M&G Global Macro Bond Fund Jim Leaviss, Fund Manager

Transcription

1 M&G Global Macro Bond Fund Jim Leaviss, Fund Manager October 2015

2 Fund facts M&G Global Macro Bond Fund Fund manager: Jim Leaviss Deputy fund manager: Claudia Calich (as of 6 July 2015) Launch date: October 1999 Fund structure: Size: Sector: UCITS III 1,462 million Morningstar Global Bond sector Yield to maturity (gross of ongoing charges): 1.79% Copyright 2015 Morningstar UK Limited. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. The Morningstar Rating is an assessment of a fund s past performance based on both return and risk which shows how similar investments compare with their competitors. A high rating alone is insufficient basis for an investment decision. Source: M&G, 30 September Ratings, Morningstar Inc. 30 June 2015 and should not be taken as recommendations

3 Jim Leaviss Biography Joined M&G in 1997 after five years at the Bank of England and is the Head of the Retail Fixed Interest team Jim is the fund manager of the M&G Global Macro Bond Fund and the M&G European Inflation Linked Corporate Bond Fund Heads up the M&G Retail Fixed Income team, made up by 20 individuals, 16 bond funds and AUM in excess of 40 billion He has 21 years of experience in fixed income markets

4 Performance in euros YTD 2015 % 2014 % 2013 % 2012 % 2011 % 2010 % 2009 % 2008 % M&G Global Macro Bond Fund Morningstar Global Bond Sector Average Drawdowns Source: Morningstar, Inc., Pan-European database, 31 August 2015, euro A share class, gross income reinvested, price to price

5 Where are the extraordinary, unjustified valuations in bond markets today? Is it government bonds? Is it credit? Is it emerging market bonds and currencies?

6 Valuing government bonds: method #1 US nominal GDP YoY vs US 5yr US Treasuries 20% Bad time to be a bond investor Start of the golden era for bonds Bond yields falling behind nominal growth 15% Vietnam Oil crises Volker - inflation buster 10% 5% Central Bank Regime Change 0% -5% US GDP nominal YoY US 5y Treasury Bond Yield On this basis, might you not be better off investing in the broader economy? Source: M&G, Bloomberg, 30 June 2015

7 Valuing government bonds: method #2 The Dots : Each dot represents an FOMC member 4.25% The dots 4.00% 3.75% 3.50% 3.25% 3.00% 2.75% The median long term Fed funds expectation fell from 3.75% to 3.5% in September "Narayana1" by Licensed under Public Domain via Wikipedia - "Janet Yellen official Federal Reserve portrait" by United States Federal Reserve - Licensed under Public Domain via Commons - d lacker" by Federal Reserve - Federal Reserve Bank. Transferred from en.wikipedia to Commons by Atmoz using CommonsHelper.. Licensed under Public Domain via Commons - Source: Federal Reserve Bank, M&G, 18 September 2015

8 Valuing government bonds: method #2 Forward-looking yields remain below the Fed s long run expectations 5.0% 4.5% 4.0% Highest FOMC long-run rate expectation Median FOMC long-run rate expectation 3.5% 3.0% Lowest FOMC long-run rate expectation 2.5% USD forward rate 10y10y 2.0% We are short duration, but not outright negative Source: Bloomberg, Federal Reserve, 29 September 2015

9 Deflation is incredibly rare Deflation in economies with floating exchange rates rarer still Deflation episodes are rare 1.4% 0.8% Even rarer in countries with floating exchange rates 0.1% 0.7% 1.0% 98.0% 0.4% Positive inflation episodes 1y deflation episodes Deflation episodes longer than 1y 1y deflation episodes - pegs 1y deflation episodes - floating currency Deflation episodes > 1y - pegs Deflation episodes > 1y - floating currency Source: M&G, Bordo and Eichengreen, IMF and OECD. Note: Sample ; 3300 observations

