MAPPING MARKETS REVIEW AND OUTLOOK

Transcription

1 FOR PROFESSIONAL CLIENTS AND MEMBERS OF THE MEDIA ONLY. NOT TO BE PASSED TO ANY OTHER PERSON. PLEASE REFER TO ALL RISK DISCLOSURES AT THE BACK OF THIS DOCUMENT. MAPPING MARKETS REVIEW AND OUTLOOK AUGUST 2018

2 TALKING POINTS PENSION FUNDS CAPPING US BOND YIELDS One factor capping US bond yields appears to be pension fund buying. Corporations are rushing to make contributions into pension funds before tax reforms lower the tax benefit they can claim, and bond markets appear to be the main beneficiary of these inflows. Longer-maturity Treasuries are being stripped to allow the matching of long-term liabilities. Jesse Fogarty Senior Portfolio Manager THREE TRADES WE ARE MONITORING IN MULTI-ASSET Although 2018 is proving a more challenging environment than 2017, there are a number of trades we are monitoring into the second half of the year. Emerging market currencies have fallen sharply, with the US dollar buoyed by the relative strength of the US economy and the move has been exacerbated by position unwinding of carry strategies in illiquid markets. From current levels, we believe signs of stabilisation could now be sufficient to offer relief to emerging market assets should trade tensions not escalate further. US bond markets continue, in our opinion, to provide a useful source of diversification within a multi-asset context and if 10-year yields moved much above 3% they would look attractive relative to valuations elsewhere, giving us a bias to add should this occur. Finally we continue to focus on alternative strategies, especially those strategies where the pay-off profile can be constructed to offer a high degree of protection should further weakness persist. Matthew Merritt Head of Multi-Asset Strategy Team INCOME KEY TO CREDIT INVESTING Long-term investors should focus on income rather than price movements in the credit markets. Although day-to-day media coverage will be focused on prices, never forget that credit assets mature at par. Income and not prices, will therefore drive long-term returns. Instead of being slaves to credit benchmarks, bonds with the best risk-adjusted coupon characteristics should form the backbone of a portfolio. Too many investors may be losing sight of the fact that the asset class is called fixed income for good reason. Gautam Khanna Senior Portfolio Manager

3 TRADE FINANCE IS A LOW RISK CREDIT OPPORTUNITY The global trade finance market is emerging as a private debt opportunity offering a material complexity premium above comparable short-dated credit such as commercial paper. In our experience, trade finance can offer yields ranging between 50bp and 800bps above Libor for credit exposures of between 30 and 150 days (comparable spreads on commercial paper are 3bp to 6bp). The global funding gap has widened to over $1trn in recent years as banks pull away from certain areas of financing due to regulatory considerations. Institutions such as global pension funds could be well-placed to step into the gap to take advantage of this short-dated and potentially very low risk private credit opportunity. Alex Veroude Head of Credit TIME TO ADD IN EMERGING MARKETS? Timing market turning points is never easy, but putting falls into a historical context can often act as a guide. When we examine the extent of the recent price action in emerging market assets, it is reminiscent of the 2013 taper tantrum, despite a still healthy outlook for global growth. The risk of a global trade war is not to be dismissed, but valuations and yield premiums available in some parts of emerging markets are at levels seemingly at odds with economic fundamentals. If 2013 serves as a reference point, now may well be a good time to add to emerging market risk. Colm McDonagh Head of Emerging Market Fixed Income THE BBB CONUNDRUM IN CREDIT MARKETS BBB rated bonds now represent around 50% of some major US corporate bond indices, and investment grade issuance is increasingly biased towards lower-grade issuers. The improving economic backdrop has also led to an increasing number of upgrades from high-yield, commonly known as rising stars. While BBBs provide fertile hunting grounds for fundamental active credit managers, our concern is that the hurdle is being lowered to remain investment grade for companies that take up significant debt following an acquisition. In the next downturn, there may be an increase in fallen angels as companies struggle to service their high debt burden. Alex Veroude Head of Credit

