Global Market Outlook 2018

Transcription

1 Global Market Outlook 2018 Belinda Boa Head of Active Investments Asia Pacific and CIO of Emerging Markets Fundamental Active Equity, BlackRock January 2018 FOR PROFESSIONAL AND INSTITUTIONAL INVESTORS USE ONLY -

2 Key themes for 2018 ROOM TO RUN INFLATION COMEBACK REDUCED REWARD FOR RISK We see a global economy with room to run but expect less room for upside growth surprises to lift markets Markets look set to rediscover U.S. inflation but minimal price pressure elsewhere heralds greater policy divergence We believe investors are still being paid to take equity risk but expect lower rewards ahead given higher valuations Any opinions, forecasts represent an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research, investment advice or a recommendation. 2

3 Room to run BlackRock Growth GPS has stabilised above-trend A broad-based recovery BlackRock Growth GPS for G7 nations, Level and breadth of global composite PMI, REAL GDP GROWTH (%) 2.0 The BlackRock Growth GPS suggests less room for upside surprise in 2018 PMI INDEX SHARE ABOVE Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Delta G7 Growth GPS G7 12m Forward Consensus Share of countries with PMI above 50 (RHS) Global Composite PMI (LHS) 0 Sources: BlackRock Investment Institute with data from Consensus Economics, December Notes: The GPS (blue line) 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 line shows the current 12-month economic consensus forecast for G7 economies. Sources: BlackRock Investment Institute, with data from Markit, December Notes: The green line shows the share of countries where the purchasing managers' index (PMI) is above 50, indicating expanding activity. The global composite PMI includes manufacturing and services activity for 34 countries. 3

4 An inflection point in global monetary policy US taking the lead on hiking, others soon to follow Central Bank interest rates, Fed: at least 3 hikes in 2018 Payrolls avg +180K in 2017, excluding hurricane effects Inflation moving towards 2.0% target INTEREST RATE (%) ECB: scaling back asset purchases Slowing purchases from 60bn to 30bn/ month starting in Jan 2018 Inflation undershooting target BoJ: holding steady Inflation to stay under 1% for all of 2018 Solid economic growth, tightening labor market, and strong corporate earnings U.S. Euro zone Japan China PBoC: no major change? Fiscal policy and structural reforms in focus Investors monitoring a weakening credit impulse Sources: BlackRock Investment Institute and Thomson Reuters, December Notes: The lines show the official policy rate of the Federal Reserve (US), ECB (Euro zone), BoJ (Japan), and PBOC (China). 4

5 The great tax undercut The new 21% US corporate tax rate will undercut global competitors US effective tax rates vs. global statutory tax rates, 2017 CORPORATE TAX RATE (%) Old US statutory corporate tax rate: 35% New US statutory corporate tax rate: 21% S&P 500 SECTOR EFFECTIVE TAX RATES US effective rates Global statutory rates Sources: BlackRock Investment Institute, with data from Thomson Reuters Datastream, OECD, Haver Analytics, December Notes: The orange bars represent the median effective corporate tax rate for the mentioned index. The light green bars represent the median effective tax rate for the mentioned S&P 500 GICS 1 sector. The blue bars represent the statutory corporate tax rates for the mentioned country. 5

6 Inflation is making a (gradual) comeback A diverging inflation outlook in the US and eurozone US and Eurozone: BlackRock Inflation GPS vs. core inflation, China has stopped exporting deflation China export prices and U.S. import prices from China, U.S. Inflation GPS 10 ANNUAL RATE (%) 1.5 U.S. Core CPI Eurozone Inflation GPS ANNUAL RATE (%) Eurozone Core HICP Sources: BlackRock Investment Institute, with data from Thomson Reuters, Eurostat and US Bureau of Labor Statistics, December Notes: This chart shows the US core CPI, which excludes food and energy costs, the U.S. core CPI excluding wireless costs, the BlackRock US Inflation GPS, eurozone core inflation (the Harmonised Index of Consumer Prices excluding food, tobacco and alcohol) and the BlackRock eurozone Inflation GPS. The Inflation GPS shows where core inflation may stand in each region in six months' time China export prices U.S. import prices from China Sources: BlackRock Investment Institute, with data from National Bureau of Statistics of China and U.S. Bureau of Labor Statistics, December Notes: U.S. import prices based on total goods imported from China. 6

