9% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 8.5% 9.0% 9.5% 10.0% 10.5% 11.0%33 -4.9% -4.4% -3.9% -3.4% -2.9% -2.4% -1.8% -1.3% -0.8% -0.3% 0.2% 0.7% 1.2% 1.7% 2.2% 2.7% 3.2% 3.7% 4.2% 4.7% 5.2% 5.7% 6.2% 6.8% 7.3% 7.8% 8.3% 8.8% 9.3% 9.8% 10.3% 10.8% 11.3%34 -4.6% -4.1% -3.6% -3.1% -2.6% -2.1% -1.6% -1.1% -0.6% -0.1% 0.4% 0.9% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 8.6% 9.1% 9.6% 10.1% 10.6% 11.1% 11.6%35 -4.4% -3.9% -3.4% -2.9% -2.4% -1.8% -1.3% -0.8% -0.3% 0.2% 0.7% 1.2% 1.7% 2.2% 2.7% 3.2% 3.8% 4.3% 4.8% 5.3% 5.8% 6.3% 6.8% 7.3% 7.8% 8.3% 8.8% 9.3% 9.9% 10.4% 10.9% 11.4% 11.9%36 -4.1% -3.6% -3.1% -2.6% -2.1% -1.6% -1.1% -0.6% -0.1% 0.4% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.1% 6.6% 7.1% 7.6% 8.1% 8.6% 9.1% 9.6% 10.1% 10.6% 11.2% 11.7% 12.2%37 -3.9% -3.4% -2.9% -2.4% -1.9% -1.4% -0.8% -0.3% 0.2% 0.7% 1.2% 1.7% 2.2% 2.7% 3.2% 3.8% 4.3% 4.8% 5.3% 5.8% 6.3% 6.8% 7.3% 7.8% 8.4% 8.9% 9.4% 9.9% 10.4% 10.9% 11.4% 11.9% 12.5%38 -3.7% -3.2% -2.7% -2.1% -1.6% -1.1% -0.6% -0.1% 0.4% 0.9% 1.4% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.1% 6.6% 7.1% 7.6% 8.1% 8.6% 9.1% 9.6% 10.2% 10.7% 11.2% 11.7% 12.2% 12.7%39 -3.5% -2.9% -2.4% -1.9% -1.4% -0.9% -0.4% 0.1% 0.6% 1.2% 1.7% 2.2% 2.7% 3.2% 3.7% 4.2% 4.8% 5.3% 5.8% 6.3% 6.8% 7.3% 7.8% 8.4% 8.9% 9.4% 9.9% 10.4% 10.9% 11.4% 12.0% 12.5% 13.0%40 -3.2% -2.7% -2.2% -1.7% -1.2% -0.7% -0.2% 0.4% 0.9% 1.4% 1.9% 2.4% 2.9% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.1% 7.6% 8.1% 8.6% 9.1% 9.6% 10.2% 10.7% 11.2% 11.7% 12.2% 12.7% 13.3%
Return = (1+g) * ((Terminal PE / Start PE) ^ (1/t)) -1 + div yld * ((Start PE / Term PE +1) / 2)Risk Premium = Implied Return - Real Bond Yield
Russia Implied Index Returns: 2006 Peak
Source: Datastream, LODH Calculation
Time Dividend Starting Implied Equity Holding Period Annualized ReturnHorizon (t) Yield P / Peak E
10 1.2 15.7 MSCI Russia Index 2006 Peak
Terminal EPS %cagr (g)P / Peak E -8 -7.5 -7 -6.5 -6 -5.5 -5 -4.5 -4 -3.5 -3 -2.5 -2 -1.5 -1 -0.5 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6 6.5 7 7.5 8
2 -19.6% -19.2% -18.8% -18.4% -18.0% -17.6% -17.2% -16.8% -16.4% -16.0% -15.6% -15.2% -14.7% -14.3% -13.9% -13.5% -13.1% -12.7% -12.3% -11.9% -11.5% -11.1% -10.7% -10.3% -9.9% -9.5% -9.0% -8.6% -8.2% -7.8% -7.4% -7.0% -6.6%3 -18.2% -17.7% -17.3% -16.9% -16.5% -16.0% -15.6% -15.2% -14.8% -14.3% -13.9% -13.5% -13.1% -12.6% -12.2% -11.8% -11.4% -11.0% -10.5% -10.1% -9.7% -9.3% -8.8% -8.4% -8.0% -7.6% -7.1% -6.7% -6.3% -5.9% -5.4% -5.0% -4.6%4 -16.7% -16.3% -15.8% -15.4% -14.9% -14.5% -14.1% -13.6% -13.2% -12.8% -12.3% -11.9% -11.5% -11.0% -10.6% -10.2% -9.7% -9.3% -8.8% -8.4% -8.0% -7.5% -7.1% -6.7% -6.2% -5.8% -5.4% -4.9% -4.5% -4.0% -3.6% -3.2% -2.7%5 -15.4% -14.9% -14.5% -14.0% -13.6% -13.1% -12.7% -12.2% -11.8% -11.4% -10.9% -10.5% -10.0% -9.6% -9.1% -8.7% -8.2% -7.8% -7.3% -6.9% -6.4% -6.0% -5.6% -5.1% -4.7% -4.2% -3.8% -3.3% -2.9% -2.4% -2.0% -1.5% -1.1%6 -14.2% -13.7% -13.3% -12.8% -12.4% -11.9% -11.5% -11.0% -10.6% -10.1% -9.6% -9.2% -8.7% -8.3% -7.8% -7.4% -6.9% -6.5% -6.0% -5.6% -5.1% -4.6% -4.2% -3.7% -3.3% -2.8% -2.4% -1.9% -1.5% -1.0% -0.6% -0.1% 0.3%7 -13.1% -12.7% -12.2% -11.7% -11.3% -10.8% -10.4% -9.9% -9.4% -9.0% -8.5% -8.0% -7.6% -7.1% -6.7% -6.2% -5.7% -5.3% -4.8% -4.4% -3.9% -3.4% -3.0% -2.5% -2.0% -1.6% -1.1% -0.7% -0.2% 0.3% 0.7% 1.2% 1.6%8 -12.2% -11.7% -11.2% -10.7% -10.3% -9.8% -9.3% -8.9% -8.4% -7.9% -7.5% -7.0% -6.5% -6.1% -5.6% -5.1% -4.7% -4.2% -3.7% -3.3% -2.8% -2.3% -1.9% -1.4% -0.9% -0.5% 0.0% 0.5% 0.9% 1.4% 1.9% 2.3% 2.8%9 -11.3% -10.8% -10.3% -9.8% -9.4% -8.9% -8.4% -8.0% -7.5% -7.0% -6.5% -6.1% -5.6% -5.1% -4.6% -4.2% -3.7% -3.2% -2.8% -2.3% -1.8% -1.3% -0.9% -0.4% 0.1% 0.6% 1.0% 1.5% 2.0% 2.4% 2.9% 3.4% 3.9%10 -10.5% -10.0% -9.5% -9.0% -8.5% -8.1% -7.6% -7.1% -6.6% -6.2% -5.7% -5.2% -4.7% -4.2% -3.8% -3.3% -2.8% -2.3% -1.9% -1.4% -0.9% -0.4% 0.1% 0.5% 1.0% 1.5% 2.0% 2.5% 2.9% 3.4% 3.9% 4.4% 4.8%11 -9.7% -9.2% -8.7% -8.3% -7.8% -7.3% -6.8% -6.3% -5.8% -5.4% -4.9% -4.4% -3.9% -3.4% -2.9% -2.5% -2.0% -1.5% -1.0% -0.5% 0.0% 0.4% 0.9% 1.4% 1.9% 2.4% 2.8% 3.3% 3.8% 4.3% 4.8% 5.3% 5.7%12 -9.0% -8.5% -8.0% -7.5% -7.1% -6.6% -6.1% -5.6% -5.1% -4.6% -4.1% -3.6% -3.2% -2.7% -2.2% -1.7% -1.2% -0.7% -0.2% 0.2% 0.7% 1.2% 1.7% 2.2% 2.7% 3.2% 3.7% 4.1% 4.6% 5.1% 5.6% 6.1% 6.6%13 -8.3% -7.9% -7.4% -6.9% -6.4% -5.9% -5.4% -4.9% -4.4% -3.9% -3.4% -2.9% -2.5% -2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 2.9% 3.4% 3.9% 4.4% 4.9% 5.4% 5.9% 6.4% 6.9% 7.4%14 -7.7% -7.2% -6.7% -6.2% -5.7% -5.3% -4.8% -4.3% -3.8% -3.3% -2.8% -2.3% -1.8% -1.3% -0.8% -0.3% 0.2% 0.7% 1.2% 1.7% 2.2% 2.7% 3.2% 3.6% 4.1% 4.6% 5.1% 5.6% 6.1% 6.6% 7.1% 7.6% 8.1%15 -7.1% -6.6% -6.1% -5.6% -5.1% -4.7% -4.2% -3.7% -3.2% -2.7% -2.2% -1.7% -1.2% -0.7% -0.2% 0.3% 0.8% 1.3% 1.8% 2.3% 2.8% 3.3% 3.8% 4.3% 4.8% 5.3% 5.8% 6.3% 6.8% 7.3% 7.8% 8.3% 8.8%16 -6.6% -6.1% -5.6% -5.1% -4.6% -4.1% -3.6% -3.1% -2.6% -2.1% -1.6% -1.1% -0.6% -0.1% 0.4% 0.9% 1.4% 1.9% 2.4% 2.9% 3.4% 3.9% 4.4% 4.9% 5.4% 5.9% 6.4% 6.9% 7.4% 7.9% 8.4% 8.9% 9.4%17 -6.1% -5.6% -5.1% -4.6% -4.0% -3.5% -3.0% -2.5% -2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 8.6% 9.1% 9.6% 10.1%18 -5.6% -5.1% -4.5% -4.0% -3.5% -3.0% -2.5% -2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.1% 3.6% 4.1% 4.6% 5.1% 5.6% 6.1% 6.6% 7.1% 7.6% 8.1% 8.6% 9.1% 9.6% 10.2% 10.7%19 -5.1% -4.6% -4.1% -3.6% -3.0% -2.5% -2.0% -1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.6% 3.1% 3.6% 4.1% 4.6% 5.1% 5.6% 6.1% 6.6% 7.1% 7.7% 8.2% 8.7% 9.2% 9.7% 10.2% 10.7% 11.2%20 -4.6% -4.1% -3.6% -3.1% -2.6% -2.1% -1.6% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.1% 3.6% 4.1% 4.6% 5.1% 5.6% 6.1% 6.6% 7.2% 7.7% 8.2% 8.7% 9.2% 9.7% 10.2% 10.7% 11.3% 11.8%21 -4.2% -3.7% -3.2% -2.6% -2.1% -1.6% -1.1% -0.6% -0.1% 0.4% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.6% 5.1% 5.6% 6.1% 6.6% 7.1% 7.6% 8.2% 8.7% 9.2% 9.7% 10.2% 10.7% 11.3% 11.8% 12.3%22 -3.8% -3.3% -2.7% -2.2% -1.7% -1.2% -0.7% -0.2% 0.4% 0.9% 1.4% 1.9% 2.4% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.1% 6.6% 7.1% 7.6% 8.1% 8.6% 9.2% 9.7% 10.2% 10.7% 11.2% 11.7% 12.3% 12.8%23 -3.4% -2.8% -2.3% -1.8% -1.3% -0.8% -0.2% 0.3% 0.8% 1.3% 1.8% 2.3% 2.9% 3.4% 3.9% 4.4% 4.9% 5.5% 6.0% 6.5% 7.0% 7.5% 8.1% 8.6% 9.1% 9.6% 10.1% 10.7% 11.2% 11.7% 12.2% 12.7% 13.3%24 -3.0% -2.5% -1.9% -1.4% -0.9% -0.4% 0.2% 0.7% 1.2% 1.7% 2.2% 2.8% 3.3% 3.8% 4.3% 4.8% 5.4% 5.9% 