MACRO INVESTMENT OUTLOOK AUGUST 18 INVESTMENT STRATEGY AND DYNAMIC MARKETS TEAM, MULTI ASSET GROUP
GLOBAL SHARES CONSTRAINED BY TRADE WAR FEARS BUT AUSTRALIAN SHARES RELATIVELY RESILIENT 5 Australia - ASX 15 1 5 US - S&P 5 1 3 4 5 6 7 8 9 1 11 1 13 14 15 16 17 18 Source: Bloomberg, AMP Capital
ECONOMIC AND INVESTMENT OUTLOOK > Solid global growth 18: 3.9%, 19: 3.9% > 18 GDP growth: China 6.5%, US 3.%, Eurozone.%, Japan 1.%, Australia.8% > Inflation starting to rise in the US resulting in a somewhat more aggressive Fed > But the ECB, BoJ and RBA are all a long way from tightening > $A to weaken > Low returns from bank deposits and bonds > Shares should provide decent returns reflecting solid global growth & profits but low interest rates. But more constrained and volatile as the investment cycle matures > Key risks: inflation/bond yields, President Trump (trade, Mueller, mid-term elections, Twitter), Italy, China, the Australian property market Source: AMP Capital 3
GLOBAL BUSINESS CONDITIONS HAVE SLIPPED BUT REMAIN SOLID 6 55 Global business conditions PMIs have slowed, but still strong Global Manufacturing PMI (LHS) 6% 5% 4% 6 55 Global manufacturing & services conditions PMIs are solid Stronger conditions Services 5 3% 5 45 % Manufacturing 4 35 World GDP growth, annual % change (RHS) 5 6 7 8 9 1 11 1 13 14 15 16 17 18 1% % -1% 45 4 Weaker conditions 5 6 7 8 9 1 11 1 13 14 15 16 17 18 Source: Bloomberg, AMP Capital 4
THE US ECONOMY IS VERY STRONG IN FACT SO GOOD THAT THE FED IS ON TRACK TO HIKE 4 TIMES THIS YEAR 155 15 145 14 135 13 15 US employment way above 8, jobless well down, around full employment Millions Payroll employment (LHS) Unemployment rate (RHS) Percent 1 4 6 8 1 1 14 16 18 1 1 8 6 4 16 15 9 55 Consumer and business confidence is strong Index US Confidence Indicators Consumer Confidence (LHS) Index Business Confidence (NFIB Small Business, RHS) 1 3 4 5 6 7 8 9 1 11 1 13 14 15 16 17 18 1 11 1 9 8 Source: Bloomberg, Reuters, AMP Capital 5
US RECESSION INDICATORS ARE NOT FLASHING RED MAYBE A RISK 5 4 3 Percent Which US yield curve? US 1 year bond yield less Fed Funds rate Flattening Investment as share GDP Private debt growth US leading indicator Inflation > target Yield curve Fed Funds rate v growth Source: Bloomberg, AMP Capital Recession Yes/No No No No No No No 1 Steepening -1 US year bond yield less Fed Shading indicates NBER defined recessions Funds rate - 85 9 95 5 1 15 9 7 5 3 1 19 17 US cyclical spending is still low as % GDP Consumer durables, housing & business investment as % of nominal GDP Shading indicates NBER defined recessions 15 65 7 75 8 85 9 95 5 1 15 6
THE PROGRESSION OF US TARIFFS GETTING MORE RISKY > January: solar panels and washing machines > March: steel and aluminium (less than % of imports) > March: $US5bn of Chinese imports (% of US imports) > April: another $1bn if China retaliates > May 19: trade war put on hold > June 15: $US5bn of Chinese imports with $US34bn started July 6 and August 3 > June 18: $USbn on the way, tariffs on all Chinese imports if it retaliates ($US55bn) > June : Threatened % tariff on car imports from EU, then put on hold Note 1. Still room for negotiation mostly proposed. But threats are bigger (% of total US imports and rising) and risks have gone up 3. Still a long way from 193 though (% tariffs on all imports) Source: AMP Capital 7
EUROZONE BUSINESS CONFIDENCE MAY HAVE PEAKED BUT REMAINS ELEVATED 6 4 Annual % change Manufacturing conditions PMI (RHS) 65 6 55 5 45 - -4 European GDP growth (LHS) 4 35-6 4 6 8 1 1 14 16 18 3 Source: Bloomberg, AMP Capital 8
