MARKET REVIEW AND OUTLOOK MARTIN LEFEBVRE Asset Allocation and - - PowerPoint PPT Presentation

MARKET REVIEW AND OUTLOOK

• Sept. 12th, 2013

MARTIN LEFEBVRE Asset Allocation and Investment Strategist

2 Source: Datastream

Presentation outline

• The past is no guarantee of the future
• Short-term outlook
• Are fundamentals turning against Canada?

The past is no guarantee

• f the future

4 Source: Datastream

Extreme volatility at play

S&P 500 returns since summit of 2000

• 60%
• 50%
• 40%
• 30%
• 20%
• 10%

0% 10% 20% 30% 40% 2000 2002 2004 2006 2008 2010 2012 Index

• 60%
• 50%
• 40%
• 30%
• 20%
• 10%

0% 10% 20% 30% 40% Index Total return Price index

5 Source: Datastream

Stocks: Worst of class since 2000

Total return since 2000

• 100%

0% 100% 200% 300% 400% 500% 600% 2000 2002 2004 2006 2008 2010 2012

• 100%

0% 100% 200% 300% 400% 500% 600% S&P 500 Treasuries Commodities Gold

6 Source: Datastream

Bonds vs Stocks: Same returns but lower volatility

Total return

• 40
• 20

20 40 60 80 1981 1986 1991 1996 2001 2006 2011 YoY %

• 40
• 20

20 40 60 80 YoY %

S&P/TSX DEX Overall Universe

Annualized return (%) 25 years 20 years 15 years 10 years 5 years Bonds (Dex Overall Universe) 8.4 7.4 6.3 6.0 6.3 S&PTSX 8.3 9.1 6.5 9.2 0.8 Volatilité (écart-type)* 25 years 20 years 15 years 10 years 5 years Bonds (Dex Overall Universe) 5.2 4.5 2.8 2.4 1.9 S&PTSX 17.5 18.3 19.7 17.7 19.6

* Monthly frequency (year over year)

Total return

• 40
• 20

20 40 60 80 1981 1986 1991 1996 2001 2006 2011 YoY %

• 40
• 20

20 40 60 80 YoY %

S&P/TSX DEX Overall Universe

Annualized return (%) 25 years 20 years 15 years 10 years 5 years Bonds (Dex Overall Universe) 8.4 7.4 6.3 6.0 6.3 S&PTSX 8.3 9.1 6.5 9.2 0.8 Volatilité (écart-type)* 25 years 20 years 15 years 10 years 5 years Bonds (Dex Overall Universe) 5.2 4.5 2.8 2.4 1.9 S&PTSX 17.5 18.3 19.7 17.7 19.6

* Monthly frequency (year over year)

7 Source: Datastream

Poor expected returns from historical low levels of yields

U.S. 10-year Treasury notes

• 6
• 4
• 2

2 4 6 8 10 12 14 16 1960 1970 1980 1990 2000 2010 %

• 6
• 4
• 2

2 4 6 8 10 12 14 16 % Real yield* Nominal yield

8 Source: Datastream

High volatility is not that unusual

Dow Jones Industrial Average (price index)

10 100 1 000 10 000 100 000 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Log scale 10 100 1 000 10 000 100 000 Log scale

10X 5X 20 years 10 years 18 years 12 years

Dow Jones Industrial Average (price index)

10 100 1 000 10 000 100 000 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Log scale 10 100 1 000 10 000 100 000 Log scale

10X 5X 20 years 10 years 18 years 12 years

Short-term outlook

10 Source: Datastream

Total returns: Cash was king in August… at 0%!

Asset classes August YTD* Cash (3-month T-bills ) 0.1% 0.7% Bonds (Dex Overall Universe)

• 0.6%
• 2.1%

Dex Overall Federal

• 0.4%
• 2.0%

Dex Overall Corporate

• 0.5%
• 0.5%

Dex BBB

• 0.7%
• 0.4%

0.0% 0.0% World equity (MSCI AC)

• 2.0%

9.9% S&P/TSX 1.5% 3.9% S&P/TSX Small cap 2.1%

• 1.0%

S&P500 (USD)

• 2.9%

16.2% Russell 2000 (USD)

• 3.3%

19.0% MSCI EAFE (USD)

• 1.3%

10.1% MSCI EM (USD)

• 1.7%
• 9.1%

0.0% Commodities (CRB index) 1.1%

• 2.3%

WTI oil (US$/barrel) 2.4% 16.3% Gold (US$/ounce) 6.7%

• 16.2%

Copper (US$/tonne) 3.0%

• 8.8%

0.0% Currencies (JPM US Dollar index) 1.0% 4.3% USD per EUR

• 0.7%

0.0% JPY per USD 0.3% 14.5% CAD per USD 2.5% 6.3%

2013/09/02

11

Stock market correction: A repeat of September 2012?

