MARKET DYNAMICS Apollo-based Chartbook for Global Markets September 1, 2014
APOLLO VIEWPOINT Back from the beach q q q q q q Having taken a two week summer break, Market Dynamics is back today and finding a lot to ponder upon in the Global Chartbook. Price action over the last two weeks has been largely about risk extremes reversing; helped by policy speeches from both Draghi and Yellen at Jackson Hole. Both Central Bank heads have, once again, sought to give comfort to those who fear that policy may deviate from the current path of maintaining the ongoing support operations. Whether we like it or not, it would seem that no-one appears to regard policy as overly loose right now so that oversold markets became easy to buy once again after the early August drops. The biggest short term gainer was Europe whose 5% rally from its lows has seen the market return to the FV range (page 3) and the discount to FV narrow to 3% (page 4). To the extent that geo-political concerns unnerved the market last month, some of this risk unwind is certainly down to improvements in sentiment in that regard but the real impetus to the rally would appear to be, once again, the perceived Central Bank policy position of the ECB. The strength of this move has taken the market into market efficient territory (page 6) but with the FV range now declining and the trend in FV growth sharply lower (page 5) - 7% annualised growth vs. 17% back in June we are already looking to lock in some of the profits provided by the price move as risk gaps have closed but value trends remain modest. With some very real economic impacts likely to be flowing from the Russian sanctions regime, Europe remains exposed to a relief rally running into a weakening growth and valuation outlook. Asia, by contrast, is facing a far more positive growth outlook and is a more interesting investment environment as a result. The index is currently growing in line with a robust 29% FV growth trend (page 12) and with only the travel and leisure sector showing weakness in FV growth because of the Casino stocks (page 14) the fact that the market has recovered back into the FV range and that the trends in value remain positive (page 10) continues to support a buy case for the market. Following what has been a solid if not overly exciting reporting season, the US market is in line with the softer but still credible FV growth outlook. Annualised growth in FV may only be 18% but it would seem that investors are prepared to pay full value for the US at present. Even though the FV outlook is mixed at a sector level ( page 21) most sectors continue to trade at a premium to their FV growth (page 23) and investors remain biased towards tech/cyclical names (page 22). The US may offer little in the way of valuation bargains at present but with Q3 economic growth looking set to be 3% and the market now moving efficiently higher (page 20) it is not a market that investors are looking to be underexposed to. When we step back to review the implications for global markets we can see that the overriding message is one of a return to normal. We are back in the FV range (page 24) and the DFV is in line with its historic trend (page 25). There are elements of negative sector growth (page 28) and some overvaluation amongst consumer discretionary stocks (page 30) but it would seem that policy fears have once again been eased by the narrative from the Central Bankers. Growth risks remain especially in Europe but as markets return to focus after the summer, markets would appear to be relatively balanced in terms of risk and reward. Chris Tinker 0207-960-6526
