Markets Summit 2016 - Resources Kit

Does it feel like we've been here before? It was expected (again) that the Fed would raise rates at its last meeting. Only, this time, they did! The situation in the Middle East is (again) alarmingly tense. Currency wars are (again) rife. Bond market liquidity is (still) tight while high yield bonds are back at 2009 price levels. And many believe some asset markets are (again) in bubble territory. Yet, for commodities, it's like the 21st century never happened. The more things change, the more they seem to stay the same! Does that mean that, going forward, markets and asset classes will behave as in the past? Is it different this time? Or is it deja-vu (all over again)?

Quicklinks

This online Resources Kit is a key feature of the Markets Summit 2016 program (in fact, all our programs feature an online Resources Kit). It enables all Members (whether or not they were part of the "studio audience" at the onstage program) to "attend" Markets Summit 2016. It's an invaluable set of continuing education material.

This Resources Kit includes all the presentations and papers for each session.

Session titles
Faculty of speakers
Session resources

An overview list of all the sessions from the jam-packed program;
24 leading investment professionals;
Presentations (sync'd video/audio with slides), papers, podcasts, slides and Faculty bios.

Session titles

The jam-packed one-day program delivered 20+ high conviction ideas about the outlook for markets - and the implications for portfolios, of course - around the Markets Summit theme - with particular emphasis on "Is it deja vu (all over again)?"

Faculty of speakers

Our 2016 program featured a stellar lineup of international and local experts offering their best high conviction idea/thesis around the Markets Summit theme - is it deja vu (all over again)? - and the resulting portfolio construction decision(s) that must be made.

Session resources

Critical Issues Forum
1

Is it deja-vu (all over again)?
Does it feel like we've been here before? It was expected (again) that the Fed would raise rates at its last meeting. Only, this time, they did! The situation in the Middle East is (again) alarmingly tense. Currency wars are (again) rife. Bond market liquidity is (still) tight while high yield bonds are back at 2009 price levels. And many believe some asset markets are (again) in bubble territory. Yet, for commodities, it's like the 21st century never happened. The more things change, the more they seem to stay the same! Does that mean that, going forward, markets and asset classes will behave as in the past? Is it different this time? Or is it deja-vu (all over again)?

Graham Rich, Managing Partner & Publisher, PortfolioConstruction Forum (Sydney)

Resources

Debt cycles do not repeat themselves - but this one rhymes
A 50-year era of inflation is ending and we are left with an environment of no inflation, little growth and too much debt. Unlike inventory and debt cycles of the past, this one is moving slowly toward its demise. Central banks have postponed the day of reckoning with extraordinary programs of negative rates and asset purchases. Those policies should be viewed as palliatives that buy time for debtors to mend their ways - not as remedies. China's slowdown and the current oil glut are early signs that this debt bubble may end badly. Like other debt cycles, however, this one will end in much the same way as they have in the past, namely when banks tighten lending standards and refuse to roll over maturing debt. We are not there yet. In the interim, investors will need investment strategies that are more nimble, more opportunistic and off-index.

Dr Robert Gay, Managing Partner, Fenwick Advisers (New York)
 - brought to you by Pinnacle Investment Management

Resources

The distorted reality is unwinding
The Fed recently began its interest rate tightening, and it's deja-vu - there continues to be a great disagreement about the quantum of the rises. Rates will go higher than most expect and quantitative tightening (QT) will impact on financial asset volatility. This scenario heightens the likelihood of an equity market correction. As this rate cycle unfolds further, the impact of these higher rates on financial markets and client portfolios will be greater volatility, requiring closer attention and more dynamic asset allocation.

Hamish Douglass, CEO, CIO and Lead Portfolio Manager (Global), Magellan Financial Group (Sydney)

Resources

2015 was a year to forget, 2016 will not be the year to forgive
For all its ups and down, 2015 ended up being a year to forget for Australian investors, with little variation in the performance of major asset classes. The coming year will be a rerun of this theme – little variation in the performance of asset classes that generate an excess positive return for the additional risk. Investors should be compelled to hold riskier assets because of the low returns on cash and Australian investors, in particular, will no longer be able to hide behind higher income from equities to guarantee positive returns. Dynamic allocation within portfolios and additional levels of diversification will be critical for 2016 to avoid the feeling of deja-vu.