Source: Datastream

12 Source: web

#1 Risk – Tensions in the Middle-East

13

United States

25 50 75 100 125 150 2007 2008 2009 2010 2011 2012 2013 US$/barrel 600 850 1100 1350 1600 1850 Index Brent oil (left) S&P 500 (right)

Source: Datastream

Oil prices at 125$ = bad omen for US stocks

14

Dow Jones' monthly returns since 1928 1.07 0.03 0.51 1.42

• 0.24

0.47 1.47 0.81

• 1.36

0.20 0.84 1.46

• 2.00
• 1.50
• 1.00
• 0.50

0.00 0.50 1.00 1.50 2.00 January February March April May June July August September October November December %

• 2.00
• 1.50
• 1.00
• 0.50

0.00 0.50 1.00 1.50 2.00 %

Source: Datastream

#2 Risk – Summer seasonality : From best to worst

15

#3 Risk – Bond yields on the rise

Source: Datastream

United States 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 % 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 % 10-year Treasury notes

16 Source: Datastream

Inflation is low…

United States

• 3
• 2
• 1

1 2 3 4 5 6 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 YoY %

• 3
• 2
• 1

1 2 3 4 5 6 YoY % Total inflation Core inflation

17 Source: Datastream

… And there is no inflationary pressure in the pipeline

United States

• 25
• 20
• 15
• 10
• 5

5 10 15 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 YoY %

• 0.5

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 YoY %

Leading economic indicator (2.5-year lead, lhs) Core inflation (rhs)

18 Source: Datastream

Will the Fed calm market expectations?

United States 61 62 63 64 65 66 67 68 69 70 1980 1985 1990 1995 2000 2005 2010 2015 % 3 4 5 6 7 8 9 10 11 12 % Unemployment rate (right) Participation rate (left)

The Fed’s 6.5% unemployment rate trough… … Could have to be lowered to 6% to calm markets’ expectations Strong labor market Weak labor market

19 Source: Datastream

Scenarios and probabilities

Probability Implications Strong growth

• Reflation efforts from central banks bear fruits
• Important infrastructure spending in China
• Germany relaxes austerity requirements

=> Risk assets outperformance Expansion

• Weak global growth, but improvements in the second half of 2013
• European problems are contained
• The full impact of the US fiscal cliff is avoided

=> Stocks outperfom bonds, but tactical allocation important World recession

• Recession in Europe worse than expected
• Hard landing in China
• Premature end to QE in the USA causes massive outflows out of EM
• Currency devaluation

=> Cash is king!

15% 70% 15%

20 Source: Datastream

The US economy is improving

United States 10 20 30 40 50 60 70 80 1985 1990 1995 2000 2005 2010 Index 20 40 60 80 100 120 140 160 Index Consumer confidence (right) NAHB (left)

Long-term average

21 Source: Datastream

Manufacturing activity is rebounding

Manufacturing Indices 30 35 40 45 50 55 60 65 2009 2010 2011 2012 2013 Index 30 35 40 45 50 55 60 65 Index ISM United States PMI Eurozone PMI China PMI Germany

22 Source: Datastream

Pressure on interest rates should remain upward

United States

• 3
• 2
• 1

1 2 3 4 5 6 1985 1990 1995 2000 2005 2010 2015 % 10 20 30 40 50 60 70 80 90 Index Real Fed funds rate (left) NAHB Construction sentiment (Forwarded 2 years, right)

23 Source: Datastream

Monetray policy will remain highly accommodative

• 6
• 5
• 4
• 3
• 2
• 1

1 2 1995 2000 2005 2010 2015 % points 400 600 800 1000 1200 1400 1600 1800 2000 Index Spread from neutral rate* (left) S&P 500 (right)

Restrictive monetary policy Accomodative monetary policy * Potential real GDP growth + inflation expectations

24 Source: Datastream

The expansion of multiples should continue

Cours/Bénéfices (TTM)