Europe Stoxx 600 380 360 340 Stoxx 600 Index and Apollo FV FV TREND NO LONGER RISING 320 300 280 260 240 220 200 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Stoxx 600 Apollo Fair Value 400 360 320 Stoxx 600 - FV range RISING THROUGH A FALLING FV RANGE 280 240 200 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Price Upper FV Range Mid FV Range Lower FV Range 3
Europe Stoxx 600 2 Stoxx 600 - Discount to FV 1 BACK TO TREND DISCOUNT -1-2 -3 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 30 25 20 Stoxx 600 - FV based volatility VOLATILITY EASING 15 10 5 0 Sep 11 Mar 12 Sep 12 Mar 13 Sep 13 Mar 14 Stoxx 600 FV Volatility Index Vix Index 50 45 40 35 30 25 20 15 10 5 0 4
Europe Stoxx 600 8 6 4 Annualised growth in Stoxx 600 GROWTH MOMENTUM CLEARLY IN DECLINE 2-2 -4-6 Aug 11 Feb 12 Aug 12 Feb 13 Aug 13 Feb 14 Aug 14 Ann. growth in Stoxx 600 Ann. growth in Apollo FV% Stoxx 600 - Intrinsic Value 400 360 INTRINSIC VALUE TREND DRIFTING LOWER 320 280 240 200 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13 Oct 13 Jan 14 Apr 14 Jul 14 Stoxx 600 Apollo Intrinsic value 5
Europe Stoxx 600 10 95% Stoxx 600 Sector average correlation SECTOR CORRELATIONS STILL HIGH 9 85% 8 75% 7 65% 6 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 0.90 0.60 Stoxx 600 Index efficiency MARKET EFFICIENCY BACK TO POSITIVE 0.30 0.00-0.30-0.60-0.90 Aug 11 Feb 12 Aug 12 Feb 13 Aug 13 Feb 14 Aug 14 6
Europe Stoxx 600 1.2 0.8 Stoxx 600 - Net beta NET BETA MOVING LOWER 0.4 0.0-0.4-0.8-1.2 Oct 09 Oct 10 Oct 11 Oct 12 Oct 13 3% 2% 1% FV trending higher 1-month Trend in FV FV MOSTLY WEAKER -1% -2% -3% -4% Resources Healthcare Banks Real Estate Telcos Tech Media Insurance FV trending lower Industrial Goods Construction Producers Retail Misc Fins Food Bev Travel Chemicals Autos 7
Europe Stoxx 600 Misc Fins Healthcare Autos Media Insurance Telcos Travel Tech Construction Banks Real Estate Industrial Goods Producers Food Bev Chemicals Retail Resources Stoxx 600 FV growth and Index performance -2-1 1 2 3 4 5 6 7 FV growth (since Jan 2013) index performance (since Jan 2013) FV IV ONLY DEFENSIVES ARE PAYING A PREMIUM TO GROWTH Healthcare Media Producers Telcos Insurance Food Bev Resources Misc Fins Real Estate Industrial Goods Chemicals Banks Tech Travel Construction Retail Autos Stoxx 600 Sector discounts to FV -15% -1-5% 5% 1 29/08/2013 29/08/2014 ONLY A HANDFUL OF SECTORS AT A PREMIUM 8
Europe Stoxx 600 Stoxx 600 Net DFV 12 month range 15% 1 NET DFV MORE NEUTRAL 5% -5% -1-15% -2-25% Autos Construction Banks Telcos Retail Chemicals Resources Industrial Goods Real Estate Misc Fins Travel Insurance Healthcare Media Food & Bev 2m Expected return Tech Producers Market 15% 1 5% -5% -1 Stoxx 600 sector risk and return RISK STILL HEAVILY PRICED IN -3-2 -1 0 1 2 3 Apollo risk score Banks Construction Food & Bev Industrial Goods Media Producers Resources Tech Travel Autos Chemicals Healthcare Insurance Misc Fins Real Estate Retail Telcos 9