Kerry Craig, Global Market Strategist, JP Morgan Asset Management (Melbourne)

Resources

Insight

 

Is it deja-vu 2008?
Many people have written to me in recent months and asked whether I believe this is yet another 2008. In my view, there are many significant differences. But I'm afraid we're set for some extreme volatility in the months, if not the years, ahead.

Jonathan Pain, Author, The Pain Report (Sydney)

Insight
 


 

Critical Issues Forum
2

Fasten your seatbelt for a volatile 2016
Debt levels are too high (deja-vu!). However, this time the problem is bigger - but until now, QE has softened the impact and supported risk taking. Now with consensus perceiving the Fed to return to normal (?), markets are entering unchartered waters. Against this backdrop, 2016 is set to be a wide ranging and volatile year. But, with volatility comes opportunity. Investors need to find assets that have re-priced to attractive entry points (investment grade credit), or offer shelter (developed market bonds), and avoid areas that are most likely to still bear some pain (emerging market debt and energy securities). Portfolios must be nimble and flexible to navigate this environment.

Brett Lewthwaite, Head of Fixed Income and Currency, Macquarie Investment Management (Sydney)

Resources

China contagion is driven more by sentiment than fundamentals
China’s Black Monday renewed investor concerns about a possible hard landing. As global economic uncertainty persists in the markets, a coherent and structured approach to assess macroeconomic and market scenarios and their impact on investors’ portfolios becomes critical. The prospect of an economic hard landing in China may significantly impact Chinese, emerging and Japanese equity markets. However, the impact on globally diversified multi-asset class portfolios greatly depends on investors' perceived degree of economic contagion from shocks to Chinese growth to the rest of the world. While the loss could be muted (-3.0%) under a medium contagion scenario, it could be more severe (-8.4%) under a high contagion scenario.

Oleg Ruban, Head of Analytics Applied Research Asia Pacific, MSCI (Singapore)

Resources

China is falling into the middle income trap
Recent Chinese equity market volatility has been a wakeup call for global investors. As the Chinese economy slows and policymakers struggle to deal with a range of challenges - stabilising growth, liberalising financial markets, reducing overcapacity, and eliminating corruption - economic frictions are mounting. The current policy mix will not be enough to stabilise growth and without more drastic reforms China will find it difficult to avoid the middle income trap. Volatility and uncertainty will increase as a result, so investors must remain highly selective in their allocation to emerging markets.

Alex Wolf, Emerging Markets Economist, Standard Life Investments (Edinburgh)

Resources

Insight

 

More from your core
Core assets - Australian equities, global equities, and fixed income - are going to generate pretty lacklustre returns this year. Having as efficient a portfolio as possible is going to be really key to your return success.

Kevin Anderson, Senior Managing Director, State Street Global Advisors

Insight
 


 

Due Diligence Forum
1

Debt - Global
Investment grade credit - income without destroying capital
It’s Groundhog Day - anaemic global growth rates coupled with low inflation highlight the ongoing lower return environment that we are all in... The New Neutral is here to stay. In this environment, you should stop blindly following a barbelled approach in deriving income - term deposits mixed with retail hybrids and high dividend-paying stocks. It's possible to have your cake and eat it too by, being smart and exploring today's global fixed income universe. Global investment grade credit has not been this attractive in spread terms for the past six years, yet the sector has returned over 7.0% p.a. to Australian investors over the same time period.

Rob Mead, MD & Head of Portfolio Management, PIMCO (Sydney)

Resources

 

Equity - Global
Sell/short beneficiaries of the US high yield debt bubble now
The extreme thirst for yield has pushed the US high yield cycle into unchartered territory, with the stock of debt outstanding and the average leverage ratio expanding significantly beyond the previous 2007 peak. In a clear case of déjà vu (replace "subprime" for "high yield"), the cycle has reached the shakeout phase. The recent widening of spreads, triggered by commodity market dislocation, is unlikely to remain silo'ed as interlinked funding mechanisms react to accelerating bankruptcies. It's time to sell/short the beneficiaries - the issuers that have applied the funds to fast track corporate ambitions via capital spending, M&A and buybacks and, accordingly, attract a growth premium.

