Global Investment Strategy

Transcription

1 Global Investment Strategy First Quarter 2018 R & A Group Research & Asset Management AG Bodmerstrasse 3 CH-8002 Zürich Phone info@ragroup.ch

2 Agenda Chapter 1: Performance review page 4 Chapter 2: World economy Outlook 2018 The world in 2018 page 5 Chapter 3: Central bank policy Still negative real rates page 31 Chapter 4: Bond markets Yields seen only modestly higher page 35 Chapter 5: World currencies Euro tends to strengthen page 49 Chapter 6: Hedge Funds page 54 Chapter 7: Equity markets Positive earnings trends page 55 Chapter 8: Commodities World economy supportive page 71 Chapter 9: Investment strategy General framework positive page 76 page -3-

3 A long business cycle In the course of 2018, the world economy will enter its tenth year of expansion (as economic activity fell to a low during the financial crisis in the first half of 2009 in most countries). While the length of the current business cycle is not atypical historically, investor concerns most often stem from the observation that the current cycle has already lasted a good deal longer than the previous one, which ended after only six years ( in Germany). On the other hand, it is often forgotten that business cycles in the 1980s and 1990s were considerably longer. The current cycle might even become the longest in the post-war period. This can in part be explained by the phenomenon that the Great Recession was unusually deep, which implies that it is taking longer to re-establish normal levels of activity and employment Germany: Business cycles (GDP) Years Source: Bundesbank/GFSO, own calculations USA: Business cycles (GDP) Years Source: BEA, own calculations page -11-

4 Eurozone: Progress in recent years Even though the euro area s debt crisis has been consigned to history for some time now, it is worth taking a brief look at government finances and current-account balances in the former crisis countries. Ireland has done best and has even managed to shrink its government debt (in relation to GDP) to below the level of Spain s budget deficit is still above the 3% limit but at a level that barely poses stability issues. The current account is in surplus, though debt remains somewhat high. Trends in Portugal have been similar, even though government debt at 126% of GDP is high. Greece has made significantly more progress than often believed, as the country now runs a primary budget surplus and a nearly balanced current account. The debt load is high, but debt servicing is sustainable as long as the country s debt is accorded preferential rates by its official lenders (Greek interest payments account for only about 3.5% of GDP, which is lower than in Italy). Eurozone: Overview Gov. budget* Prim.surpl.* Gov. debt* Curr.acc.* Popul. Share eurozone (%) (mill.) GDP Debt Popul. Germany Austria Finland Netherlands Belgium France Italy Spain Portugal Ireland Greece Euro area *in % of gross domestic product (GDP). "Prim.surplus"=Surplus excluding interest payments. Source: IMF, national statistics page -18-

5 U.K. economy Economic growth in Britain has slowed down roughly in line with expectations after the Brexit vote, though by no means as much as feared by many. Sterling weakness has caused inflation to rise, thus eroding purchasing power and private consumption. Business investment has suffered modestly, though overall economic sentiment has recovered in We expect GDP growth in 2018 at least to match the 1.6% recorded in This assumes a Brexit transition deal with the EU, however, which would help to maintain confidence in the corporate sector. With the unemployment rate at a historic low, the U.K. s economic cycle is well advanced (similar to that in the USA). This will justify the Bank of England continuing to nudge up interest rates in U.K.: Purchasing manager indices Manufacturing Services 50 (above=growth) 30 Nov-07 May-10 Nov-12 May-15 Nov-17 Source: Markit Retail sales U.K. -4 Oct-11 Oct-13 Oct-15 Oct Source: Eurostat U.K.: unemployment rate 3 Sep-77 Sep-87 Sep-97 Sep-07 Sep-17 Source: UK Of f ice f or National Statistics U.K. economic sentiment Nov-97 Nov-01 Nov-05 Nov-09 Nov-13 Nov Source: European Commission UK Consumer confidence Nov-11 Nov-13 Nov-15 Nov-17 Inflation U.K. Consumer prices (%year-ago) Core inflation (%year-ago) -1 Oct-11 Apr-13 Oct-14 Apr-16 Oct-17 Source: UK Of f ice f or National Statistics page -19-

6 Japan: Good momentum Japan s economy has been doing well in recent quarters when considering that its growth potential driven by negative trends in the working-age population is among the lowest in the world. Domestic demand has firmed in recent quarters and is now more important a driver of growth than net exports. We expect the current positive momentum to be maintained in While wage growth has remained sluggish, we see some firming as the unemployment rate is close to a historic low. With this in mind, we anticipate higher core inflation, though it will remain well below the Bank of Japan s target of 2% through 2019 (the BoJ, however, maintains its view that its target is within reach by the end of 2019) Japan Q Q Q Japan: Wage growth (%yoy) Q Avg. Pers. expend Gov. expend Corp. Invest Domestic dem Exports Imports GDP Net exports Invent. chg GDP deflator Note: Change in gross domestic product from previous quarter, annualized in % (except otherw ise noted). Source: Economic and Social Research Institute Japan: Purchasing manager index 25 Nov-05 Nov-08 Nov-11 Nov-14 Nov Source: Markit Japan: Inflation (Tokyo, %y.ago) Consumer prices Consumer prices (excl. fresh food) Source: MIC page -27-

