Beruflich Dokumente
Kultur Dokumente
Of Two Halves
A Roadmap For The Global Recession
Contents
INTRODUCTION
Page 1
GLOBAL EQUITIES
Finding opportunities in a recession
Page 2
FIXED INCOME
Focusing on quality
Page 4
DISTRESSED ASSETS
Catalysing credit normalisation
Page 5
FOREIGN EXCHANGE
Weak confidence spurs dollar and a yen for safety
Page 6
Introduction
Amid unprecedented stress in the core of the global financial system, the world is now in the midst of a
global recession. Major industrial economies are expected to contract well into 2009 as adjustments occur
to raise the level of savings in these economies. The depth, scope and pace of this adjustment and the
recovery of the financial sector are likely to remain important sources of uncertainty for the next few years.
So even as the pace of economic contraction is expected to ease moving into the second half of 2009,
growth is likely to remain below trend even after an expected recovery in 2010.
Mitigating this cautious outlook, however, is the fact that many asset prices already seem to anticipate very
negative outcomes. Indeed, the performance of government bonds, equities and credit instruments in 2008
reflects very adverse expectations for fundamentals in 2009.
As a result, 2009 is expected to be a year of two halves. In the near-term, investment returns are likely
to be driven by ongoing trends of economic contraction, policy easing and de-leveraging, leaving equity
and credit products volatile. But at some point in the year, the extreme valuations seen currently in equity
and credit markets should provide attractive opportunities, as downside risks to economic growth dissipate
and de-leveraging pressures ease.
Against this backdrop, we highlight four investment themes which investors can leverage to navigate the
near-term economic contraction pressures and exploit emerging opportunities as these pressures ease in
the coming year:
Infrastructure
Distressed Assets
Yet even as opportunities surface, it is crucial to remember that the key to capital preservation and growth
for investors remains diversification and a proper evaluation of ones risk tolerance.
Chart 1. World GDP growth (PPP)
8%
8%
Actual
Trend
6
1.25 St.Dev.
0
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
01
GLOBAL EQUITIES
Table 1. Value vs growth stocks in recessions that lasted more than six months
Year
Growth
Value
1970
1974
1980
1981
1982
1990
2001
Average Returns
Standard Deviation
-5.8%
-32.4%
38.5%
7.5%
19.0%
0.0%
-17.6%
-0.8%
23.4%
9.9%
-21.7%
26.9%
0.1%
23.0%
10.5%
-6.0%
3.1%
17.8%
Undoubtedly, value investing poses its own challenges as it requires a bottom-up approach
in identifying stocks that are not only attractive in valuation, but also possess appealing
fundamentals such as high returns on capital and a strong balance sheet to sustain even a
prolonged economic downturn. Value investing also requires patience, as business momentum,
either through economic recovery or operating and market share gains, needs to first improve
before investors can reap the benefits of this strategy.
02
Global infrastructure
Just as the global recession is creating value opportunities, the slowdown is also the beginning
of a long-term rebalancing of the consumer-heavy US/world economy. Highlighting this shift
most starkly has been the announcement and anticipation of fiscal stimulus programmes from
the worlds largest economies.
% of local GDP
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
Australia
China
Announced Stimulus
Japan
Korea
UK
Projected Stimulus
France
Germany
EU
US
4%
3%
2%
1960
1970
1980
1990
2000
2010
03
FIXED INCOME
Focusing on quality
Down-beaten high-grade corporates offer opportunities with attractive valuations, without
the potential risks of heightened default rates that are expected to plague the high yield
market. As for treasuries and other government debt, valuations have reached levels which
appear unattractive relative to other high quality alternatives.