Jacob Mitchell, MD, CIO & Portfolio Manager, Antipodes Global Investment Partners (Sydney) - brought to you by Pinnacle Investment Management

Resources

Equity - Global
Demographic shifts are polarising investment opportunities
Explosive population growth in some areas against declines in others contributes to everything from shifts in economic power, to resource scarcity, to the changes in societal norms. We are at an inflection point where the global dependency ratio - the ratio of young and old to the workforce - is becoming adverse. This will lead to profound changes to the composition of the population around the world, polarising investment opportunities. In developed markets, growth is scarce. However, investors can access growth in sectors such as healthcare, with growing health care budgets necessary to support the growth of the over-65s. In emerging markets, growth is more abundant but more risky - an attractive exposure to growth is via emerging market consumption, as GDP/capita moves closer to the magic U$10,000/capita mark. Risk appropriate sizing of investments on both sides of the coin is critical. It's deja-vu all over again, as one thing never changes in investment markets – the quest for earnings growth while avoiding a permanent loss of capital.

Aneta Wynimko, Co-portfolio Manager, Fidelity International (London)

Resources

 

Equity - Specialty - Australian
The ASX’s future is past
ASX performance from 2001 to 2010 was outstanding. But, over the past five years, the index has significantly underperformed global equity markets - as it did for much of the 1980s and 1990s. Diving commodity prices, combined with a high concentration in a few stocks, means the Australian equity market will continue to underwhelm going forward. As the Australian economy begins to 'rebalance', so too Australian investors will need to invest in an equally-weighted approach to capturing market returns that places far less emphasis on commodities and banking. Failure to do so will risk repeating the poor returns of the past.

Joe Bracken, Principal, Tempo Asset Management (Sydney)
- brought to you by Fidante Partners

Resources

 

Multi-Asset
This is anything but a new paradigm
Nominal growth is scarce in the world today and is likely to stay that way, despite consistent flawed forecasts of an impending improvement by central banks and consensus. In the end, ageing, highly indebted and imbalanced societies are destined for weak growth – and, therefore, strong sharemarket returns in this environment are limited in a world of rising valuations, which are already uncomfortably high. Historically, investors have managed an imbalanced equity climate with increased exposure to bonds. However, these securities are at record valuations which has reduced the benefits of traditional diversification. This means that growing wealth and managing risk is a considerably more complex challenge than it was a decade ago. In this environment, investors will need to be more discerning about and more nimble with the assets they hold, as markets today are faster moving than ever before and less forgiving of investment mistakes. Excellence in asset allocation and implementation are more important than ever before.

Matthew Sherwood, Head of Investment Strategy - Multi-Assets, Perpetual Investments (Sydney)

Resources

 

Due Diligence Forum
2

Debt - Global
Don’t catch a falling knife: Avoid High yield and EM bonds
As world growth continues to slow and commodities come under pressure - despite credit spreads moving out on high yield and EM bonds - the market continues to misprice the risk of large scale defaults and debt restructures. The impacts of regulation on the liquidity of secondary markets will only enhance these issues and could spill over onto other parts of credit markets where liquidity issues are building. This is not deja-va back to GFC - rather, the start of a new, vicious commodity cycle unwind causing more pressure on many companies and countries. Now is the time to sell your high yield and EM bonds exposure - while you still can.

Vimal Gor, Head of Income & Fixed Interest, BT Investment Management (Sydney)

Resources

 

Equity - Speciality - European
The Eurozone is an economic calamity
After 17 years, the eurozone has managed annualised real GDP growth of just 1.4%. Greece, Italy and Portugal have barely grown at all. Labour productivity growth across the "zone" is and has been woeful. Unemployment is more than 10%, while youth unemployment stands at more than 20%. All of the eurozone faces a serious "ageing" problem, and pension and social security systems are inadequate. One currency and one short-term interest rate continues to make no economic sense for 19 disparate economies - and while full political union might work, it is neither on the table nor agreeable to the bulk of the eurozone's residents. The protest vote is growing and austerity is wearing thin. The refugee crisis adds further uncertainty and is chipping away at Mrs Merkel's power-base. Breakup will eventually occur. First to go will be the countries suffering from the largest public debt burdens (relative to GDP). In the meantime, investment in "peripheral" Europe is a high-risk proposition. Much has changed, but nothing has changed! Yes, the eurozone is an economic calamity.

