Schroders PLC · LSE:SDR
Schroders — Teleconference March 2007
17 slides from Schroders's conference presentation, March 2007
Slide 1: Submerged by sub-prime? Outlook for the economy and risk assets
Teleconference March 2007 Submerged by sub-prime? Outlook for the economy and risk assets Keith Wade Chief Economist For professional advisers and intermediate customers only. This material is not suitable for private customers. 29309
Slide 2: What caused the correction? Some Suspects
What caused the correction? Some Suspects 29309
Slide 3: An extended period of stability
An extended period of stability Occurrence of Market Corrections of more than 2% in one day No. of Observations 25 20 15 10 5 0 70 73 76 79 82 85 88 91 94 97 00 03 06 Period (Days) 2% - 3% drop in 1 day >3% drop in 1 day Data: S&P500 Price Index Source: Thomson Datastream, Schroders 29309
Slide 4: What has been driving risk appetite? Liquidity
What has been driving risk appetite? Liquidity Excess savings in Asia - FX reserves soar USD Billion y/y% 1100 55 1000 50 900 45 800 40 700 35 600 30 500 25 400 20 300 15 200 10 100 5 0 0 97 99 01 03 05 07 China's FX reserves 3 month moving average, rhs Source: Thomson Datastream 29309
Slide 5: More liquidity
More liquidity Petrodollars Oil exporters revenue USD Billion 1800 1600 $1500bn 1400 1200 $1000bn – Foreign assets 1000 and goods & services 800 600 $500bn 400 200 0 2002 2006 Source: US Federal Reserve 29309
Slide 6: Sources of liquidity: What can you buy with $1,000 bn?
Sources of liquidity What can you buy with $1,000 bn? 42,701 tonnes of gold, or 4 million Ferrari’s, or 2.5 million UK houses, or - 8% of market value of S&P 500, or - 27% of market value of FTSE All Share, or - ….Exxon, Shell and BP 29309
Slide 7: Drivers of the risk trade: Macro stability
Drivers of the risk trade Macro stability : The great moderation Standard deviation (10 year period) 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 61 64 67 70 73 76 79 82 85 88 91 94 97 00 03 06 US Real GDP, y/y% US Headline CPI, y/y% Source: Thomson Datastream to 15/11/2006 29309
Slide 8: Threats to risk appetite
Threats to risk appetite - Change in savings behaviour in Asia - An increase in inflation - An increase in macro volatility = Higher real interest rates 29309
Slide 9: Macro worries: Sub-prime delinquencies and bank lending conditions
Macro worries Sub-prime delinquencies and bank lending conditions % % 16 20 15 14 10 5 12 0 -5 10 -10 8 -15 98 99 00 01 02 03 04 05 06 07 Sub-prime delinquencies Net tightening of mortgage lending conditions from Federal Reserve, rhs Source: Federal Reserve, Mortgage Bankers' Association to 15/02/20
Slide 10: Other indicators are not saying recession
Other indicators are not saying recession Credit conditions are not tight for corporates Index bps 70 140 60 120 50 Lending conditions tightening 40 100 30 80 20 10 60 0 40 -10 20 -20 Lending conditions loosening -30 0 Jan 90 May 93 Sep 96 Dec 99 Apr 03 Aug 06 US C&I loan survey - large & medium fir
Slide 11: Go your own way? Europe and Asia de-coupling from US
Go your own way? Europe and Asia de-coupling from US Surveys diverge Normalised 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5 -3.0 97 98 99 00 01 02 03 04 05 06 07 US ISM Purchasing Managers Index Belgium BNB Business survey Japan's Shoko Chukin's small business survey Source: Thomson Datastream
Slide 12: The changing balance of economic power
The changing balance of economic power The rise and rise of Asia Shares of global growth % share 40 35 30 25 20 15 10 5 0 1960s 1970s 1980s 1990s Last 5 years Eurozone Asia Pacific ex Japan US Note: Data calculated on the basis of nominal GDP weights Source: HSBC, World Bank, World Development Indic
Slide 13: Hard v. soft landing critical for equity returns
Hard v. soft landing critical for equity returns US equity market post peak in Fed rate (1957-today) % equity return (vs. cash) vs. peak 20 10 Return as at 6th March 07 0 -10 -20 Peak 3 6 8 12 Months from peak in Fed rate Assuming June 06 is the Peak Hard Landing Avg. (7 cycles) Soft Landing Avg. (4
Slide 14: Valuation: Markets discounting slower earnings growth
Valuation Markets discounting slower earnings growth Global EPS vs. trend (MSCI World) Global PE based on trend EPS Index (March 1987 =100) PE 275 35 250 Trend growth of real EPS: 3.4% pa. 225 30 44% 200 175 25 150 125 20 100 15 75 50 10 87 89 91 93 95 97 99 01 03 05 07 09 87 89 91 93 95 97 99 01 03
Slide 15: Debt versus equity
Debt versus equity Gap between cost of capital and return % 20 18 16 14 12 10 8 6 4 2 0 79 81 84 86 89 91 94 96 99 01 04 06 MSCI W orld earning yield (inverse of the price-earning ratio) G7 short-term interest rate (GDP-weighted) Source: Thomson Datastream to 31/12/06 29309
Slide 16: Submerged by sub-prime? Summary
Submerged by sub-prime? Summary - Recent correction a market, not a macro event - Risk appetite underpinned by excess savings/ stability - Sub-prime concerns increase downside risk, but broader indicators still say soft landing - Evidence of decoupling from US in Europe and Asia - Soft landing/ Liqu
Slide 17: Important Information
Important Information For professional advisers and intermediate customers only. This material is not suitable for private customers. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investo