4 MARKET OUTLOOK US GOVERNMENT BONDS Isobel Lee, Head of Global Fixed Income Bonds Yields on 10-year US Treasuries have been unable to move above 3% on a sustained basis, partially a result of strong demand from US pension funds who are buying bonds to match long- term liabilities. One consequence of the tax-reform plan is that corporates are rushing to make pension fund contributions before a drop in corporate tax rates later in the year reduces the tax benefit. A surprise acceleration in inflation, possibly buoyed by higher trade tariffs, could be a risk for US bond markets, especially if it were to come at a point when pension fund demand was dissipating and Treasury supply increasing. In the short term, however, the upward move in yields over the year has reduced the overvaluation in US bond markets, moving them closer to fair value meaning that we believe a significant duration underweight is no longer appropriate. EUROPEAN GOVERNMENT BONDS Gareth Colesmith, Senior Portfolio Manager, European Fixed Income With the European Central Bank s (ECB) deposit rate looking likely to remain in negative territory for some time and European economic growth coming off record-highs, a short duration position appears less justified. We believe bund yields are likely to be range-bound for a while and think investors should consider more tactical positioning, as yields are likely to oscillate within the range. In the periphery, Italian political developments remain a risk. The publication of the new budget will be a key event it may well be in violation of EU limits and sovereign ratings downgrades could be likely, meaning Italian government spreads may have the potential to gap wider. We expect any weakness to remain idiosyncratic to Italian bonds and therefore a short position in Italy, offset against a long in Spain (to exclude the effects of trends in peripheral debt), could be worth considering. UK GOVERNMENT BONDS Harvey Bradley, Portfolio Manager, Fixed Income The BoE has forecast Q2 GDP to rise to 0.4%, and expects inflation to remain at 2.4% year-on-year in Q2. The key risk continues to be the evolution of Brexit negotiations, as well as the profile of UK inflation. We expect the unwind of quantitative easing to begin when official rates reach 1.5%. GLOBAL INVESTMENT GRADE CREDIT Peter Bentley, Head of UK and Global Credit Credit markets are in something of a tricky spot. On the one hand, the global economy looks robust, though growth now looks less globally synchronised. Corporate earnings growth still looks strong. On the other hand, valuations do not look particularly compelling and most sectors are increasingly showing late cycle signs. Political risk is far from receding, at a time in which central bank support is fading. Tactically though, as the summer lull causes issuance to dry up, absent political surprises, we believe credit markets will have little reason to sell off over the coming few weeks. A short position would sacrifice carry and could be costly. A modest, and very cautious, long position (with tactical hedges where necessary), could be the optimal path. It is unlikely to be the time to materially add risk. US INVESTMENT GRADE CREDIT Jesse Fogarty, Senior Portfolio Manager On a tactical basis, we believe credit spreads are likely to grind tighter into the summer, partly as technical factors take effect such as the annual lull in supply. From September onwards, the market could come under pressure again. While we expect Q2 earnings to put in a solid showing, and economic growth looks both strong and sustainable at this stage, valuations look stretched. Although yields have risen, at this stage the move is not sufficient to materially increase risks. Instead, we think maintaining a modest tactical long for now is likely to be attractive.

