Ninety One Plc · LSE:N91
Ninety One — Investor Presentation (May 2022)
49 slides from Ninety One's investor presentation, May 2022
Slide 1: Navigating the Markets in an Upside-Down World
Navigating the Markets in an Upside-Down World 10 triangulation points to help identify where you are… …and to guide you to where you want to go
Slide 2: Target audience
Target audience Audience This document is being provided for informational purposes for discussion with institutional investors and financial advisors only. Circulation must be restricted accordingly. Nothing herein should be construed as an offer to enter into any contract, investment advice, a rec
Slide 3: Why 'upside down'?
Why ‘upside down’? Because many of the fundamental principles of modern finance have been abrogated… …and they were corrupted even before COVID… …and Russia’s invasion of Ukraine Confidential | Ninety One 3
Slide 4: Real yield for the Dollar World's risk-free rate is at an unreal level
Real yield for the Dollar World’s risk-free rate is at an unreal level 10-year US Treasury real yield 10 5 % Average = 3.04 Historically, the risk-free rate has nearly always been positive real. 0 Paul Volcker infamously Modern finance was built raises the Fed Funds rate Using CPI, the upon this sim
Slide 5: To use the TIPS implied inflation or current CPI?
To use the TIPS implied inflation or current CPI? The TIPS market is comparatively small and thinly traded; might the Fed be manipulating it? The TIPS market has a capitalization of $1.5 trillion versus the US Treasury market of $22.8 trillion The Federal Reserve own $9 trillion worth of Treasuries,
Slide 6: Another reason to be wary of the usefulness of TIPS
Another reason to be wary of the usefulness of TIPS Inflation-linked bonds are used by oil traders as a way to hedge their positions When the price level surges, investors flood into inflation protected bonds 140 .46 130 120 110 .44 100 90 80 .42 70 60 .40 50 40 .38 .36 30 2002 2004 2006 2008 2010 2
Slide 7: The Fed is in a race against time
The Fed is in a race against time… Can they tame inflation before recession takes hold? Break-even inflation rate for five-year TIPS Fed rate: Market implied vs. forecast 4.0% Swaps market starts to price toward a 75bp rate hike at June Fed meeting Fed Funds Effective Rate Market implied path Fed pr
Slide 8: The Crux of the Challenge facing the Federal Reserve
The Crux of the Challenge facing the Federal Reserve – What if the Fed is obliged to stop raising the Fed Funds rate when a recession looms large? – (Remember 2024 is a Presidential Election year) – What if, at that point in time, CPI inflation is not lower than this “Recession-is-here” Terminal Rat
Slide 9: The least transitory part of the current inflation: wages
The least transitory part of the current inflation: wages Even if the rest of the inflation mix is “transitory”, wage growth will stay ‘high’ until it is real 9% 7% 6.7% 5% 4.5% 3% 1% 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Employment cost index, YoY (best measure) Average hourly earn
Slide 10: Powell cannot do a Volcker and raise rates to nearly 20% in 2022
Powell cannot do a Volcker and raise rates to nearly 20% in 2022 1975: US debt to GDP was under 35%; today it is over 130% America’s Finances If debt servicing costs were 20%, that would consume 100% of 2022’s $5 trillion US$6 trillion Federal Budget. Dot-com Surplus This time, the terminal rate – t
Slide 11: US, Japanese and European government bonds are 99% underwater
US, Japanese and European government bonds are 99% underwater Percentage of negative yielding Government Debt Stock for US, Japan and Europe Japan 100% Europe (ELSI) United States (JUSTINE) 80% 60% Ninety One estimates 40% approximately 90% of the global bond market is ‘underwater’ in real terms. 20
Slide 12: The Spectre at the Feast: Financial Repression
The Spectre at the Feast: Financial Repression Mountains of debt meet aging demographics ECB Balance Sheet 10,000 9,000 8,000 7,000 8 6,000 5,000 6 4,000 3,000 4 2,000 1,000 2 0 Jul 2021 Oct 2021 Jan 2021 Apr 2021 2008 2010 2013 2016 2019 2020 2007 2011 2012 2018 2014 2015 2017 2021 2009 German CPI
Slide 13: Meanwhile the equity risk premium has fallen to GFC lows
Meanwhile the equity risk premium has fallen to GFC lows ‘Raw’ Equity Risk Premium currently at 170 bps 6.0% ‘Raw’ ERP = S&P 500 earnings yield less 5.0% 10-year Treasury yield 4.0% Spread 3.0% 2.0% 1.0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Calculating today’s real weighted av
Slide 14: The RFR underpins all key components of WACC
The RFR underpins all key components of WACC …and WACC is the gimble that balances the gyroscope of capitalism At post-GFC lows; the Equity Risk Premium ‘raw’ ERP is derived by netting off the RFR X from the market’s Cost of Beta = Cost of Equity earnings yield Equity Weighted + Average Risk free ra
Slide 15: Why is this so extraordinary?
