Global Portfolio Solutions (GPS) Group 2017

Transcription

1 Global Portfolio Solutions (GPS) Group 2017 This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.

2 GPS Viewpoints Macroeconomic Outlook Broadening global expansion Secular Stagnation in retreat Dynamic Allocation Most synchronized global growth since 2010 Burden of proof has shifted to the proponents of secular stagnation Policy uncertainty is at extreme levels US and EU similar to 2016, risks to the upside in Japan 2017 likely an inflection point for real GDP and its composition M acro volatility typically high in late stage of Expansionary Phase Some slowdown expected in China and India Cyclical turn in the likes of Russia and Brazil M arkets still pricing quite a severe secular stagnation narrative A number of sectors (credit, energy) may remain range-bound Source: GSAM Global Portfolio Solutions as of January The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation. 1

3 Viewpoint 1: Broadening Global Expansion

4 Broadening Global Expansion Labor and capital market capacity utilization rates suggest that the expansion could continue for another couple of years, in the absence of unexpected shocks US Labor market improvements Growth in real estate investment Manufacturing to slowly recover NBER Recession Europe Phase of the cycle Easy monetary and fiscal policy Improvements in global manufacturing and PM Is Referendum result to have only limited impact outside the UK EM and China Downside risks to Chinese growth remain Improvements in EM imbalances and valuation Room for broader EM growth in 2017 Rollover Expansion Turnaround Crisis Fiscal & Monetary Tightening Overheating 1 st Oil Shock 2 nd Oil Shock & Volcker Deflation S&L Crisis & Gulf War Burst of Tech Bubble Financial Crisis Year Source: Haver Analytics, GSAM Global Portfolio Solutions as of January The economic and market forecasts presented herein have been generated by GSAM for informational purposes as of the date of this presentation. They are based on proprietary models and there can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation. 3

5 Broadening Global Expansion While equity valuations are elevated on an absolute basis, we believe they are reasonable considering the macro environment and interest rate levels M arket Implied ERP* M acro Benchmarked ERP % Source: Haver Analytics, Robert Shiller data, GSAM Global Portfolio Solutions. As of February The market implied ERP is based on a 1-stage dividend discount model and cyclically adjusted earnings. The macro benchmarked ERP is GSAM s estimate of the fair level of the ERP given prevailing macro conditions. There can be no assurance that these estimates can be realized. Actual ERP is likely to vary. The equity risk premium measures the market-implied return expectations for owning stocks versus a risk-free asset. Although certain information has been obtained from public sources believed to be reliable, without independent verification, we do not guarantee its accuracy, completeness or fairness. Past performance does not guarantee future results, which may vary. 4

6 Viewpoint 2: Secular Stagnation in Retreat

7 Secular Stagnation in Retreat The burden of proof for the existence of secular stagnation is once more on its proponents Source: Haver Analytics, GSAM Global Portfolio Solutions, IMF as of January The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation. Although certain information has been obtained from public sources believed to be reliable, without independent verification, we do not guarantee its accuracy, completeness or fairness. 6

8 Secular Stagnation in Retreat Secular stagnation challenged by inflationary pressures CPI Flexible Prices CPI Sticky Prices % % Source: Haver Analytics, GSAM Global Portfolio Solutions as of January Past performance does not guarantee future results, which may vary. Although certain information has been obtained from public sources believed to be reliable, without independent verification, we do not guarantee its accuracy, completeness or fairness. 7

9 Secular Stagnation in Retreat Secular stagnation challenged by inflationary pressures Unemployment around 5% and declining Nominal grow th in avg. hourly earnings (%, yoy) % Source: Haver Analytics, GSAM Global Portfolio Solutions as of January

10 Secular Stagnation in Retreat Secular stagnation challenged by inflationary pressures %, yoy 2.5 US Core CPI US CPI Euro Area Core CPI Euro Area CPI Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Source: Haver Analytics, GSAM Global Portfolio Solutions as of January Past performance does not guarantee future results, which may vary. Although certain information has been obtained from public sources believed to be reliable, without independent verification, we do not guarantee its accuracy, completeness or fairness. 9

