Sarasin Global Strategy and Outlook Guy Monson
Synchronised global growth and trade at last GDP, ANNUAL GROWTH (YOY %) GLOBAL TRADE Global Export Volumes The pickup in global growth has been broad based, with notable upside surprises in Europe and Asia. IMF Jan 2018 Source: IMF, Macrobond 1
In the US business sentiment is strong with GDP accelerating is this the time for tax cuts? US BUSINESS CYCLES 2
While a weaker dollar and recent tax cuts/spending heighten pricing pressure WEAKNESS IN THE US DOLLAR WILL LIKELY CONTINUE. The $1.5 trillion tax cut that President Trump signed into law late last year, combined with a looming agreement to increase federal spending by hundreds of billions of dollars, would deliver a larger short-term fiscal boost than President Barack Obama and Democrats packed into their $835 billion stimulus package in the Great Recession. NY Times Feb 6 2018 3
The peak of Central Bank liquidity is now past us tighter money policy will now start to influence asset prices CENTRAL BANK BALANCE SHEETS TOTAL NEARLY 40% OF GDP 3000 2500 2000 Total, % GDP 40 35 30 The architects of Global Central Bank Bond Purchases are due to retire or need reappointing. 1500 25 1000 20 500 15 Yellen/Powell Feb 18 Kuroda Re-Nominated 0 10-500 5-1000 01/05 01/07 01/09 01/11 01/13 01/15 01/17 Fed ECB BoJ BoE Total stock as a share of GDP 0 Carney Jun 2019 Draghi Weidmann? Oct 2019 Source: IMF Global Financial Stability Report, October 2017 4
Euro area economy is booming with eurozone inflation still very muted PACE OF ECONOMIC RECOVERY ACROSS EURO BLOC GDP index (Q1 2008 =100) INFLATION REMAINS LOW Euro area inflation 5
China: A text-book handover from investment led growth to consumption COMPONENTS OF CHINESE GDP GROWTH AND THE IMPACT OF CONSUMPTION and Sarasin & Partners 6
The UK and Brexit 7
The extraordinary feeling of policy uncertainty that characterised Brexit is quite unprecedented ECONOMIC POLICY UNCERTAINTY INDEX FOR THE UK Economic Policy Uncertainty: We obtain a monthly count of articles that contain a triple of terms about the economy (E), policy (P) and uncertainty (U). We then scale the raw counts, standardize each newspaper s variation, average across papers in a country by month, and normalise. Source: Economic Policy Uncertainty 8
Wording on Northern Ireland accentuates extremes Hard Brexit or an embrace of Customs Union/Single Market EXTRACT FROM EU DRAFT TEXT FOR ARTICLE 50 European Commission Draft Withdrawal Agreement Protocol on Ireland/Northern Ireland 28.2.2018 DESIRING to create a common regulatory area on the island of Ireland in order to safeguard North-South cooperation, the allisland economy, and protect the 1998 Agreement; Should a subsequent agreement between the Union and the United Kingdom which allows addressing the unique circumstances on the island of Ireland, avoiding a hard border and protecting the 1998 Agreement in all its dimensions, become applicable after the entry into force of the Withdrawal Agreement, this Protocol shall not apply or shall cease to apply, as the case may be, in whole or in part, from the date of entry into force of such subsequent agreement and in accordance with that agreement. Article 9
The economic impact has been surprisingly measured, although the potential for weaker investment is clear BREXIT INVESTMENT INTENTIONS LONGER TERM INVESTMENT IMPACT Source: Bank of England, CBI, Deloitte CFO Survey, EEF, Lloyds Bank/London First & Thomson Reuters 10
Immediate effects include falling net migration and a weaker currency - both of which are inflationary FALLING MIGRATION WILL LIFT LABOUR COSTS STERLING STILL 15-20% BELOW PRE-REFERENDUM Source: Bank of England Inflation Report Feb 2018 11
UK inflation principal casualty of Brexit to date UK INFLATION 12
Despite weakness in London UK wide property prices are stabilising RIGHTMOVE ALL UK RESIDENTIAL PRICE INDEX Rightmove February Property blog Record home-hunter activity fuels rises in most regions Active start to 2018 as housing demand continues to be resilient: Price of property coming to market up by an average of 0.8% (+ 2,414), indicating cautious optimism among new sellers All regions see price rises except for marginal fall of just 131 in the South West January busiest month ever on Rightmove with home-hunter visits hitting over 141 million Midlands dominates fast-selling hotspots with prices rising three times faster than the national average. 13
Future trade negotiations somewhere between Norway Minus and Canada/Korea-Plus PRESENTATION BY MICHEL BARNIER TO EU 27 DECEMBER 2017 UK Desire EU Offer Source: Slide presentation by Michel Barnier to Heads of Government 15.12.2017 14
Risks 15
Risk 1: US equity returns have been dominated by PE multiple expansion rather then Profits Growth 16
Risk 2: Rising Income Inequality in the Developed World GLOBAL INCOME GROWTH 1998-2008 Source: Branko Milanovic/Alliance Berstein 2016 17
UK Wealth distribution more uneven than income WEALTH OF TOP 10% OF HOUSEHOLDS 5 X BOTTOM 50% MAINLY VIA PENSIONS AND PROPERTY VERY SUBSTANTIAL REGIONAL WEALTH DIVIDE Note: Total UK Wealth 7.4 trillion of which 35% Property & 41% Pensions. 2016 ONS Wealth in Great Britain Source: Wealth and Assets Survey ONS Source: Wealth and Assets Survey ONS 18
Recent Market Volatility & Future Strategy 19
Equities have dominated global asset class returns over the past 12 months, even after recent declines MULTI ASSET RETURNS SINCE SARASIN 2017 CHARITY SEMINAR (GBP) 20
Few safe havens this time - In the early weeks of 2018 all major asset classes generated negative returns FEW SAFE HAVENS IN 2018 21
Equity volatility in 2018 was material and exceeded the Trump election and Brexit referendum readings US EQUITY MARKET VOLATILITY OVER 10 YEARS 22
Note that, despite equity falls, US and global bond yields rose and bond market volatility surged UK AND US BOND YIELDS RISE THROUGH 2018 VOLATILITY OF 10 YEAR TREASURY BONDS 23
But equity dividend yields remain compelling against global cash or bonds, and dividend growth is robust EQUITY YIELD GAPS MORE THAN 20 YEAR HIGHS 24
A cautious portfolio to reflect interest rate risks and the challenges for corporate profits GLOBAL STRATEGY UPDATE 1. Bonds: Underweight Government and corporate issues, and maintain short duration 2. Equities: Underweight or utilise Portfolio Insurance Valuations are rich, beware of excessive growth tilt US & now European banks an effective hedge vs. rising rates Favour old world industries using new world technologies Global equity dividends rising strongly and are attractive vs bonds and cash UK domestic assets abnormally cheap as global investors shun UK 3. Alternatives: Overweight Global infrastructure attractive as bond alternative Gold attractive with interest rates in Europe and Japan negative and continuing QE 4. Cash: Overweight Risks: Long term: Global debt levels, Asset valuations, Populism & Inequality 25
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