Market review and outlook

Transcription

1 Market review and outlook Q Euan Dangerfield, Client Director Cazenove Capital Management is a trading name of Schroders (C.I.) Limited, licensed and regulated by the Guernsey Financial Services Commission for banking and investment business; and regulated by the Jersey Financial Services Commission. For your security, communications may be taped or monitored.

2 Investment returns have been good Source: Enhance Group Limited. Past performance is not a guide to future performance. 2

3 Post-referendum market performance Both FTSE 100 and FTSE 250 rebounded strongly Sterling vs US dollar Brexit vote FTSE 250 vs FTSE 100 Brexit vote 10-year gilt yield Brexit vote Source: Datastream, Cazenove Capital. 3

4 Post-referendum update No sign of high-street and jobs slowing UK retail sales Brexit vote UK job vacancies Brexit vote The bumper UK retail sales figures for July and another solid report for August showed that shoppers were undeterred by Brexit uncertainty. Economic data so far suggests the UK may avoid entering a recession. While uncertainty is unlikely to go away, the tight labour market and high levels of job vacancies should remain supportive to overall activity. Source: Datastream, Cazenove Capital. 4

5 Brexit: headline warnings vs. latest evidence Consumers John Lewis total sales % year-on-year Week 11 vs weeks Week 11 Week % +3.6% +8.2% +5.2% vs vs vs Million 360 First post-referendum week Weeks Source: Bloomberg, Datastream, John Lewis, Cazenove Capital. 5

6 Valuation - Historic non-financial trend P/Es US non-financial historic trend P/E Eurozone non-financial historic trend P/E UK non-financial historic trend P/E Japan non-financial historic trend P/E Source: Datastream, Cazenove Capital Management. Past performance is not a guide to future performance. 6

7 Emerging markets Supported by a weaker US dollar Composite Purchasing Managers Indices EM vs DM* EM vs DM forward P/E There are signs that activities in emerging markets are improving incrementally. Emerging markets are likely to thrive against the backdrop of a more dovish US interest rates profile and softness of the US dollar. Valuations of emerging markets equities remain attractive relative to developed markets. Source: *EM emerging markets; DM developed markets; Datastream, Cazenove Capital. 7

8 US and UK GDP growth US GDP growth % yoy UK GDP growth % yoy Consensus forecasts (%) Consensus forecasts (%) Source: Datastream, Bloomberg, Cazenove Capital. 8

9 Eurozone and Japan GDP growth Eurozone GDP growth % yoy Japan GDP growth % yoy Consensus forecasts (%) Consensus forecasts (%) Source: Datastream, Bloomberg, Cazenove Capital. 9

10 China and emerging markets GDP growth China GDP growth % yoy Emerging markets GDP growth % yoy Consensus forecasts (%) Source: Datastream, Bloomberg, Cazenove Capital. Consensus forecasts (%)

11 Big Picture, GDP = PPP Population, Participation & Productivity The future has already happened as the global workforce in 2035 has already been born % of population over 65 years Working age population 40% 35% 30% 25% China United States of America EUROPE Japan 80% 75% 70% China United States of America EUROPE Japan 20% 65% 15% One leads to the other 60% 10% 5% 55% 0% 50% Demographics matters a lot Ageing is now giving way to population decline Source: United Nations World Population Prospects (2015) / Groucho Marx. 11

12 Nigeria Ethiopia Pakistan Philippines India Mexico Bangladesh Indonesia United States of America Brazil China Japan United Kingdom France Spain EUROPE Italy Germany Russian Federation Poland Demographics What do we know? % 120% 100% 80% 60% 40% 20% 0% -20% The UN projects that the world s population will continue to grow out to 2050 But at half the pace (0.8% p.a) than it did over the previous 65 years Growth is increasingly concentrated in frontier economies -40% By 2050 Nigeria will be the third largest country in the world, with a population of 400 million, surpassing that of the US In blunt terms, as investors we must ask whether the demographic tailwinds are becoming deflationary headwinds Source: United Nations World Population Prospects (2015). 12