5 10 15 20 25 30 1985 1990 1995 2000 2005 2010 Ratio 5 10 15 20 25 30 Ratio S&P500 S&P/TSX

25

United States

600 800 1000 1200 1400 1600 1800 1998 2000 2002 2004 2006 2008 2010 2012 2014 Index 100 200 300 400 500 600 700 Thousands Initial claims (Inversed scale, right) S&P 500 (left)

Source: Datastream

The economy is still a long way from overheating

26 Source: Datastream

Asset rotation underway

Cumulative net new flows in mutual funds

• 600
• 300

300 600 900 1 200 1 500 2007 2008 2009 2010 2011 2012 2013 US$B

• 600
• 300

300 600 900 1 200 1 500 US$B Total mutual funds Total fixed income Total equity

Are fundamentals turning against Canada?

28

TSX vs S&P 500

• 40
• 30
• 20
• 10

10 20 2009 2010 2011 2012 2013 % from peak

• 40
• 30
• 20
• 10

10 20 % from peak Local currencies USD terms

Source: Datastream

Will Canada continue to catch up?

29 Source: Datastream

Gold: Not for the long run

• 60
• 50
• 40
• 30
• 20
• 10

10 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 % YTD

• 60
• 50
• 40
• 30
• 20
• 10

10 % YTD Gold price Gold miners (TSX)

30 Source: Datastream

TSX: Strong resistance at 12,900 points

S&P/TSX 11800 12000 12200 12400 12600 12800 13000 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Indice 11800 12000 12200 12400 12600 12800 13000 Indice

31 Source: Datastream

Emerging markets: Fundamentals are worsening

• 100%
• 80%
• 60%
• 40%
• 20%

0% 20% 2000 2002 2004 2006 2008 2010 2012 Jan 2010 = 0%

• 100%
• 80%
• 60%
• 40%
• 20%

0% 20% Jan 2010 = 0% BRIC ($US) vs SP500 EM ($US) vs SP500

32 Source: Datastream

End of the run for commodity prices

Commodity prices 100 200 300 400 500 600 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 $US 100 200 300 400 500 600 $US

3x 2x

33 Source: Datastream

A lot of upside for the greenback

Trade-weigthed index 60 70 80 90 100 110 120 130 140 150 1973 1978 1983 1988 1993 1998 2003 2008 2013 USD 60 70 80 90 100 110 120 130 140 150 USD

34 Source: Datastream

Exchange-rate parity unsustainable

Canadian exchange rate (monthly average) 0.60 0.70 0.80 0.90 1.00 1.10 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 US$/C$ 0.60 0.70 0.80 0.90 1.00 1.10 US$/C$

35 Source: Datastream

The beginning of a new cycle

Ratio TSX vs S&P500

• 50

50 100 150 200 250 300 350 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 % since 2000

• 50

50 100 150 200 250 300 350 % since 2000

Local cuurency US$

36

Asset allocation strategy

Source: CIC

Cash Cash Bonds Bonds (Duration) (Duration) Federal Federal Investment grade Investment grade High yield (USD) High yield (USD) Non-traditionnal income Non-traditionnal income World equities World equities S&P/TSX S&P/TSX S&P 500 (USD) S&P 500 (USD) Growth vs Value Growth vs Value Large cap. vs Small cap. Large cap. vs Small cap. Defensives vs Cyclicals Defensives vs Cyclicals MSCI EAFE (USD) MSCI EAFE (USD) MSCI EM (USD) MSCI EM (USD) Alternative investments Alternative investments Commodities Commodities Energy Energy Base metals Base metals Gold Gold Hedge funds (USD) Hedge funds (USD) REITS REITS Equal Over Max Over Max Min Under 3-month horizon 12 to 18-month horizon Asset classes Weight Asset classes Weight Min Under Equal

National Bank Financial is an indirect wholly-owned subsidiary of National Bank of Canada which is a public company listed on the Toronto Stock Exchange (NA: TSX). The particulars contained herein were obtained from sources we believe to be reliable, but are not guaranteed by us and may be incomplete. The opinions expressed are based upon our analysis and interpretation of these particulars and are not to be construed as a solicitation or offer to buy or sell the securities mentioned herein. National Bank Financial may act as financial advisor, fiscal agent or underwriter for certain companies mentioned herein and may receive remuneration for its services. National Bank Financial and/or its officers, directors, representatives or associates may have a position in the securities mentioned herein and may make purchases and/or sales of these securities from time to time on the open market or otherwise.

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