5 EMERGING MARKET DEBT Colm McDonagh, Head of Emerging Market Fixed Income While specific countries vulnerabilities undoubtedly exist, our view is that emerging market fundamentals are on a solid trajectory. The growth backdrop for emerging markets continues to improve relative to developed markets, and this should continue to support longer-term flows into emerging market debt. There has been a focus on countries with current account concerns, but deficits across emerging markets have reduced on aggregate since 2013 and are now within 3% of GDP. While government borrowing has increased since 2008, similar to developed markets, the composition of this debt has undergone a considerable transformation, rendering emerging markets more resilient (local currency rather than hard currency debt accounts for most of the increase). If 2013 serves as a good reference point, much of the sell-off has already likely materialised. We believe the premia on offer across emerging market debt more than compensate for the risks associated with the uncertain external backdrop. We believe valuations look increasingly compelling given our fundamental outlook. SECURED LOANS Ranbir Singh Lakhpuri, Senior Portfolio Manager, Secured Finance Going into the second half of the year, the near-term forecast is for better-balanced market conditions, barring any unexpected shocks to the system or a material increase in interest rates that draws even more cash into the asset class. We expect returns to be primarily driven by income through the remainder of 2018, with minimal default activity and stable loan prices supported by strong demand from US collateralised loan obligation (CLO) issuance, along with institutional and retail fund flows looking for floating rate debt. HIGH YIELD Uli Gerhard, Senior Portfolio Manager, High Yield The economic environment, translating into positive earnings momentum, continues to be positive for high yield. We expect growth in the US and Europe to be sufficient to support earnings momentum through the rest of this year and 2019, keeping defaults low. However, the rate of growth in Europe has moderately slowed and the direction of the Italian economy is of concern. Moreover, some of the tariffs announced by the Trump administration are set to come into effect soon, and we await the effect on credit and clarity on what happens next. Year-to-date fund flows have been negative, but we do not foresee a significant increase in supply over the next few months. This benign backdrop should help to underpin demand from investment grade accounts. We expect comments from the Trump administration regarding companies and sectors outside the US to result in periods of extreme volatility. There are a variety of country-specific risks that we are alert to: in Mexico the ongoing threat of NAFTA dissolution, in Brazil, we will stay cautious into the October election; and we are also keeping an eye on the Chinese yuan, and the Chinese government s decision to push liquidity into the domestic system to support growth. ASSET-BACKED SECURITIES (ABS) Shaheer Guirguis, Head of Secured Finance Recent weakness in the European ABS market, and US structured credit market, has been driven by supply rather than any changes in fundamentals. In Europe, markets have been re-pricing as ECB asset purchases wind down, and it is not yet clear if the ECB will reinvest maturing debt in the ABS market after the programme ends. We believe increasing issuance in European ABS reflects issuers seeking to wean themselves from the European Central Bank asset purchase programme before its end. We believe ABS markets offer compelling strategic value given the fundamental credit quality and security of the assets. CURRENCIES Paul Lambert, Head of Currency US cyclical outperformance is supporting the dollar (USD), particularly versus other major currencies. At the same time trade tensions are leading to USD strength versus growth-sensitive currencies that will suffer the most if global trade is disrupted. In our view this combination can persist for now. We are mindful that the cyclical US outperformance is stretched relative to history, and we are alert to any signs that relative growth rates are starting to converge which would be negative for the USD. Any improvement in relations between the US and its trading partners, especially China, could also see a turnaround in USD sentiment.

6 MARKET REVIEW AND CONSENSUS FORECASTS Equity markets (total return, local currency) H FTSE % 0.7% -1.3% 19.1% 11.9% 1.7% FTSE All-Share 20.8% 1.2% 1.0% 16.8% 13.1% 1.7% S&P % 13.7% 1.4% 12.0% 21.8% 2.6% Euro Stoxx 21.5% 4.0% 6.4% 3.7% 9.2% -1.0% Topix 54.4% 10.3% 12.1% 0.3% 22.2% -3.7% Currencies H GBP-USD 1.9% -5.9% -5.4% -16.3% 9.5% -2.3% GBP-EUR -2.2% 6.9% 5.4% -13.6% -4.0% 0.4% Bond markets (Bloomberg Barclays) H US Treasury -2.7% 5.1% 0.8% 1.0% 2.3% -1.1% US Corporate -1.5% 7.5% -0.7% 6.1% 6.4% -3.3% US High Yield 7.4% 2.5% -4.5% 17.1% 7.5% 0.2% UK Gilts -4.2% 14.6% 0.5% 10.7% 2.0% 0.2% UK Inflation Linked Gilts 0.6% 18.8% -1.1% 25.4% 2.4% -1.1% Pan European Corporate 1.5% 11.0% 1.3% 2.9% 1.9% -0.8% Pan European High Yield 9.9% 7.0% 2.9% 6.5% 6.2% -1.4% Real GDP 1 Consensus Versus previous year 2017 E 2018 F 2019 F 2018 F 2019 F US Eurozone Japan China Developed markets Emerging markets Global CPI 1 Consensus Versus previous year 2017 E 2018 F 2019 F 2018 F 2019 F US Eurozone Japan China Developed markets Emerging markets Global Forecasts and forecast returns are estimates based on data that is currently available. As such, they are not a reliable indicator of future performance. 1 Source: Bloomberg, data as at 30 June E Estimate. F Forecast.

