P R O F E S S I O N A L S O N LY Milan IFTA Conference "Sailing to the Future" October 2017
Frédéric Leroux Global Fund Manager Head of Cross Asset Team 2
The Importance of Being a Risk Manager 3
Over the Past 10 Years, Central Banks Have Given Themselves the Mission to Save the World 3,000 Annual change in the balance sheets of the main central banks ($ billion) 16 2,500 2,000 1,500 1,000 500 0-500 14 12 10 8 6 Trillion dollars -1,000 4 06/08 06/09 06/10 06/11 06/12 06/13 06/14 06/15 06/16 06/17 Fed ECB BoJ BPoC Total Total Taille G4 total size G4 4 Source: Carmignac, 30/06/2017
And Savers Have Accelerated their Allocation from Active Funds to Passive Funds US Equity funds Net inflows ($bn) 1,600 1,600 1,200 1,200 Passive 800 800 400 400 0 0-400 -400-800 -800-1,200 Active -1,200-1,600-1,600-2,000-2,000 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 5 Source: Bloomberg, 28/09/2017
This Trend Started 20 Years with some Backfires $ Bn 500 400 300 200 100 0-100 -200-300 -400 Fund flow into active and passive funds and ETFs* ($bn) Passively Managed Actively managed 6 *US domestic equity, from 1990 to 2016 Source: Financial times, June 2017
Central Banks Seem to have Succeeded in Synchronizing the World Economy 3% OECD Indicators 2% 1% 0% -1% -2% G7 United States Eurozone Japan Asia China UK -3% 7 Source: Bloomberg, 31/07/2017
Eurozone: Investment at its Highest Level since the Crisis 5% Eurozone: real investment, annual change 15% Germany: industrial production, annual change 0% 5% -5% -5% -10% -15% -15% 09/07 09/09 09/11 09/13 09/15-25% 09/07 09/09 09/11 09/13 09/15 8 Sources: LHS: Carmignac, CEIC, 31/03/2017 RHS: Bloomberg, 31/05/2017
Emerging Markets: the Simultaneous Improvement Continues Apr.16 May 16 Jun.16 Jul.16 Aug.16 Sep.16 Oct.16 Nov.16 Dec.16 Jan.17 Feb.17 Mar.17 Apr.17 May 17 Jun.17 Jul.17 Aug.17 Emerging Markets 49,6 49,6 49,4 50,4 50,1 50,1 50,9 50,7 51,2 50,8 51,3 51,6 50,8 50,6 50,8 50,9 51,7 Asia China 50,1 50,1 50 49,9 50,4 50,4 51,2 51,7 51,4 51,3 51,6 51,8 51,2 51,2 51,7 51,4 51,7 India 50,5 50,7 51,7 51,8 52,6 52,1 54,4 52,3 49,6 50,4 50,7 52,5 52,5 51,6 50,9 47,9 51,2 Indonesia 50,9 50,6 51,9 48,4 50,4 50,9 48,7 49,7 49 50,4 49,3 50,5 51,2 50,6 49,5 48,6 50,7 South Korea 50 50,1 50,5 50,1 48,6 47,6 48 48 49,4 49 49,2 48,4 49,4 49,2 50,1 49,1 49,9 Taiwan 49,7 48,5 50,5 51 51,8 52,2 52,7 54,7 56,2 55,6 54,5 56,2 54,4 53,1 53,3 53,6 54,3 Latin America Emerging Markets: PMI* evolution Brazil 42,6 41,6 43,2 46 45,7 46 46,3 46,2 45,2 44 46,9 49,6 50,1 52 50,5 50 50,9 Mexico 52,4 53,6 51,1 50,6 50,9 51,9 51,8 51,1 50,2 50,8 50,6 51,5 50,7 51,2 54,1 51,2 52,2 EMEA Russia 48 49,6 51,5 49,5 50,8 51,1 52,4 53,6 53,7 54,7 52,5 52,4 50,8 52,4 50,3 52,7 51,6 Turkey 48,9 49,4 47,4 47,6 47 48,3 49,8 48,8 47,7 48,7 49,7 52,3 51,7 53,5 54,7 53,6 South Africa 54,9 51,9 53,7 52,5 46,3 48,5 45,9 48,3 46,7 50,9 52,5 52,2 44,7 51,5 46,7 42,9 44 Poland 51 52,1 51,8 50,3 51,5 52,2 50,2 51,9 54,3 54,8 54,2 53,5 54,1 52,7 53,1 52,3 52,5 Czech Republic 53,6 53,3 51,8 49,3 50,1 52 53,3 52,2 53,8 55,7 57,6 57,5 57,5 56,4 56,4 55,3 54,9 Hungary 52,1 52,2 50,9 53,8 51,3 57,2 57 56,6 52,2 56,5 59,5 56 55,9 62,1 57,2 54,2 56,6 9 *Purchasing Managers Index Source: Bloomberg, 31/08/2017
Will the Global Trade Recovery Continue to Support Global Earnings Growth and Investment? Annual change 40% 30% 20% 10% 0% -10% -20% -30% -40% Growth in global trade (in volume) and profit cycle MSCI World AC 12m forward EPS Growth in global trade, in volume -50% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 10 Source: Kepler Cheuvreux, European Investment Notes, 20/03/2017