7 Emerging markets: Hard currency debt Emerging market sovereign bonds, issued in the currencies of industrialized countries, notably in euros or U.S. dollars, are attractive in the medium term, as the credit ratings of emerging countries tend to improve over time. While strongly rising U.S. bond yields are usually negative for this segment (the index duration is relatively long at about seven years), this is not too much of a concern as we do not expect a major increase in U.S. Treasury yields. Even with near-term drivers missing after the narrowing of spreads seen in 2017, this bond class is worth holding, given its attractive yield, with setbacks offering buying opportunities Bond performance (USD) U.S. government bonds Em.markets sovereigns (EMBI) 85 Nov-12 Feb-14 May-15 Aug-16 Nov-17 Source: Index prov ider Credit spreads (USD, basis points) Russia Brazil Mexico China Indonesia 0 Nov-07 Nov-09 Nov-11 Nov-13 Nov-15 Nov-17 Source: Index prov ider Emerging markets bonds Credit spread vs. government bonds (USD, %) 1 Nov-05 Nov-08 Nov-11 Nov-14 Nov-17 Source: Index prov ider page -45-

8 Cat bonds Cat bonds are bonds issued by insurance and re-insurance companies to transfer defined catastrophe risks (e.g. hurricanes, earthquakes) to capital markets. Cat bonds pay an attractive coupon when there are no catastrophes, but investors lose coupon payments and in some cases even principal when certain catastrophe events occur. As the chart shows, the cat-bond market experienced comparatively small losses even during events such as the Fukushima earthquake in 2011 and even during the U.S. hurricane season in 2017 (an earthquake in California would be significantly more damaging, however). Irrespective of this positive record, cat bonds remain asymmetric-risk investments as gains are confined to the coupon whereas losses may be much higher. From a portfolio perspective, Cat bonds have a very attractive risk-return profile and in addition have little to no correlation with traditional asset classes (in the case of an extreme natural catastrophe, Cat bonds would however highly correlate with equity markets). We also note that returns for Cat bonds funds, given high fees, are often meaningfully lower than index returns. Global Cat bond markets Performance - USD 4Q17* 2017* 3 years Swiss Re Cat Bond Index Overall 3.0% -0.5% 11.4% BB Rated 1.0% 2.5% 11.8% US Winds 5.6% 1.0% 12.8% Aon Cat Bond Index Overall 1.6% -1.2% 9.4% US Hurricane 3.9% 0.9% 13.5% US Earthquake - 2.5% 10.7% BB rated 0.0% 3.1% 9.9% *Data as per 11-Dec-17. Source: Standard & Poor's, Aon Benfield Securities Performance Swiss Re indices (USD) Overall BB rated US Wind Oct-05 Oct-07 Oct-09 Oct-11 Oct-13 Oct-15 Oct-17 Source: Standard & Poor's Risk and return characteristics Asset class Return Volatility Equities (S&P 500 Total Return in USD) 18.3% 12.4% Cat bonds (Swiss Re Total Return Index) 7.5% 3.8% Government bonds USD (3-5 years maturity) 2.2% 2.6% Annualized monthly data Source: Index provider page -48-

9 Regional equity market outlook U.S. equities have outperformed the global market (MSCI World) in most of the past ten years. With earnings growth continuing and the market s uptrend intact we continue to see no way around the world s leading equity market. While underlying earnings growth in Europe and the USA is similar, U.S. companies get an additional one-off boost from lower taxes. As European markets have been getting ever cheaper (based on relative price/bookratios), Europe s relative potential for 2018 remains intact. As far as non-core markets are concerned, wee see further upside in Emerging Markets, while Japanese equities will continue to benefit from earnings growth Stoxx Europe minus S & P Nov-02 Nov-07 Nov-12 Nov Source: Index prov ider Price/book-value Performance: Japan/World MSCI Japan/MSCI World (total return) 60 Nov-02 Nov-07 Nov-12 Nov-17 Source: Index prov ider, own calculations Performance: USA/World MSCI USA/MSCI World (total return) 75 Nov-02 Nov-07 Nov-12 Nov Source: Index prov ider, own calculations Performance: EMA/World MSCI Emerging Markets/ MSCI World (total return) 85 Nov-02 Nov-07 Nov-12 Nov-17 Source: Index prov ider, own calculations page -61-