11 Secular Stagnation in Retreat Our models explain bond yields using cyclical factors leaving no room for a secular explanation to be required Slope of yield curve vs. macro benchmark 1 % 8 10Y - 3M curve Macro benchmark for 10Y - 3M curve Zero Lower Bound Is Binding For the period where the zero lower bound is binding we have replaced the 3M interest rate with our Macro benchmarked 3M real yield plus its expected inflation, for our curve calculations. Source: Haver Analytics, GSAM Global Portfolio Solutions as of January Past performance does not guarantee future results, which may vary. Although certain information has been obtained from public sources believed to be reliable, without independent verification, we do not guarantee its accuracy, completeness or fairness. 10

12 Secular Stagnation in Retreat Our models support our bearish view on bonds they suggest that the Fed is behind the curve 3M real yield vs. macro benchmark 3M real yield Macro benchmark for 3M real yield % 4 2 Zero Lower Bound Is Binding Source: Haver Analytics, GSAM Global Portfolio Solutions as of January Past performance does not guarantee future results, which may vary. Although certain information has been obtained from public sources believed to be reliable, without independent verification, we do not guarantee its accuracy, completeness or fairness. 11

13 Viewpoint 3: Dynamic Allocation

14 Dynamic Allocation Expect range-bound spreads and see this as an area where a tactical, dynamic approach may add value Spread levels at the end of the expansion phase IG Spread M acro Benchmarked IG Spread bps Spread Investment Grade High Yield As of May bps 494 bps As of July As of Nov Average at end of expansion Median Current (March) 125 bps 387 bps Year For the table, current spread levels are as of March Source: Bloomberg, Bank of America Merrill Lynch, Haver Analytics, GSAM Global Portfolio Solutions as of January IG refers to the Bank of America Merrill Lynch US Corporate Index of investment grade corporate debt. HY refers to the Bank of America Merrill Lynch High Yield Index. The economic and market forecasts presented herein have been generated by GSAM for informational purposes as of the date of this presentation. They are based on proprietary models and there can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation. Past performance does not guarantee future results, which may vary. Although certain information has been obtained from public sources believed to be reliable, without independent verification, we do not guarantee its accuracy, completeness or fairness. 13

15 Dynamic Allocation Short-term upside in crude oil, however, we continue to believe rallies will prove self-defeating in the medium term Shale Oil Breakevens Have Fallen to $55/bbl The US Rig Count Is on the Rise Cost per barrel ($/bbl) US rig count % drop % increase from the trough 0 May 2014 May Jan Feb M ar Apr M ay Jun Jul Aug Sep Oct Nov Dec 2016 Source: GIR, Baker Hughes, Haver Analytics, GSAM Global Portfolio Solutions as of January Past performance does not guarantee future results, which may vary. Although certain information has been obtained from public sources believed to be reliable, without independent verification, we do not guarantee its accuracy, completeness or fairness. 14

16 Dynamic Allocation Medium term upside in EM: we have an overweight to EM over DM in portfolios EMFX Overvaluation vs USD (GPS 'fair value') % FX overvaluation increases 05 0 Year 05 MSCI EM weights Source: Haver Analytics, Bloomberg, GSAM Global Portfolio Solutions as of January Although certain information has been obtained from public sources believed to be reliable, without independent verification, we do not guarantee its accuracy, completeness or fairness. Please see additional disclosures at the end of this presentation. Past performance does not guarantee future results, which may vary. 15

17 Risks: Upside and Downside

18 Risks Upside Global Manufacturing Growth Manufacturing PMIs improving DM EM Source: Haver Analytics, GSAM Global Portfolio Solutions as of January The list of risks mentioned above is not exhaustive. Past performance does not guarantee future results, which may vary. 17

19 Risks Upside Earnings Recovery S&P 500 EPS near post-crisis high $ $ Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Source: Haver Analytics, GSAM Global Portfolio Solutions as of January The list of risks mentioned above is not exhaustive. Past performance does not guarantee future results, which may vary. 18

20 Risks Downside Uncertainty around President Trump s policies, though we expect limited impact to growth this year Fiscal Policy Deregulation Trade Key drivers of potential market volatility Fed Policy Immigration Geopolitical relationships For illustrative purposes only. The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation. 19