6.4% 6.9% 7.5% 8.0% 8.5% 9.0% 9.5% 10.1% 10.6% 11.1% 11.6% 12.2% 12.7% 13.2% 13.7%25 -2.6% -2.1% -1.6% -1.0% -0.5% 0.0% 0.5% 1.1% 1.6% 2.1% 2.6% 3.2% 3.7% 4.2% 4.7% 5.3% 5.8% 6.3% 6.8% 7.4% 7.9% 8.4% 8.9% 9.4% 10.0% 10.5% 11.0% 11.5% 12.1% 12.6% 13.1% 13.6% 14.2%26 -2.2% -1.7% -1.2% -0.7% -0.1% 0.4% 0.9% 1.4% 2.0% 2.5% 3.0% 3.5% 4.1% 4.6% 5.1% 5.7% 6.2% 6.7% 7.2% 7.8% 8.3% 8.8% 9.3% 9.9% 10.4% 10.9% 11.4% 12.0% 12.5% 13.0% 13.5% 14.1% 14.6%27 -1.9% -1.4% -0.8% -0.3% 0.2% 0.8% 1.3% 1.8% 2.3% 2.9% 3.4% 3.9% 4.5% 5.0% 5.5% 6.0% 6.6% 7.1% 7.6% 8.1% 8.7% 9.2% 9.7% 10.3% 10.8% 11.3% 11.8% 12.4% 12.9% 13.4% 14.0% 14.5% 15.0%28 -1.5% -1.0% -0.5% 0.0% 0.6% 1.1% 1.6% 2.2% 2.7% 3.2% 3.8% 4.3% 4.8% 5.3% 5.9% 6.4% 6.9% 7.5% 8.0% 8.5% 9.1% 9.6% 10.1% 10.6% 11.2% 11.7% 12.2% 12.8% 13.3% 13.8% 14.4% 14.9% 15.4%29 -1.2% -0.7% -0.1% 0.4% 0.9% 1.4% 2.0% 2.5% 3.0% 3.6% 4.1% 4.6% 5.2% 5.7% 6.2% 6.8% 7.3% 7.8% 8.4% 8.9% 9.4% 10.0% 10.5% 11.0% 11.5% 12.1% 12.6% 13.1% 13.7% 14.2% 14.7% 15.3% 15.8%30 -0.9% -0.4% 0.2% 0.7% 1.2% 1.8% 2.3% 2.8% 3.4% 3.9% 4.4% 5.0% 5.5% 6.0% 6.6% 7.1% 7.6% 8.2% 8.7% 9.2% 9.8% 10.3% 10.8% 11.4% 11.9% 12.4% 13.0% 13.5% 14.0% 14.6% 15.1% 15.6% 16.2%31 -0.6% 0.0% 0.5% 1.0% 1.6% 2.1% 2.6% 3.2% 3.7% 4.2% 4.8% 5.3% 5.8% 6.4% 6.9% 7.4% 8.0% 8.5% 9.1% 9.6% 10.1% 10.7% 11.2% 11.7% 12.3% 12.8% 13.3% 13.9% 14.4% 14.9% 15.5% 16.0% 16.5%32 -0.3% 0.3% 0.8% 1.3% 1.9% 2.4% 2.9% 3.5% 4.0% 4.6% 5.1% 5.6% 6.2% 6.7% 7.2% 7.8% 8.3% 8.9% 9.4% 9.9% 10.5% 11.0% 11.5% 12.1% 12.6% 13.1% 13.7% 14.2% 14.8% 15.3% 15.8% 16.4% 16.9%33 0.0% 0.6% 1.1% 1.6% 2.2% 2.7% 3.3% 3.8% 4.3% 4.9% 5.4% 5.9% 6.5% 7.0% 7.6% 8.1% 8.6% 9.2% 9.7% 10.3% 10.8% 11.3% 11.9% 12.4% 12.9% 13.5% 14.0% 14.6% 15.1% 15.6% 16.2% 16.7% 17.3%34 0.3% 0.8% 1.4% 1.9% 2.5% 3.0% 3.5% 4.1% 4.6% 5.2% 5.7% 6.2% 6.8% 7.3% 7.9% 8.4% 8.9% 9.5% 10.0% 10.6% 11.1% 11.7% 12.2% 12.7% 13.3% 13.8% 14.4% 14.9% 15.4% 16.0% 16.5% 17.1% 17.6%35 0.6% 1.1% 1.7% 2.2% 2.8% 3.3% 3.8% 4.4% 4.9% 5.5% 6.0% 6.5% 7.1% 7.6% 8.2% 8.7% 9.3% 9.8% 10.3% 10.9% 11.4% 12.0% 12.5% 13.0% 13.6% 14.1% 14.7% 15.2% 15.8% 16.3% 16.8% 17.4% 17.9%36 0.9% 1.4% 1.9% 2.5% 3.0% 3.6% 4.1% 4.7% 5.2% 5.7% 6.3% 6.8% 7.4% 7.9% 8.5% 9.0% 9.6% 10.1% 10.6% 11.2% 11.7% 12.3% 12.8% 13.4% 13.9% 14.4% 15.0% 15.5% 16.1% 16.6% 17.2% 17.7% 18.2%37 1.1% 1.7% 2.2% 2.8% 3.3% 3.9% 4.4% 4.9% 5.5% 6.0% 6.6% 7.1% 7.7% 8.2% 8.8% 9.3% 9.8% 10.4% 10.9% 11.5% 12.0% 12.6% 13.1% 13.7% 14.2% 14.7% 15.3% 15.8% 16.4% 16.9% 17.5% 18.0% 18.6%38 1.4% 1.9% 2.5% 3.0% 3.6% 4.1% 4.7% 5.2% 5.8% 6.3% 6.9% 7.4% 7.9% 8.5% 9.0% 9.6% 10.1% 10.7% 11.2% 11.8% 12.3% 12.9% 13.4% 14.0% 14.5% 15.0% 15.6% 16.1% 16.7% 17.2% 17.8% 18.3% 18.9%39 1.6% 2.2% 2.7% 3.3% 3.8% 4.4% 4.9% 5.5% 6.0% 6.6% 7.1% 7.7% 8.2% 8.8% 9.3% 9.9% 10.4% 11.0% 11.5% 12.0% 12.6% 13.1% 13.7% 14.2% 14.8% 15.3% 15.9% 16.4% 17.0% 17.5% 18.1% 18.6% 19.2%40 1.9% 2.4% 3.0% 3.5% 4.1% 4.6% 5.2% 5.7% 6.3% 6.8% 7.4% 7.9% 8.5% 9.0% 9.6% 10.1% 10.7% 11.2% 11.8% 12.3% 12.9% 13.4% 14.0% 14.5% 15.1% 15.6% 16.2% 16.7% 17.3% 17.8% 18.4% 18.9% 19.5%
Return = (1+g) * ((Terminal PE / Start PE) ^ (1/t)) -1 + div yld * ((Start PE / Term PE +1) / 2)
Russia Implied Index Returns: 2009 Low
Source: Datastream, LODH Calculation