Why is this so extraordinary? Could the foundation of financial risk have been poisoned? What part did the Fed play in doing it?? “ ‘Risk free’ is the most important concept in financial markets because it's the baseline for setting the value of pretty much everything… (The risk-free rate) determine
Slide 16: In the beginning, there was the real interest rate
In the beginning, there was the real interest rate Government bonds are the linchpin that connects the macro to the macro Confidential | Ninety One 16
Slide 17: What this means for equities?
What this means for equities? They are still investible, of course… but untethered from the anchor of fundamental valuation Confidential | Ninety One 17
Slide 18: Risk looked 'normal' back in 2007
Risk looked ‘normal’ back in 2007 The West entered the Global Financial Crisis with a POSITIVE real risk-free rate In 2007, the RFR was a healthy Exacerbated by COVID and now Ukraine, today’s real risk-free rate is +2.7% -5.8% whilst real WACCs were For high quality so low risk companies, real WACCs
Slide 19: To compound matters, geopolitical temperatures are visibly rising
“Measure what can be measured and make To compound matters, geopolitical measurable what cannot be measured.” temperatures are visibly rising… GALILEO … but geopolitics is hard to measure in navigating markets… so welcome to GEOECONOMICS For investors, geopolitical commentary often falls into the ca
Slide 20: Extending an idea from geopolitics
Extending an idea from geopolitics Geopolitics has ‘spheres of influence’, geoeconomics ‘atmospheres of capital’ Graham Allison disagrees with US politicians that spheres of influence had disappeared: U.S. policymakers had ceased to recognize spheres of influence – the ability of other powers to dem
Slide 21: Q: What is an atmosphere of capital?
Q: What is an atmosphere of capital? A zone with a particular ‘atmospheric pressure’ in which capital is contained Whilst a sphere of influence is more metaphysical and mostly delineated by geography, an atmosphere of capital is much less confined… unless it is confined by capital controls. What is
Slide 22: Real RFRs in the two main atmospheres for capital compared
Real RFRs in the two main atmospheres for capital compared Question: In which atmosphere is risk more ‘real-istically’ priced? -5.4% +1.9% +0.7% Confidential | Ninety One 22
Slide 23: The dilemma facing capital in the US Dollar atmosphere
The dilemma facing capital in the US Dollar atmosphere All dressed up but where to go? Capital inside the US Dollar atmosphere is obliged to deal with a bond (and cash) market that has a negative real yield… …and an equity market valued off a negative real weighted average cost of capital -5.4% This
Slide 24: Geopolitical tensions are erecting 'walled gardens' for capital
Geopolitical tensions are erecting ‘walled gardens’ for capital Chinese real risk free rate +0.7% +1.9% Confidential | Ninety One 24
Slide 25: The Chinese are not happy but is their response too little too late?
The Chinese are not happy but is their response too little too late? The proposals come amid signs China is stepping up efforts to ensure Chinese companies remain listed in New York April 2, 2022 19:42 JST Confidential | Ninety One 25
Slide 26: How to navigate in a Jabberwocky World
How to navigate in a Jabberwocky World
Slide 27: New compass points for the 2020s
New compass points for the 2020s Confidential | Ninety One 27
Slide 28: What to keep an eye on if you are a truly GLOBAL investor
What to keep an eye on if you are a truly GLOBAL investor When you need to know where you are, it may help to look at the following: Market measures that might be useful to add to your dashboard: Everyday 1. The cross-rate between the US Dollar Index (DXY) and the Chinese Renminbi measures 2. Real y
Slide 29: Shorter term compass readings
Shorter term compass readings
Slide 30: Compass Point 1:
Compass Point 1: Looking at the US Dollar Index (DXY) and the Chinese Renminbi since 2010 The Renminbi versus the US Dollar The Renminbi versus the DXY 7.4 120 7.2 100 7.0 6.8 80 6.6 6.4 60 6.2 40 6.0 5.8 20 5.6 5.4 0 Dec 18 Mar 20 Feb 13 Nov 11 Jul 13 Dec 13 Nov 16 Jan 11 Jun 11 Jun 21 Apr 12 Sep 1
Slide 31: Compass Point 2:
Compass Point 2: Real yields on US government bonds vs the same for Chinese government bonds US real 10 year yield using CPI China real 10 year yield using CPI 3.00 5.00 2.00 4.00 1.00 3.00 - (1.00) 2.00 (2.00) 1.00 (3.00) - (4.00) (5.00) (1.00) (6.00) (2.00) (7.00) (3.00) Mar 20 Mar 22 Sep 13 Sep 1
Slide 32: Compass Point 3:
Compass Point 3: The performance of key US versus Chinese equity indices Since 2010 Since 2019 800 350 700 300 600 250 500 200 400 150 300 100 200 100 50 0 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2018 2019 2020 2021 S&P 500 Shanghai Composite ChiNext Nasdaq S&P 500 Shanghai Com
