The outlook for UK savers: Markets, Politics and Policy

Transcription

1 The outlook for UK savers: Markets, Politics and Policy Rupert Harrison, Portfolio Manager Multi-Asset Strategies Tuesday 21 st November, 2017

2 Not a bad year so far for a UK investor Asset performance in GBP and local currency, 2017 YTD Asia ex-japan Equities EM Equities European Equities Japan Equities DM Equities U.S. Equities UK Equities German Bunds Global High Yield bonds UK Gilts Global IG Corporate Bonds U.S. Treasuries RETURN (%) Sterling Local Currency Sources: BlackRock Investment Institute with data from Thomson Reuters Datastream, 9 th November Note: The bars show the total return in sterling and local currency terms. Government bonds are 10-year benchmark issues. Equities are represented by the relevant MSCI index. IG and HY bonds are represented by the Merrill Lynch indexes, and local currency is shown in USD.. Past performance is not a reliable indicator of future results. It is not possible to invest directly in an index. 2

3 REAL GDP GROWTH (%) A sustained global economic expansion BlackRock s growth indicator points to above-trend growth BlackRock Growth GPS for G7 nations, Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 BlackRock s proprietary growth indicator suggest that global growth has been cruising along at strong levels We combine regular economic data with big data such as Google searches to gauge where the global economy is heading G7 Growth GPS G7 12m Forward Consensus Sources: BlackRock Investment Institute with data from Consensus Economics, November Notes: The GPS (blue lines) shows where the 12-month consensus GDP forecast may stand in three months time. Consensus forecasts are measured by Consensus Economics. G7 country components are weighted by country GDP. The green lines shows the current 12-month economic consensus forecast. The GPS builds on existing nowcasting models that exploit the information from dozens of macroeconomic indicators to forecast GDP growth including realized activity, employment, sentiment and survey data. It draws on a wider set of information sources by incorporating proprietary big data insights from BlackRock s Scientific Active Equity team. These include micro insights, such as consumer behavior captured through internet searches, and macro insights such as country business sentiment measured through the text-mining of corporate managers conference calls. Other big data inputs include online job postings, inflation chatter, satellite images, e-invoicing and traffic patterns. 3

4 U.S. REAL GDP (100=PRIOR CYCLE PEAK) Our analysis of economic cycles suggests that there is room to run U.S. GDP growth points to a period of sustained expansion U.S. GDP versus other cycles We think about economic cycles based on how close the economy is to running at full steam, not just the time since the last recession Prior Trough At Potential Peak Peak Source: BlackRock Investment Institute with data from BEA, NBER, CBO, as of 6 th September 2017 Note: This chart compares the level of real U.S. GDP across different cycles. The peak is quarter when GDP peaks before each recession. The trough refers to the trough in GDP each recession. At potential refers to the quarter when the output gap has been closed each cycle. All series have been stretched or wrapped so as to fit onto the same scale. A dot represents one quarter. 4

5 YIELD (%) Given lower growth going forward, we expect a gradual rise in bond yields We see rates remaining below long-term averages over next five years U.S. and German 10-year government bond yields, year expectation U.S. Germany UK Source: BlackRock Investment Institute with data from Thomson Reuters, November Notes: 5-year expectations are based on BlackRock Capital Market Assumptions. Forward looking estimates may not come to pass. Yield data based on Thomson Reuters 10-year government bond indexes. Averages are calculated over the full period from Forward looking estimates may not come to pass. 5

6 PERCENTILE Stock market valuations look reasonable given the low level of interest rates Valuations look more attractive in the context of structurally lower interest rates Global equity valuations relative to bonds, % 75% Stocks cheap 50% 25% Stocks expensive 0% US Europe ex-uk Source: BlackRock Investment Institute, with data from Thomson Reuters, IBES, HaverAnalytics and Bloomberg, October Notes: U.S., Europe ex-uk, Japan and emerging market (EM) equities are represented by their respective MSCI equity indexes. Absolute valuation is based on earnings yield (the inverse of 12-month forward price-to-earnings ratios). Valuation relative to bonds is based on the earnings yield minus the real bond yield. The real bond yield is the 10-year government bond yield (or nearest equivalent) of each market minus the oneyear average inflation rate. Real bond yields for EM and Europe ex-uk are the GDP-weighted average of 10-year government bond yields of each country within each region. Valuations are shown in percentiles using a post-1990 history. For example, the current U.S. relative earnings yield is in the 72nd percentile, meaning it has been equal to or below that level 72% of the time. 6

7 ANNUAL EARNINGS GROWTH ESTIMATE (%) European earnings have been supported by improving growth This year is different for European earnings Annual earnings growth estimates for European equities, Source: BlackRock Investment Institute with data from Thomson Reuters, November Notes: The lines show annual earnings growth estimates for MSCI Europe. 7

8 REAL GDP GROWTH (%) The UK has stabilised after a post-brexit slump The UK has stabilised after a post-brexit slump BlackRock Growth GPS for UK, UK growth took a hit post-brexit, but has since stabilised Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 UK GPS UK 12m Forward Consensus GDP Sources: BlackRock Investment Institute with data from Consensus Economics, November Notes: The GPS (blue lines) shows where the 12-month consensus GDP forecast may stand in three months time. Consensus forecasts are measured by Consensus Economics. The green lines shows the current 12-month economic consensus forecast. The GPS builds on existing nowcasting models that exploit the information from dozens of macroeconomic indicators to forecast GDP growth including realized activity, employment, sentiment and survey data. It draws on a wider set of information sources by incorporating proprietary big data insights from BlackRock s Scientific Active Equity team. These include micro insights, such as consumer behavior captured through internet searches, and macro insights such as country business sentiment measured through the text-mining of corporate managers conference calls. Other big data inputs include online job postings, inflation chatter, satellite images, e-invoicing and traffic patterns. 8

