Spotlight on Global Asset Classes. Global Asset Allocation Research June 2017

Transcription

1 Spotlight on Global Asset Classes Global Asset Allocation Research June 217

2 Setting the Scene Benign Economic Backdrop Growth Holding Up Relatively Well in a More Synchronized Way The growth outlook is benign: we confirm our global GDP growth forecast, at 3.5% for 217, acknowledging better than expected World Trade dynamics. The European outlook is improving with European politics less of a threat. Inflation is Mild, with Limited Upside The inflation outlook remains constructive although milder than anticipated. The output gap is narrowing and commodity prices are expected to bottom out. Deflation risk is behind us while the risk of overheating is contained. Global Growth Outlook GDP Growth (%, Pioneer Investments Forecast for 217-2) 1% 8% 6% 4% 2% % Pioneer Investments Forecast Central Banks to Remain Accommodative Financial conditions around the world are favourable. The Fed s normalization path is on track and should remain gradual with two more hikes in 217 and smooth progress afterwards. Concerns about less accommodative financial conditions in EMs have eased in general. US economic policy direction Brexit path (hard or soft) Commodity prices dynamics Potential Chinese slowdown. -2% -4% 1% 8% 6% Growth gap (percentage points) DMs EMs DMs = Developed Markets; EMs = Emerging Markets. Source: Analysis by Pioneer Investments - Global Asset Allocation Research, IMF. Data as of June 14, 217. Global Inflation Outlook World CPI (y/y %, Pioneer Investments Forecast) Pioneer Investments Forecast The global economic backdrop remain positive and confirms the supportive ground for risky assets. Overall risks have eased somewhat Focus on geopolitical events remains key Uncertainty over US policy direction still high China hard-landing. 4% 2% % -2% EMs DMs DMs = Developed Markets; EMs = Emerging Markets. Source: Analysis by Pioneer Investments - Global Asset Allocation Research. Data as of June 14,

3 Yield Yield Core Government Bonds Protecting Against Interest Rate Sensitivity US Yield Rises Mainly Focused on 1Y Delays and disagreements in the implementation of Trump s fiscal package are weighing on our expectations of a repricing in US yields. Currently the 2Y and 5Y buckets look fairly priced, while the 1Y still offers room for an increase by the end of 217. We are expecting the Fed to hike once again by the end of the year and at the same time to announce the start of its plan to shrink its balance sheet. German Rates Fundamentally too Low With the Eurozone s macro picture continuing to improve and the political landscape looking more stable, the macro backdrop supports a shift higher for the German curve. We see the ECB s possible announcement of a less accommodative monetary policy in 218 to be the trigger for such repricing. Positive risk sentiment towards European assets should also support investors reallocation away from safe havens. US Rates 217 Targets US Government Bond Yields Forecast 2.6% 2.2% 1.8% 1.4% 1.% 1.51% 1.91% 2Y 5Y 1Y 2.43% Delta Yield (RHS) 6M forward rate 217 Target.3%.2%.1%.% Yield Differential Source: Analysis by Pioneer Investments - Global Asset Allocation Research. Yield differential between Dec. 17 Forecast and 6M forward rate. Data as of June 16, 217. Progress on Trump s fiscal agenda Changes to Fed s dot plot chart and details on balance sheet adjustment Pattern of core CPI inflation in Eurozone ECB s announcements on changes to QE programme. German Rates 217 Targets German Government Bond Yields Forecast 1.%.72%.4% Core government bond yields have reached their lows. German rates set for a much more severe sell off when monetary policy starts to normalize. Implementation of an aggressive fiscal reform in the US, leading to a more hawkish Fed Strong downward correction in Eurozone s CPI inflation preventing ECB s tapering Resurgence of political risks..5%.% -.5% -1.% -.41%.5% 2Y 5Y 1Y Delta Yield (RHS) 6M forward rate 217 Target Source: Analysis by Pioneer Investments - Global Asset Allocation Research. Yield differential between Dec. 17 Forecast and 6M forward rate. Data as of June 16, %.2%.1%.% Yield Differential 3