Time Dividend Starting Implied Equity Holding Period Annualized ReturnHorizon (t) Yield P / Peak E
10 4.0 2.4 MSCI Russia Index 2009 Low
Terminal EPS %cagr (g)P / Peak E -8 -7.5 -7 -6.5 -6 -5.5 -5 -4.5 -4 -3.5 -3 -2.5 -2 -1.5 -1 -0.5 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6 6.5 7 7.5 8
2 -5.4% -4.9% -4.4% -3.9% -3.4% -2.9% -2.4% -1.9% -1.4% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 3.9% 4.4% 4.9% 5.4% 5.9% 6.4% 6.9% 7.4% 7.9% 8.4% 8.8% 9.3% 9.8% 10.3%3 -2.5% -1.9% -1.4% -0.9% -0.4% 0.1% 0.6% 1.1% 1.6% 2.1% 2.7% 3.2% 3.7% 4.2% 4.7% 5.2% 5.7% 6.2% 6.7% 7.2% 7.8% 8.3% 8.8% 9.3% 9.8% 10.3% 10.8% 11.3% 11.8% 12.3% 12.9% 13.4% 13.9%4 -0.1% 0.4% 0.9% 1.5% 2.0% 2.5% 3.0% 3.6% 4.1% 4.6% 5.1% 5.7% 6.2% 6.7% 7.2% 7.8% 8.3% 8.8% 9.3% 9.9% 10.4% 10.9% 11.4% 12.0% 12.5% 13.0% 13.5% 14.1% 14.6% 15.1% 15.6% 16.2% 16.7%5 1.8% 2.4% 2.9% 3.4% 4.0% 4.5% 5.0% 5.6% 6.1% 6.7% 7.2% 7.7% 8.3% 8.8% 9.3% 9.9% 10.4% 10.9% 11.5% 12.0% 12.6% 13.1% 13.6% 14.2% 14.7% 15.2% 15.8% 16.3% 16.9% 17.4% 17.9% 18.5% 19.0%6 3.5% 4.0% 4.6% 5.1% 5.7% 6.2% 6.8% 7.3% 7.8% 8.4% 8.9% 9.5% 10.0% 10.6% 11.1% 11.7% 12.2% 12.8% 13.3% 13.9% 14.4% 15.0% 15.5% 16.1% 16.6% 17.1% 17.7% 18.2% 18.8% 19.3% 19.9% 20.4% 21.0%7 4.9% 5.5% 6.0% 6.6% 7.1% 7.7% 8.3% 8.8% 9.4% 9.9% 10.5% 11.0% 11.6% 12.1% 12.7% 13.3% 13.8% 14.4% 14.9% 15.5% 16.0% 16.6% 17.1% 17.7% 18.3% 18.8% 19.4% 19.9% 20.5% 21.0% 21.6% 22.1% 22.7%8 6.2% 6.8% 7.3% 7.9% 8.5% 9.0% 9.6% 10.1% 10.7% 11.3% 11.8% 12.4% 13.0% 13.5% 14.1% 14.7% 15.2% 15.8% 16.3% 16.9% 17.5% 18.0% 18.6% 19.2% 19.7% 20.3% 20.8% 21.4% 22.0% 22.5% 23.1% 23.7% 24.2%9 7.4% 7.9% 8.5% 9.1% 9.6% 10.2% 10.8% 11.4% 11.9% 12.5% 13.1% 13.6% 14.2% 14.8% 15.3% 15.9% 16.5% 17.1% 17.6% 18.2% 18.8% 19.3% 19.9% 20.5% 21.0% 21.6% 22.2% 22.7% 23.3% 23.9% 24.5% 25.0% 25.6%
10 8.4% 9.0% 9.6% 10.1% 10.7% 11.3% 11.9% 12.5% 13.0% 13.6% 14.2% 14.8% 15.3% 15.9% 16.5% 17.1% 17.6% 18.2% 18.8% 19.4% 19.9% 20.5% 21.1% 21.7% 22.2% 22.8% 23.4% 24.0% 24.5% 25.1% 25.7% 26.3% 26.8%11 9.4% 10.0% 10.6% 11.1% 11.7% 12.3% 12.9% 13.5% 14.0% 14.6% 15.2% 15.8% 16.4% 16.9% 17.5% 18.1% 18.7% 19.3% 19.9% 20.4% 21.0% 21.6% 22.2% 22.8% 23.3% 23.9% 24.5% 25.1% 25.7% 26.2% 26.8% 27.4% 28.0%12 10.3% 10.9% 11.5% 12.0% 12.6% 13.2% 13.8% 14.4% 15.0% 15.6% 16.2% 16.7% 17.3% 17.9% 18.5% 19.1% 19.7% 20.3% 20.8% 21.4% 22.0% 22.6% 23.2% 23.8% 24.4% 24.9% 25.5% 26.1% 26.7% 27.3% 27.9% 28.5% 29.1%13 11.1% 11.7% 12.3% 12.9% 13.5% 14.1% 14.7% 15.3% 15.9% 16.4% 17.0% 17.6% 18.2% 18.8% 19.4% 20.0% 20.6% 21.2% 21.8% 22.4% 22.9% 23.5% 24.1% 24.7% 25.3% 25.9% 26.5% 27.1% 27.7% 28.3% 28.9% 29.4% 30.0%14 11.9% 12.5% 13.1% 13.7% 14.3% 14.9% 15.5% 16.1% 16.7% 17.3% 17.9% 18.5% 19.1% 19.6% 20.2% 20.8% 21.4% 22.0% 22.6% 23.2% 23.8% 24.4% 25.0% 25.6% 26.2% 26.8% 27.4% 28.0% 28.6% 29.2% 29.8% 30.4% 31.0%15 12.6% 13.2% 13.8% 14.4% 15.0% 15.6% 16.2% 16.8% 17.4% 18.0% 18.6% 19.2% 19.8% 20.4% 21.0% 21.6% 22.2% 22.8% 23.4% 24.0% 24.6% 25.2% 25.8% 26.4% 27.0% 27.6% 28.2% 28.8% 29.4% 30.0% 30.6% 31.2% 31.8%16 13.3% 13.9% 14.5% 15.1% 15.7% 16.4% 17.0% 17.6% 18.2% 18.8% 19.4% 20.0% 20.6% 21.2% 21.8% 22.4% 23.0% 23.6% 24.2% 24.8% 25.4% 26.0% 26.6% 27.2% 27.8% 28.4% 29.0% 29.6% 30.2% 30.8% 31.4% 32.0% 32.6%17 14.0% 14.6% 15.2% 15.8% 16.4% 17.0% 17.6% 18.2% 