9 CORE INFLATION (%) The UK inflation picture is different to global counterparts U.K. inflation has spiked Global core inflation, U.S. Eurozone UK Central bank target Source: BlackRock Investment Institute with data from Thomson Reuters, November

10 ANNUAL CHANGE (%) After considering inflation, UK wages are coming under pressure UK nominal and real (after inflation) wage growth, Brexit Nominal wage growth Real wage growth Source: BlackRock Investment Institute with data from Thomson Reuters, November

11 USD to GBP CO-EFFICIENT OF DETERMINATION Political risk has been most clearly demonstrated in Sterling Equity markets, unlike Sterling, were not hit by Brexit while UK rates are increasingly correlated to global markets USD vs. GBP and FTSE All-Share Index, Co-movement of major bond yields, Brexit INDEX Jan 2016 Jul 2016 Jan 2017 Jul USD to GBP (LHS) FTSE All-Share (RHS) Source: BlackRock Investment Institute, with data from Thomson Reuters, November Notes: FTSE All-Share performance in GBP. Past performance is not a reliable indicator of future results. Source: BlackRock Investment Institute, November Notes: This chart shows a seven-year rolling regression (R-squared, or coefficient of determination) of monthly changes in UK 10-year yields on a factor that captures the monthly change in German, Japanese and US 10-year yields. The regression shows what proportion of UK yield changes may be explained by a common global factor extracted from all the yield moves. 11

12 Politics not quite as usual U.S. Key Fed meetings Dec Debt ceiling and 2018 budget Q Potential tax reform Mexico NAFTA renegotiation Q North Korea Missile and nuclear tests China 19 th Party Congress Attempts to rein in credit South China Sea disputes ME European Union Key ECB meetings 14 Dec. Italy General elections before 20 May 2018 UK Brexit negotiations Ongoing Middle East Gulf conflicts Source: BlackRock Investment Institute, November

13 Important information This material is prepared by BlackRock and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of November 2017 and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This material may contain forward-looking information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. This material is issued for Institutional Investors only (or professional/wholesale investors as such term may apply in local jurisdictions) and does not constitute investment advice or an offer or solicitation to purchase or sell in any securities, BlackRock funds or any investment strategy nor shall any securities be offered or sold to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. BlackRock Capital Market Assumptions This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. Note that these asset class assumptions are passive, and do not consider the impact of active management. All estimates in this document are in U.S. dollar terms unless noted otherwise. Given the complex risk-reward trade-offs involved, we advise clients to rely on judgment as well as quantitative optimization approaches in setting strategic allocations to all the asset classes and strategies. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions, opinions and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell securities. Forecasts of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal, or tax advice. The outputs of the assumptions are provided for illustration purposes only and are subject to significant limitations. Expected return estimates are subject to uncertainty and error. Expected returns for each asset class can be conditional on economic scenarios; in the event a particular scenario comes to pass, actual returns could be significantly higher or lower than forecasted. Because of the inherent limitations of all models, potential investors should not rely exclusively on the model when making an investment decision. The model cannot account for the impact that economic, market, and other factors may have on the implementation and ongoing management of an actual investment portfolio. Unlike actual portfolio outcomes, the model outcomes do not reflect actual trading, liquidity constraints, fees, expenses, taxes and other factors that could impact future returns. BlackRock 5-year asset return and long-term volatility assumptions Five-year and long-term equilibrium annualised return assumptions are in geometric terms. Return assumptions are total nominal returns. Return assumptions for all asset classes are shown in unhedged terms, with the exception of global ex-us treasuries. We use long-term volatility assumptions. We break down each asset class into factor exposures and analyse those factors' historical volatilities and correlations over the past 15 years. We combine the historical volatilities with the current factor makeup of each asset class to arrive at our forward-looking assumptions. This approach takes into account how asset classes evolve over time. Example: Some fixed income indices are of shorter or longer duration than they were in the past. Our forward-looking assumptions reflect these changes, whereas a volatility calculation based only on historical monthly index returns would fail to capture the shifts. We have created BlackRock proxies to represent asset classes where historical data is either lacking or of poor quality. Expected return estimates are subject to uncertainty and error. Expected returns for each asset class can be conditional on economic scenarios; in the event a particular scenario comes to pass, actual returns could be significantly higher or lower than forecasted. The geometric return, sometimes called the time-weighted rate of return, takes into account the effects of compounding over the investment period. The arithmetic return can be thought of as a simple average calculated by taking the individual annual returns divided by the number of years in the investment period. 13

14 Important information This material is for distribution to Professional Clients (as defined by the Financial Conduct Authority or MiFID Rules) and Qualified Investors only and should not be relied upon by any other persons. Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: Registered in England No For your protection telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited. Past performance is not a reliable indicator of future results. The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time. Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy. This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, ishares, BUILD ON BLACKROCK, SO WHAT DO I DO WITH MY MONEY and the stylized i logo are registered and unregistered trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners. 14