EUROZONE BREAK UP RISK IS LOW BUT WATCH ITALY Key issues and what to watch > The mess in Italy is bad for Italy, but unlikely to threaten the Euro > Support for the Euro in Italy has increased lately to around 57% (and up to 7% in one poll), and is solid across the Eurozone generally > The key issue is the upcoming Italian budget which is likely to result in conflict with the European Commission 9 85 8 75 7 65 6 55 5 Support for Euro remains strong (albeit less so in Italy) Germany Support for the Euro generally remains high Percent in favour of the Euro Netherlands Spain Euro area France Greece Italy Source: Eurobarometer, AMP Capital 9
CHINESE GROWTH IS LIKELY TO SLOW A BIT THIS YEAR EXPECT A RENEWED FOCUS ON ECONOMIC REFORM BUT NO GROWTH COLLAPSE 14 13 1 11 1 9 8 7 6 5 Chinese growth has stabilised Annual % change Chinese growth is holding steady Chinese real GDP growth (LHS) Chinese PMI manufacturing conditions indexes, smoothed (RHS) 5 6 7 8 9 1 11 1 13 14 15 16 17 18 6 58 54 5 46 4 China is in transition from manufacturing & investment to services & consumption 55% 5% 45% 4% 35% 3% 5% % 15% 1% % GDP China - GDP weight by sector Secondary industry (manufacturing & investment) Tertiary industry (services) Primary industry (agriculture) 5% 93 95 97 99 1 3 5 7 9 11 13 15 17 Source: Thomson Reuters, Bloomberg, AMP Capital 1
SPARE GLOBAL CAPACITY IS BEING USED UP MAINLY IN THE US 1 1 - -4 t -6 11 8 6 4 81 85 89 93 97 1 5 9 13 17 Source: Bloomberg, AMP Capital Investors Annual % change G3 = US, Europe, Japan G3 inflation (LHS) G3 capacity utilisation (RHS) Capacity utilisation 1 1 8 6 4 - -4 // 11
INFLATIONARY PRESSURES ARE SLOWLY LIFTING IN THE US AS GROWTH RUNS ABOVE POTENTIAL 5 4 3 Annual % change US inflation indicators are heading up Core producer prices (LHS) Average hourly wages (LHS) - -15-1 -5 1-1 US dollar (inverted, RHS) Core inflation (LHS) 5 1 15-7 8 9 1 11 1 13 14 15 16 17 18 5 1 Source: Thomson Reuters, AMP Capital Investors // 1
INTEREST RATES TO REMAIN LOW, BUT FED GETTING MORE AGGRESSIVE Interest Rates % 8 7 6 China 5 4 3 Australia 1 Japan US Europe 94 95 96 97 98 99 1 3 4 5 6 7 8 9 1 11 1 13 14 15 16 17 18 Source: Thomson Reuters, Bloomberg, AMP Capital 13
THE GLOBAL INVESTMENT CYCLE STILL IN THE SWEET SPOT BUT MATURING IN THE US Economic Slowdown Inflation becomes a problem, interest rate fears Real assets do well Govt bonds do well Economic Recovery Equities do well US EZ/Aust Japan Current position Source: AMP Capital // 14
THE AUSTRALIAN ECONOMY STILL MIXED Housing investment has slowed Building approvals down from 15 highs 5 Dwelling approvals, monthly 's Total 15% 1% and retail sales growth is sluggish Retail Sales % yoy 15 5% 1 5 1 9 8 7 6 5 4 3 1 9 9 94 96 98 4 6 8 1 1 14 16 18 But mining investment is close to the bottom, non-mining capex is lifting % GDP 69/7 79/8 89/9 99/ 9/1 19/ Source: ABS, AMP Capital Mining versus non-mining investment Non-mining investment Mining investment Units Forecast based on capex plans % -5% 9 9 94 96 98 4 6 8 1 1 14 16 18 and services exports are strong 3 8 4 16 1 Rolling 1 mth exports, $m Surging services exports Education Tourism 8 5 7 9 11 13 15 17 15
VICTORIA STILL DOING WELL, NSW IMPROVING AND NT AND WA STILL AT THE BOTTOM State of the states, annual % change to latest Retail Sales Building Approvals, trend Real State Final Demand Home prices Employment Unemployment % Rank* NSW +3. -6. +3.7-5.4 +3.9 4.8 4(=3) Victoria +5.8 +1.6 +4.9 -.5 +1.9 5.3 (1) Queensland +.6-5. +3.1 +1. +3.5 6.1 6 (6) WA -.5-1.9 +.8 -.3 +1.1 6. 8 (8) SA +.5 +1. +.1 +.7 +.1 5.6 5 (=3) Tasmania +3.9 +13. +3.9 +11.5 +.6 6. 3 (=3) NT +.4 +. -7.9-6. +. 4.1 7 (7) ACT +4.3 +48.4 +1.6 +.4 +.9 3.5 1 () * Rank a year ago shown in brackets. Source: Bloomberg, CoreLogic Data, AMP Capital 16
US SHARES A BIT EXPENSIVE BUT OTHER MARKETS OKAY SHARE MARKET VALUATION INDICATORS Australia Europe - - Expensive Expensive -1-1 1 1 Cheap 3 5 6 7 8 9 1 11 1 13 14 15 16 17 18 USA - Expensive -1 Cheap 3 5 6 7 8 9 1 11 1 13 14 15 16 17 18 Japan - Expensive -1 1 1 Cheap Cheap 3 3 5 6 7 8 9 1 11 1 13 14 15 16 17 18 5 6 7 8 9 1 11 1 13 14 15 16 17 18 Source: Bloomberg, AMP Capital 17
