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1、,.,.,Strategist,ab,Global Equity Research,AmericasUBS Investment Research,US Equity Strategy,Equity Strategy,Market Comment2013 and Beyond2 January sense is that many investors are feeling confident heading into 2013,following a year of strong equity market returns,and signs that Congress isclose to
2、 a deal that may avoid the most damaging aspects of the fiscal cliff.However,after looking at each of these items in greater detail,we aremaintaining a cautious outlook for the year ahead.The S&P 500 rose 13.4%in 2012,bringing the markets advance to 110.8%since its 2009 lows(excluding dividends).At
3、first glance,this could be viewedas a sign of robust economic and market health.However,a closer analysisreveals a disconnect between stock returns and underlying fundamentals.Exhibit 1:S&P 500,Jonathan Golub,CFA+1-212-713 8673Chip Miller,CFAS+1-203-719 3720Manish Bangard,CFAS+1-212-713 3036,1600150
4、014001300120011001000,Log scale,4/23/10,+3%,12/31/11,12/31/12+13%,Mark CardenAssociate S+1-212-713 3218,900800700,3/9/09,+80%,60008,09,10,11,12,Source:S&P,FactSet and UBSMore specifically,we view last year as being defined by expanding multiplesand falling risk aversion.This report has been prepared
5、 by UBS Securities LLCANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 14.UBS does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the firm mayhave a conflict of interest that could affect the objectivity of this report.I
6、nvestors should consider this report as only a single factor in makingtheir investment decision.,US Equity Strategy 2 January 2013As illustrated in the table below,risk metrics fell across the board in 2012,withthe VIX declining substantially and high yield spreads collapsing.More thananything else,
7、expanding risk appetites were evidenced by the sharp fall inEuropean sovereign yields.Normally,such periods are accompanied by improving growth.However,thiswas not the case last year,as global GDP slowed to just over 2%and earningsgrowth declined by almost two-thirds.Exhibit 2:Year-End Comparison 20
8、12 vs.2011,2012,2011,GrowthGlobal Real GDPS&P 500 EPS Growth,2.2%4.8%,2.9%14.4%,While growth slowed in 2012,valuations are higher on declining riskaversion,Valuation&Volatility,Forward P/E(Bottom-Up)VIXCreditU.S.10-year TreasuryInvestment Grade(Baa)Non-investment Grade(B)Italy 10-year SovereignCommo
9、ditiesOilCRB Raw Industrials,12.6x18.01.76%4.585.994.48$91.82530.40,11.7x23.41.89%5.358.467.10$99.81516.84,Source:Standard&Poors,Bloomberg,Haver and UBSECB Propels U.S.EquitiesA quick review of last years trading activity shows that ECB actions that led toa decline in European sovereign concerns wer
10、e the most important factorsdriving above-average U.S.stock returns.As we entered 2012,the S&P 500 was in the midst of a strong rally up 14.4%from its autumn lows on the back of the ECBs LTRO announcement.Riskappetites continued to expand through early April,driving the market up anadditional 12.8%.