Asia Stoxx 1200 120 110 Asia 1200 Index and Apollo FV FV TREND MOVING HIGHER 100 90 80 70 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Asia 1200 Apollo Fair Value 120 110 Asia 1200 - FV range BACK INTO THE FV RANGE 100 90 80 70 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Price Upper FV Range FV Mid Range Lower FV Range 10
Asia Stoxx 1200 25% Asia 1200 - Discount to FV 2 15% 1 5% DISCOUNT STILL NARROW -5% -1-15% -2 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 30 25 Asia 1200 - FV based volatility ASIA VOLATILITY LOWER 20 15 10 5 0 Sep 11 Mar 12 Sep 12 Mar 13 Sep 13 Mar 14 Asia 1200 FV Volatility Index Vix Index 50 45 40 35 30 25 20 15 10 5 0 11
Asia Stoxx 1200 8 6 4 Annualised growth in Asia 1200 INDEX IN LINE WITH FV GROWTH 2-2 -4-6 Aug 11 Feb 12 Aug 12 Feb 13 Aug 13 Feb 14 Aug 14 Ann. growth in Asia 1200 Ann. growth in Apollo FV% 120 110 Asia 1200 - Intrinsic Value INTRINSIC VALUE TRENDING HIGHER 100 90 80 70 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13 Oct 13 Jan 14 Apr 14 Jul 14 Asia 1200 Apollo Intrinsic value 12
Asia Stoxx 1200 10 9 Asia 1200 Sector average correlation CORRELATIONS IN LINE WITH TREND 8 7 6 5 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 0.90 0.60 Asia 1200 Index efficiency INDEX EFFICIENCY NEUTRAL 0.30 0.00-0.30-0.60-0.90 Aug 11 Feb 12 Aug 12 Feb 13 Aug 13 Feb 14 Aug 14 13
Asia Stoxx 1200 1.2 0.8 Asia 1200 - Net beta NET BETA IN LINE WITH TREND 0.4 0.0-0.11-0.4-0.8 Oct 09 Oct 10 Oct 11 Oct 12 Oct 13 6% 5% 4% 3% 2% 1% -1% -2% -3% 1m change in FV FV trending higher ONLY TRAVEL &LEISURE NOT SHOWING FV GROWTH FV trending lower Travel Media Retail Food& Bev Chemicals Industrial Goods Autos Producers Tech Construction Banks Real Estate Misc Fins Telcos Resources Healthcare Insurance 14
Asia Stoxx 1200 Tech Misc Fins Autos Insurance Construction Industrial Goods Travel Telcos Healthcare Real Estate Banks Food Bev Producers Retail Media Chemicals Resources Asia 1200 FV growth and Index performance MAJORITY STILL AT A PREMIUM TO FV GROWTH 1 2 3 4 5 6 7 8 FV growth since Jan 2013 index performance since Jan 2013 Telcos Food Bev Chemicals Misc Fins Insurance Healthcare Real Estate Media Construction Banks Industrial Goods Travel Producers Retail Autos Resources Tech Asia 1200 Sector discounts to FV -12% -1-8% -6% -4% -2% 2% 4% 6% 29/08/2013 29/08/2014 RISK REMAINS PRICED IN 15
Asia Stoxx 1200 15% 1 5% Asia 1200 Net DFV 12 month range MOST SECTORS NEUTRALLY VALUED -5% -1-15% -2 Resources Tech Retail Banks Misc Fins Industrial Goods Media Construction Real Estate Autos Insurance Healthcare Travel Producers Chemicals Food & Bev Telcos Market 1 8% 6% 4% 2% -2% -4% Asia 1200 sector risk and return RISK/RETURN TRADE OFF IS CLEAR -3-2 -1 0 1 2 3 Banks Construction Food & Bev Industrial Goods Media Producers Resources Tech Travel Autos Chemicals Healthcare Insurance Misc Fins Real Estate Retail Telcos 16
US S&P 500 2200 2000 S&P500 Index and Apollo FV FV TREND FLAT 1800 1600 1400 1200 1000 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 S&P 500 Apollo Fair Value S&P500 - FV range 2200 2000 1800 RALLYING UP THROUGH FV TRADING RANGE 1600 1400 1200 1000 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Price Upper FV Range FV Mid line Lower FV Range 17
