Global Equities Fragmentation in the Global Village"

Transcription

1 Global Equities Fragmentation in the Global Village" Virginie Maisonneuve Head of Global and International Equities, Global and International Portfolio Manager June 2012 For Professional Investors or Advisors Only Schroder International Selection Fund is referred to as Schroder ISF throughout this presentation

2 Framing Our Investment Decisions: World Shaping Trends

3 Super Cycle Demographics Climate Change Fragmentation In The Global Village

4 Fragmentation in the Global Village: A Structural Rise in Volatility?

5 Investing in an Increasingly Volatile World: Growing fragmentation within the global village Global village: The widening, deepening and speeding up of worldwide interconnectedness in all aspects of contemporary life Facilitated by technology Increasing trade and capital flows Fragmentations Adds complexity to the dynamics of globalisation and investment analysis May materialize in conflicts, drive economic divergence or add confusion to decision-making processes May create unpredictable patterns of volatility contrary to the usual sector / region / country lines?

6 Global Village: Growing trade and capital flows Multinational co. earnings vs listing (half of S&P 500 revenue now from overseas) Global exports , USD Insert - Leading economies by trade in goods Trillions Imports (Billion USD) France United States Japan Netherlands Germany China Exports (Billion USD) Services Goods Source: World Trade Organization

7 Global Village: the iphone, a Symbol Growing trade and capital flows : designed in California, assembled in China Sum of Its Parts Value of iphone 3G $ components and labor* *Estimates do not total 100% due to rounding Source: Rassweiler Countries are mentioned for illustrative purposes only and should not be viewed as a recommendation to buy/sell. Source: Image Courtesy of Apple

8 Global Village: Social/cultural dimension International media: CNN now available to >2bn people in >200 countries Communications technology: mobile penetration almost 80%, >4000 tweets per second Rise of the global community: shared culture and values 90 Global Mobile and Internet Penetration The widening, deepening and speeding up of worldwide interconnectedness in all aspects of contemporary life Source: World Bank, World development indicators 2009 Internet - World Mobile - World

9 Fragmentation in the Global Village: Emergence of new fragmentations Economic fragmentation Social Fragmentation Political fragmentation Attention Fragmentation

10 Economic growth: 20 year Perspective, the Birth of a New World Contribution to global growth by group and region, Contribution to Global Growth (in percent) World Advanced economies Emerging market economies United states G-7 China, India and Brazil Source: Brookings Institution, Emerging Markets, p Notes: Share contributions are derived by dividing world GDP growth by group/region growth. Growth is calculated suing PPP exchange rates

11 Economic Fragmentation: Convergence becomes divergence Economic divergence in highly connected and relatively homogenous units New phase for Europe? Unemployment rates Spain Ireland Greece Germany Portugal 10-year Govt. bond yield spreads over Bunds, % 10-year Govt. bond yield spreads over Bunds, % Greece debt swap completed 0 Jan 09 Sep 09 May 10 Jan 11 Sep 11 May 12 Italy Greece Ireland Spain Portugal 1 Source: Thompson Datastream, Schroders. Updated May 15, Source: Thompson Datastream, Schroders. Updated May 22,, 2011

12 Economic Fragmentation: Convergence becomes divergence Source: Economist

13 Economic Fragmentation and Competitiveness: Salary versus productivity in manufacturing - % change % HIGHER UNIT LABOUR COST Salary per unit labour input Italy 30% 20% Germany 10% UK Spain US Greece Korea LOWER UNIT LABOUR COST Poland 0% % % 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% Output per unit labour input Source: OECD Statistics, extracted 1/6/2012. N.B. Unit labour input in most cases equals hours worked, but equals persons employed for some countries including the United States, United Kingdom and Poland. Japan is excluded because the most recent data points are for 2007.

14 Global Competitiveness: Europe, China and the USA. Is Tennessee the new Guangdong? Source: Oxford Economics, OECD. Unit Labour Costs: 2008 = Europe: currency issue? Exchange rate adjusted unit labour costs Euro adopted US Germany China Greece Italy Portugal Spain China: still competitive but decreasingly

15 Global Competitiveness: The US Adjustment Falling US labour costs boost corporate profits Private wages and unit labour costs decelerate QoQ annualised growth rate, 12 month centred moving avg US profits versus wages % of GDP 14% 13% 12% 11% 10% 9% 8% 7% 6% 5% 4% Feb 1950 Aug 1953 Feb 1957 Aug 1960 Feb 1964 Aug 1967 Feb 1971 Aug 1974 Feb 1978 Aug 1981 Feb 1985 Aug 1988 Feb 1992 Aug 1995 Feb 1999 Aug 2002 Feb 2006 Aug % 60% 59% 58% 57% 56% 55% 54% 53% 52% Corporate profit Employee compensation Source: GaveKal, US Bureau of Economic Analysis

16 Global Competitiveness: while Chinese corporates adapt to higher costs Operating profit margin MSCI China (LHS) S&P 500 (RHS) ource: Bloomberg

17 Economic Fragmentation: Working Towards a New Equilibrium? Deleveraging the developed world and growing EM domestic consumption Current account balance % of GDP China United States Source: IMF