11、UBS 2,US Equity Strategy 2 January 2013Exhibit 3:S&P 500 Returns,12.8%,14.3%,Events in Europe dominated the years,stock market movements-2.4%-9.9%,LTRORally12/31-4/2,EuropeanCrisis4/2-6/1,WhateverIt Takes6/1-10/17,Elections&Fiscal Cliff10/17-12/31,Source:Standard&Poors,FactSet and UBSThe European cr
12、isis then re-emerged as sovereign concerns spread to Spain andItaly.In early-June,Mario Draghi promised to do whatever it takes to defendthe Euro,setting off a second ECB-driven rally that lasted through mid-October.In the final weeks of the year,the market provided flattish returns,as the focusshif
13、ted to election outcomes and the fiscal cliff.2013 and BeyondAs we look to the future,its important to recognize that the economic andmarket environment is still shaped by the financial crisis.While in many wayslife appears to have returned to normal,this is only the case due to trillion dollardefic
14、its and extraordinary central bank actions.,Going forward,we believe that the environment will be defined by the actions offour key economic actors:(1)policymakers committed to averting crises,butlikely to push off the greatest long-term fiscal challenges;(2)corporationsfocused on cost controls;(3)c
15、onsumers inclined to spend;and(4)investors,The actions of four economic actorsdefine todays environment:policymakers,corporations,consumersand investors,wary of future outcomes and unwilling to“pay up”for earnings results.In total,we believe that these trends will result in an environment characteri
16、zedby mid-single digit earnings growth,downward pressure on stock multiples,anddisappointing equity market returns.PolicymakersThroughout the recovery,policymakers have been largely successful in avertingworst-case outcomes.However,they have shown much less of an ability toreinvigorate a slow econom
17、y,despite unprecedented deficit spending and centralbank actions.On the fiscal front,the Federal government has outspent tax revenues by morethan$1 trillion in each of the past four years.This deficit represented 7.0%ofGDP in 2012.According to the Congressional Budget Office,avoiding thefiscal cliff
18、 would result in a continuation of this trend into the future.UBS 3,US Equity Strategy 2 January 2013Exhibit 4:Federal Budget Deficit under Existing CBO Alternative Scenario(US$Trillions),1.4,1.3 1.3,1.1,1.0,0.9,0.8,0.8 0.8 0.9,1.0,1.1,1.2,1.4,Policymakers have run large deficits toavoid downside ri
19、sks to the economy,09,10,11,12,13,14,15,16,17,18,19,20,21,22,Source:CBO,Choices for Deficit Reduction(Nov.2012),Haver and UBSWhile cliff avoidance is the order of the day,its apparent that our system oftransfer payments is at the heart of current imbalances.As dependence on theseprograms increases,i
20、t will become even more politically difficult to reconcilefiscal challenges in the future.As stated earlier,policymakers are committed tominimizing short-term pain,even at the expense of longer-term success.Exhibit 5:%of US Population on Food Stamps&Social Security Disability Benefits,16%,4%,12%,%on
21、 Food Stamps,3%,8%2%4%on Disability,0%,1%,70,75,80,85,90,95,00,05,10,Source:Social Security Administration,USDA and UBSUBS 4,3.0,US Equity Strategy 2 January 2013On the monetary front,we have seen a tripling of the Feds balance sheet sincemid-2008.The Feds current Quantitative Easing programs are pr
22、ojected tosend these balances significantly higher.Exhibit 6:Fed Balance Sheet Assets($T)The Fed continues to take extraordinary,2.52.01.51.00.50.0,measures,90,92,94,96,98,00,02,04,06,08,10,12,Source:Federal Reserve,Bloomberg and UBSAccording to UBS economists Drew Matus and Sam Coffin,“Monetary pol
23、icy,will continue to operate as a poor substitute for responsible fiscal policy.Thepossibility of policy errors remains a key risk for the foreseeable future.Webelieve that the Fed will find it far more difficult to exit than they have found it,Policy uncertainty may be offsettingsome of the benefit
