PACE - Finance Presentation

Editor's Notes

• #5: Economic conditions around the world are also improving. BofA-ML’s Economic Conditions Index (ECI), a broad measure of business conditions around the world, has been trending up steadily and uniformly across regions. The world economy, outside of the U.S., is expected to grow around 4% annually between now and 2014. Stress in financial markets is now at the lowest levels since 2007.Europe slipped back into recession in 2012, with the peripheral countries suffering the worst losses in jobs and declines in living standards. The continent is expected to experience a tepid recovery in 2013.However, more positively, investors’ worst case fears-the break of the euro-did not materialize. Spreads on Greek govt bonds have dropped markedly. With the probability of a tail risk event receding, volatility in European equity markets fell to multi-year lows and was the impetus for the risk-off rally around the world.Bond spreads on other troubled countries, such as Spain, Portugal, Ireland and Italy have all fallen sharply after credible steps were taken by the ECB and Europe’s leaders in 2H 2012.Despite the recent rebound in European stocks, valuations remain attractive.
• #6: Economic conditions around the world are also improving. BofA-ML’s Economic Conditions Index (ECI), a broad measure of business conditions around the world, has been trending up steadily and uniformly across regions. The world economy, outside of the U.S., is expected to grow around 4% annually between now and 2014. Stress in financial markets is now at the lowest levels since 2007.Europe slipped back into recession in 2012, with the peripheral countries suffering the worst losses in jobs and declines in living standards. The continent is expected to experience a tepid recovery in 2013.However, more positively, investors’ worst case fears-the break of the euro-did not materialize. Spreads on Greek govt bonds have dropped markedly. With the probability of a tail risk event receding, volatility in European equity markets fell to multi-year lows and was the impetus for the risk-off rally around the world.Bond spreads on other troubled countries, such as Spain, Portugal, Ireland and Italy have all fallen sharply after credible steps were taken by the ECB and Europe’s leaders in 2H 2012.Despite the recent rebound in European stocks, valuations remain attractive.
• #10: Various housing fundamentals such as household formation, home prices, housing starts, housing inventory, etc. point to an improvement in the sector. Existing home sales increased 5.9% in November from the previous month, representing an annual rate of 5 million units. Home prices are projected to increase 5% year over year in 2012 compared to 3.7% decline in 2011. Residential homebuilding is expected to contribute 0.3 percentage point to US GDP growth in 2012 and 0.4 percentage points in 2013. Housing was at the center of the recent global financial crisis. It may now hold the key to a sustainable U.S. recovery.Housing sales are on the rise across the country and in most markets home values are increasing.Residential homebuilding is forecasted to add 0.4% to GDP growth in 2013. The first positive contribution since 2005.Homebuilding helps create jobs. Each new home built help create three new full-time jobs (source: NAHB). Improvements in the housing sector is expected to benefit not just the real estate sector, but also materials, financials, consumer discretionary sectors.
• #11: Various housing fundamentals such as household formation, home prices, housing starts, housing inventory, etc. point to an improvement in the sector. Existing home sales increased 5.9% in November from the previous month, representing an annual rate of 5 million units. Home prices are projected to increase 5% year over year in 2012 compared to 3.7% decline in 2011. Residential homebuilding is expected to contribute 0.3 percentage point to US GDP growth in 2012 and 0.4 percentage points in 2013. Housing was at the center of the recent global financial crisis. It may now hold the key to a sustainable U.S. recovery.Housing sales are on the rise across the country and in most markets home values are increasing.Residential homebuilding is forecasted to add 0.4% to GDP growth in 2013. The first positive contribution since 2005.Homebuilding helps create jobs. Each new home built help create three new full-time jobs (source: NAHB). Improvements in the housing sector is expected to benefit not just the real estate sector, but also materials, financials, consumer discretionary sectors.
• #12: Various housing fundamentals such as household formation, home prices, housing starts, housing inventory, etc. point to an improvement in the sector. Existing home sales increased 5.9% in November from the previous month, representing an annual rate of 5 million units. Home prices are projected to increase 5% year over year in 2012 compared to 3.7% decline in 2011. Residential homebuilding is expected to contribute 0.3 percentage point to US GDP growth in 2012 and 0.4 percentage points in 2013. Housing was at the center of the recent global financial crisis. It may now hold the key to a sustainable U.S. recovery.Housing sales are on the rise across the country and in most markets home values are increasing.Residential homebuilding is forecasted to add 0.4% to GDP growth in 2013. The first positive contribution since 2005.Homebuilding helps create jobs. Each new home built help create three new full-time jobs (source: NAHB). Improvements in the housing sector is expected to benefit not just the real estate sector, but also materials, financials, consumer discretionary sectors.
• #13: Advancement in technology has boosted US energy production over the past 5 years. US is on track to supply a large portion of Non-OPEC supply growth in the near future. Harnessing these reserves gives the US a significant competitive advantage that will grow in year to come, with Commodity Strategist Francisco Blanch estimating that the US enjoys a $700mn per day “energy carry” relative advantage.What does the Index means?
• #14: While US GDP growth remains tepid, US corporate profits have soared leading companies to build cash on their balance sheets. However, capex has not kept pace after years of underinvestment. Mergers and acquisitions activity can also rise given strong balance sheets, low interest rates, and attractive equity valuations. In lieu of M&A, idle cash has resulted in increased dividend payouts and share buybacks.Capital expenditure spending is cyclical (and mean reverting). We also find it to be a good coincidental market indicator: a rise in capex is generally associated with gains in the equity markets. Capex levels appear to have troughed and are reverting back towards their historical level, which should be supportive of equity markets.M&A activity has yet to recover from the global financial crisis. M&A levels are at their lowest since 2002 and more than 60% below the historical average, despite a rising stock market, comparatively inexpensive corporate debt and record levels of corporate cash. So far, companies have used their increasing cash levels to buy back shares and distribute dividends.The good news: from these levels, M&A should rise, particularly as the economy continues to improve.
• #20: The Troika (European Commission (EC), International Monetary Fund (IMF) and European Central Bank (ECB)) could make a few concessions to Greece on the extent of its austerity, by cutting interest rates on loans and supporting infrastructure spending, but is unwilling to pledge additional fundsFull debt monetization remains a possibility for the ECB as the crisis has spread to Spain and Italy. Near-term focus will be on whether the ECB sticks to its previous comments by purchasing short-dated peripheral debt to reduce these country’s funding pressuresA more expanded role by the ECB, including full use of its balance sheet, is needed to supplement the current European crisis management tools (the European Stability Mechanism continues to be delayed). Without a commitment from the ECB to use its balance sheet, investors will likely remain skeptical as to whether the current “firewalls” are sufficientEurozone banks are still at the early stages of deleveraging - an “orderly deleveraging” is required to reduce economic risks to the global economy. Policies will likely be focused to reduce the flow of capital from peripheral banks to outside of their respective countryWhile many European equities look attractive in the medium-term (extreme defensive positioning, attractive valuations), the recent rally could be coming to an end without decisive policy action. We remain cautious and patience is warranted before investing in risk assets. Markets will likely remain macro-driven through 2012