18 Political Fragmentation: Recent elections in Europe France: 2012 presidential election UK: 2010 general election First hung parliament since Italy: Nov 2011 Greece: 2012 parliamentary election Spain: 2011 general election Hungary: Jan 2012 Netherlands: April 2012 Far-right candidate Marine Le Pen wins 18% of first round vote, beating previous record for Front National. Election dominated by anti-immigrant rhetoric. Silvio Berlusconi forced to resign; technocratic government of entirely unelected officials formed by economist Mario Monti. Will remain in office until next elections in Failure to form a government to replace technocratic caretaker government. Far-right Golden Dawn wins 7% of the vote, entering parliament for the first time with 21 seats. Stable majority government formed but remaining voters polarised with separatist parties gaining ground. New constitution enshrines anti-democratic principles, endangers EU/IMF bailout. Government collapses during budget talks. Belgium Political instability with multiple government changes Finland: 2011 parliamentary election Populist/nationalist True Finns win 19% of vote to become third largest party in parliament.

19 Political Fragmentation: The rise of extremists movements in Europe: expression of social grievance? Rising extremism - Marine Le Pen support rate in France Rising tension among EU countries Source: Guardian

20 Political Fragmentation:

21 Social Fragmentation: Income inequality and the skill premium Rising income inequality due to skill premium in the global labor market Richest 1% in the US earn 25% of all income (up from 13% in the early 1980s) Emerging markets remain highly unequal; China has seen the biggest increase in Gini coefficient Financial crisis has aggravated problem: low-skilled workers far more likely to be unemployed The skill premium in the US 1 Unemployment rate in 2010 (%) Median weekly earnings in 2010($) Doctoral degree Professional degree 1,550 1, Gini coefficient in the developed world 2 United States 4.0 Master s degree 1,272 United Kingdom Bachelor s degree Associate s degree Some college, no degree High school diploma Less than a high school degree ,038 Average : 8.2% Average : $ Germany Japan 25 France Italy 1 Source: Bureau of Labor Statistics, Current Population Survey 2 Source: IMF (2008), Rising Income Inequality: Technology, or Trade and Financial Globalisation? Countries are mentioned for illustrative purposes only and should not be viewed as a recommendation to buy/sell.

22 Social Fragmentation: Distribution of financial wealth in the United States, 2009 Bottom 88 percent 7% of financial wealth Top 1 percent 43% of financial wealth Source: G. William Domhoff, Wealth, Income and Power

23 Social Fragmentation: Income gains at the top dwarf those of the low-and middle-line households, Percentage change in after-tax income since % +95% +25% +16% Source: CBPP calculations from congressional budget office data.

24 New Dimensions of Loyalty and Conflict: Belonging to a community but which one? Traditional religious, ethnic and tribal divides remain salient Now overlaid by new dimensions of group identity and notions of community Technology provides the means to bypass and challenge established structures e.g. Middle East Number of ethnic conflicts starting in a given year Fall of the Soviet Union and Yugoslavia Source: Cederman et al (2008), Ethnic Armed Conflict dataset.

25 Attention Fragmentation: Information overload Many professionals now own 5 6 connected devices, meaning constant distractions Average # of Connected Devices Owned Studies suggest there is an optimal amount of information, beyond which we make worse decisions Overloaded investors lose sight of long-term trends: average holding period has fallen from 7 years to 7 months since 1970s Tablet owners ebooks owners Portable game player owners Short-termism causes excessive volatility and poor performance Portable media player owners 5 Netbook owners 4 Source: The Nielsen Company

26 Fragmentation Leads to Higher Equity Market Volatility Volatility remains high Earnings risk at a 70-year high % 250% 200% 150% 100% 50% 0% VIX Index 3 Week Average Rolling 5-Yr Std Deviation of Y/Y EPS Growth for SP 500 Source: CBOE, Morgan Stanley Research, as at 31th May 2012 Source: BofA ML US Equity & Quant Strategy, as at 30 September 2011

27 Fragmentation Leads to Higher Equity Market Volatility Volatility remains high 2011 Sector Performance has rotated violently Dec Mar Mar-11 2-May-11 2-May ct-11 4-Oct Oct Oct Nov-11 Materials (4.97)% 12.75% (32.24)% 25.01% (13.63)% Financials 1.36% 7.01% (30.96)% 21.45% (15.20)% Energy 8.67% 6.58% (27.76)% 25.20% (8.93)% Industrials 0.93% 10.20% (27.59)% 19.54% (9.65)% Consumer Discretionary (1.71)% 9.86% (19.43)% 16.35% (9.75)% Information Technology (2.02)% 7.68% (14.31)% 14.50% (7.47)% Telecommunication Services 1.30% 9.11% (14.05)% 10.22% (6.94)% Utilities (1.58)% 7.92% (12.66)% 7.75% (6.50)% Health Care 0.78% 12.28% (12.47)% 9.91% (6.96)% Consumer Staples (2.45)% 11.45% (8.65)% 9.01% (4.92)% MSCI World 0.32% 9.17% (21.98)% 16.81% (9.65)% VIX Index 3 Week Average Best performing sectors Source: CBOE, Morgan Stanley Research, as at 31th May 2012 The last two periods of rotation were especially short: 4 weeks each Source: BofA ML US Equity & Quant Strategy, as at 30 September

28 Conclusion The new Fragmentations in the global village are on going, long term themes They contribute to rising macro risk as the world attempts to find a new equilibrium in a shifting economic growth environment And makes fundamental investing into quality growth companies more compelling

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