18.8% 19.5% 20.1% 20.7% 21.3% 21.9% 22.5% 23.1% 23.7% 24.3% 24.9% 25.5% 26.1% 26.7% 27.3% 28.0% 28.6% 29.2% 29.8% 30.4% 31.0% 31.6% 32.2% 32.8% 33.4%18 14.6% 15.2% 15.8% 16.4% 17.1% 17.7% 18.3% 18.9% 19.5% 20.1% 20.7% 21.3% 21.9% 22.6% 23.2% 23.8% 24.4% 25.0% 25.6% 26.2% 26.8% 27.4% 28.0% 28.7% 29.3% 29.9% 30.5% 31.1% 31.7% 32.3% 32.9% 33.5% 34.2%19 15.2% 15.8% 16.4% 17.1% 17.7% 18.3% 18.9% 19.5% 20.1% 20.7% 21.4% 22.0% 22.6% 23.2% 23.8% 24.4% 25.0% 25.6% 26.3% 26.9% 27.5% 28.1% 28.7% 29.3% 29.9% 30.6% 31.2% 31.8% 32.4% 33.0% 33.6% 34.2% 34.9%20 15.8% 16.4% 17.0% 17.6% 18.2% 18.9% 19.5% 20.1% 20.7% 21.3% 21.9% 22.6% 23.2% 23.8% 24.4% 25.0% 25.7% 26.3% 26.9% 27.5% 28.1% 28.7% 29.4% 30.0% 30.6% 31.2% 31.8% 32.4% 33.1% 33.7% 34.3% 34.9% 35.5%21 16.3% 16.9% 17.6% 18.2% 18.8% 19.4% 20.0% 20.7% 21.3% 21.9% 22.5% 23.1% 23.8% 24.4% 25.0% 25.6% 26.2% 26.9% 27.5% 28.1% 28.7% 29.3% 30.0% 30.6% 31.2% 31.8% 32.4% 33.1% 33.7% 34.3% 34.9% 35.5% 36.2%22 16.8% 17.5% 18.1% 18.7% 19.3% 20.0% 20.6% 21.2% 21.8% 22.5% 23.1% 23.7% 24.3% 24.9% 25.6% 26.2% 26.8% 27.4% 28.1% 28.7% 29.3% 29.9% 30.5% 31.2% 31.8% 32.4% 33.0% 33.7% 34.3% 34.9% 35.5% 36.2% 36.8%23 17.3% 18.0% 18.6% 19.2% 19.8% 20.5% 21.1% 21.7% 22.4% 23.0% 23.6% 24.2% 24.9% 25.5% 26.1% 26.7% 27.4% 28.0% 28.6% 29.2% 29.9% 30.5% 31.1% 31.7% 32.4% 33.0% 33.6% 34.2% 34.9% 35.5% 36.1% 36.7% 37.4%24 17.8% 18.5% 19.1% 19.7% 20.3% 21.0% 21.6% 22.2% 22.9% 23.5% 24.1% 24.7% 25.4% 26.0% 26.6% 27.3% 27.9% 28.5% 29.1% 29.8% 30.4% 31.0% 31.7% 32.3% 32.9% 33.5% 34.2% 34.8% 35.4% 36.1% 36.7% 37.3% 37.9%25 18.3% 18.9% 19.6% 20.2% 20.8% 21.4% 22.1% 22.7% 23.3% 24.0% 24.6% 25.2% 25.9% 26.5% 27.1% 27.8% 28.4% 29.0% 29.6% 30.3% 30.9% 31.5% 32.2% 32.8% 33.4% 34.1% 34.7% 35.3% 36.0% 36.6% 37.2% 37.9% 38.5%26 18.7% 19.4% 20.0% 20.6% 21.3% 21.9% 22.5% 23.2% 23.8% 24.4% 25.1% 25.7% 26.3% 27.0% 27.6% 28.2% 28.9% 29.5% 30.1% 30.8% 31.4% 32.0% 32.7% 33.3% 33.9% 34.6% 35.2% 35.8% 36.5% 37.1% 37.7% 38.4% 39.0%27 19.2% 19.8% 20.4% 21.1% 21.7% 22.4% 23.0% 23.6% 24.3% 24.9% 25.5% 26.2% 26.8% 27.4% 28.1% 28.7% 29.3% 30.0% 30.6% 31.3% 31.9% 32.5% 33.2% 33.8% 34.4% 35.1% 35.7% 36.3% 37.0% 37.6% 38.2% 38.9% 39.5%28 19.6% 20.2% 20.9% 21.5% 22.1% 22.8% 23.4% 24.1% 24.7% 25.3% 26.0% 26.6% 27.3% 27.9% 28.5% 29.2% 29.8% 30.4% 31.1% 31.7% 32.4% 33.0% 33.6% 34.3% 34.9% 35.5% 36.2% 36.8% 37.5% 38.1% 38.7% 39.4% 40.0%29 20.0% 20.6% 21.3% 21.9% 22.6% 23.2% 23.8% 24.5% 25.1% 25.8% 26.4% 27.0% 27.7% 28.3% 29.0% 29.6% 30.2% 30.9% 31.5% 32.2% 32.8% 33.4% 34.1% 34.7% 35.4% 36.0% 36.7% 37.3% 37.9% 38.6% 39.2% 39.9% 40.5%30 20.4% 21.0% 21.7% 22.3% 23.0% 23.6% 24.3% 24.9% 25.5% 26.2% 26.8% 27.5% 28.1% 28.7% 29.4% 30.0% 30.7% 31.3% 32.0% 32.6% 33.2% 33.9% 34.5% 35.2% 35.8% 36.5% 37.1% 37.7% 38.4% 39.0% 39.7% 40.3% 41.0%31 20.8% 21.4% 22.1% 22.7% 23.4% 24.0% 24.6% 25.3% 25.9% 26.6% 27.2% 27.9% 28.5% 29.2% 29.8% 30.4% 31.1% 31.7% 32.4% 33.0% 33.7% 34.3% 35.0% 35.6% 36.3% 36.9% 37.5% 38.2% 38.8% 39.5% 40.1% 40.8% 41.4%32 21.2% 21.8% 22.4% 23.1% 23.7% 24.4% 25.0% 25.7% 26.3% 27.0% 27.6% 28.3% 28.9% 29.6% 30.2% 30.9% 31.5% 32.1% 32.8% 33.4% 34.1% 34.7% 35.4% 36.0% 36.7% 37.3% 38.0% 38.6% 39.3% 39.9% 40.6% 41.2% 41.8%33 21.5% 22.2% 22.8% 23.5% 24.1% 24.8% 25.4% 26.1% 