Slide 33: Compass Point 4:
Compass Point 4: The price of commodities using the CRB Index as a proxy CRB Index China’s share of global grain stocks 700 80 600 Maize 60 Rice 500 Wheat Percent; crop year 400 40 300 Soybeans 200 20 100 0 0 2010 2018 2022 2020 2011 2013 2014 2016 2017 2019 2021 2012 2015 2020 2022 2013 2016 2019 2
Slide 34: Compass Point 4 continued:
Compass Point 4 continued: Post 2020, the inverse relationship between the US Dollar and commodities breaks down S&P Goldmans Sachs commodity index and trade-weighted dollar (daily) 1000 140 900 JP Morgan Nominal 130 800 Broad Effective 700 Exchange Rate 120 600 110 500 400 100 S&P GSCI (nearby 300
Slide 35: Longer term compass readings
Longer term compass readings
Slide 36: Compass Point 5:
Compass Point 5: US CPI inflation versus Chinese CPI inflation US versus Chinese CPI Inflation 9.0 8.0 The Larry Summers thesis – the US overfilled its bath with fiscal 7.0 stimulus during the COVID 6.0 pandemic – may help explain why 5.0 US inflation has grown so much more than China’s 4.0 3.0 2.0
Slide 37: Compass Point 6:
Compass Point 6: The nominal GDP of the US versus the nominal GDP of China US and Chinese economies 2010-2035 Gross domestic product in $US trillions (constant prices) China By most estimates, 35 China’s GDP will overtake the US’s in 30 the next presidential US cycle, 2025-2029 25 20 15 10 5 0 2010
Slide 38: Compass Point 7:
Compass Point 7: The share of US Dollars used as central bank reserves The US dollar share of global reserve currencies % of allocated reserves, quarterly 66% In the past year, the share of the US Dollar in global foreign exchange reserves has 64% fallen below 60% for the first time since the 62% ea
Slide 39: Compass Point 8:
Compass Point 8: The growth of internationalization of the RMB 3,000 Starting from a very low base, there has been an 2,700 uptick in Standard Chartered’s Renminbi Globalization Index in the past five years. 2,400 If, as predicted, China becomes able to settle its oil purchases from the likes of Sau
Slide 40: Compass Point 9:
Compass Point 9: The health of the US and Chinese property markets: the current US position Case-Shiller House Price Index 30 year fixed mortgage rate 350 20% 1. Mortgage rate tops 5% for the first time in a 18% decade 300 2. NAHB Housing Market Index falls to a 7 month 16% low in April SPDR Homebui
Slide 41: Compass Point 9:
Compass Point 9: The health of the US and Chinese property markets: the current Chinese situation China property sales Growth rate (% y/y 3mma) Year-ended growth, floor area 120% 80 Overall construction index 100% Floor space started 70 Floor space sold 80% 60 50 605 40 40% 30 Total 20% 20 0% 10 0 -
Slide 42: Compass Point 10:
Compass Point 10: The price of possible stepping-stones between the two atmospheres: Gold, the Swiss Franc and the Singapore Dollar US Dollar to Swiss Franc Gold price in US Dollars US Dollars to Singapore Dollar 1.4 2,500 1.6 1.2 1.4 2,000 1.2 1.0 1,500 1 0.8 0.8 0.6 1,000 0.6 0.4 0.4 500 0.2 0.2 0
Slide 43: Triangulating where in the world we are
Triangulating where in the world we are It is early days yet… …but ‘new orientations’ are emerging… Ninety One is here to help you navigate them…
Slide 44: Conclusions
Conclusions Ninety One: Uniquely placed to straddle multiple investment atmospheres 1. One can invest in multiple atmospheres, to cross over from one to another…and of course to return! 2. Extra risk might be entailed so extra reward for that cross-over risk might be sought 3. A clear distinction ex
Slide 45: Following the light of the sun, we left the Old World
“Following the light of the sun, we left the Old World.” Christopher Columbus
Slide 46: Confidential | Ninety One 46
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Slide 47: Disclaimer
Disclaimer All information and opinions provided are of a general nature and are not intended to address the circumstances of any particular individual or entity. We are not acting and do not purport to act in any way as an adviser or in a fiduciary capacity. No one should act upon such information
Slide 48: Important information
Important information This communication is for institutional investors and financial advisors only. It is not to be distributed to the Investment Team public or within a country where such distribution would be contrary to applicable law or regulations. There is no assurance that the persons refere
Slide 49: Ninety One
Ninety One Australia Hong Kong Singapore United Kingdom Level 28 Suite 3 Suites 1201 – 1206, 12/F, 138 Market Street 55 Gresham Street Chifley Tower One Pacific Place CapitaGreen #27-02 London, EC2V 7EL 2 Chifley Square 88 Queensway, Admiralty Singapore 048946 Telephone: +44 (0)20 3938 1900 Sydney,