Equity Markets in a Late-Cycle Environment: Balancing Opportunity and Risk

Transcription

1 Equity Markets in a Late-Cycle Environment: Balancing Opportunity and Risk Speaker: Olivia Engel, CFA Senior Managing Director, CIO, Active Quantitative Equity State Street Global Advisors

2 2 Content What s happening in equities? What could go wrong? What can we do about it?

3 A lengthy Bull Market Since March 2009 Low S&P 500 Euro Stoxx 600 (USD) Nikkei 225 (USD) FTSE Developed APAC ex JP (USD) MSCI World (USD) MSCI EAFE (USD) MSCI Emerging Markets Trump Takes Office S&P 500 up 242% Developed World up 163% 200 Emerging up 109% Source: Bloomberg Finance L.P. As at March 7, Past performance is not a reliable indicator of future results Index growth chart is based on price return, excluding dividends, in USD

4 Earnings growth is the best and broadest we ve seen in over 6 years, with Europe, APAC and EM looking particularly strong 60% 40% 20% 0% YoY Forward EPS Growth USA Europe Japan Asia EM 60% 40% 20% 0% YoY Forward EPS Growth, MSCI World Sectors Energy Industrials Staples Financials Materials Discretionaries Health Care Technology -20% -20% -40% -40% -60% % Source: Bloomberg Finance L.P., MSCI as of 7-Mar Forward EPS are based on Bloomberg estimates. MSCI Indices used as proxy for each region.

5 Source: Bloomberg Finance L.P., MSCI as of 7-Mar Forward PEs are based on Bloomberg estimates. MSCI Indices used as proxy for each region. Headline valuations, low correlations and wide dispersion are constructive for true active management Forward PE Ratio USA Europe Japan Asia-Pac Emerging

6 Equity Valuations signal more potential outside U.S. Global Equity Market Price to Book Ratios (P/B) USA Europe Japan Asia-Pac Emerging Mar-18 Jan year high 15 year low 15 year average Source: Bloomberg Finance L.P., and SSGA of 7 Mar Characteristics are as of the date indicated and should not be relied upon as current thereafter. Past performance is not a reliable indicator of future results.

7 What happens in a correction? Dispersion of sector returns during market drawdowns 20% 0% -20% -40% -60% Best Sector Worst Sector Market Fall -80% Sep-98 Sep-02 Mar-09 Oct-11 Jun-12 Oct-14 Sep-15 Feb-16 Feb % MSCI World Returns during major market drawdowns ending dates shown, and best vs worst performing GICS sectors, sourced from Bloomberg Finance L.P.

8 Options for Tail Risk Hedging Strategy Benefits Costs Sell Equities Simple/Direct Foregone upside Purchase Put Options Direct Puts are expensive Buy Long US Treasuries Inexpensive Opportunity cost has low yield Targeted Volatility Triggers Managed Futures Can be run as an overlay on an entire equity program Momentum-based trading at the macro level can offer strong downside protection Variable equity exposure may be difficult to grasp for asset owners High active risk High fees are often paid to the best managers Flexible Asset Allocation Asset allocation mix is dynamically adjusted to match expectations about market conditions Active fees, though much less than standard liquid alternatives This information does not constitute investment advice and it should not be relied on as such

9 An Active Equity Approach Portfolio Construction Return Objective Total Risk Objective Link equity portfolio construction with investor objectives Hold only the most favored stocks* Be explicit in managing total portfolio risk Remove benchmark constraints in portfolio construction Focus on the best investment ideas* High quality Reasonable value Sustainable earnings Ability to generate internal growth Positive outlook Risk is total volatility and capital lost, not tracking error * Based on our stock selection model.

10 Stock exposures on return and risk SSGA Expected Return Index SSGA Expected Risk As of December 31, Sources: FactSet, GICS, MSCI, Inc., Thomson Reuters Worldscope. Benchmark is MSCI World Index.. The results shown were achieved by means of a mathematical formula, and are not indicative of actual performance which could differ substantially. Expected Risk is Axioma Total Risk. Expected returns and characteristics are based upon estimates and reflect subjective judgments and assumptions. There can be no assurance that developments will transpire as forecasted and that the estimates are accurate.

11 Stock exposures on return and risk SSGA Expected Return Index Preferred SSGA Expected Risk As of December 31, Sources: FactSet, GICS, MSCI, Inc., Thomson Reuters Worldscope. Benchmark is MSCI World Index. The Supplemental Information above is that of a single representative account within the Composite, which is subject to change. The representative account was chosen because it has no material restrictions and fairly represents the investment style of the Strategy.Value, Quality and Sentiment scores are produced using SSGA s proprietary alpha model. The results shown represent current results generated by our Global Defensive Equity model. The results do not reflect actual trading and do not reflect the impact that material economic and market factors may have had on SSGA s decision-making. The results shown were achieved by means of a mathematical formula, and are not indicative of actual performance which could differ substantially. Expected Risk is Axioma Total Risk. Expected returns and characteristics are based upon estimates and reflect subjective judgments and assumptions. There can be no assurance that developments will transpire as forecasted and that the estimates are accurate.

12 Sector exposures on return and risk Industrials Real Estate Staples Financials Technology SSGA Expected Return Utilities Utilities Telecoms Real Estate Staples Health Care Discretionaries Materials Financials Industrials Health Care Telecoms Technology DiscretionariesMaterials Energy Model Selections Index SSGA Expected Risk As of date: December 31, Source: SSGA, Factset. Benchmark is MSCI World Index. Area of scatter points reflect sector active weights. Expected Return is produced using SSGA s proprietary alpha model. The results shown represent current results generated by our Global Defensive Equity model. The results do not reflect actual trading and do not reflect the impact that material economic and market factors may have had on SSGA s decision-making. The results shown were achieved by means of a mathematical formula, and are not indicative of actual performance which could differ substantially. Expected returns and characteristics are based upon estimates and reflect subjective judgments and assumptions. There can be no assurance that developments will transpire as forecasted and that the estimates are accurate.

13 Potential Benefits of this Approach Strong equity-linked returns Reduced volatility Strong upside capture, muted downside capture High active share Diversified exposures Low correlation with other strategies

14 14 Conclusion Equity markets could run a lot further, but there are risks Major market drawdowns are harmful for retirement objectives There are many ways to hedge against tail risk Active equity strategies focused on total volatility rather than tracking error can be an effective tool

15 Important Information The information contained above is for illustrative purposes only. The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. Diversification does not ensure a profit or guarantee against loss. Investing involves risk including the risk of loss of principal. Investing in foreign domiciled securities may involve risk of capital loss from unfavorable fluctuation in currency values, withholding taxes, from differences in generally accepted accounting principles or from economic or political instability in other nations. Investments in emerging or developing markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries. Derivative investments may involve risks such as potential illiquidity of the markets and additional risk of loss of principal. Equity securities may fluctuate in value in response to the activities of individual companies and general market and economic conditions. The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA's express written consent. State Street Global Advisors 2018 State Street Corporation. All Rights Reserved NA.INST Exp. Date 30 June 2018