13 Demographics Is Japan the playbook and not the exception? Ageing demographics and low inflation Does an ageing population cause sanguine economic growth? Opinion is divided As the population ages, the number of workers decline An imbalance of the production of goods/services relative to demand = inflation Older people consume less As the population ages, demand falls Goods/service prices drop to incentivise demand Japan provides a clear example as to what happens to an economy when its population ages Source: National sources/unctad/haver/ubs calculations. Schroders Asian team September

14 Demographics What can be done? 1. Family policy go forth &. The approach of the Italian Government who attempted to instigate a National Fertility day on September 22 nd 2. Structural reforms have more appeal: increasing labour force participation rates Politically difficult: In the US, only 41% of year olds voted in the 2012 US Presidential elections Conversely 71% of those aged 60+ voted 3. Immigration (the European response) For Germany s working population to be constant over the next 20 years, it needs 650,000 immigrants each year 4. Boosting robotics/artificial intelligence (AI)/automation (the Japanese response) 5. Spend, spend, spend Source: Authorised by the Italian Health Ministry (Beatrice Lorenzin). 14

15 Political risk set to return in Europe A roadmap to upcoming events Country Date Event Event risk Probability Market impact Italy 04 December 2016 Constitutional referendum Renzi resigns Medium High Austria 04 December 2016 Re-run of presidential election Far-right party winning Medium Low Netherlands 15 March 2017 General election Far-right party winning High Medium France 23 April and 7 May 2017 Presidential elections National Front winning Low Extreme Germany August-October 2017 Federal elections AfD* winning Very low Extreme Brexit is not the only anti-establishment warning signal. Political extremism is rising across Europe. Source: *Alternative for Deutschland, Schroders, Cazenove Capital. 15

16 Monetary policy Negative interest rates and QE Benchmark policy rates of major central banks % 6 5 QE (by end-2016) % of GDP UK Eurozone Japan US Eurozone UK Japan Actual Planned Source: Datastream, Cazenove Capital. 16

17 UK monetary policy post-referendum Interest rates and QE Bank of England official Bank rate Number of months to the next rate increase* Q % We believe the easing in monetary policy by the Bank of England in July was counter-productive. While the Bank of England has signalled another rate cut the by end of the year, resilient data post-brexit may reduce the likelihood. The Bank of England will buy corporate bonds of firms who make a material contribution to the UK economy including those of Apple and British American Tobacco. Markets are not expecting a rate increase in the UK until Q Source: Datastream, Cazenove Capital. *Implied by interest rate futures. 17

18 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Global monetary policy Remains highly supportive but approaching its limit Central banks balance sheets $11.7 Trillion QE 27% ($7tn) worth of DM sovereign bonds now have a negative yield $tn 35% $9 30% $8 $7 25% $6 20% $5 15% $4 $3 10% $2 5% $1 0% $0 Central banks are committed to do whatever it takes to defend inflation targets and support growth. Global liquidity is likely to remain abundant thanks to accommodative monetary policies. However, major central banks are already stretched well into conventional and unconventional policies and are reaching their limits. Source: Datastream, Schroders, Cazenove Capital. 18

19 Focus on fiscal policy Fiscal policy eases back to the forefront US budget balance as a % of GDP Potential fiscal easing in the UK Public spending Central banks are running low on policy tools to keep recoveries on track. Fiscal policy may have to complement monetary policy going forward. After several years of austerity, fiscal stances around the world have generally become more supportive of growth. Japan has already announced stimulus plans, while fiscal easing may follow in the UK after the Brexit vote. Both US presidential candidates have proposed public infrastructure programs and other fiscal measures. Source: Congressional Budget Office, Telegrah.co.uk, Datastream, Cazenove Capital. 19