24、 provided by lowinterest rates,to enter QE.”From an investment perspective,easy money policies create significantambiguity around the future direction of inflation,interest rates,currency values,and commodity prices,offsetting some of the benefits provided to the economythrough lower rates.This,in t
25、urn,is negatively impacting business confidenceand capital investment.In the long-run,large deficits and ballooning centralbank balance sheets will likely result in some combination of austerity,taxincreases,and sub-par growth.CorporationsThe same environment that has resulted in extraordinary polic
26、y responses is alsohaving an outsized impact on corporate behavior.More specifically,an array ofuncertainties has resulted in conservative spending policies,especially aroundlonger-term capital commitments.The result is clearly visible on companyfinancial statements,where margins and cash balances a
27、re high,and capexspending remains near record lows.UBS 5,30,20,US Equity Strategy 2 January 2013This behavior is evident in capital goods orders,where the trend remains weak,despite a recent uptick.While underinvestment is likely to lead to stronger cashflows and profitability in the near term,it is
28、 also likely to retard longer-termgrowth.Exhibit 7:Capital Goods New Orders ex-Defense&AircraftsCorporate spending remainsconstrained due to macro uncertainties100-10-20-30,94,97,00,03,06,09,12,Source:BEA,Bloomberg and UBSThis same pattern is also reflected on corporate income statements.By way ofex
29、ample,twelve quarters into the current recovery,we find SG&A and R&Dspending at trough levels and falling.Exhibit 8:SG&A and R&D as a%of Sales20.0%,8.8%,Operating expenses and R&D continue,19.0%18.0%,R&D/Sales,SG&A/Sales(Rolling 12M),8.3%7.8%,to shrink as a percent of sales,(Rolling 12M),17.0%16.0%,
30、16.9%6.9%,7.3%6.8%,00,01,02,03,04,05,06,07,08,09,10,11,12,Source:Standard&Poors,Compustat,Thomson Financial,FactSet and UBSUBS 6,US Equity Strategy 2 January 2013On the cash flow front,while most investors predicted that companies wouldrelease their war chests through increased buybacks,dividends an
31、d M&A this has clearly not been the case.Exhibit 9:S&P 500 Cash%of Assets,12%,10.8%,Cash remains near peak levels 3,years into the recovery10%8%6%4%,99,01,03,05,07,09,11,Source:S&P,Compustat,FactSet and UBS,Note:Universe excludes Financials,Its also interesting to see buybacks stall out at mid-cycle
32、 levels.A similarpattern can be seen in the level of M&A activity which is far below trend.Exhibit 10:Total Payout Ratio,110%90%70%50%30%,108.0 Dividends+Buybacks,58.1,71.730.2,Buyback activity has stalled out mid-cycle,Dividends10%,00,01,02,03,04,05,06,07,08,09,10,11,12,Source:S&P,Compustat,FactSet
33、 and UBS,Note:Universe excludes Financials,We expect these trends to persist.In addition to the ongoing macro uncertaintiesdiscussed above,earnings growth is decelerating.As illustrated below,S&P500 companies delivered outsized results from 4Q09 to 3Q11 as profitsrebounded from recessionary levels.H
34、owever,a slowing economy and flat-to-down commodity prices have impaired this pace in 2012.Our$108 estimate for2013 earnings is consistent with roughly 4%EPS growth in the year ahead.UBS 7,US Equity Strategy 2 January 2013Exhibit 11:S&P 500 Operating EPS Growth(YoY),40 41,Earnings growth should be r
35、ather tepid,16,25,18 20 18 17,in 2013,-30-21,7,4,-2-3,4,-4,1,3,4,2Q09,4Q09,2Q10,4Q10,2Q11,4Q11,2Q12 4Q12E 2Q13E 4Q13E,Source:Standard&Poors,Thomson Financial,Compustat,FactSet and UBSNote:Year-over-year growth actuals are shaded in black.Estimates beginning in 3Q12 are shaded in greyConsumersWhile c
36、ompanies are responding to macro and growth uncertainties throughcautious behavior,the same cannot be said of the consumer.Over the past threeyears,retail sales grew in line with the long-term average and nominal GDP.Exhibit 12:Retail&Food Services Sales YoY12%,8%4%0%-4%-8%-12%,Avg.3.8%,3.8%,Retail
37、sales remains roughly inline withnominal GDP,00,02,04,06,08,10,12,Source:US Census Bureau,Haver and UBSMoreover,consumers are showing a willingness to commit their capital towardlonger-term purchases.As shown below,auto sales continue to improve from2009 levels.The same can be said for housing activ