4 Ratio Yield Forecast Core DM Credit Late-Cycle; Valuation Stretched, but Some Decent Carry Remains Moderately Supportive Macro Conditions The economic backdrop for the credit market remains moderately positive, mainly due to supportive growth enabling credit fundamentals to improve (declining default rates and supportive corporate earnings). Even if Valuations are Somewhat Expensive As we are approaching the end of ultra-low rates, ultra-low volatility and ultraeasy central bank policy the scenario progressively is becoming less benign. As a consequence, valuations are becoming less attractive and are approaching a late-cycle phase, especially in the US HY space. Technical Factors & Political Uncertainty Remain the Main Risks The carry remains attractive for the time being, even if technical factors, like scarcity, positioning, robust issuance and political uncertainty makes the asset class vulnerable. All in all, the low level of risk premium makes the risk/reward asymmetric in our view. Financial conditions tightening ECB progressively modifying its forward guidance Global growth Italian elections. Our overall assessment for the credit market is now neutral, from slightly positive, mainly due to a technical deterioration. Acceleration of monetary policy normalization and rising real rates Weaker than expected economic data (confidence hit, weak policy implementation by Trump). Credit Yield Forecast Pioneer Investments Forecast on ML Corporate Bond Indexes Current Sep-17 Dec-17 Mar-18 Jun-18 US HY US IG EMU HY EMU IG Source: Analysis by Pioneer Investments - Global Asset Allocation Research, Bank of America Merrill Lynch. Data as of June 16, 217. HY Leverage Approaching New Highs High Yield Gross and Net Leverage Ratio US HY Gross Leverage US HY Net Leverage Source: Analysis by Pioneer Investments - Global Asset Allocation Research, Bank of America Merrill Lynch. Gross Leverage (Total Debt / 12M EBITDA), Net Leverage (Net Debt / 12M EBITDA). Data as of June 16,

5 Spread, Basis Points Spread BPS Emerging Market Bond Still Neutral, but Selective Opportunities The Global Macro Context Remains Relatively Carry Friendly, Supporting EM Bonds Improving fundamentals, including China and commodity prices stability are contributing to subdued global volatility. In this environment, we believe that it is difficult to see massive capital outflows from EM bonds, so the case for EM carry is likely to remain in the spotlight, even if positioning is becoming a bit stretched. Valuation-wise we Remain Neutral According to our valuation metrics, current trading levels are somewhat expensive, even if we have revised down our year-end EMBI spread target to 38bp from 39bp, mainly due to our lower forecast for US Treasury yields. We Continue to Prefer a Relative Value Approach We believe that selective opportunities are available at a single country level. This means favouring countries with strong fundamentals, a credible reform agenda, attractive valuations and attractive risk-adjusted carry. Fed policy and US Dollar China Commodity prices (i.e., sentiment) Geo-political risk events. Selection is key for EM bonds is key in our view. The asset class is still attractive from an income perspective, but exposed to some risks. Aggressive Fed Protectionist measures/trade war China hard-lending Commodity prices slowdown Geo-political risks. Neutral View on EM Bonds EMBI Spread Source: Analysis by Pioneer Investments - Global Asset Allocation Research. Data as of June 13, 217. EMBI = JPMorgan EM Bond Index. Some Selective Opportunities EMBI Spread and Rating Brazil South Africa Turkey Croatia Mexico Colombia Russia Chile ChinaMalaysia Indonesia Korea Hungary Peru Romania Philippines Israel Poland Thailand Pioneer Investments Forecast Dec. 17, 38 Rating Source: Analysis by Pioneer Investments - Global Asset Allocation Research. We consider the median rating on External debt published by Moody, S&P and Fitch. Data as of 13 June, 217. Argentina AAA AA A BBB BB B 5

6 Global Equity Consolidation Fundamentals Unchanged Perspectives on fundamentals remain unchanged while markets on average have lifted, eroding the undervaluation gap and moving global equity into a consolidation phase. Europe Remains the Favourite Region Upside potential for the European market is based on positive momentum in earnings revision and some valuation metrics. The US market struggles to find triggers beyond what the markets has already priced in terms of macro and micro fundamentals improvements, which is consistent with a growing & performing economy. The value of the yen, the downsized macroeconomic perspectives and the recent market rally have eroded the potential upside in the Japanese equity market. Crowded Positioning Equity is crowded, leaving us with an overall more cautious stance to exposure. US corporate tax cuts and factors affecting corporate margins Currency dynamics: excessive USD and Yen appreciation would be negative for US and Japan markets. Recent Rally Closed Upside in all Regions Except Europe Pioneer Investments Fair Values 8% 4% % -4% -8% US Equity European Equity Japanese Equity Pacific Equity 12M FWD as of 8-jun-17 12M FWD as of 1-April-17 Source: Analysis by Pioneer Investments - Global Asset Allocation Research on MSCI indexes. Data as of June 14, 217. Macro Target Price is the theoretical price level consistent with our base scenario. The gap versus market price defines the over/under valuation gap. Multiples Become Expensive in Many Regions Fundamental Metrics GEM Equity Progressive erosion of the valuation gap and heavy positioning, have left the equity market in a consolidation phase. Political instability in the EU Central Banks normalization discipline is too hawkish. PE PBV PS PCF DY PEBITDA Very Expensive Expensive Neutral Cheap Very Cheap Source: Pioneer Investments, Bloomberg. Color stands for each market relative to their own history over a 1 year period. The price/earnings (PE) is the ratio of a company market share price (share price) compared to its per share earnings. The price/book value (PBV) is the ratio of the share price over its book value of equity. The price to sales (PS) is the ratio of the share price to its revenue per share for the trailing 12 months. The price to cash flow (PCF) compares the share price to its level of annual cash flow. Dividend Yield (DY) is the annual dividends per share divided by the share price. The price to EBITDA (PEBITDA) compares the share price to earnings before interest, taxes, depreciation and amortization. Data as at May 31, 217. Indexes: Europe=Stoxx6, US=S&P5, Japan=Topix, France=CAC4, Germany=DAX, Italy=FTS EMIB, Spain=IBEX 35, Switzerland=SMI, UK=FTSE1. 6