20 Inflation is picking up Inflation-linked bonds remain attractive Headline CPI and consensus forecasts US core CPI and components Medical Care 8% of Core CPI Rent 31% of Core CPI Core CPI US and UK CPI is set to rise toward 2% in 2017 (with UK RPI rising towards 3%), as the year-on-year impact from oil prices is turning from hugely negative to positive. US core inflation may suffer upward pressure from rent and medical care. UK inflation faces upward pressure from the slump in sterling. Petrol costs have risen 10-12% in the last few months. The Federal Reserve and the Bank of England are likely to be inflation tolerant, raising risk of an inflation overshoot in the medium term. We continue to favour inflation-linked bonds, especially US Treasury Inflation Protection Securities (TIPS). Source: Datastream, Cazenove Capital. 20

21 Inflation pressure from rising wages? Unemployment below 6% in US, UK, Germany & Japan US Eurozone Japan Source: Datastream, Cazenove Capital. 21

22 Oil prices A lack of supportive fundamentals Brent crude oil prices US oil rig counts Brent crude oil prices have bounced almost 50% since their trough in early There is a lack of supportive fundamentals for a further rally. We are sceptical of OPEC s decision to cut oil production and do not think it will be meaningfully supportive to oil prices. There remain many hurdles for each member country to commit to a production cut. US shale producers are getting more active again, evidenced by the recent pick up in rig counts. Source: *EM emerging markets; DM developed markets; Datastream, Cazenove Capital. Past performance is not a guide to future performance. 22

23 Central Banks to tolerate inflation A dovish Fed is likely to cap dollar strength FOMC Fed funds rate projection Trade-weighted US dollar index The Federal Open Market Committee (FOMC) stayed put in September but signalled an interest rate increase in December. The median Fed funds rate projections are again revised downward. A more shallow path of Fed funds rate increase is likely to keep dollar strength at bay. This should be positive for Asian and Emerging Markets. Source: Datastream, Cazenove Capital. 23

24 Gilts are the most expensive they have ever been Gilt yields, % South Sea Company founded UK inflation in excess of 20% 16 American War of Independence 1931 Sterling leaves the Gold Standard 1997 BoE independence victory at Waterloo Outbreak WWII WWI post South Sea Bubble flight to quality 2009 Wartime controls BoE QE % Perpetual UK government bond yield UK 10-year government bond yield Past performance is not a guide to future performance. Source: Bank of England ( ), Thomson Datastream, 6 th September

25 Government Bonds Asymmetrical Returns Central banks bond purchases as a % of net issuance UK gilt yields vs. potential loss 1 Year % 0.09% 0.21% 0.73% 1.42% Gilt Yield -0.9% Effect on bond price of a 1% rise in gilt yields -1.8% -4.6% Despite the clear asymmetrical returns investors still flock to bonds -9.3% ECB & BoJ dominate their respective markets absorbing over 250% of net issuance -20.6% Source: Cazenove Capital, JP Morgan, Bloomberg. Past performance is not a guide to future performance 25

26 Treasury Inflation Protected Securities A good hedge against inflation Spread between UK and US breakeven inflation rates* Great Financial Crisis Brexit vote Highest since March 2009 We continue to favour US Treasury Inflation Protected Securities (TIPS). TIPS look attractively valued relative to both US treasures and index-linked gilts. The spread between UK and US breakeven inflation rates is the widest since the Great Financial Crisis. While a Trump or Clinton administration are both expected to be inflationary, we believe a Trump victory is more so from a policy standpoint alongside a potentially weaker US dollar. Source: Bloomberg, Cazenove Capital. Difference between the yield of a nominal bond and an inflation-linked bond of the same maturity. 26

27 Focus on infrastructure Targeting stable returns with a focus on income A return to fiscal stimulus will benefit infrastructure investment. Attractive qualities of infrastructure include some (or all) of the following: High income (currently between 4% to 8% per annum) Asset backed (property, leasing, renewables, care homes, medical centres) Inflation linked (infrastructure, renewables) Long asset life or lease term Government backed cashflows (infrastructure, renewables, medical centres). Source: Cazenove Capital. 27

