Capital Markets How are investors reacting to the crisis? What tto expect tin the coming years? José Ramón Valente March, 2009
World growth over its historical rate World GDP (Real annual % grow th) 3.6 4.9 4.4 5.1 5.2 Average 2003-2007: 4.7 Average 1971-2007: 3.6 2003 2004 2005 2006 2007 2 Source: IMF
Historical world growth rate US GDP JAPAN GDP CHINA GDP (Annual real % grow th) (Annual real % grow th) (Annual real % grow th) 20.0 20.0 16 15.0 15.0 Average 10.0 1900- Average 2008: 3.3 10.0 1946-1990: 7.0 5.0 14 12 10 0.0-5.0 5.0 0.0 8 6 Average 1978-2008: 9.9-10.0-5.0 4-15.0 1900 1918 1936 1954 1972 1990 2008-10.0 1946 1957 1968 1979 1990 2 1978 1984 1990 1996 2002 2008 3 Source: Maddison, Bloomberg and measuringworth.org
Risk 1800 EMBI+ Spread b.p. 350 AAA spreads b.p. 1600 1400 1200 1000 300 250 200 800 600 400 200 0 Average 1997-2009: 651 Average 2005-2007: 257 1997 1997 1999 2000 2001 2002 2003 2004 2005 2006 2006 2007 2008 150 100 50 0 Average 1997-2009: 112 A verage 2003-2007: 84 96 97 98 99 00 01 02 03 04 05 06 07 08 4 Source: JPMorgan and
Interest rates went permanently lower 10.0 Real Interest Rates (annual %) 8.0 60 6.0 4.0 Average 1980-2009: 3.3 Average 2003-2007: 2.3 2.0 0.0 Average 1980-2009: 2.2 Average 2003-2007: 1.1-2.0 FED T10y -4.0 J.80 J.82 J.84 J.86 J.88 J.90 J.92 J.94 J.96 J.98 J.00 J.02 J.04 J.06 J.08 5 Source: FED and Bloomberg
What is the effect in stock prices? Assumptions P x = F. r - g Increase in GDP growth (g): 1.5% Drop in risk premium: 200 b.p. Decline in risk free interest rate (R f ): 100 b.p. Then stock prices should have increased 140.6% 6
What happened in the markets? 450 World MSCI (Index in USD) 400 Δ- 56.2% 350 Δ+ 140.7% 300 250 200 150 2002 2003 2004 2005 2006 2007 2008 2009 7 Source: Morgan Stanley
What happened in the markets? 1600 S&P 500 (Index in USD) 1500 Δ- 52.6% 1400 1300 Δ+ 90.0% 1200 1100 1000 900 800 700 2002 2003 2004 2005 2006 2007 2008 2009 8 Source: Bloomberg
Value creation Index 2000=100 135 130 125 World US 129 120 115 110 112 105 100 95 2002 2003 2004 2005 2006 2007 2008 2009 9 Source: IMF
What to expect for the future? According to historical data (1928 2008) R f = 2.2% R(m) R f = 5.9% β m = 10 1.0 R k = 8.1% According to Fama R f = 2.2% R(m) R f = 3.5% β m = 1.0 R k = 5.7% 10
What to expect for the future? 70 S&P Total Return (Real annual %) 50 30 7.0% 10-10 -30-50 1926 1940 1954 1968 1982 1996 2008 11 Source: Bloomberg
What about the asset allocation? 60.0 Annual Real Return (%) 30.0 Rolling 5 Years Annual Real Return (%) 25.0 40.0 20.0 20.0 15.0 10.0 0.0 5.0-20.0 0.0-40.0 Large Stocks US T-bills -60.0 1926 1936 1946 1956 1966 1976 1986 1996 2006-5.0-10.0 0 Large Stocks US T-bills -15.0 1926 1936 1946 1956 1966 1976 1986 1996 2006 Probability of Negative Return Stocks US T Bills Probability of Negative Return Stocks US T Bills Before 2008 31.7% 36.6% After 2008 32.5% 37.3% Change in probability 0.8% 0.8% Before 2008 19.5% 33.8% After 2008 20.5% 33.3% Change in probability 1.0% -0.4% 12 Source: Ibbotson and Econsult
What about the asset allocation? 20.0 Rolling 10 Years Annual Real Return (%) 16.0 Rolling 20 Years Annual Real Return (%) 14.0 15.0 12.0 10.0 10.0 8.0 5.0 6.0 4.0 0.0 2.0-5.0 0.0 Large Stocks -2.0 Large Stocks US T-bills US T-bills -10.0-4.0 1926 1936 1946 1956 1966 1976 1986 1996 2006 1926 1936 1946 1956 1966 1976 1986 1996 2006 Probability of Negative Return Stocks US T Bills Before 2008 9.7% 37.5% After 2008 11.0% 37.0% Change in probability 1.2% -0.5% Probability of Negative Return Stocks US T Bills Before 2008 0.0% 32.3% After 2008 0.0% 31.7% Change in probability 0.0% -0.5% 13 Source: Ibbotson and Econsult
Effects on asset allocation Permanent increase on fixed income weight on portfolios Permanent reduction on high yield and emerging market debt Permanent reduction on hedge funds 14