7 FOR PROFESSIONAL CLIENTS ONLY. NOT TO BE REPRODUCED WITHOUT PRIOR WRITTEN APPROVAL. JUNE 2018 > Equity and credit markets show strong signs of exuberance, and the clock is ticking on a potential reversal of recent trends. We believe that investors should be considering risk re-allocation strategies. FOR PROFESSIONAL CLIENTS ONLY. NOT TO BE REPRODUCED WITHOUT PRIOR WRITTEN APPROVAL. PLEASE REFER TO ALL RISK DISCLOSURES AT THE BACK OF THIS DOCUMENT. JULY 2018 > Should investors be worried about global inflation? We examine the short and long-term factors currently impacting inflation data. FOR PROFESSIONAL CLIENTS ONLY. NOT TO BE REPRODUCED WITHOUT PRIOR WRITTEN APPROVAL. PLEASE REFER TO ALL RISK DISCLOSURES AT THE BACK OF THIS DOCUMENT. MAY 2018 > We believe the trade finance market is emerging as a compelling private debt opportunity for institutional investors seeking sources of attractive risk-adjusted returns. We look at how they can seek to exploit the growing funding gap faced by businesses worldwide. FOR PROFESSIONAL CLIENTS ONLY. NOT TO BE REPRODUCED WITHOUT PRIOR WRITTEN APPROVAL. PLEASE REFER TO ALL RISK DISCLOSURES AT THE BACK OF THIS DOCUMENT. JULY 2018 > Emerging market debt (EMD) has endured a challenging year-to-date, leading investors to question whether this is merely a correction following a strong two-year performance spell, or the start of something bigger. We believe technical factors have driven the sell-off, and that emerging markets remain fundamentally sound meaning now is a good time to consider adding exposure. FOR PROFESSIONAL CLIENTS ONLY. NOT TO BE REPRODUCED WITHOUT PRIOR WRITTEN APPROVAL. BY PETER TURCHIN MAY 2018 > History shows us that eras of good feelings are followed by ages of discord. The first age of discord in the USA coincided with the American Civil War and my research overwhelmingly shows we are entering a second. I describe the driving forces of rising social discord and articulate how we should formulate policies to navigate the troubled waters ahead. THOUGHT LEADERSHIP AVAILABLE ON REQUEST OR FROM OUR WEBSITE EXUBERANT MARKETS Exuberant Markets Contrarian investors will likely see the current environment of excessive equity and credit market valuations as an opportunity to re-allocate risk. Our analysis indicates that market conditions are exuberant in equities and, to a lesser extent, in credit markets. The clock appears to be ticking on a reversal as central bank support declines. We believe it is now time to consider re-allocating risk before it is too late. We outline four strategies for investors to consider. Markets are resilient until a critical threshold is reached, but accurately predicting a tipping point is close to impossible. With signs of market exuberance and irrationality, we believe that investors should heed the warning signs and consider re-allocating risk. INFLATION OUTLOOK FOCUS: GLOBAL INFLATION Inflation outlook: global inflation Inflation has accelerated globally as growth has strengthened, buoyed by an upturn in commodity prices. This has led to an increase in inflation forecasts for 2018 and For now, we believe that this is merely inflation returning to levels more consistent with this stage of the economic cycle and believe that there are a number of key factors which could act to contain inflationary pressures in the short term. Longer term, we anticipate low levels of spare capacity increasing the risk of policy error in a world where the long-term effects of unconventional monetary policy are still unknown. THE TRILLION-DOLLAR TRADE FINANCE OPPORTUNITY The trillion-dollar trade finance opportunity Trade finance is private debt financing that investors offer to businesses to help them overcome the mismatch between when they expect to receive payments from their clients, and when they need to pay their own suppliers or spend money elsewhere. Research indicates that $1.5trn of the trade finance market is subject to a funding gap, driven by the retrenchment of banks from lending markets due to regulatory considerations. Broadly, there are two types of trade finance structures that we believe investors should consider investing in: supply chain financing, which involves providing funding to the suppliers of a large corporate; and receivables financing, which involves providing funding to a supplier, secured by receivables from its customer base. Insight currently sees trade finance as a short-duration yield enhancer within secured finance portfolios, multi-credit investment mandates and absolute return strategies. EMERGING MARKET DEBT PUTTING THIS SELL-OFF INTO CONTEXT Emerging market debt: Putting this sell-off into context Emerging market debt (EMD) has had challenging year-to-date performance, and investors are questioning whether this is merely a performance correction after a strong two-year spell, or the start of something bigger. There are some similarities between the current sell-off and 2013 s taper tantrum, with both influenced to an extent by Federal Reserve (Fed) policy normalisation. If this serves as a useful point of reference, much of the sell-off has already likely materialised. Technicals rather than fundamentals have exacerbated this sell-off, with a big unwind of cross-over investor positioning. Relative to 2013, EMs are in a fundamentally stronger position in aggregate. We believe it is time to consider adding back some EMD risk, given that the risk premia currently on offer across EMD assets more-than-adequately compensate for the risks brought about by the uncertain external backdrop. THE HISTORY OF THE NEAR FUTURE WHAT DOES HISTORY TELL US ABOUT OUR AGE OF DISCORD? Age of Discord: The history of the near future Social and political turbulence in the United States and in a number of European countries has been rising in recent years. Research, which combines analysis of historical data with the tools of complexity science, has identified the deep structural forces that work to undermine societal stability and resilience to internal and external shocks. Look beneath the surface of day-to-day contentious politics and social unrest, and focus on the negative social and economic trends that explain our current age of discord.