US S&P 500 1 S&P 500 - Discount to FV SMALL, POSITIVE DISCOUNT -1-2 -3 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 25 20 S&P500 - FV based volatility VOLATILITY BOUNCES 15 10 5 0 Sep 11 Mar 12 Sep 12 Mar 13 Sep 13 Mar 14 S&P 500 FV Volatility Index Vix Index 50 45 40 35 30 25 20 15 10 5 0 18
US S&P 500 8 Annualised growth in S&P 500 4-4 MARKET TRACKING THE SOFTER VALUE TREND -8 Aug 11 Feb 12 Aug 12 Feb 13 Aug 13 Feb 14 Aug 14 3m Ann. growth in S&P 500 3m Ann. growth in Apollo FV% 2200 2000 S&P 500 - Intrinsic Value INTRINSIC VALUE LEVELING OFF 1800 1600 1400 1200 1000 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13 Oct 13 Jan 14 Apr 14 Jul 14 S&P 500 Apollo Intrinsic Value 19
US S&P 500 10 S&P500 Sector average correlation CORRELATIONS STRONGER 9 8 7 6 5 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 0.90 0.60 S&P500 Index efficiency MARKET EFFICIENCY POSITIVE ONCE MORE 0.30 0.00-0.30-0.60-0.90 Aug 11 Feb 12 Aug 12 Feb 13 Aug 13 Feb 14 Aug 14 20
US S&P 500 1.2 0.8 S&P 500 - Net Beta NET BETA REMAINS NEUTRAL 0.4 0.0 0.09-0.4-0.8-1.2 Oct 09 Oct 10 Oct 11 Oct 12 Oct 13 4% S&P 500-1m change in FV 3% FV trending higher 2% 1% -1% -2% -3% -4% MIXED VALUE OUTLOOK Div. Financials Materials Food & Bev Banks Software Real Estate Semiconductors Healthcare Equip. Comm. Services Tech. H'ware & Equip. Pharma Biotech H'hold & Personal Transportation FV trending lower Autos & Components Insurance Con. Services Retailing Telecoms Media Cons. Durables Food & Staples Ret. Capital Goods 21
US S&P 500 Div. Financials Autos & Components Media Pharma Biotech Insurance Healthcare Equip. Transportation Semiconductors Retailing Software Comm. Services Capital Goods Materials Cons. Durables Banks Tech. H'ware & Equip. Food & Staples Ret. Con. Services H'hold & Personal Food & Bev Real Estate Telecoms S&P 500 FV Growth and Index performance 2 4 6 8 10 FV growth index performance MOST SECTORS AHEAD OF VALUE GROWTH Tech. H'ware & Equip. Food & Staples Ret. Retailing Telecoms Semiconductors Insurance H'hold & Personal Div. Financials Media Healthcare Equip. Software Food & Bev Capital Goods Pharma Biotech Comm. Services Transportation Cons. Durables Real Estate Materials Con. Services Autos & Components Banks S&P 500 Sector discounts to FV PAYING UP FOR TECH/ CYCLICALS -15% -1-5% 5% 1 15% 29/08/2013 29/08/2014 22
US S&P 500 15% 1 5% S&P500 Net DFV 12-month range VERY FEW SECTORS LOOKING CHEAP -5% -1-15% Banks Materials Capital Goods Automobiles & Components Consumer Services Commercial Professional Services Transportation Food & Staples Retailing Software & Services Health Care Equipment & Services Pharm Biotech & Life Sciences Real Estate Household & Personal Products Insurance Semicons & Equipment Food Beverage & Tobacco Media Consumer Durables & Apparel Telecommunication Services Diversified Financials Tech. Hardware & Equipment Retailing S&P 500 12% 8% 4% -4% -8% S&P 500 Sector Risk and Return RISK PRICED IN BUT RETURNS LIMITED -4-3 -2-1 1 2 3 Banks Comm. Services Cons. Services Food & Bev. H'hold Products Materials Pharma Biotech Retailing Autos Capital Goods Cons. Durables Div. Financials Food Retailing H'care Equip. Insurance Media Real Estate Semicons. 23
