The outlook for credit and government bond markets in 2018: groundhog day?

Transcription

1 This document is solely for the use of professionals and is not for general public distribution. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. The outlook for credit and government bond markets in 2018: groundhog day? Jenna Barnard Co-Head of Strategic Fixed Income John Pattullo Co-Head of Strategic Fixed Income Nicholas Ware Director of Strategic Fixed Income

2 Learning outcomes Understand the current backdrop for bond investing in 2018 Identify appropriate strategies for income-seeking clients Gain a better understanding of how to manage duration, in a market that looks increasingly Japanese 1

3 Agenda The persistent misforecasting of bond yields Macro outlook Debt trauma Demographics Disruption Investment philosophy Providing for Margaret 2

4 Negative bond sentiment has been pervasive Source: Financial Times Bond market turmoil yet to materialise despite repeated warnings over the past five years 3

5 Amid a persistent misforecasting of Treasury yields 10-year US Treasury rate and historical economist forecasts % Source: Philadelphia Fed Survey of Professional Forecasters, as at June 2017 Forecasters have called for lower bond yields in only two of the last 26 years 4

6 Lots of theories same secular trends persist Productivity Political uncertainty Technology Demographics Low growth, Low inflation Secular stagnation Peak globalisation Richard Koo s balance sheet recession Debt 5

7 Technology outperformance driven by superior earnings growth Technology sector earnings vs non-technology 250 MSCI AC World IT - earnings MSCI AC World non IT - earnings % 150 High yield markets % Source: Bernstein, as at 30 September 2017 Note: Based on trailing earnings. Rebased to 100 at 30 September Nearly all of the growth in the last decade has come from IT 6

8 Global value has underperformed growth in equity markets Global value/growth strategy index and global government bond yield Value/growth relative index (left) Government bond yield (right) 3.0% 2.5% % 1.5% % % Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Source: Janus Henderson Investors and Thomson Reuters DataStream, as at December 2017 Note: MSCI World Value & Growth indices, rebased as of 2009 JP Morgan Global Government Bond Index, redemption yield Live in growth, holiday in value? 7

9 Stay away from HY secularly challenged sectors US high yield index spread in 2017 OAS (bp) OAS (bp) Sector % weight Retail 5.3% Telecom (wireline) 4.9% Car rental 1.0% Health facilities 5.1% Source: ICE-BAML US High Yield Index, S&P Capital IQ LCD, iboxx, Goldman Sachs Global Investment Research, as at 30 November 2017 Note: HY = High yield; OAS = option-adjusted spread 8

10 Debt trauma: the Japanese experience Discovering Japanese economist Richard Koo was instrumental in informing the way we approached bond investing post GFC Source: YouTube and Amazon, as at December 2017 A link to a short 10 minute video explaining Balance Sheet Recession theory 9

11 Debt trauma: US consumers scarred for life? US household debt growth pre and post-crisis % US Household debt growth Pre-crisis average Post-crisis average Sep-17 Mar-00 Sep-00 Mar-01 Sep-01 Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Source: St Louis Fed, as at December 2017

12 Debt trauma: balance sheet recessions BEFORE (China/Australia) AFTER (Japan) Source: Reuters, CNN, as at December

13 Demographics: turning Japanese? Japan population trends 000s 000s 140, , ,000 80,000 60,000 40,000 20,000 0 Japanese population Projected population Birth rate (rhs) Death rate (rhs) ,000 2,500 2,000 1,500 1, Japan s TFR* stands at approximately 1.44; far short of the required replacement rate of 2.1 An estimated 20m additional houses to become empty by 2030 from current 8m Over 40% of year olds are virgins There were over 68,000 centenarians in 2017 Population to shrink by over 20% in next 35 years Over 33% of population 60+ years old Source: Ministry of Health, Labour & Welfare, Japan Times, Financial Times, as at December 2017 Note: * TFR = Total Fertility Rate. Number of children per woman based on current fertility schedules. 12

14 Demographics: peak youth, peak stuff Global population age trends; the crossing 25% 20% 15% 10% Under 5 Over 65 By about 2033 working-age Americans will support more people over 64 than under 18 - US census bureau 5% 0% Share of working-age population in total for G5 countries 80% 70% 60% UK % Japan % China % US % Europe % Since 1987, US consumer spending on live experiences and events relative to total spend has increased by 70% We have probably hit peak stuff in the West - Steve Howard, Chief Sustainability Officer (Ikea) 50% Source: UN, Financial Times, BAML, as at

15 Demographics: age of the millennial Millennials will make up 75% of the workforce by 2025 Account for over $1 trillion in global spending Millennials drive less; number of vehicle miles travelled fell 23% in US from 01 to 09 Source: exploringmarkets, BAML, as at 2017 Special, sheltered, confident, team-orientated, law abiding snowflakes! 14

16 Disruption: technology driving down costs Cost of car travel using different platforms 3.5 4% The time an average car is in use Cost per mile, $ US passenger miles forecasted to 95% be made by autonomous, electric, on-demand vehicle fleets within 10 years of regulatory approval 247m to 44m Reduction in the number of passenger vehicles on American roads by Taxi Uber Ownership Autonomous Source: Janus Henderson Investors, Google, CLSA, as at November

