Marko Papic Chief Strategist Geopolitical Strategy The BCA Dialogue Webcast February 19, 2013 Ian MacFarlane Chief Strategist Global Asset Allocation.

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Presentation transcript:

Marko Papic Chief Strategist Geopolitical Strategy The BCA Dialogue Webcast February 19, 2013 Ian MacFarlane Chief Strategist Global Asset Allocation

GEOPOLITICS AS A POSITIVE SURPRISE 2 © BCA Research U.S. EQUITY RISK PREMIUM* (LS) POLICY UNCERTAINTY INDEX** (RS) Bp * 12-MONTH FORWARD EARNING YIELD (SOURCE: THOMSON REUTERS / IBES) MINUS 10-YEAR GOVERNMENT BOND YIELD. ** SHOWN SMOOTHED. SOURCE: BAKER, BLOOM, AND DAVIS (2012).

U.S.: CEO BUSINESS CONFIDENCE* (LS) POLICY UNCERTAINTY INDEX** (Inverted, RS) SOURCE: THE CONFERENCE BOARD. ** SHOWN SMOOTHED. SOURCE: BAKER, BLOOM, AND DAVIS (2012). NOTE: 218 VOTES ARE REQUIRED TO PASS LEGISLATION IN THE U.S. HOUSE OF REPRESENTATIVES SANDY DISASTER RELIEF DEBT CEILING AGREEMENT FISCAL CLIFF AGREEMENT The magic 218 votes DEMOCRATS REPUBLICANS © BCA Research 2013 THE U.S.: CHANGE YOU CAN BELIEVE IN?

4 © BCA Research PERCENT OF RESPONDENTS IN FAVOR OF THE EURO: GREECE SPAIN FRANCE ITALY % % SOURCE: EU COMMISSION. SOURCE: WORLD BANK, BCA CALCULATIONS. * THE BCA GOVERNANCE INDICATOR INCLUDES THE FOLLOWING WORLD BANK MEASURES: GOVERNANCE EFFECTIVENESS, VOICE AND ACCOUNTABILITY, POLITICAL STABILITY, RULE OF LAW, AND CONTROL OF CORRUPTION. THE ORIGINAL MEASURES ARE DERIVED FROM IN-COUNTRY SURVEYS CONDUCTED BY THE WORLD BANK AND RANGE FROM -2.5 (WEAKEST) TO 2.5 (STRONGEST). 0 % PERCENT CHANGE IN BCA GOVERNANCE INDICATOR* BETWEEN 2007 AND 2011 SPAIN PORTUGAL FRANCE GERMANY ITALY IRELAND GREECE © BCA Research 2013 WEIMAR EUROPE? DON’T BET ON IT

POPULATION AGED 15 TO 29 YEARS AS A PERCENT OF TOTAL POPULATION: FRANCE ITALY SPAIN U.S. U.K. % % SOURCE: U.N. POPULATION DIVISION. © BCA Research 2013 TODAY’S YOUTH ARE NOT BABY BOOMERS

UNEMPLOYMENT RATE: GERMANY* ( ) SPAIN ITALY FRANCE % SOURCE: MITCHELL, B.R. "INTERNATIONAL HISTORICAL STATISTICS: EUROPE " INFLATION RATE: GERMANY* ( ) SPAIN ITALY FRANCE % % © BCA Research 2013 HOW BAD IS IT IN EUROPE?

REAL DISPOSABLE INCOME: U.S. GERMANY PORTUGAL ITALY SPAIN FRANCE SERIES SHOWN REBASED TO JAN = 100. SOURCE: OECD. © BCA Research 2013 HOW BAD IS IT IN EUROPE?

8 1.OMT initiation before German elections 2.Oil Price Risk To The Upside 3.Is There Real Growth? © BCA Research CREDIT CYCLE LEADING INDICATOR* (ADVANCED, LS) COMMODITY PRICES** (RS) WORLD EXPORTS*** (RS) 6-Mth % Chg * ADVANCED BY 6 MONTHS. ** COMMODITY SPOT PRICE INDEX (SEASONALLY ADJUSTED). SOURCE: CRB. *** SOURCE: IMF. RISKS TO THE VIEW

U.S. REAL S&P 500 TOTAL RETURN* JAN DEC 1929 SEPT AUG 1949** NOV OCT 1988** AUG TODAY * DEFLATED BY CPI. ALL SERIES REBASED TO STARTING POINT = 100. ** ADVANCED IN ORDER TO MATCH UP STARTING POINTS. © BCA Research 2013 APPROACHING A TURN IN THE CYCLE?

10 © BCA Research MEDIAN S&P 500 P/E VS REAL LONG-TERM BOND YIELDS ( ) RBY < < RBY < < RBY < < RBY < < RBY < 22.1 < RBY < < RBY < 4.0RBY > 4.1 REAL LONG-TERM BOND YIELDS RANGE (%) MEDIAN S&P 500 P/E P/E IS POSITIVELY CORRELATED WITH REAL BOND YIELDS

U.S. REAL* 10-YEAR GOVERNMENT BOND YIELDS % % *DEFLATED BY CONSUMER PRICE INFLATION; SOURCE: THOMSON REUTERS, BCA CALCULATIONS. NEGATIVE REAL YIELDS REMINISCENT OF THE 1940S AND 1970s © BCA Research 2013

12 © BCA Research JUNK BOND YIELD TO WORST (Inverted, LS)* S&P 500 TOTAL RETURN (RS) BPs YIELD TO WORST*: CORPORATE BONDS (LS) JUNK BONDS (RS) % % * SOURCE: BARCLAYS. FOLLOW CORPORATE AND JUNK YIELDS CLOSELY