21 Risks Downside We believe the French and German Elections are crucial for 2017; we are also monitoring Brexit negotiations, the Netherlands and China January February M arch April M ay June July August September October November December Presidential Inauguration January 20, USA General Election March 15, Netherlands Proposed Date by which Article 50 will be Triggered March 31, UK 1 st round Presidential Elections April 23, France EU Economic Sanctions Renewal Deadline July 31, Russia 19 th National Congress of The Communist Party of China October November, China US Debt Ceiling Extension Expires March 15, USA G7 Summit M ay 26-27, Italy 2017 NATO Summit July-August, Belgium Potential General Election October November, Italy 2 nd round Presidential Elections M ay 7, France G20 Summit July 7-8, Germany Federal Elections September 24, Germany Source: GSAM Global Portfolio Solutions. The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation. 20

22 Risks Two Major Imbalances in China Despite Chinese real estate being a potential catalyst for instability we think debt levels will be sustainable Latent Risks Non Financial Debt 250 Corporate nonfinancial Consumer Government (central + local) % of GDP Sources: CEIC, Haver Analytics, China Central Depository & Clearing Co., The People's Bank of China, Chinese Ministry of Finance, China National Bureau of Statistics, Asset Management Association of China. Past performance does not guarantee future results, which may vary. 21

23 Risks Two Major Imbalances in China Despite Chinese real estate being a potential catalyst for instability, we think debt levels will be sustainable Potential Catalyst Real Estate Investment Total real estate investment Residential real estate investment % of GDP Sources: CEIC, Haver Analytics, China Central Depository & Clearing Co., The People's Bank of China, Chinese Ministry of Finance, China National Bureau of Statistics, Asset Management Association of China. Past performance does not guarantee future results, which may vary. 22

24 Risks Two Major Imbalances in China A surge in bad debts and large-scale restructuring would still be manageable for the government Future government debt and contingent liabilities Assuming historical credit and GDP growth rates % of GDP 175% % 125% 100% 75% 50% Sources: CEIC, Haver Analytics, China Central Depository & Clearing Co., The People's Bank of China, Chinese Ministry of Finance, China National Bureau of Statistics, Asset Management Association of China. To calculate contingent liabilities on corporate debt, we assume a 20% recovery rate on both SOE and non-soe debt, and apply the following formula: Contingent liabilities = Credit Default Rate (1 Recovery Rate). Contingent liabilities are losses on corporate credit, assuming that SOEs account for 56% of total corporate credit, in line with IMF estimates. Sources: CEIC; GPS; RAND; CEPII; BIS; IMF; Moody s; Kansas City Fed; Giesecke, Kay, F. Longstaff, S. Schaefer, I. Strebulaev (2010): Corporate Bond Default Risk: A 150-Year Perspective. The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation. Past performance does not guarantee future results, which may vary. 23

25 Asset Class Views: Multi-Asset Class Portfolios 1-Year View US Neutral U.S. economy resilient, but equity returns likely muted as pickup in earnings growth may be partially offset by compression in P/E. European Positive Improving economic growth, supportive fundamentals, accommodative monetary policy and thawing credit markets to drive excess return. However, continuing political uncertainty in a year dominated by major elections remains a concern. Equity Japanese Neutral Scope for earnings growth, favorable relative valuations and accommodative policy offset by challenging macro and declining impact of additional monetary easing. Emerging Market Positive EMs have outperformed DMs in 2017 as improving macro stability on recovering external balances, supportive economic data and accommodative monetary policy remain strong tailwinds. We would turn more constructive on EM Equities if we see near-term reversal. EMD Local Positive Increasing attractiveness of valuation and carry (now above 6%), stabilizing commodities are supportive. However, concerns around rebalancing in China and threat of rising protectionism are headwinds for EM Debt. Fixed Income IG Corp. Bonds HY Corp. Bonds Negative Neutral Demand for up-in-quality yield drove US IG market higher. However, risk reward is skewed towards downside given rising treasury yields amidst signs of maturation in the broader credit cycle. Rally in commodities and rising expectations of improving profitability to drive US HY higher. However, cautious on US HY credit given threat of maturing US credit cycle, higher inflation and firming rates on the back end. US Government Negative At current levels, market is more dovish than Fed and we feel that US government bond investors are undercompensated for Fed policy and inflation risk. Commodities Neutral We believe that oil prices materially above $50/bbl. would incentivize new supply, effectively putting a cap on rallies. High inventories are likely to result in negative roll yields, which reduces return potential. Real Assets Public Real Estate Neutral Strong fundamentals and continued foreign flows into real estate are counter-balanced by the risks from rising interest rates in US and strength in US dollar. Public Infrastructure Neutral Potential fiscal expansion and focus on infrastructure by incoming US administration is supportive. However, rising US interest rates, post US elections, has driven recent underperformance. US Dollar Positive We expect USD to be modestly stronger from the current level but we are less bullish than before. Valuations remain a headwind for USD. We don t see much upside from current levels as markets seem to be a bit optimistic about the policy expectations from the new US government. Currency Euro Negative We believe the ECB will continue to keep real rates capped as the recovery is still in its nascent stage. Additionally, we also see political risks as a headwind to EUR. Japanese Yen Negative Weak wage growth, slowing inflation, and low inflation expectations argue for more easing and weaker JPY. With BoJ s yield curve control measure, we expect interest rate differentials to move against JPY as we expect yields elsewhere to rise. Chinese Renminbi Negative Hard landing not our base case, but RMB to remain under pressure from continued gradual capital outflows. While RMB has depreciated relative to US Dollar, it has traded sideways relative to trade-weighted basket. Source: GSAM Global Portfolio Solutions. Asset class views as of March Please see additional disclosures at the end of this presentation. 24