8 IMPORTANT INFORMATION RISK DISCLOSURES Past performance is not indicative of future results. Investment in any strategy involves a risk of loss which may partly be due to exchange rate fluctuations. ASSOCIATED INVESTMENT RISKS Fixed income and Multi-asset Where the portfolio holds over 35% of its net asset value in securities of one governmental issuer, the value of the portfolio may be profoundly affected if one or more of these issuers fails to meet its obligations or suffers a ratings downgrade. A credit default swap (CDS) provides a measure of protection against defaults of debt issuers but there is no assurance their use will be effective or will have the desired result. The issuer of a debt security may not pay income or repay capital to the bondholder when due. Derivatives may be used to generate returns as well as to reduce costs and/or the overall risk of the portfolio. Using derivatives can involve a higher level of risk. A small movement in the price of an underlying investment may result in a disproportionately large movement in the price of the derivative investment. Investments in emerging markets can be less liquid and riskier than more developed markets and difficulties in accounting, dealing, settlement and custody may arise. Investments in bonds are affected by interest rates and inflation trends which may affect the value of the portfolio. Where high yield instruments are held, their low credit rating indicates a greater risk of default, which would affect the value of the portfolio. The investment manager may invest in instruments which can be difficult to sell when markets are stressed. Where leverage is used as part of the management of the portfolio through the use of swaps and other derivative instruments, this can increase the overall volatility. While leverage presents opportunities for increasing total returns, it has the effect of potentially increasing losses as well. Any event that adversely affects the value of an investment would be magnified to the extent that leverage is employed by the portfolio. Any losses would therefore be greater than if leverage were not employed. Property assets are inherently less liquid and more difficult to sell than other assets. The valuation of physical property is a matter of the valuer s judgement rather than fact. Investment in any strategy involves a risk of loss. Trade finance exposure is complex and is exposed to credit and other risks. It is not actively traded and this may impair the ability of a portfolio to realise full value in the event of the need to liquidate such investments.

9 MEDIA RELATIONSHIP Lisa McHugh Corporate Communications Manager +44 (0) Amanda Williams Head of Corporate Communications +44 (0) FIND OUT MORE Institutional Business Development European Business Development Consultant Relationship Management Client Relationship Management company/insight-investment This document is a financial promotion and is not investment advice. Unless otherwise attributed the views and opinions expressed are those of Insight Investment at the time of publication and are subject to change. This document may not be used for the purposes of an offer or solicitation to anyone in any jurisdiction in which such offer or solicitation is not authorised or to any person to whom it is unlawful to make such offer or solicitation. Insight does not provide tax or legal advice to its clients and all investors are strongly urged to seek professional advice regarding any potential strategy or investment. Issued by Insight Investment Management (Global) Limited. Registered office 160 Queen Victoria Street, London EC4V 4LA. Registered in England and Wales. Registered number Authorised and regulated by the Financial Conduct Authority. FCA Firm reference number Insight Investment. All rights reserved

10 DONT FORGET TO INSERT CONTACT DETAILS AND DISCLAIMER ON PREVIOUS PAGE