7 Negative 12M FWD Macro momentum Positive 12 M FWD Macro Momentum Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Emerging Markets Equity More Supportive Global Conditions Growth Outlook for Earnings per Share is Improving Our forecasts for Global Emerging Market EPS (in USD) for 217 are +9% YoY, unchanged from March. Q1 217 earnings season (almost finished) has been quite good with YoY growth and surprises being mainly positive. Revisions have also been positive everywhere over the last 3 month (with the only exception being Taiwan). A More Benign Scenario for GEM This Year A rebound in world trade volume (signaling stronger than expected global demand) and benign financial conditions (USD and US real rate) are all supporting factors for EM equities. MSCI EM EPS is Bottoming Out Our Forecasts Show Reasonable Growth 25% 15% 5% -5% -15% -25% Crowded Positioning Positioning in the EM equity space is becoming a bit stretched, especially in LATAM where local dynamics (political instability, in particular) make the asset class more vulnerable than other EM regions. Trump programme on protectionism and fiscal expenditure Domestic demand and reforms Commodity prices and global growth. Our overall view on EM equity remains neutral, with country-specific opportunities. Protectionism/Trump policies Downturn for commodity prices Slowdown in the global recovery Fed policy mistake (strong USD, higher real rates). MSCI EM EPS Consensus Exp Pioneer Forecast Source: Analysis by Pioneer Investments - Global Asset Allocation Research. Forecast on MSCI EM EPS in USD. Data as of June 13, 217. Country Selection Paramount in EM Equity Assessment based on internal Equity Score and Macro Momentum Korea Chile Taiwan South Africa China Brazil India Russia Czech Republic Peru 13 Low Fundamental Momentum Malaysia Philippines Mexico 8 Poland Hungary Indonesia Thailand Turkey 3 High Fundamental Momentum Source: Analysis by Pioneer Investments - Global Asset Allocation Research. Ranking of 18 Global Emerging equity markets with an overall score attributed to each market, ranking them from most to least attractive, (on the basis of valuation, profitability, growth, positioning, risk) based on econometric model. Countries in the top right are the most attractive. Data as of June 16,

8 Currency EUR/USD FX in G4 Volatility Could Create Opportunities EUR/USD to Continue Trending Higher With US politics dominated by the issues surrounding President Trump, USD remains vulnerable vs EUR. Moreover, the single currency is supported by expectations of diminishing monetary stimulus from the ECB (likely to come in 218), strong and more homogenous growth across member countries and its valuation is still considered cheap despite the recent appreciation. Yen still Bound to Yield Differentials Bank of Japan s yield curve targeting, since its introduction, has meant USD/JPY moves have been driven by the USD leg. It is reasonable to expect a stronger Yen in the medium/long term, when monetary policy from BOJ starts to normalise. GBP Vulnerable to Political Uncertainty Increased political risk will weigh on GBP, resulting in a weaker currency. The BOE is expected to remain on hold, tolerating higher inflation as generated by a weaker currency. Resurgence of political risk in the Eurozone Trump s fiscal reforms ECB s shift to a less accommodative monetary policy Brexit developments with a weaker mandate for May. EUR/USD 217 Forecast at 1.14 Pioneer Investments Forecast Source: Analysis by Pioneer Investments - Global Asset Allocation Research. Data as of June 16, 217. G4 Currencies Pioneer Investments Forecast (End of Dec. 217) Dec. 217 Targets Pioneer Investments Forecast Dec. 17, 1.14 USD EUR GBP JPY EUR to trend towards fair value (1.15) as USD bull phase runs out of steam. GBP moving as a Brexometre more than ever. JPY lacking any specific driver. ECB postponing QE tapering Protectionist policies in US (i.e. Border Adjustment Tax) Fed more hawkish than expected Prospects of a much softer Brexit BOJ changing its yield targeting policy. USD EUR GBP JPY Source: Analysis by Pioneer Investments - Global Asset Allocation Research. Data as of June 16,

