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Global investment outlook Financial crisis Global recession Rising geopolitical tensions Policy response Fiscal stimulus
Credit headwinds Avoid government bonds
Policy stimulus
Increase in government spending Focus on longterm investment
Loose monetary and fiscal policy
Global infrastructure
EM - consumer & banks
Global recovery
Rising income, rising credit
Cash sitting on corporate balance sheets
M&A – event driven AI
Low short-term interest rates + high cash level
Equities > bonds/cash
Higher growth potential in EM
EM secular bull, Developed Markets cyclical bull
Export oriented benefiting from sales into EM
Mega-cap DM multinationals
Alternatives to Treasuries Attractive valuation vs EU and US
Attractive valuation
Europe High Yield bonds Declining VIX implies stock picking over sector picks
Asian Credit
Long / Short equity AI
3 Please refer to the page over for details Past performance is not indicative of future performance
Global investment outlook ? ? ? ? ? ? ? ? ? Rotate towards scarcity themes of Yield (investment grade and high yield bonds + mega cap financials), Growth (EM debt and equity + EM consumer) & Quality (best of breed + mega cap multinationals + gold + tech titans) Global equities over bonds EM favorite structural overweight – long best of breed companies in EM Asia and the EM consumer remain core structural themes => large cap EM financials Cyclical bulls on Developed markets and it is Europe over Japan - bullish view on global economic recovery + attractive valuation + extraordinary policy response Corporate Credit > high grade corporate bonds > government bonds – small negative returns forecast for US Treasuries in 2010 = headwinds for credit Huge valuation distortion in global FX markets – long EM FX and short EUR Cash suffers from low yields – not a good investment Commodities – oil and copper, but not aluminium
4 Reference: 1. The RIC Report: Overweight equities, underweight bonds, BofA Merrill Lynch Global Research, 12 January 2010 2. The RIC Report: Stay the course, BofA Merrill Lynch Global Research, 08 June 2010 3. The RIC Report: Japanification & bull markets BofA Merrill Lynch Global Research, 10 August 2010
Past performance is not indicative of future performance
Global economic outlook Global economic forecasts (percent)
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Despite recent downward revisions, the story is still intact. “Double dip” unlikely event Forecast moderate global growth but strong emerging market growth Do not underestimate developed economies inventory restocking could last longer and
Shaded regions represent BofA Merrill Lynch Global Research forecast Source: BofA Merrill Lynch Global Research
ultimately lead to job creation
Global growth forecasts in perspective
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Credit growth + tight industrial capacity = inflation. But not there yet in developed economies
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Delayed rate hikes in most central banks encourage a steep yield curve
Reference: 1. 2010 - Reinventing the Tiger, BofA Merrill Lynch Global Research, 14 December 2009 2. Global Economic Weekly: Mid-year review, BofA Merrill Lynch Global Research, 11 June 2010 3. Saving Private Payrolls BofA Merrill Lynch Global Research, 06 August 2010 4. The RIC Report: Japanification & bull markets BofA Merrill Lynch Global Research, 10 August 2010
5 Past performance is not indicative of future performance
FX strategy ? ? ? Huge valuation distortion – G10 overvalued, EM FX under-valued USD – should remain the clear outperformer in G10 JPY upgraded as US interest rates stay lower for longer. USD-JPY to be choppy till mid-2011 then enter steady upward trend on expectations of eventual Fed tightening
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EM central bank buying for “liquidity currencies” will slow in 2010. Short GBP, EUR and SEK.
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Short EUR-USD, 2010 target trimmed to 1.15. AUD expected to depreciate against USD over 2010 as risk trade matures and reserve accumulation slows. Target AUD-USD is 0.80 for year-end.
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Greater EM FX flexibility expected in 2010 (i.e. appreciation and e.g. RMB) Short EUR - long Asia FX (KRW & IDR)
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Risks – China and EM resist currency appreciation + USD resumes decline versus G10 currencies (a la 2009)
Reference: 1. The world at a glance BofA Merrill Lynch Global Research, 29 June 2010 2. The RIC Report: Japanification & bull markets BofA Merrill Lynch Global Research, 10 August 2010 3. Forex Focus: After the tests BofA Merrill Lynch Global Research, 27 July 2010
6 Past performance is not indicative of future performance
Commodities Almost all of global oil demand growth expected to be generated in Emerging Markets
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Commodity demand starting to recover after very deep recession but the European debt crisis will limit upside in 2H10 => firm cyclical recovery in commodity prices expected in 2011
? ? Source: IEA, BofAML Global Commodities Research
Prefer oil, copper (healthy micro variables) and platinum - but not aluminium Oil to trade at USD78/bbl in 2H10, but oil markets to remain tight beyond 2011- WTI could potentially break USD100/bbl
Crude oil looks cheap relative to gold prices
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Gold could potentially break USD1500/oz in 2011 Iron ore remains in tight supply next two years Commodities are a good hedge against inflation and offer portfolio diversification benefits: comparable risk-reward but with low or negative correlations with fixed income or EM equities
Source: 2010 Year Ahead Investment Outlook – A return to normality (January 2010)
Reference: 1.Global Commodity Paper #11: Commodity alpha, beta and the investment super-cycle, BofA Merrill Lynch Global Research, 22 February 2010 2. The RIC Report: Japanification & bull markets BofA Merrill Lynch Global Research, 10 August 2010 3. Is the oil market normalizing? BofA Merrill Lynch Global Research, 19 July 2010 4. Macro versus micro: the metals heat grid BofA Merrill Lynch Global Research, 03 August 2010
7 Past performance is not indicative of future performance
Fixed income strategy Spreads have narrowed but still wide IG corporate to 10-year Treasury (till end-July 2010)
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IG corporate credit > sovereign bonds Seek relative value after the big credit gains in 2009 Small negative return forecast for Treasuries = headwind for credit overall TIPS – inexpensive insurance if and when it happens Investment grade bonds – spreads likely to tighten further Asian credit names look better value versus US and EU (see chart) Regulation is positive for bank bonds while deleveraging means management favours bondholders over shareholders. Also positive bank credit and select preferreds too
Source: BofA Merrill Lynch Global Research Bond indexes
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Global investment grade credit relative value
Source: BofA Merrill Lynch Global Research
8 Reference: 1. Asian Credit Strategy Year Ahead 2010, BofA Merrill Lynch Global Research, 05 January 2010 2. Waiting for Yield BofA Merrill Lynch Global Research, 02 August 2010 3. The RIC Report: Japanification & bull markets BofA Merrill Lynch Global Research, 10 August 2010
Past performance is not indicative of future performance
US economic outlook Rehab: Lessons learnt from Japan (percent)
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