INVESTMENT UPDATE BUBBLE CRASH CRISIS RECESSION? MARKETS? INVESTMENT STRATEGIES LTD OCTOBER 2008
BUBBLE EXPANSION PHASE Asset Bubbles Complex, Opaque Instruments CDO, ABS, CLO, CDS, SIV Leverage Disintermediation Securitisation Lending Standards Weaken Expanded Risk Appetities Low Interest Rates Excess Liquidity
BUBBLE EXPANSION PHASE House Prices Fall Sub-Prime Crisis Complex Instruments Collapse ReIntermediation on Balance Sheet Deleveraging Rating Downgrades Forced Sales Loan Write Offs Credit Spreads Widen Credit Insurance Crisis Bank Equity Scarcity Bankruptcy and Bail Outs Banking Crisis Credit Crisis
THE DOMINO EFFECT TIMELINE 2 Bear Stearns Hedge Funds Implode HSBC Sub Prime write offs BNP Paribas suspends 3 Funds UK Govt. supports Northern Rock M.L. write-off $7.9bn CBs add liquidity Northern Rock nationalised Bear Stearns rescue Fanny Mae/ Freddie rescued Lehmans Bankrupt ML/BOA AIG nationalised HBOS/ Lloyds/TSB FEB APRIL AUG SEPT OCT DEC FEB APRIL SEPT 2007 2008
HBOS: SPIRAL OF DECLINE Despite huge deposits HBOS is more reliant on borrowing other bank s spare cash to fund its business than most of its rivals HBOS share price falls Further, undermining the Bank s financial health HBOS shares fall in Reaction to the ratings reports. Speculators Place bets on further share price declines This triggers another ratings downgrade from the agencies Concerns over solvency grow. Bank seeks merger with Lloyds At the credit crisis hits and bank s losses increase, the amount of spare cash in the banking system or liquidity declines This increases the cost of borrowing between banks. The impact on HBOS is greater than on most of its rivals This triggers downgrades from independent agencies Which rate and report on HBOS financial health Share price declines further. Speculators increase bets on further falls
TED SPREAD 4.00 3.00 2.00 1.00 0.0 JAN 08 FEB 08 MAR 08 APR 08 MAY 08 JUNE 08 JULY 08 AUG 08 SEPT 08
A CHECK LIST FOR SYSTEMIC SURVIVAL 1. Add liquidity 2. Reduce Interest Rates 3. Provide Safety Net 4. Protect Markets 5. Ease Accounting Rules? 6. Re-build Confidence?
THE ECONOMIC OUTLOOK GROWTH INFLATION 2008 2009 2008 2009 UNITED STATES 1.7 (0.2) 4.6 2.3 EUROLAND 1.3 1.1 3.5 2.3 UNITED KINGDOM 1.1 0.3 3.9 3.2 JAPAN 1.0 1.4 1.8 1.0 CHINA 10.0 9.2 6.5 4.1 IRELAND (0.2) (0.1) 4.5 2.0 SOURCES: Merrill Lynch: Davy
EQUITY MARKET VALUATIONS SOLID GROUND? 31st August 2008 BOND YIELD DIVD YIELD RATIO UNITED STATES 3.75 2.13 1.76 EUROLAND 4.14 4.20 0.99 UNITED KINGDOM 4.50 4.21 1.07 JAPAN 1.47 1.81 0.81 EMERGING MARKETS 3.75* 2.78 1.35 IRELAND 4.60 4.70 0.98 *US Bond Yield
IRISH EQUITIES IN THE EYE OF THE STORM MARKET WEIGHT % DEC 1998 DEC 2006 AUG 2008 AIB BANK OF IRELAND IRISH LIFE ANGLO IRISH OTHERS FINANCIALS 14.6 11.3 4.7 1.0 1.3 32.9 16.6 14.3 4.8 9.5 1.2 46.4 14.2 10.1 3.2 8.2 0.6 36.3 CRH GRAFTON (HEITONS) KINGSPAN READYMIX OTHERS BUILDING CONSTRUCTION 10.3 0.7 0.7 0.2 0.3 12.2 14.3 2.5 2.9 0.2 0.7 20.6 17.5 1.4 1.8 0.1 0.2 21.0 TOTAL TOTAL MARKET TOTAL MARKET CAPITALISATION ISEQ INDEX P.E.R. DIVD. YIELD 45.1 100.0 66.7bn 4704 18.3 1.7% 67.0 100.0 119.6bn 9408 14.2 2.2% 45.1 100.0 61.2bn 4451 8.0 4.5%
DOWNTRODDEN FINANCIALS OFFER A SIGNIFICANT VALUE OPPORTUNITY 1.4 Financials Relative Price/Book History* 1.3 1.2 1.1 1.0 Average 0.9 Ratio (x) 0.8 0.7 Savings & Loan/ Commercial Real Estate Crisis 0.6 0.5 Tech Bubble Global Credit Crisis 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 Through June 30, 2008 *Versus Bernstein global large-cap stock universe;cap weighted Source: Bernstein