7 Take risk where you are being rewarded Risk and reward BlackRock five-year asset return assumptions in USD, Q % ANNUALisED RETURN ASSUMPTIONS (%) 6% 4% 2% 0% U.S. Treasuries U.S. investment grade U.S. cash Global ex- U.S. gov. bonds U.S. TIPS U.S. high yield Current assumptions EM debt ($) Last quarter US small cap US large cap Global ex- US large cap EM equity 60:40 portfolio Sources: BlackRock Investment Institute and BlackRock Solutions, November Notes: This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. The bars show our expected annualised nominal return assumptions for the next five years from a U.S. dollar perspective. Representative indexes used are: Barclays Global Aggregate Treasury Index ex U.S., Barclays Government Index, Barclays U.S. Credit Index, Citigroup 3-Month Treasury Bill Index, Barclays U.S. Government Inflation-Linked Bond Index, Barclays U.S. High Yield Index, JP Morgan EMBI Global Diversified Index, MSCI USA Small Cap Index, MSCI USA Index, MSCI World ex USA Index, MSCI Emerging Markets Index, and 60% MSCI USA Index / 40% Bloomberg Barclays U.S. Aggregate Index. Indexes are unmanaged and used for illustrative purposes only. They are not intended to be indicative of any fund or strategy's performance. It is not possible to invest directly in an index. Past performance is not a reliable indicator of future results. CMA disclosures are provided in the appendix. 7

8 Politics and policy pose risks for 2018 U.S. Key Fed meetings Mar Jun Sept Dec Mexico Elections July 1 Russia Presidential elections Mar. 18 Eurozone Key ECB meetings Jan. 25 Mar. 8 Apr. 26 Jun. 14 Jul. 26 Sep. 13 Oct. 25 Dec.13 Brazil Presidential election Oct. 7 and 28 UK EU deadline for UK-EU agreement on Brexit deal October Japan Key BoJ meetings Jan Jul Apr Oct Italy Elections Mar. 4 Source: BlackRock Investment Institute, December Notes: The Fed and ECB meetings are those accompanied by press conferences. The BoJ events shown are followed by the publication of the central bank s outlook report. 8

9 This kind of global synchronisation has not happened for awhile Earnings growth is powering returns Raising the bar Global earnings growth, Global equities earnings revisions ratio, ANNUAL EARNINGS GROWTH (%) est est. EARNINGS REVISION RATIO US Europe EM Japan China ACWI Sources: BlackRock Investment Institute with data from MSCI, Thomson Reuters and IBES, December Notes: USA is represented by MSCI USA; Europe is represented by MSCI Europe; Japan is represented by MSCI Japan; China is represented by MSCI China; EM is represented by MSCI Emerging Markets; and ACWI is represented by MSCI All-Country World Index. Indexes are unmanaged. You cannot invest directly in an index ACWI Average since 2000 Sources: BlackRock Investment Institute, with data from Thomson Reuters, December Notes: The purple line shows the number of companies in the MSCI All-Country World Index with 12-month forward earnings-per-share (EPS) estimates revised up in the previous month divided by the number of companies with downward revisions to EPS estimate. Any opinions, forecasts represent an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research, investment advice or a recommendation. Future estimates may not come to pass. 9