26.7% 27.4% 28.0% 28.6% 29.3% 29.9% 30.6% 31.2% 31.9% 32.5% 33.2% 33.8% 34.5% 35.1% 35.8% 36.4% 37.1% 37.7% 38.4% 39.0% 39.7% 40.3% 41.0% 41.6% 42.3%34 21.9% 22.5% 23.2% 23.8% 24.5% 25.1% 25.8% 26.4% 27.1% 27.7% 28.4% 29.0% 29.7% 30.3% 31.0% 31.6% 32.3% 32.9% 33.6% 34.2% 34.9% 35.5% 36.2% 36.8% 37.5% 38.1% 38.8% 39.4% 40.1% 40.7% 41.4% 42.0% 42.7%35 22.2% 22.9% 23.5% 24.2% 24.8% 25.5% 26.1% 26.8% 27.4% 28.1% 28.7% 29.4% 30.0% 30.7% 31.3% 32.0% 32.6% 33.3% 34.0% 34.6% 35.3% 35.9% 36.6% 37.2% 37.9% 38.5% 39.2% 39.8% 40.5% 41.1% 41.8% 42.4% 43.1%36 22.5% 23.2% 23.9% 24.5% 25.2% 25.8% 26.5% 27.1% 27.8% 28.4% 29.1% 29.7% 30.4% 31.1% 31.7% 32.4% 33.0% 33.7% 34.3% 35.0% 35.6% 36.3% 36.9% 37.6% 38.2% 38.9% 39.6% 40.2% 40.9% 41.5% 42.2% 42.8% 43.5%37 22.9% 23.5% 24.2% 24.8% 25.5% 26.2% 26.8% 27.5% 28.1% 28.8% 29.4% 30.1% 30.7% 31.4% 32.1% 32.7% 33.4% 34.0% 34.7% 35.3% 36.0% 36.7% 37.3% 38.0% 38.6% 39.3% 39.9% 40.6% 41.2% 41.9% 42.6% 43.2% 43.9%38 23.2% 23.8% 24.5% 25.2% 25.8% 26.5% 27.1% 27.8% 28.5% 29.1% 29.8% 30.4% 31.1% 31.7% 32.4% 33.1% 33.7% 34.4% 35.0% 35.7% 36.3% 37.0% 37.7% 38.3% 39.0% 39.6% 40.3% 41.0% 41.6% 42.3% 42.9% 43.6% 44.2%39 23.5% 24.2% 24.8% 25.5% 26.1% 26.8% 27.5% 28.1% 28.8% 29.4% 30.1% 30.8% 31.4% 32.1% 32.7% 33.4% 34.1% 34.7% 35.4% 36.0% 36.7% 37.4% 38.0% 38.7% 39.3% 40.0% 40.7% 41.3% 42.0% 42.6% 43.3% 43.9% 44.6%40 23.8% 24.5% 25.1% 25.8% 26.5% 27.1% 27.8% 28.4% 29.1% 29.8% 30.4% 31.1% 31.7% 32.4% 33.1% 33.7% 34.4% 35.0% 35.7% 36.4% 37.0% 37.7% 38.4% 39.0% 39.7% 40.3% 41.0% 41.7% 42.3% 43.0% 43.6% 44.3% 45.0%
Return = (1+g) * ((Terminal PE / Start PE) ^ (1/t)) -1 + div yld * ((Start PE / Term PE +1) / 2)
Russia Implied Index Returns: May 2011
Source: Datastream, LODH Calculation
Time Dividend Starting Implied Equity Holding Period Annualized ReturnHorizon (t) Yield P / Peak E
10 1.5 6.2 MSCI Russia Index May-11
Terminal EPS %cagr (g)P / Peak E -8 -7.5 -7 -6.5 -6 -5.5 -5 -4.5 -4 -3.5 -3 -2.5 -2 -1.5 -1 -0.5 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6 6.5 7 7.5 8
2 -14.7% -14.3% -13.8% -13.4% -12.9% -12.5% -12.0% -11.6% -11.2% -10.7% -10.3% -9.8% -9.4% -8.9% -8.5% -8.0% -7.6% -7.1% -6.7% -6.2% -5.8% -5.4% -4.9% -4.5% -4.0% -3.6% -3.1% -2.7% -2.2% -1.8% -1.3% -0.9% -0.4%3 -12.1% -11.6% -11.2% -10.7% -10.3% -9.8% -9.3% -8.9% -8.4% -7.9% -7.5% -7.0% -6.5% -6.1% -5.6% -5.1% -4.7% -4.2% -3.7% -3.3% -2.8% -2.4% -1.9% -1.4% -1.0% -0.5% 0.0% 0.4% 0.9% 1.4% 1.8% 2.3% 2.8%4 -10.0% -9.5% -9.1% -8.6% -8.1% -7.6% -7.1% -6.7% -6.2% -5.7% -5.2% -4.7% -4.3% -3.8% -3.3% -2.8% -2.4% -1.9% -1.4% -0.9% -0.4% 0.0% 0.5% 1.0% 1.5% 2.0% 2.4% 2.9% 3.4% 3.9% 4.3% 4.8% 5.3%5 -8.3% -7.8% -7.3% -6.8% -6.3% -5.8% -5.3% -4.8% -4.3% -3.9% -3.4% -2.9% -2.4% -1.9% -1.4% -0.9% -0.4% 0.1% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.4% 5.9% 6.4% 6.9% 7.4%6 -6.8% -6.3% -5.8% -5.3% -4.8% -4.3% -3.8% -3.3% -2.8% -2.3% -1.8% -1.3% -0.8% -0.3% 0.2% 0.7% 1.2% 1.7% 2.2% 2.7% 3.2% 3.7% 4.2% 4.7% 5.2% 5.7% 6.2% 6.7% 7.2% 7.7% 8.2% 8.7% 9.2%7 -5.4% -4.9% -4.4% -3.9% -3.4% -2.9% -2.4% -1.9% -1.4% -0.9% -0.4% 0.1% 0.6% 1.1% 1.6% 2.1% 2.6% 3.2% 3.7% 4.2% 4.7% 5.2% 5.7% 6.2% 6.7% 7.2% 7.7% 8.2% 8.7% 9.2% 9.7% 10.2% 10.7%8 -4.3% -3.8% -3.3% -2.7% -2.2% -1.7% -1.2% -0.7% -0.2% 