10 Inflation expectations Valuations support inflation protection Five-year breakeven rates for the US and Germany 3.0% 2.5% 2.0% CPI target 1.5% 1.0% 1.0% 0.5% 0.5% 0.0% -0.5% United States Inflation protection looks cheap Germany Source: Bloomberg, 29 September 2015 (latest data available)

11 Oil price change The drop in oil prices could lead to higher G7 GDP growth -100% 5% -50% 0% 50% 4% 3% 2% 1% G7 GDP growth 0% 100% -1% 150% -2% Oil price change YoY % (inverted, 18m lead, lhs) G7 GDP growth YoY % (rhs) Source: M&G, Bloomberg, 30 September 2015

12 Spread in basis points Historic level of investment grade and HY spreads Current spread Spread range % times spreads tighter % times spreads wider Global IG US IG Euro IG UK IG Global HY 185 Credit valuations have improved, but it s not outright cheap Source: Bloomberg, 6 October 2015 (the chart is considering data starting from 31/ )

13 US dollars (billions) Be mindful of liquidity 80 7, ,000 5,000 4,000 3,000 2,000 1,000 US dollars (billions) 0 0 US corporate total market value (RHS) US corporate bonds dealer inventories (LHS) Source: Royal Bank of Scotland, December 2014

14 GDP growth Since 1990s China has invested lots, and it looks productive. But Average real GDP Growth per capita pa, % 9% 8% China China 7% 6% 5% 4% 3% 2% 1% UK South Africa India Poland Korea Singapore Chile Peru Thailand Egypt Indonesia Malaysia Colombia Turkey Hong Kong Australia Greece Czech Republic Brazil US Spain Germany Mexico France Italy Japan Switzerland 0% 15% 20% 25% 30% 35% 40% 45% Fixed capital formation Source: M&G, World Bank, December Countries selected are world s 50 biggest economies as at 2011 and where data available since 1991

15 Real GDP growth per capita Be very afraid of the overinvestment death spiral when soaring investment has lower and lower returns 14% 12% 10% 8% Kazakhstan ( ) Iceland ( ) South Korea ( ) Thailand ( ) 2007 China ( ) 2013* 6% % 2% Spain ( ) Soviet Union ( ) 0% 15% 20% 25% 30% 35% 40% 45% 50% 55% 1989 Gross Fixed Capital Formation, % GDP 1996 The quality of China s GDP growth has become increasingly poor; higher investment is resulting in lower growth Source: M&G, World Bank, January * China population growth for 2013 estimated at 0.5%

16 % % $bn China still has tools to manage slowdown , ? ,000 3,500 3,000 2,500 2,000 1,500 1, IMF range for «adequate reserves*» (30% STD + 10%X +10%M2) China Required Reserve Deposit Ratio China 1 year benchmark lending rates (rhs) China foreign exchange PBoC still has many levers to pull Source: M&G, Bloomberg, 31 August 2015 * See IMF Assessing Reserves Adequacy. Range equates to February 2011

17 % yield Emerging Markets: the adjustment continues JP Morgan GBI EM Global Diversified index yields YTD currency spot returns in US Dollars % -5% -10% -15% -20% -25% -30% -35% -40% Brazil Turkey Indonesia Russia Colombia South Africa Mexico Since 10th August Total YTD Are EMs starting to look attractive? Source: Bloomberg, M&G, 29 September 2015

18 M&G Global Macro Bond Fund Key fund convictions Government bonds are overvalued remain short duration Deflation is unlikely to persist and inflation protection is cheap Credit valuations have improved, but credit is still not outright cheap China is slowing down, and will slow further. This is bad news for emerging market economies but particularly for EM credit

19 Asset split M&G Global Macro Bond Fund 70% subset 60% 50% 40% 30% 20% 10% 0% High yield* Investment grade* Net government bonds** Inflation-linked EM bonds*** 30-Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep-15 Source: M&G, 30 September 2015

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