AUST LISTED COMPANY PROFITS ARE RISING (+6%) BUT THE OUTLOOK IS STRONGER GLOBALLY (+14%) 5 15 percent change Global earnings growth 1 5 Europe Japan US -5 Australia -1 14 15 16 17 18 Forecast 19 Forecast Source: Bloomberg. UBS, AMP Capital 18
BONDS AT THE END OF A 35 YEAR BULL MARKET EXPECT POOR RETURNS FROM BONDS 8 6 4 8 6 Bond yields have seen a 35 year bull market 1 year bond yields, % Australia Strong fund inflows post GFC leave bonds vulnerable 15 1 5 $US billion Cumulative net flows into US mutual funds Bond fund flows 4 US 186 188 19 19 194 196 198-5 -1 Equity fund flows 8 9 1 11 1 13 14 15 16 17 18 Source: ICI, Bloomberg, AMP Capital 19
THE SEARCH FOR YIELD CONTINUES FOR UNLISTED ASSETS BUT IS LIKELY TO WEAKEN OVER TIME 18 16 14 1 1 8 6 4 % Australian property yields versus the bond yield 1 year bond yield Avg residential property yield Avg yield on office, industrial and retail property 8 8 84 86 88 9 9 94 96 98 4 6 8 1 1 14 16 18 Source: RBA, AMP Capital
THE $A IS LIKELY TO FALL AS THE FED TIGHTENS AND THE RBA HOLDS 3..5. The $A is "around" fair value based on relative prices $US per $A, at June each year 1.8 1.6 1.4 The falling and now negative interest rate gap between Australia and the US points down for the $A Gap between RBA cash rate and Fed Funds rate, % (RHS) 6 4 1.5 1. $A/$US Latest 1. 1..8.5 Purchasing power parity implied level (based on relative consumer prices). 19 191 19 193 194 195 196 197 198 199 1.6.4 $A/$US (LHS) 95 97 99 1 3 5 7 9 11 13 15 17 - -4 Source: RBA, ABS, Bloomberg, AMP Capital 1
SYDNEY AND MELBOURNE HOME PRICES TO FALL FURTHER OTHER CITIES LOOK OKAY 9 8 Monthly avg, % First rate cut Auction clearance rates First rate cut 3 5 Property prices have more downside in Sydney & Melbourne Dwelling prices, annual % change Melbourne Sydney Outlook 7 15 6 Melbourne 1 5 5 4 Sydney 7 8 9 1 11 1 13 14 15 16 17 18-5 -1 Perth 97 99 1 3 5 7 9 11 13 15 17 19 Source: Core Logic, Domain, AMP Capital
TRAFFIC LIGHT SIGNALS FROM DAA PROCESS Signal Equities Listed property Fixed income Commodities Valuation Cycle Liquidity Sentiment Technical Result Favourable Neutral Negative Favourable Source: AMP Capital. As at August 18 3
DYNAMIC ASSET ALLOCATION DYNAMIC MARKETS FUND Change in growth/defensive mix and hedge ratio Allocations Range (%) Current AA (%) 1% 75% % Allocation 5% 5% Total growth assets Total defensive assets AUD effective exposure Growth 9 57.5 Australian Shares 5 9. International Shares (Developed Markets) 5 33.5 International Shares (Emerging Markets) 4.5 Global REITs 5. Commodities 5 1.5 Global High Yield Credit 5. Defensive 1 1 4.5 Australian Sovereign Bonds 5. Global Sovereign Bonds 5 13.5 Global Investment Grade Credit 5. Global Inflation Linked Bonds 5 1. Cash & Hedges 5 19. % Mar-11 Mar-1 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 AUD exposure (% of total fund) 1 8. Current AA as at August 18 4
PROJECTED MEDIUM TERM RETURNS, %PA, PRE FEES AND TAXES Current Yield # + Hedge Points +Growth =Return US Equities 1.9 -.5 4.5 5.9 Asia ex Japan Equities.7 -.6 7. 9.1 Emerging Equities.9-1.4 7. 8.5 World Equities, local currencies.4.6 4.1 7.1 Australian Equities 4.3/5.6*. 3.5 7.8/9.1* New Zealand Equities.8.1 3.8 6.6 Unlisted Commercial Property 5.5.. 7.5 Australian REITS 4.4..3 6.6 Global REITS 4.1.1. 6.1 Unlisted Infrastructure + 4.5. 3. 7.7 Global Listed Infrastructure.8.1 3. 5.9 Australian Gov t Bonds.3...3 Australian Corporate Debt 3.3.. 3.3 Australian Cash.7...7 Diversified Growth Mix 6.1 # Current dividend yield for shares, distribution/net rental yields for property and 5 year bond yield for bonds. * With franking credits added in + Does not include franking credit which could add.45% to the return Source: AMP Capital 5
IMPORTANT NOTE While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 1 777 591, AFSL 3497) and AMP Capital Funds Management Limited (ABN 15 159 557 71, AFSL 46455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided. 6