10 Fed rate hikes and U.S. equities Contrary to common wisdom, equities do not generally suffer when the Fed raises its rates. Since the 1980s, the S&P 500 has risen during tightening episodes albeit less than average. In addition, the risk of a major correction was not higher than average during these periods, particularly in the recent three episodes. In five of the past seven episodes, equity prices even staged strong rallies once Fed tightening was over. This was also true in the last cycle, with the Lehman-induced crash in September 2008 taking place more than two years after the last rate increase in June Indeed, a number of significant equity corrections, including that from 2000 to 2002 (the bursting of the tech bubble), took place only some time after Fed tightening had ended. Corporate earnings (see last two columns in the table) have grown during past episodes of Fed tightening. The first signs of a slowdown in earnings growth did not occur until well after the last rate hike in a cycle (earnings, End +12m ). Downward pressure on earnings was more pronounced in the second year following the last rate hike (not shown in the table), which is consistent with the notion that the economy (and thus earnings) tend to react to rate increases with a considerable lag. Fed rate hikes: U.S. equities (S&P 500) Start (first rate hike) Episode End (last rate hike) Start +12m Period price change End/ start p.a. End +12m Start +12m Max. loss Start to End End +12m End/ start p.a. Earnings End +12m Mar-1972 May % -6% -19% 0% -22% -32% 21% 18% Dec-1976 Oct % 0% 36% -11% -15% -2% 17% 7% Mar-1983 Aug % 8% 18% 0% -13% -3% 9% 5% Dec-1986 Feb % 8% 36% -9% -33% -1% 30% -2% Feb-1994 Feb % 1% 35% -7% -6% 0% 45% 14% Jun-1999 May % 5% -13% -5% -7% -18% 16% 3% Jun-2004 Jun % 6% 30% -6% -7% -2% 18% 13% Average 3% 3% 18% -6% -15% -8% 22% 8% Dec-2015 Nov % 15% - -7% -10% - 4% - Note: The last row show s the current episode (first hike in Dec. 2015), w ith 'End' denoting the latest available data point. 'Max loss' relates to low est w eekly close 12 months forw ard (average since 1970: -9%). Source: Federal Reserve, index provider, ow n calculations page -62-

11 Trends in equity sectors: Economy argues for cyclicals As we expect economic momentum to remain solid and in particular also see further gains in corporate investment spending, we continue to advocate a bias towards cyclical companies. A small warning signal comes from the continued flattening of the U.S. yield curve (the difference between long- and short-maturity bonds), although we would not overly emphasize this at present. In the USA, those companies with a high share of U.S. production benefit most from a cut in the corporate tax rate (notably telecommunications, financials and health care), whereas production in other sectors (energy, materials, technology and industrials) is more global and companies thus benefit less. Non-U.S. companies with a high share of their production in the USA benefit comparatively strongly as well (these tend to come from the globalized sectors). Equity sectors Europe (Stoxx Europe600) USA (S&P 500) Yield Index Performance Yield Index Performance Divid. FCF weight 4Q17* 2017* Divid. FCF weight 4Q17* 2017* Stable demand sectors % 4.8% % 10.1% Consumer staples % 10.4% % 9.3% Healthcare % 1.5% % 20.2% Telecommunications % -2.1% % -10.5% Energy % -3.7% % -8.1% Utilities % 10.4% % 14.1% Financials % 8.7% % 19.9% Cyclical sectors % 11.5% % 27.0% Durable consumer goods % 5.8% % 19.2% Industrial companies % 13.5% % 16.7% Technology % 19.7% % 36.3% Basic industries % 10.5% % 18.9% Market % 7.7% % 18.4% *Data as per 11-Dec-17. FCF = Free cash flow. Source: Index provider, ow n calculations page -68-

12 R & A Group is an independent investment research and asset management company. R & A Group has a comprehensive investment research offering with a focus on investment strategies and global stock selection. Founded in 2001, R A & Group is a joint stock company domiciled in Zurich and a member of the leading independent asset manager organization VSV (Swiss Association of Asset Managers). Investment- Research at Work TM Disclaimer: We do not make any guaranties for the validity of the information herein even though the information is based on public sources believed to be reliable. We are independent and do not have business relationships with any company possibly mentioned in this report. Opinions, estimates and projections in this report reflect our judgment at the date of writing and are subject to change without notice. We have no obligation to update, modify or amend this report or to notify a reader hereof if any matter, opinion, estimate or projection subsequently changes or becomes inaccurate. This report is provided for information purposes only and does not constitute an offer to buy or sell company stock or related securities or take any other investment decision. This report must not be made available to US or UK residents or to any other person to whom governing law may prohibit distribution of this report. Data sources in charts or tables that are not specifically mentioned are either companies or index provider. R & A Group Research & Asset Management AG Bodmerstrasse 3 CH-8002 Zürich. Phone info@ragroup.ch page -79-