0.3% 0.8% 1.4% 1.9% 2.4% 2.9% 3.4% 3.9% 4.4% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 8.5% 9.1% 9.6% 10.1% 10.6% 11.1% 11.6% 12.1%9 -3.2% -2.7% -2.2% -1.7% -1.2% -0.6% -0.1% 0.4% 0.9% 1.4% 2.0% 2.5% 3.0% 3.5% 4.0% 4.6% 5.1% 5.6% 6.1% 6.6% 7.1% 7.7% 8.2% 8.7% 9.2% 9.7% 10.3% 10.8% 11.3% 11.8% 12.3% 12.9% 13.4%10 -2.3% -1.7% -1.2% -0.7% -0.2% 0.4% 0.9% 1.4% 1.9% 2.4% 3.0% 3.5% 4.0% 4.5% 5.1% 5.6% 6.1% 6.6% 7.2% 7.7% 8.2% 8.7% 9.3% 9.8% 10.3% 10.8% 11.4% 11.9% 12.4% 12.9% 13.5% 14.0% 14.5%11 -1.4% -0.9% -0.3% 0.2% 0.7% 1.3% 1.8% 2.3% 2.8% 3.4% 3.9% 4.4% 5.0% 5.5% 6.0% 6.6% 7.1% 7.6% 8.1% 8.7% 9.2% 9.7% 10.3% 10.8% 11.3% 11.8% 12.4% 12.9% 13.4% 14.0% 14.5% 15.0% 15.6%12 -0.6% 0.0% 0.5% 1.0% 1.6% 2.1% 2.6% 3.2% 3.7% 4.2% 4.8% 5.3% 5.8% 6.4% 6.9% 7.4% 8.0% 8.5% 9.0% 9.6% 10.1% 10.6% 11.2% 11.7% 12.2% 12.8% 13.3% 13.8% 14.4% 14.9% 15.4% 16.0% 16.5%13 0.2% 0.7% 1.3% 1.8% 2.3% 2.9% 3.4% 4.0% 4.5% 5.0% 5.6% 6.1% 6.6% 7.2% 7.7% 8.3% 8.8% 9.3% 9.9% 10.4% 11.0% 11.5% 12.0% 12.6% 13.1% 13.6% 14.2% 14.7% 15.3% 15.8% 16.3% 16.9% 17.4%14 0.9% 1.4% 2.0% 2.5% 3.1% 3.6% 4.2% 4.7% 5.2% 5.8% 6.3% 6.9% 7.4% 7.9% 8.5% 9.0% 9.6% 10.1% 10.7% 11.2% 11.7% 12.3% 12.8% 13.4% 13.9% 14.5% 15.0% 15.5% 16.1% 16.6% 17.2% 17.7% 18.3%15 1.6% 2.1% 2.7% 3.2% 3.8% 4.3% 4.8% 5.4% 5.9% 6.5% 7.0% 7.6% 8.1% 8.7% 9.2% 9.8% 10.3% 10.9% 11.4% 11.9% 12.5% 13.0% 13.6% 14.1% 14.7% 15.2% 15.8% 16.3% 16.9% 17.4% 18.0% 18.5% 19.0%16 2.2% 2.7% 3.3% 3.8% 4.4% 4.9% 5.5% 6.0% 6.6% 7.1% 7.7% 8.2% 8.8% 9.3% 9.9% 10.4% 11.0% 11.5% 12.1% 12.6% 13.2% 13.7% 14.3% 14.8% 15.4% 15.9% 16.5% 17.0% 17.6% 18.1% 18.7% 19.2% 19.8%17 2.8% 3.3% 3.9% 4.5% 5.0% 5.6% 6.1% 6.7% 7.2% 7.8% 8.3% 8.9% 9.4% 10.0% 10.5% 11.1% 11.6% 12.2% 12.7% 13.3% 13.9% 14.4% 15.0% 15.5% 16.1% 16.6% 17.2% 17.7% 18.3% 18.8% 19.4% 19.9% 20.5%18 3.4% 3.9% 4.5% 5.0% 5.6% 6.1% 6.7% 7.3% 7.8% 8.4% 8.9% 9.5% 10.0% 10.6% 11.1% 11.7% 12.3% 12.8% 13.4% 13.9% 14.5% 15.0% 15.6% 16.2% 16.7% 17.3% 17.8% 18.4% 18.9% 19.5% 20.0% 20.6% 21.2%19 3.9% 4.5% 5.0% 5.6% 6.1% 6.7% 7.3% 7.8% 8.4% 8.9% 9.5% 10.1% 10.6% 11.2% 11.7% 12.3% 12.9% 13.4% 14.0% 14.5% 15.1% 15.6% 16.2% 16.8% 17.3% 17.9% 18.4% 19.0% 19.6% 20.1% 20.7% 21.2% 21.8%20 4.4% 5.0% 5.5% 6.1% 6.7% 7.2% 7.8% 8.4% 8.9% 9.5% 10.0% 10.6% 11.2% 11.7% 12.3% 12.9% 13.4% 14.0% 14.5% 15.1% 15.7% 16.2% 16.8% 17.3% 17.9% 18.5% 19.0% 19.6% 20.2% 20.7% 21.3% 21.8% 22.4%21 4.9% 5.5% 6.0% 6.6% 7.2% 7.7% 8.3% 8.9% 9.4% 10.0% 10.6% 11.1% 11.7% 12.3% 12.8% 13.4% 14.0% 14.5% 15.1% 15.6% 16.2% 16.8% 17.3% 17.9% 18.5% 19.0% 19.6% 20.2% 20.7% 21.3% 21.9% 22.4% 23.0%22 5.4% 6.0% 6.5% 7.1% 7.7% 8.2% 8.8% 9.4% 9.9% 10.5% 11.1% 11.6% 12.2% 12.8% 13.3% 13.9% 14.5% 15.0% 15.6% 16.2% 16.7% 17.3% 17.9% 18.4% 19.0% 19.6% 20.1% 20.7% 21.3% 21.8% 22.4% 23.0% 23.5%23 5.8% 6.4% 7.0% 7.6% 8.1% 8.7% 9.3% 9.8% 10.4% 11.0% 11.5% 12.1% 12.7% 13.3% 13.8% 14.4% 15.0% 15.5% 16.1% 16.7% 17.2% 17.8% 18.4% 19.0% 19.5% 20.1% 20.7% 21.2% 21.8% 22.4% 22.9% 23.5% 24.1%24 6.3% 6.9% 7.4% 8.0% 8.6% 9.1% 9.7% 10.3% 10.9% 11.4% 12.0% 12.6% 13.2% 13.7% 14.3% 14.9% 15.4% 16.0% 16.6% 17.2% 17.7% 18.3% 18.9% 19.4% 20.0% 20.6% 21.2% 21.7% 22.3% 22.9% 23.5% 24.0% 24.6%25 6.7% 7.3% 7.9% 8.4% 9.0% 9.6% 10.2% 10.7% 11.3% 11.9% 12.5% 