17 Disruption: Amazon-isation of retail Amazon quarterly revenue and the effect on e-commerce 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% Amazon quarterly revenue (rhs) E-commerce sales as a % of all retail Change in price of e-commerce goods (start = 2009) US$ billion -8.0% 0 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Source: Bureau of Economic Analysis, Bloomberg, as at December

18 Investment style: sensible income Blend of income assets Focused on investment grade bonds, non-cyclical high yield bonds, subordinated financial bonds in the UK, Europe & US Ignore the index It corrupts the investment process Large-cap, non-cyclical bias Offers superior risk-adjusted returns Aggressive sell discipline What you don t own is more important than what you do for bond funds Working with the cycle Be wary of late-cycle behaviour and don t be herded into these trades 17

19 Overheard on the Strategic Fixed Income desk Covenants don t make a bad credit good Pull the trigger Avoid sole-led deals Di-worse-ification Positioning, technicals then fundamentals Some businesses don t suit leverage Get paid for illiquidity Positive Free Cash Flow yield Mature vs sunset Steer clear of the 3 R s Avoid if it rolls, floats or flies Don t ski off piste in the afternoon We define our style by what we don t do 18

20 Who is Margaret? The average investor in the Fixed Interest Monthly Income Fund 900m AUM 4.7% distribution yield 4.1% underlying yield Monthly payments Female (55% of investors in fund), seventy-six years old and lives in Bournemouth She holds approximately 10,000 in the fund Age distribution of Fixed Interest Monthly Income Fund 40% 30% 20% 10% 0% Age Source: Janus Henderson Investors, as at November 2017 Note: Yield may vary and is not guaranteed. Past performance is not a guide to future performance. Based on underlying analysis of the direct shareholder register of the fund; as at November

21 What does Margaret expect? Delivering an output: providing a sensible, monthly, consistent income Ignore the index Means saying No most of the time Important to manage downside risk, the income will take care of itself Understandable investments with predictable outcomes Antithesis of the over-engineered bond fund 20

22 Fixed Interest Monthly Income Fund Investing in resilient names for the future 12.6 % of the fund is invested in names involved in the modern economy such as Apple, Dell, Equinix, McAfee and Verizon 18.6% of the fund is invested in names we would consider global titans (with a market cap exceeding 50bn) such as Apple, AT&T, HSBC, PepsiCo and UBS Source: Janus Henderson Investors, as at 30 November 2017 Note: Examples are intended for illustrative purposes only and is not indicative of the historical or future performance of the security. Janus Henderson Investors, one of its affiliated advisors, or its employees, may have a position in the securities mentioned in the report. References made to individual securities should not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase the security. Past performance is not indicative of future results. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Over 25% of the fund is invested into new world or global titan businesses 21

23 Summary Forecasters calling for higher yields have been proven wrong over the course of what has been a 25-year bull market Low growth and low inflation has persisted post-crisis, despite global coordinated quantitative easing programmes Record dispersion of corporate returns is the hallmark of an unusual business cycle We continue to focus on sensible income for Margaret 22

24 Janus Henderson Fixed Interest Monthly Income Fund Janus Henderson Fixed Interest Monthly Income Fund performance since fund mergers* Total return index (rebased) IA OE Strategic Bond 32.2% Janus Henderson Fixed Intr Mth Inc X Inc 45.1% Janus Henderson Fixed Intr Mth Inc I Inc 49.6% Fixed Interest Monthly Income Fund IA Strategic Bond Sector Quartile YTD 9.24% 4.62% 1 st 1 year 10.55% 5.87% 1 st 3 years 19.63% 11.68% 1 st 5 years 37.77% 22.71% 1 st 90 May-12 Nov-12 May-13 Nov-13 May-14 Nov-14 May-15 Nov-15 May-16 Nov-16 May-17 Nov-17 Source: Morningstar, Janus Henderson Investors, as at 30 November 2017 Note: I Inc share Class, as at 30 November All performance presented net of fees. Based on cumulative GBP midday pricing, nav-nav, net income reinvested. * The Henderson Extra Monthly Income Fund and High Yield Monthly Income Fund merged into the Henderson Fixed Interest Monthly Income Fund on 4 May 2012 Yield may vary and is not guaranteed. Past performance is not a guide to future performance. 4.6% distribution yield, as at 30 November

25 Janus Henderson Investors 201 Bishopsgate, London EC2M 3AE Tel: Fax: This document is intended solely for the use of professionals, defined as Eligible Counterparties or Professional Clients, and is not for general public distribution. Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor s particular circumstances and may change if those circumstances or the law change. If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially. Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment. Any investment application will be made solely on the basis of the information contained in the Prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the prospectus, and where relevant, the key investor information document before investing. We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes. Important information Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name under which Janus Capital International Limited (reg. no ), Henderson Global Investors Limited (reg. no ), Henderson Investment Funds Limited (reg. no ), AlphaGen Capital Limited (reg. no ), Henderson Equity Partners Limited (reg. no ), (each incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Conduct Authority to provide investment products and services. 2017, Janus Henderson Investors. The name Janus Henderson Investors includes HGI Group Limited, Henderson Global Investors (Brand Management) Sarl and Janus International Holding LLC. CS\UK\2017\!Pres\Gen17\JIF Final - Normal format.pptx 24