1200
STW
1100
14%
12%
1000
STW (bp)
8%
700
6%
600
500
Default Rates
10%
900
800
4%
400
2%
300
0%
200
Jan-85 Jan-88
Jan-91
Jan-94
Jan-97
Jan-00 Jan-03
Jan-06
DISTRESSED ASSETS
Yoy return
20%
10%
0%
-10%
-20%
-30%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
In addition, high equity market volatility and wide credit spreads have historically been
favourable for distressed asset strategies. With volatility elevated for much of the past quarter
and Moodys Baa bond spreads near six standard deviation readings, the current global
financial market backdrop mimics previous periods in which distressed asset investors
performed well.
With default rates now increasing (a key catalyst for many distressed asset investors) and
some US banks having sufficient capital to take further write-downs and sell distressed assets
from their balance sheets, Citi analysts expect distressed asset investors to be more active
in 2009. Just like in the US recession in the early 1990s, the Asian crisis-induced recession
in 1997-98, and the global recession in 2001-02, Citi analysts believe the current downturn
may translate into attractive prospects for the distressed asset space over the next two to
three years.
05
FOREIGN EXCHANGE
90
85
80
75
70
65
Jan-08
Jul-08
06
Jul-08
Oct-08
2009: A Tale
2009:
Of Two
A Tale
Halves
Of Two05
Halves
07
Global
Inflation
2008F
2009F
2010F
2008F
2009F
2010F
2.6%
0.5%
2.6%
5.2%
2.5%
2.6%
US
1.3%
-1.5%
1.7%
4.0%
0.2%
0.7%
Europe
1.0%
-1.4%
0.5%
3.3%
1.2%
1.3%
-0.2%
Japan
0.2%
-1.2%
1.1%
1.5%
-0.2%
Latin America
4.5%
2.2%
2.8%
8.9%
8.8%
8.7%
Emerging Europe
5.0%
2.4%
4.7%
11.2%
8.5%
5.9%
5.5%
5.3%
2.6%
4.6%
12.2%
6.9%
Asia
6.9%
5.6%
6.6%
7.0%
2.7%
3.5%
China
9.3%
8.2%
8.5%
6.1%
1.4%
3.5%
Hong Kong
2.5%
0.3%
2.3%
4.5%
2.7%
2.2%
India
6.8%
5.5%
6.6%
10.5%
5.0%
4.5%
Indonesia
6.0%
3.8%
5.0%
10.2%
6.0%
5.0%
Malaysia
5.2%
3.1%
4.9%
5.7%
3.6%
2.4%
Philippines
4.3%
3.0%
4.6%
9.5%
5.3%
3.9%
Singapore
2.2%
-1.2%
3.8%
6.6%
1.2%
2.1%
South Korea
4.2%
2.0%
3.8%
4.7%
3.0%
2.5%
Taiwan
2.1%
1.5%
3.0%
3.6%
1.0%
1.2%
Thailand
4.5%
1.0%
3.1%
5.6%
1.1%
2.5%
2Q09
3Q09
4Q09
Europe
1.20
1.17
1.15
1.15
Japan
93
92
90
88
1.43
1.39
1.37
1.37
0.70
UK
Australia
0.65
0.68
0.70
China
6.90
6.85
6.75
6.65
Hong Kong
7.770
7.775
7.775
7.780
India
48.50
48.30
48.25
48.00
Indonesia
10500
9500
9300
9000
3.78
3.80
3.61
3.48
Philippines
Malaysia
52.00
51.50
51.00
49.50
Singapore
1.60
1.65
1.55
1.48
1325
1300
1300
1275
Taiwan
South Korea
34.00
34.30
33.80
33.30
Thailand
36.00
36.25
35.75
35.50
1Q09
2Q09
3Q09
4Q09
US
0.25%
0.00%
0.00%
0.00%
0.00%
Europe
2.50%
1.50%
1.00%
1.00%
1.00%
Japan
0.10%
0.10%
0.10%
0.10%
0.10%
Australia
4.25%
3.50%
3.50%
3.50%
3.50%
UK
2.00%
1.50%
1.50%
1.50%
1.50%
Source: Forecasts from Citi Investment Research, as of 3 December 2008. Current rates as of 19 December 2008.
08
Disclaimer
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