28 Investors own equities for yield UK dividend yield remains attractive UK cash yield, 10-year gilt yield and FTSE All Share dividend yield UK dividend yield remains attractive in a prolonged low interest rates environment. Source: Datastream, Cazenove Capital. Past performance is not a guide to future performance. 28

29 Are equities really growth assets? The march of the bond proxies Dividend stocks tracking treasury yields % (inverted) Low rates may no longer help the economy, but they can drive asset prices by intensifying the search for yield Equities are often termed "growth" assets, but they have now become more "income" like Indices that target dividend paying stocks, such as the S&P Dividend Aristocrats Index, continue to track treasury yields 98 Aug 14 Nov 14 Feb 15 May 15 Aug 15 Nov 15 Feb 16 May 16 Aug S&P dividend aristocrats/s&p year UST yield - inverted, rhs Past performance is not a guide to future performance. Source: Thomson Datastream, Schroders Economics Group, 25 th July

30 Investment views Fundamentals Sentiment Global economic growth remains positive but unexciting Inflation is set to gain momentum in the US and the UK Global monetary policy will remain supportive but more constraining. Is fiscal easing the next focus? Emerging markets fundamentals are gradually improving Political risks are rising globally as support for populism and alternative parties gain momentum The market is currently pricing in a Clinton victory The European election cycle will lead to volatility during 2017 Valuation Have government bond yields finally started to rise? We favour US TIPS as protection for portfolios and especially in the event of a Trump victory We prefer UK equities compared to Europe ex-uk equities Slower US interest rate cycle and better relative growth momentum will be more supportive to Asian equities Given QE there is a struggle to find diversifying assets 30

31 Risk warnings You should consider the following risks: Investment risk: Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. Taxation: Statements concerning taxation are based on our understanding of the taxation law in force at the time of publication. The levels and bases of taxation may change. You should obtain professional advice on taxation where appropriate before proceeding with any investment. Exchange rates: Investments in overseas securities are exposed to movements in exchange rates. These may cause the sterling value of units to go up or down. Debt securities: Investments in higher yielding bonds issued by borrowers with lower credit ratings may result in a greater risk of default and have a negative impact on income and capital value. Income payments may constitute a return of capital in whole or in part. Income may be achieved by foregoing future capital growth. Emerging markets: You should be aware of the additional risks associated with investment in emerging and developing markets. These include: higher volatility of markets; systems and standards affecting trading, settlement, registration and custody of securities all possibly lower than in developed markets; lack of liquidity in markets and exchanges leading to lower marketability of securities and greater price fluctuation; significant currency volatility, possibly resulting in adoption of exchange controls; lower shareholder protection or information to investors provided from the legal infrastructure and accounting, auditing and reporting standards Unregulated collective investment schemes: Unregulated collective investment schemes and other non-mainstream pooled investments (NMPIs) are unlikely to offer a level of investor protection equivalent to that available for UK regulated investments. Such schemes may deal infrequently and may limit redemption. Structured products: Structured products are usually issued by financial institutions and in the event of these institutions going into liquidation or failing to comply with the terms of the securities you may not receive the anticipated returns and you may lose all or part of the money you originally invested. If you sell your investment before its maturity date the investment may achieve a price less than the original investment. The performance of these investments may depend on indices and defined calculations which may differ from direct investments. Gearing: Some of the investments we may make on your behalf could be in investment companies which use gearing as a strategy or invest in other investment companies which use gearing, such as investment trusts. The strategy which the issuer of such securities uses or proposes to use may result in movements in the price of the securities being more volatile than the movements in the price of underlying investments. Such investments may be subject to sudden and large falls in value and you may get back nothing at all if there is a sufficiently large fall. Portfolios which invest in a smaller number of stocks carry more risk than funds spread across a larger number of companies. 31

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