Bruce Campbell, Strategic Investment Advisor, Pyrford International (London)
- brought to you by BMO Global Asset Management

Resources

  

Equity - Specialty - Australian
Australia is the land of complacent oligopolies
Australian equity investors may find their portfolios have become reliant on a few companies for a significant portion of their returns. While that might not have been a great concern when returns have been positive, a portfolio that is concentrated in specific companies and industry sectors may find it is vulnerable to changing economic conditions and structural shifts. Australian equity investors should look beyond the largest blue chip stocks in the financial, resources and telecommunications sectors – to industrial companies that are better positioned for growth. Market dynamics are changing, and in ways that we have not experienced before.

Madeleine Beaumont, Senior Portfolio Manager, BlackRock (Sydney)

Resources

  

Equity - Specialty - Resources
The resources cycle is getting closer to the bottom
In a cyclical sector like commodities deja-vu abounds for those with a long memory. Extended periods of high prices provide both incentive and funding for new projects and expansions. Today, after five years of declining prices, more than half the industry is struggling to generate free cash flow. Companies are forced to respond aggressively - cutting capex, costs, jobs and high cost production. Assets sales and M&A usually come next. Later cycle, consumer-oriented commodities such as base metals, precious metals, diamonds and oil have the best potential for price recovery in the medium term. Bulk commodities like iron ore, coal and steel are likely to remain in over supply longer. Seek out robust businesses that can weather the storm and prosper when economic conditions improve. Company valuations look attractive but a premium is justified for quality. As the outlook improves, equities usually rally before commodity prices, responding to improved demand forecasts.

Dr Joanne Warner, Head of Global Resources, Colonial First State Global Asset Management (Sydney)

Resources 

Multi-Asset
There's nowhere to run, nowhere to hide... but plenty of risks
It might feel like deja-vu all over again - and in some ways, it is. But in a fundamentally important way, it's not. Today, there are no clearly diversifying mainstream assets. In 2007/8, we had foreign currency and long nominal bonds. Today, the policies of central banks have spilled over into all asset classes and too many investors are crowding into the same trades. Confident sounding stories about the future are more entertainment than insight. Forecasts of the future are always unreliable. Given that, how should portfolios be positioned? Today, all assets are expensive and what seems safe may hold the greatest risk. To avoid disappointing investors, we need to both set realistic expectations and invest only of the basis of genuine insight.

Dr Susan Gosling, Head of Investments, MLC (Sydney)

Resources 

Insight

 

Investment lessons from Japan
Often in markets, you do get the feeling that somehow we've been here before. But things are never quite the same. Looking at some examples from the past, particularly Japan, we can see what can we learn and apply to our investment decisions going forward.

Tim Farrelly, Principal, farrelly's (Sydney)

Insight
 


 

Critical Issues Forum
3

 

It’s the end of EU-rope as we know it
The European Union has been in crisis for many years. Simultaneous sovereign debt, banking and monetary crises have tested the European institutions to the limit. But if you thought it could not get worse for Europe, you ain't seen nothing yet! The continent is grappling with an uncontrolled influx of migrants, Eastern European countries are moving towards authoritarian structures, while the United Kingdom will hold a referendum on exiting the EU. 2016 will change the nature of the European Union – and it might well signify deja-vu - the end of Europe's process of political and economic integration.

Dr Oliver Hartwich, Executive Director, The New Zealand Initiative (Wellington)

Resources
 


 

Old fears in emerging markets are masking new opportunities
If you think you've heard all there is to hear about emerging markets, think again. It's true that the past few years have been challenging for this part of the world as a whole. But not all emerging economies are equal, and uneven prospects are driving compelling return differences. Several countries including India are not wasting a good crisis and have pushed through game-changing reforms. Both equities and bonds offer tremendous opportunities to benefit from these diverging conditions. For investors concerned about volatility, a flexible multi-asset approach is a solution. As emerging markets begin to shake off the indiscriminate gloom surrounding them, investors should have them back on their radars.