9 Low Carry High Carry EM Currencies Tactical & Selective on High Carry, Still Some Attractiveness Still Some Valuation Gaps to Be Filled According to our valuation metrics there is still some attractive valuation stories in the EMFX space. Certainly, valuations are less compelling compared to a year ago but prospects of continued US dollar weakness continue to be supportive for (select) EM currencies going forward. The External Environment Remains Relatively Carry Friendly Improving fundamentals, included China, commodity prices and US real rates stability are likely to maintain risk sentiment and resilient capital flows. Focus on Low External Vulnerability In evaluating the attractiveness of EM currencies, we combine the implied carry with our external vulnerability index based on the assessment of each country s reserve adequacy, external debt and current account. Based on this, Brazil, Russia, India and Mexico are among our favored countries. US foreign policy (border taxes) Commodity prices USD and US real rates China macro developments. Different economic conditions and sensitivity to commodities, EU recovery and Trump economic programmes could provide relative opportunities within EM currencies. Idiosyncratic political risks China hard landing Commodity price decline Aggressive Fed. EM Currencies Outlook Carry vs External Vulnerability TRY Negative Outlook CLP ZAR High External Vulnerability COP PLN MYR RON TWD CZK HUF MXN Positive Outlook BRL RUB PEN CNY Low External Vulnerability Source: Analysis by Pioneer Investments - Global Asset Allocation Research. Data as of June 16, 217. Vulnerability Index takes into account: CA and Funding; External Debt and ST External Debt; Reserve Adequacy; Domestic variables. IDR THB KRW ILS PHP INR 9

10 Index 1996Q1 1997Q1 1998Q1 1999Q1 2Q1 21Q1 22Q1 23Q1 24Q1 25Q1 26Q1 27Q1 28Q1 29Q1 21Q1 211Q1 212Q1 213Q1 214Q1 215Q1 216Q1 217Q1 Commodities Expectations for Prices to Bottom Out Attractive Asset Class Commodities should perform in line with global equities thanks to improving global growth prospects not only in the US and China, but also in Europe, as recent data flow looks more promising than in the recent past. Positive Economic Cycle Conditions Cyclical components and inventory cycles are finally starting to play in favour of commodities, although the extraordinary bull cycle we had in 2s is unlikely to be repeated. China s economic stabilization should guarantee a period of consolidation for base metals at least. Overcapacity Keeps Oil Prices Down We ve revised down our target per barrel due to oil supply pressure as Opec and non-opec countries are planning to increase supply more than global demand in the next quarters. Growth dynamics Oil supply/demand dynamics Commodity inventories cycle and supply restructuring. Positive momentum for commodities driven by cyclical factors and supply/demand dynamics. World trade Economic slowdown. Commodities Historically Affected by China and GEM Growth China Economic stabilization and consolidation for Base Metals Source: Bloomberg, Pioneer Investments - Global Asset Allocation Research. Data as of June 14, 217. Most of the Oversupply is Over Pioneer s Supply Index Base Metals (LHS) China Coincident indicator (RHS) Oversupply Undersupply Source: Analysis by Pioneer Investments - Global Asset Allocation Research. The plot shows Pioneer Investment internal indicator of the commodity inventories cycle. Data as of June 16,

11 Asset Class Assessment Q2 217 ASSET CLASS ECONOMIC BACKDROP VALUATION RISK SENTIMENT TECHNICAL ASSESSMENT Core Government Bonds Core Credit EM Bonds Global Equity EM Equity Commodities Poor Medium Good Source: Analysis by Pioneer Investments - Global Asset Allocation Research. Data as of June 16,

12 Contributors EDITORIAL TEAM Monica Defend Head of Global Asset Allocation Research Isabelle Armanville de Calbiac, PhD, Global Asset Allocation Research Daniele Bivona Global Asset Allocation Research Claudia Bertino Head of Financial Communication, Global Strategy and Marketing Debora Delbò Global Asset Allocation Research Silvia Di Silvio Global Asset Allocation Research This material reflects the opinions of the above authors at the time of writing. Lorenzo Portelli Global Asset Allocation Research Laura Fiorot Financial Communication Specialist, Global Strategy and Marketing Important Information The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an as is basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the MSCI Parties ) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. ( Unless otherwise stated, all information contained in this document is from Pioneer Investments and is as of June 16, 217. The views expressed regarding market and economic trends are those of the author and not necessarily Pioneer Investments, and are subject to change at any time based on market and other conditions and there can be no assurances that countries, markets or sectors will perform as expected. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading on behalf of any Pioneer Investments product. There is no guarantee that market forecasts discussed will be realized or that these trends will continue. Investments involve certain risks, including political and currency risks. Investment return and principal value may go down as well as up and could result in the loss of all capital invested. This material does not constitute an offer to buy or a solicitation to sell any units of any investment fund or any services. Pioneer Investments is a trading name of the Pioneer Global Asset Management S.p.A. group of companies. Date of First Use: June 28,