Effects on asset allocation World Capital Market December 2007 US$109.6 tr. All Other Stocks 22% Emerging Market Stocks 3% U.S. Stocks 18% Private Capital 1% Cash Equivalents 4% Real State 6% EM Market Debt 3% Non- U.S. Bonds 19% High Yield Bonds 1% U.S. Bonds 23% 15 Source: Ennis Knupp
Effects on asset allocation World Capital Market December 2008 - December 2008 Due to Valuation All Other Stocks U.S. Stocks Real State Emerging Market Stocks High Yield Bonds Private Capital -6.8% -4.1% -1.7% -0.9% -0.1% -0.1% Emerging Market Debt Cash Equivalents 0.3% 09% 0.9% Non- U.S. Bonds U.S. Bonds 5.7% 6.6% 16 Source: Ennis Knupp and Econsult
Chilean Pension Funds Dec. 2007 Jan.2009 Variation Fund A 23.7% 15.8% -7.9% Fund B 22.8% 18.7% -4.1% Fund C 42.0% 44.0% 2.0% Fund D 10.1% 13.3% 3.2% Fund E 1.4% 8.2% 6.8% Total 100.0% 0% 100.0% 0% 17 Source: SAFP
Chilean Pension Funds Chilean AFPs Asset Allocation (January 2009) Chilean Money Market 14.70% Other 3.70% Foreign Fixed Income 2.60% Foreign Equity 14.50% Chilean Equity 12.90% Chilean Fixed Income 30.60% 18 Source: SAFP
Bond issues vs. IPOs Chilean Bond Issues 3,500 ($MM) 2008 MM 3,000 2,500 2,000 1,500 1,000 500 0 Expected in March 2003 2004 2005 2006 2007 2008 2009 Arauco UF 1.00 Arauco UF 5.00 Cementos Bio Bio UF 1.50 Endesa UF 10.00 Saesa UF 4.00 2009 MM Masisa UF 3.00 SQM UF 400 4.00 SQM UF 21,000 Enap UF 9.75 Sodimac UF 32,170 Indura UF 0.50 Indura UF 3.00 Cencosud UF 3.00 Esval UF 0.50 Esval UF 2.00 19 Source: BCS
Bond issues vs. IPOs Chilean IPOs 600 6 USD MM 500 Nº of IPOs 5 400 4 300 3 200 2 100 1 0 2003 2004 2005 2006 2007 2008 0 20 Source: BCS
What to expect in the coming years?
Economic policies for the future Chile faces a presidential election at the end of this year What to expect? The difference between candidates will be the way in which they approach much needed long term reforms Education quality 22
Education quality Máximo 605 Matemáticas Ciencias Máximo 578 Promedio Internacional 467 Promedio Internacional 474 Chile 387 Chile 413 23 Source: TIMMS
Economic policies for the future Chile faces a presidential election at the end of this year What to expect? The difference between candidates will be the way in which they approach much needed long term reforms Education quality Entrepreneurship 24
Difficulties to start and close a business Rankings Doing Business 2009 Ease of Doing Business Starting a Business Closing a Business Singapore 1 10 2 New Zealand 2 1 17 United States 3 6 15 Hong Kong 4 15 13 Denmark 5 16 7 United Kingdom 6 8 9 Ireland 7 5 6 Canada 8 2 4 Australia 9 3 14 Norw ay 10 33 3 Iceland 11 17 16 Japan 12 64 1 Thailand 13 44 46 Finland 14 18 5 Chile 40 55 112 Colombia 53 79 30 Mexico 56 115 23 Peru 62 116 96 El Salvador 72 103 78 25 Source: World Bank
Economic policies for the future Chile faces a presidential election at the end of this year What to expect? The difference between candidates will be the way in which they approach much needed long term reforms Education quality Entrepreneurship State Reform Bureaucracy (enviromental impact, etc.) Project evaluation (Ferrocarriles del Estado) Corporate governance (Enap) 26
Economic policies for the future The difference is on the GDP potential growth rate, not in the annual growth The government term is inconvenient for this objective. You need to seed during several years to harvest later. 13.0 GDP (Real % annual grow th) 11.0 90 9.0 Average 1986-1997: 7.9% 7.0 5.0 Average 1998-08: 3.7% 3.0 1.0-1.0 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 27 Source: Central Bank of Chile
Economic policies for the future The difference is on the GDP potential growth rate, not in the annual growth The government term is inconvenient for this objective. You need to seed during several years to harvest later. Grow th Sources (Real annual %) 7.9 TFP Capital Labor 3.6 2.7 3.7 0.1 2.6 1.6 10 1.0 1987-1997 1998-2008 28 Source: Central Bank of Chile and Econsult
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