Not that Sure! Japan: Global Trade, annualized 6-month 100% 50% 0% -50% -100% 07/05 07/07 07/09 07/11 07/13 07/15 07/17 United States: Global Trade, annualized 6-month 40% 20% 0% -20% -40% -60% 01/05 01/07 01/09 01/11 01/13 01/15 01/17 50% 30% 10% -10% -30% -50% -70% 07/05 07/07 07/09 07/11 07/13 07/15 07/17 100% 50% 0% -50% South Korea: Global Trade, annualized 6-month Germany: Global Trade, annualized 6-month -100% 07/05 07/07 07/09 07/11 07/13 07/15 07/17 11 Source: Bloomberg, 28/09/2017
However Central Banks are Seeking all the Excuses to Normalize Inflation Rate 8.5% US: Can full employement still become inflationnary? Theoretical Phillips Curve 7.5% 6.5% Unemployment rate 5.5% 4.5% Fed s long-term unemployment forecasts 3.5% 03/13 10/13 05/14 12/14 07/15 02/16 09/16 04/17 Unemployment rate Phillips Curve 12 Source: Carmignac, CEIC, 30/06/2017
Inflation Rate Is Inflation Really the Justification for the FED s Monetary Policy Normalization? 4.0% Phillips curve since 2009 3.5% 3.0% 2016-2017 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% 3% 4% 5% 6% 7% 8% 9% 10% 11% Unemployment rate 13 Source: Carmignac, CEIC, 30/06/2017
Yet Here s What They Are Planning to Do 3,000 Annual change in the balance sheets of the main central banks ($ billion) Projections 16 2,500 2,000 1,500 1,000 500 0-500 -1,000 14 12 10 8 6 4 Trillion dollars Fed ECB BoJ BPoC Total Taille Total G4 total size G4 14 Source: Carmignac, 30/06/2017
Monetary Policy Normalization is all the More Risky as the Weakness of Growth is Structural The effects of deleveraging 370% 320% 270% 220% 170% US debt, % GDP 120% 1952 1958 1964 1970 1976 1982 1988 1994 2000 2006 2012 18% 13% 8% 3% -2% -7% US: real GDP -12% 1952 1958 1964 1970 1976 1982 1988 1994 2000 2006 2012 15 Source: Carmignac, CEIC, 06/2015
How to Translate these Macroeconomic data into an Investment Strategy? Sectors with the largest number of values sensitive to a recovery (high risk/ low quality) : Energy Materials Industrials Financials SPECULATIVE SCARE GROWTH Low RISK High QUALITY 1 Low RISK High QUALITY 2 Accelerating Economic Growth 1 2 Decelerating Economic Growth 3 4 CAPITAL PRESERVATION 3 4 RECOVERY Low RISK High QUALITY 3 Low RISK High QUALITY 4 Sectors with the largest number of values sensitive to a scarce growth (low risk/ high quality) : Healthcare Consumer staples Utilities 16 Source: Carmignac
High vs Low Quality Stocks Performance 1,400 1,200 1,000 800 600 400 200 MSCI World vs quality stocks* performance Quality stocks* MSCI World 0 12/88 12/90 12/92 12/94 12/96 12/98 12/00 12/02 12/04 12/06 12/08 12/10 12/12 12/14 12/16 17 *Quality stocks are stocks with a high visibility on return on equity and return on assets Source: Carmignac, Bloomberg, 31/08/2017
Brexit as a Case Study of Risk Management Brexit Day (24/06/2016): market performance and net exposure of a diversified strategy* 24 th of June 2016 Performance of the EuroStoxx 50: -8.62% Performance of the MSCI World Index: -3.17% Performance of the fund as of the 24 June: -0.31% Gold mines JPY/USD USD/EUR CNY/USD Healthcare Industry GBP/EUR Euro Stoxx FTSE 100 50 28.9% 0% 6.0% 4.1% 4.1% 10.5% 2.4% -0.6% -3.3% 9.4% -5.1% -0.9% -6.7% 0.1% -10.0% 9.1% -10.1% 2.0% -17.1% Market performance 18 Exposure of the Funds *Share A Eur ACC Source: Carmignac, Bloomberg, 24/06/2016 Past performance is not an indication of future results. Performance is shown net of fees (excluding any entry charges payable to the distributor)
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