10 Late cycle or still recovering? Nominal aggregate earnings ex US have had a turbulent recovery Twelve month trailing aggregate earnings (rebased to 2007), The global earnings synchronisation in perspective Contribution to ACWI 12m trailing earnings growth by sector, NET INCOME (2007 = 100) PERCENT (%) Sept Current Cons. Disc. Cons. Staples Energy Financials Healthcare Industrials IT Materials Telecom Utilities ACWI PERCENT (%) MSCI USA MSCI ACWI xus Contribution to ACWI earnings growth Financials Tech Nov % 24% Sept % 14% Diff -13% +10% Source: BlackRock Investment Institute with data from MSCI and Thomson Reuters, December Notes: The lines show trailing 12-month aggregate earnings for the MSCI USA and MSCI ACWI ex USA indexes, rebased to 100 as of January Source: BlackRock Investment Institute with data from MSCI and Thomson Reuters, December Notes: Individuals sectors are components of MSCI ACWI. 10

11 What s been down, must go up? Macro & markets exhibit persistent volatility regimes S&P 500 realised monthly volatility, Equity volatility can stay in a low regime for long periods VOLATILITY (%) Volatility Low-volatility regime High-volatility regime Sources: BlackRock Investment Institute, with data from Robert Shiller, December Notes: realised volatility is calculated as the annualised standard deviation of monthly changes in US equities over a rolling 12-month period. Using a Markov-Switching regression model, we calculate two volatility regimes: a high-volatility regime and a low-volatility regime. The lines plot the average level of volatility during each regime based on data from 1872 to

12 Equity valuations are not always a great guide to future returns Valuations can be a murky guide to returns Starting valuations and future equity returns, 0-10 year holding periods The discount that wasn t U.S. ex-faang vs. Europe P/E ratio, % US Europe Japan EM 28 US ex-faang Europe Coefficient of determination 60% 40% 20% Forward P/E ratio % Holding Period (in years) Sources: BlackRock Investment Institute, with data from Thomson Reuters and Worldscope, December Notes: The coefficient of determination measures the strength of the statistical relationship between valuations at the time of purchase and subsequent stock market returns for various holding periods. Valuation is an equalweighted blend of five measures (forward price-to-earnings, trailing price-to-earnings, price-to-book value, price-to-cash, and enterprise value to earnings before interest, taxes, depreciation and amortisation). The regression analysis takes equal-weighted averages for each holding period since The markets are represented by Worldscope indexes. Returns are in U.S. dollars Sources: BlackRock Investment Institute, with data from MSCI and Thomson Reuters, December Notes: The blue line shows the market capitalisation-weighted average 12-month forward P/E ratio of the MSCI USA Index, excluding the five large tech stocks commonly known by the FAANG moniker: Facebook, Apple, Amazon, Netflix and Google parent company Alphabet. The green line shows the 12-month forward P/E of the MSCI Europe Index. References to securities are for illustration only and not investment advice or recommendations. It is not possible to invest in an index. 12

13 Still room to run in Emerging Markets Bucking the trends in EM Return on equity and price-to-book ratio, EM vs. DM, Flows into EM are still bouncing back Flows into EM equity funds, $64 $84 RETURN ON EQUITY EM DM Average Average FLOWS AS A PERCENT OF AUM $39 -$34 $50 -$15 -$24 -$73 -$3 $65* PRICE TO BOOK $38 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Sources: BlackRock Investment Institute, with data from Thomson Reuters and IMF, December Notes: The chart shows return on equity and price-to-book ratios for EMs and DMs. EM is represented by the MSCI Emerging Markets Index and DM by the MSCI World Index. The averages are based on the period Sources: BlackRock Investment Institute, with data from EPFR, December Notes: The bars represent annual flows into EM equity funds as a percentage of total assets under management (AUM) in global EM mutual funds and exchange-traded funds. The annotated numbers represent notional annual flows into EM equity funds. *2017 figure is annualised. 13