38、ity.UBS 8,17,16,US Equity Strategy 2 January 2013Exhibit 13:U.S.Light Vehicle Sales,18151413121110,Mn,14.1,Auto sales and housing activity are upsharply,95,97,99,01,03,05,07,09,11,Source:Wards,Haver and UBS,Note:Rolling 12-month basis,Clearly,consumers have benefitted from the actions taken by polic
39、ymakers,whohave run large deficits and provided ultra-aggressive monetary policy.Althoughthe level of unemployment remains uncomfortably high,consumers are reapingsignificant benefits from reduced debt burdens and increased asset values.Forexample,over 3%of disposable income has been freed up as hom
40、eowners haverefinanced at lower rates.Exhibit 14:Household Debt Service to Disposable Income,140120,%,%,14,Household debt service has fallendramatically supporting spending,13,1008060,Household Debt/Disposable Income,HouseholdDebt Service,121110,80,85,90,95,00,05,10,Source:Federal Reserve,Haver and
41、UBSThroughout the recovery,the savings rate has fallen from 6.0%to 3.6%ofdisposable income,providing another tailwind for spending.While many areconcerned that higher taxes resulting from the fiscal cliff will drive a contractionin demand,we believe that this will be partially mitigated as consumers
42、 take thesavings rate even lower.UBS 9,200,US Equity Strategy 2 January 2013Exhibit 15:Savings Rate&Total Household Net Worth,12%108,Savings Rate,Total Household Net Worth,$T3.6%,020,A lower savings rate provides anadditional tailwind for consumerspending,642,$64.8,4060,65,70,75,80,85,90,95,00,05,10
43、,80,Source:Federal Reserve,BEA,FactSet and UBS,Note:Savings displayed on a rolling 12 month basis,In the short run,spending is critical to economic growth.However,currentsavings are woefully inadequate running one-half to one-third of the levelsexperienced in the 60s,70s and 80s.At some point in the
44、 not-so-distantfuture,consumption will have to fall as retirees find themselves with insufficientassets.InvestorsGenerally speaking,investors remain cautious nearly four years after themarkets 2009 bottom.This is evident in the direction of equity mutual fundflows.As the exhibit below highlights,the
45、 shift away from stocks began wellbefore the 2008 crisis.Exhibit 16:12 Month Flows to U.S.Equity Mutual Funds(in$Billions),150100500-50-100,Period of Inflows,Period of Outflows,U.S.equity fund flows have beennegative since 2004,92,96,00,04,08,Source:AMG Lipper and UBS,Note:Excludes ETFs,We believe t
46、hat investor sentiment is even better captured by stock multiples what investors are willing to pay for a dollar of earnings.Throughout therecovery,investors have espoused reversion toward some mean multiple,with14.5x cited as normal.We do not endorse this line of reasoning,as the range ofvaluations
47、 over time has been extremely wide,and average levels tend to bequite specific to the time period measured.UBS 10,30,15,16,14,4,US Equity Strategy 2 January 2013Exhibit 17:Forward P/E MultiplesThe average multiple depends largely,2520105,Avg=11.1x,Avg=16.5x,on the period measured,70,75,80,85,90,95,0
48、0,05,10,Source:Standard&Poors,Dept.of Labor,Thomson Financial,FactSet and UBSWhile stock multiples move in an extremely wide band over time,over shorterperiods they tend to anchor on a specific market metric which captures thegeneral level of interest rates/inflation,growth expectations,and attitude
49、stowards risk.This behavior is most visible in the relationship between earningsyields and 10-year bond yields from 1981 to 1999.Exhibit 18:Fed Model(1981-1999),Earnings Yield,Stocks anchor on a single valuation,metric for prolonged periods of time12108610-year Yield,82,84,86,88,90,92,94,96,98,Sourc
50、e:Federal Reserve,S&P,Thomson Financial,FactSet and UBSHistory shows us,however,that these relationships often come to an abrupt end.As shown below,the 18-year Fed Model period broke down in the latter days ofthe TMT bubble.In the years that followed,investors and market punditspredicted a reversion