David Holstein, Portfolio Manager, Capital Group (New York)

Resources
 

Get ready for a record-length US recovery
This is not deja-vu all over again. The Global Financial Crisis was unparalleled in post-war history and so will be the recovery. Some believe it will die of old age. They are wrong. This recovery is still middle aged and has years to go before it fades into memory. Despite China's stumbles and only the beginnings of forward momentum in Europe, the US recovery transition in the next one to two years will be a broader-based, more normal growth cycle driven by job market strength, lower fuel prices, a belated housing recovery and strengthened consumer demand. While the easy money of the multi-year equity market rally may be behind us, there will be increased dispersion in securities markets and improved opportunities for non-beta reliant returns. Equity markets continue to be attractive on their own merits and especially relative to fixed income.

Ron Temple, MD, Co-Head of Multi Asset & Head of US Equity, Lazard Asset Management LLC (New York)

Resources
 

 

Critical Issues Forum
4

Don't pile into resources this year
The Australian equity market is trading near long-term average valuation, with large dispersion in underlying segments. Like 2014 and 2015, resources in 2016 may look cheap. But buying into them now requires a belief that economic fundamentals are improving – but they are not. While they may well be nearing the bottom, there is no imminent catalyst for improvement in return drivers. Given their high volatility and poor earnings outlook, this is not an attractive trade. More reliable returns in 2016 will be delivered by high quality companies with stable earnings, cash generation and moderate growth, well beyond the familiar territory of the 20 Leaders. You may have to pay up for this quality, but it is worth taking this risk.

Olivia Engel, Head of Active Quantitative Equity (APAC), State Street Global Advisors (Sydney)

Resources
 

 

The chickens are coming home to roost
For the past six years, the US Federal Reserve has operated (along with other major central banks) a 'cheap money' policy. As a result, we have had a 'cheap money' recovery - debt ballooning in parts of the world, commodities bubbly (up until 2011/12) and EM and commodity DM economies the key recipients of the excess global liquidity. With the Fed now two years into its tightening (having started with its tapering in 2014), the chickens are coming home to roost. In this environment, investors need to be nimble and, more importantly, cautious for the next six to 12 months or so. Beyond that, opportunities should re-present themselves once again. In so many ways, in the words of Yogi Berra, "it's deja-vu all over again". The equity bear market is underway.

Chris Watling, CEO & Chief Market Strategist, Longview Economics (London)

Resources
 

The Great Debate
In this simulated investment board meeting, our day's DDF Faculty debates and votes on critical issues related to the theme - is it deja-vu (all over again) - and the implications for portfolios. Delegates vote on the issues too, before and after considering the Investment Board's views (as well as use the meeting as a role model for their own investment committees).

Markets Summit 2016 Investment Advisory Board

Dr Robert Gay, Managing Partner, Fenwick Advisers (New York)
Dr Oliver Hartwich, Executive Director, The New Zealand Initiative (Wellington
Chris Watling, CEO & Chief Market Strategist, Longview Economics (London)

Rob Mead, MD & Head of Portfolio Management, PIMCO (Sydney)
Jacob Mitchell, MD, CIO & PM, Antipodes Global Investment Partners (Sydney)
Aneta Wynimko, Co-Portfolio Manager, Fidelity International (London)
Joe Bracken, Principal, Tempo Asset Management (Sydney)
Matthew Sherwood, Head Inv Strat Multi-Asset, Perpetual Investments (Sydney)
Vimal Gor, Head of Income & Fixed Int, BT Investment Management (Sydney)
Bruce Campbell, Strategic Investment Advisor, Pyrford International (London)
Madeleine Beaumont, Senior Portfolio Manager, BlackRock (Sydney)
Dr Joanne Warner, Head Gl Rsces, Colonial First State Gl Asset Mgmt (Sydney)
Dr Susan Gosling, Head of Investments, MLC (Sydney)

Resources
 

 

 

 

 

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