26 Additional Information Source: GSAM Global Portfolio Solutions. Asset class views as of 28-February *Note that this does not account for liability-driven investment. Views and opinions expressed are for informational purposes only and do not constitute a recommendation by GSAM to buy, sell, or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change, they should not be construed as investment advice. Asset class views are relative to the GPS Model Strategic Portfolio. The economic and market forecasts presented herein have been generated by GSAM for informational purposes as of the date of this presentation. They are based on proprietary models and there can be no assurance that the forecasts will be achieved.. Any mention of an investment decision is intended only to illustrate our investment approach and/or strategy, and is not indicative of the performance of our strategy as a whole. It should not be assumed that any investment decisions shown will prove to be profitable, or that any investment decisions made in the future will be profitable or will equal the performance of the investments discussed herein. A complete list of past recommendations is available upon request.. This material is provided at your request solely for your use. This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. THIS MATERIAL DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY JURISDICTION WHERE OR TO ANY PERSON TO WHOM IT WOULD BE UNAUTHORIZED OR UNLAWFUL TO DO SO. Prospective investors should inform themselves as to any applicable legal requirements and taxation and exchange control regulations in the countries of their citizenship, residence or domicile which might be relevant. Views and opinions expressed are for informational purposes only and do not constitute a recommendation by GSAM to buy, sell, or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change, they should not be construed as investment advice. Economic and market forecasts presented herein reflect a series of assumptions and judgments as of the date of this presentation and are subject to change without notice. These forecasts do not take into account the specific investment objectives, restrictions, tax and financial situation or other needs of any specific client. Actual data will vary and may not be reflected here. These forecasts are subject to high levels of uncertainty that may affect actual performance. Accordingly, these forecasts should be viewed as merely representative of a broad range of possible outcomes. These forecasts are estimated, based on assumptions, and are subject to significant revision and may change materially as economic and market conditions change. Goldman Sachs has no obligation to provide updates or changes to these forecasts. Case studies and examples are for illustrative purposes only. This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. This material has been prepared by GSAM and is not financial research nor a product of Goldman Sachs Global Investment Research (GIR). It was not prepared in compliance with applicable provisions of law designed to promote the independence of financial analysis and is not subject to a prohibition on trading following the distribution of financial research. The views and opinions expressed may differ from those of Goldman Sachs Global Investment Research or other departments or divisions of Goldman Sachs and its affiliates. Investors are urged to consult with their financial advisors before buying or selling any securities. This information may not be current and GSAM has no obligation to provide any updates or changes. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. We have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources. Emerging markets securities may be less liquid and more volatile and are subject to a number of additional risks, including but not limited to currency fluctuations and political instability. High-yield, lower-rated securities involve greater price volatility and present greater credit risks than higher-rated fixed income securities. An investment in real estate securities is subject to greater price volatility and the special risks associated with direct ownership of real estate. Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur. Index Benchmarks Indices are unmanaged. The figures for the index reflect the reinvestment of all income or dividends, as applicable, but do not reflect the deduction of any fees or expenses which would reduce returns. Investors cannot invest directly in indices. The indices referenced herein have been selected because they are well known, easily recognized by investors, and reflect those indices that the Investment Manager believes, in part based on industry practice, provide a suitable benchmark against which to evaluate the investment or broader market described herein. The exclusion of failed or closed hedge funds may mean that each index overstates the performance of hedge funds generally. 25

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