13.0% 13.6% 14.2% 14.8% 15.3% 15.9% 16.5% 17.1% 17.6% 18.2% 18.8% 19.4% 19.9% 20.5% 21.1% 21.7% 22.2% 22.8% 23.4% 23.9% 24.5% 25.1%26 7.1% 7.7% 8.3% 8.8% 9.4% 10.0% 10.6% 11.2% 11.7% 12.3% 12.9% 13.5% 14.0% 14.6% 15.2% 15.8% 16.3% 16.9% 17.5% 18.1% 18.7% 19.2% 19.8% 20.4% 21.0% 21.5% 22.1% 22.7% 23.3% 23.8% 24.4% 25.0% 25.6%27 7.5% 8.1% 8.7% 9.2% 9.8% 10.4% 11.0% 11.6% 12.1% 12.7% 13.3% 13.9% 14.5% 15.0% 15.6% 16.2% 16.8% 17.4% 17.9% 18.5% 19.1% 19.7% 20.3% 20.8% 21.4% 22.0% 22.6% 23.1% 23.7% 24.3% 24.9% 25.5% 26.0%28 7.9% 8.5% 9.1% 9.6% 10.2% 10.8% 11.4% 12.0% 12.5% 13.1% 13.7% 14.3% 14.9% 15.4% 16.0% 16.6% 17.2% 17.8% 18.4% 18.9% 19.5% 20.1% 20.7% 21.3% 21.8% 22.4% 23.0% 23.6% 24.2% 24.7% 25.3% 25.9% 26.5%29 8.3% 8.8% 9.4% 10.0% 10.6% 11.2% 11.8% 12.3% 12.9% 13.5% 14.1% 14.7% 15.3% 15.8% 16.4% 17.0% 17.6% 18.2% 18.8% 19.3% 19.9% 20.5% 21.1% 21.7% 22.3% 22.8% 23.4% 24.0% 24.6% 25.2% 25.8% 26.3% 26.9%30 8.6% 9.2% 9.8% 10.4% 11.0% 11.5% 12.1% 12.7% 13.3% 13.9% 14.5% 15.1% 15.6% 16.2% 16.8% 17.4% 18.0% 18.6% 19.2% 19.7% 20.3% 20.9% 21.5% 22.1% 22.7% 23.3% 23.8% 24.4% 25.0% 25.6% 26.2% 26.8% 27.4%31 9.0% 9.6% 10.1% 10.7% 11.3% 11.9% 12.5% 13.1% 13.7% 14.3% 14.8% 15.4% 16.0% 16.6% 17.2% 17.8% 18.4% 19.0% 19.5% 20.1% 20.7% 21.3% 21.9% 22.5% 23.1% 23.7% 24.2% 24.8% 25.4% 26.0% 26.6% 27.2% 27.8%32 9.3% 9.9% 10.5% 11.1% 11.7% 12.3% 12.8% 13.4% 14.0% 14.6% 15.2% 15.8% 16.4% 17.0% 17.6% 18.1% 18.7% 19.3% 19.9% 20.5% 21.1% 21.7% 22.3% 22.9% 23.4% 24.0% 24.6% 25.2% 25.8% 26.4% 27.0% 27.6% 28.2%33 9.6% 10.2% 10.8% 11.4% 12.0% 12.6% 13.2% 13.8% 14.4% 15.0% 15.5% 16.1% 16.7% 17.3% 17.9% 18.5% 19.1% 19.7% 20.3% 20.9% 21.5% 22.0% 22.6% 23.2% 23.8% 24.4% 25.0% 25.6% 26.2% 26.8% 27.4% 28.0% 28.5%34 10.0% 10.6% 11.1% 11.7% 12.3% 12.9% 13.5% 14.1% 14.7% 15.3% 15.9% 16.5% 17.1% 17.7% 18.3% 18.8% 19.4% 20.0% 20.6% 21.2% 21.8% 22.4% 23.0% 23.6% 24.2% 24.8% 25.4% 26.0% 26.6% 27.1% 27.7% 28.3% 28.9%35 10.3% 10.9% 11.5% 12.1% 12.6% 13.2% 13.8% 14.4% 15.0% 15.6% 16.2% 16.8% 17.4% 18.0% 18.6% 19.2% 19.8% 20.4% 21.0% 21.6% 22.2% 22.8% 23.3% 23.9% 24.5% 25.1% 25.7% 26.3% 26.9% 27.5% 28.1% 28.7% 29.3%36 10.6% 11.2% 11.8% 12.4% 13.0% 13.6% 14.2% 14.7% 15.3% 15.9% 16.5% 17.1% 17.7% 18.3% 18.9% 19.5% 20.1% 20.7% 21.3% 21.9% 22.5% 23.1% 23.7% 24.3% 24.9% 25.5% 26.1% 26.7% 27.3% 27.9% 28.5% 29.1% 29.7%37 10.9% 11.5% 12.1% 12.7% 13.3% 13.9% 14.5% 15.1% 15.7% 16.3% 16.9% 17.4% 18.0% 18.6% 19.2% 19.8% 20.4% 21.0% 21.6% 22.2% 22.8% 23.4% 24.0% 24.6% 25.2% 25.8% 26.4% 27.0% 27.6% 28.2% 28.8% 29.4% 30.0%38 11.2% 11.8% 12.4% 13.0% 13.6% 14.2% 14.8% 15.4% 16.0% 16.6% 17.2% 17.8% 18.4% 19.0% 19.6% 20.2% 20.8% 21.4% 22.0% 22.6% 23.2% 23.8% 24.3% 24.9% 25.5% 26.1% 26.7% 27.3% 27.9% 28.5% 29.1% 29.7% 30.3%39 11.4% 12.0% 12.6% 13.3% 13.9% 14.5% 15.1% 15.7% 16.3% 16.9% 17.5% 18.1% 18.7% 19.3% 19.9% 20.5% 21.1% 21.7% 22.3% 22.9% 23.5% 24.1% 24.7% 25.3% 25.9% 26.5% 27.1% 27.7% 28.3% 28.9% 29.5% 30.1% 30.7%40 11.7% 12.3% 12.9% 13.5% 14.1% 14.7% 15.3% 15.9% 16.5% 17.1% 17.7% 18.4% 19.0% 19.6% 20.2% 20.8% 21.4% 22.0% 22.6% 23.2% 23.8% 24.4% 25.0% 25.6% 26.2% 26.8% 27.4% 28.0% 28.6% 29.2% 29.8% 30.4% 31.0%
Return = (1+g) * ((Terminal PE / Start PE) ^ (1/t)) -1 + div yld * ((Start PE / Term PE +1) / 2)