14 Bonds for ballast Bonds still act as a diversifier, provided that a risk-off event is not policy related STOCK AND BOND RETURN CORRELATION (%) 60% 40% 20% 0% -20% -40% -60% Taper tantrum German Bund yield spike U.S. election jitters ECB normalisation speech -80% Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 US Rate and Equity Return Correlation (Last 60D) EU Rate and Equity Return Correlation (Last 60D) Source: BlackRock Investment Institute, with data from Bloomberg, November 2017.Notes: The chart shows the correlation of daily returns between equities and bonds over a rolling 60-day period. Equity returns are based S&P and Euro Stoxx Indices, while bond returns are based on Barclays U.S. and German government bond indexes. Past performance is not a reliable indicator of future results. 14

15 Take risk where you are being rewarded Risk and reward BlackRock five-year asset return assumptions in USD, Q % ANNUALisED RETURN ASSUMPTIONS (%) 6% 4% 2% 0% U.S. Treasuries U.S. investment grade U.S. cash Global ex- U.S. gov. bonds U.S. TIPS U.S. high yield Current assumptions EM debt ($) Last quarter US small cap US large cap Global ex- US large cap EM equity 60:40 portfolio Sources: BlackRock Investment Institute and BlackRock Solutions, November Notes: This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. The bars show our expected annualised nominal return assumptions for the next five years from a U.S. dollar perspective. Representative indexes used are: Barclays Global Aggregate Treasury Index ex U.S., Barclays Government Index, Barclays U.S. Credit Index, Citigroup 3-Month Treasury Bill Index, Barclays U.S. Government Inflation-Linked Bond Index, Barclays U.S. High Yield Index, JP Morgan EMBI Global Diversified Index, MSCI USA Small Cap Index, MSCI USA Index, MSCI World ex USA Index, MSCI Emerging Markets Index, and 60% MSCI USA Index / 40% Bloomberg Barclays U.S. Aggregate Index. Indexes are unmanaged and used for illustrative purposes only. They are not intended to be indicative of any fund or strategy's performance. It is not possible to invest directly in an index. Past performance is not a reliable indicator of future results. CMA disclosures are provided in the appendix. 15

16 BII Tactical Market Views Overweight Neutral Underweight Positive on momentum and value stocks in a sustained expansion Equities Attractive valuations and solid earnings for Japanese equities Like EM and European equity markets given above-trend global growth Neutral on U.S. stocks Neutral on U.S. investment grade credit and emerging market debt Fixed Income Sustained economic expansion challenges nominal U.S. govt. bonds High valuations make us cautious on European sovereigns Risks are tilted to the downside for European credit given tight spreads Commodities / FX * Oil prices underpinned by supply-and-demand rebalancing USD has scope to strengthen, with the Fed normalising ahead of its DM peers Source: BlackRock Investment Institute. As of December Subject to change. Any opinions, forecasts represent an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research, investment advice or a recommendation. 16

17 Important Information General disclosures 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 December 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 optimisation 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. Index returns are for illustrative purposes only and do not represent any actual fund performance. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. 17

18 Important Information In Hong Kong, this material is issued by BlackRock Asset Management North Asia Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong. This material is for distribution to "Professional Investors" (as defined in the Securities and Futures Ordinance (Cap.571 of the laws of Hong Kong) and any rules made under that ordinance.) and should not be relied upon by any other persons or redistributed to retail clients in Hong Kong. This material is for distribution to professional and institutional investors only and should not be relied upon by any other persons. This material is provided for informational or educational purposes only and does not constitute a solicitation of any securities or BlackRock funds in any jurisdiction in which such solicitation is unlawful or to any person to whom it is unlawful. Moreover, it neither constitutes an offer to enter into an investment agreement with the recipient of this document nor an invitation to respond to it by making an offer to enter into an investment agreement. This material may contain forward-looking information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of yields or returns. This material 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 December 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. 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. 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. Past performance is not a guide to future performance. 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 fluctuate. THIS MATERIAL IS HIGHLY CONFIDENTIAL AND IS NOT TO BE REPRODUCED OR DISTRIBUTED TO PERSONS OTHER THAN THE RECIPIENT BlackRock, Inc., All Rights Reserved. 18