S&P Global 1200 2200 2000 1800 GLOBAL FV TREND HAS FLATTENED OUT Global 1200 Index and Apollo FV 1600 1400 1200 1000 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Global 1200 Apollo Fair Value 2200 Global 1200 - FV range 2000 1800 1600 1400 1200 RECOVERY BACK INTO FV RANGE 1000 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 24
S&P Global 1200 1 Global 1200 - Discount to FV -1-2 DISCOUNT IN LINE WITH TREND -3 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 25 20 15 Global 1200 - FV based volatility VOLATILITY HAS PICKED UP 10 5 0 Sep 11 Mar 12 Sep 12 Mar 13 Sep 13 Mar 14 Global 1200 FV Volatility Index Vix Index 50 45 40 35 30 25 20 15 10 5 0 25
S&P Global 1200 8 6 Annualised growth in Global 1200 ANNUALISED FV GROWTH WEAKENING 4 2-2 -4-6 Aug 11 Aug 12 Aug 13 Aug 14 3m Ann. growth in Global 1200 index 3m Ann. growth in Apollo FV% 2200 2000 Global 1200 - Intrinsic Value INTRINSIC VALUE NOW FLAT 1800 1600 1400 1200 1000 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13 Oct 13 Jan 14 Apr 14 Jul 14 SP Global 1200 Apollo Intrinsic value 26
S&P Global 1200 10 Global 1200 Sector average correlation 95% 9 85% 8 75% 7 CORRELATIONS BACK ABOVE TREND 65% Sep 09 Sep 10 Sep 11 Sep 12 Sep 13 0.90 0.60 Global 1200 Index efficiency MARKET EFFICIENT ONCE AGAIN 0.30 0.00-0.30-0.60-0.90 Dec 11 Jun 12 Dec 12 Jun 13 Dec 13 Jun 14 27
S&P Global 1200 0.8 0.6 0.4 Global 1200 - Neta beta NET BETA REMAINS NEUTRAL 0.2 0.0-0.2-0.04-0.4-0.6-0.8-1.0 Oct 09 Oct 10 Oct 11 Oct 12 Oct 13 1m Change in Global Sector FV 2. 1.5% 1. 0.5% FV trending higher NEGATIVE GROWTH INCREASINGLY APPEARING 0. -0.5% -1. -1.5% -2. -2.5% FV trending lower Industrials Cons Disc. Cons. Staples Materials Financials Telcos InformationTech Healthcare 28
S&P Global 1200 Global 1200 FV growth and Index performance Healthcare Financials Cons Disc. InformationTech Industrials Cons. Staples Telcos Materials PRICES MOSTLY AHEAD OF VALUE GROWTH 1 2 3 4 5 6 7 FV growth index performance Global 1200 Sector discounts to FV Telcos InformationTech Healthcare Cons. Staples Financials Industrials Cons Disc. Materials INTERESTINGLY, NOT AS WEAK AS 2013-8% -6% -4% -2% 2% 4% 6% 29/08/2013 29/08/2014 29
S&P Global 1200 15% 1 S&P GLOBAL 1200 Net DFV 12 Month range ONLY CONS DISCRETIONARY 5% -5% -1 Materials Financials Industrials Telcos Healthcare Consumer Staples Information Tech Cons. Discretion Market 5% 4% 3% 2% 1% -1% Global 1200 Sector risk and return RISK IS PRICED IN BUT LIMITED RETURNS Consumer Staples Industrials Consumer Disc. Materials Information Tech Healthcare Financials Telcos -2% -3-2 -1 0 1 2 3 30
Global Comparisons 6 4 3-m Annualised growth in FV % FV GROWTH TREND IN ASIA STANDS OUT 2-2 -4-6 Mar 11 Sep 11 Mar 12 Sep 12 Mar 13 Sep 13 Mar 14 Asia US Europe 30 25 20 Index level volatility VOLATILITY NORMALISING AGAIN? 15 10 5 0 Mar 11 Sep 11 Mar 12 Sep 12 Mar 13 Sep 13 Mar 14 Asia US Europe 31
US/Europe Comparisons 10 Average sector correlations 9 8 7 6 SECTOR CORRELATIONS IN SYNCH 5 Aug 11 Feb 12 Aug 12 Feb 13 Aug 13 Feb 14 Aug 14 Europe Average Sector Correlation US Average Sector Correlation 1.2 0.8 Europe and US Net Beta NET BETA NON-CORRELATING 0.4 0-0.4-0.8-1.2 Aug 11 Feb 12 Aug 12 Feb 13 Aug 13 Feb 14 Aug 14 Europe Net Beta US Net Beta 32
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