Investment Opportunities in Global Fixed Income Markets GSAM Insurance Fixed Income May 217
GSAM Insurance Asset Management Key Themes for 217 Economic Backdrop End of the Distortion Monetary to Fiscal Policy Transition Cyclical Expansion Continues Apace Can it Continue? Geopolitical Ever Present but on the Rise and Anti-globalism Valuations Source: GSAM. As of March 31, 217. 1
US: Potential Fiscal Easing Adds to Case for Fed Tightening Fiscal expansion appears likely but may be limited by concerns over debt-to-gdp. In an economy at full employment, tax cuts could add pressure to shrink Fed balance sheet Tax cuts are likely but fiscal concerns may limit size % of GDP 11 1 9 8 7 6 US Federal Debt Held by the Public Actual Projection based on Current Law Projection if 1-year deficit increased by $2 trillion Fed likely to announce balance sheet plan this year US$ bn 45 4 35 3 25 Notes & Bonds MBS TIPS Total Holdings ($4.2tn) QE2 (Nov '1) Operation Twist (Sep '11) Fed Assets Tapering (Dec' 13-Oct '14) QE3 (Sep'12) 5 4 Reagan Tax Cuts Bush Tax Cuts 2 15 Expansion of QE1 (Mar '9) QE1 (Nov '8) 3 2 1 1 5 '7 '75 '8 '85 '9 '95 ' '5 '1 '15 '2 '25 8 9 1 11 12 13 14 15 16 17 Source: Congressional Budget Office for actual and projections. As of March 217. The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved. Goldman Sachs does not provide accounting, tax or legal advice. Please see additional disclosures at the end of this presentation. Source: GSAM, Bloomberg, Federal Reserve Board, Goldman Sachs Global Investment Research. As of March 17, 217. 2
Interest Rates: We Expect Divergence to Continue We expect European rates to remain low relative to US and UK rates as the Fed tightens, the BoE contends with inflation and the ECB remains accommodative We expect a further two rate hikes in the US this year while we expect rates to remain low in Europe through to 218 We expect European rates to remain low relative to US, UK 2.5 % US and European Policy Rates % 8 5-Year Government Bond Yields 2. Euro Area 7 United States Spain US 6 France 1.5 Market Implied - Europe Germany Market Implied - US 5 United Kingdom 1. 4.5 3. 2 1 -.5-1. '12 '13 '14 '15 '16 '17 '18 '19 Source: GSAM, Bloomberg. As of March 3, 217. The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation. -1 '14 '15 '16 '17 Source: Macrobond. As of April 217. 3
Global: Broad-Based Improvement in Economic Growth 217 Data (So Far) Suggests Broad-based Growth Index 58 56 Improving global economic activity Global PMI Composite Manufacturing Services Survey data suggests elevated expectations % US Current Activity Indicator - Hard vs Soft Data 7 Hard Data Survey Data 6 5 54 4 52 3 5 2 1 48 '1 '11 '12 '13 '14 '15 '16 '17 Source: Macrobond. As of March 217. 14 15 16 17 Source: Goldman Sachs Global Investment Research. As of March 217. Survey data include measures such as consumer confidence, ISM indices, and manufacturing/non-manufacturing surveys. Hard data include concrete, quantitative measures such as sales and spending, payrolls, and industrial production. The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation. 4
Global: A Busy Political Calendar Raises Potential Risks Brexit negotiations, European elections, US policy developments and China s priorities ahead of its National Communist Party Congress may be important market drivers. January February March April May June July August September October November December Presidential Inauguration 2-Jan, USA General Election 15-Mar, Netherlands Article 5 Triggered 29-Mar, UK 1st Round Presidential Election 23-Apr, France General Election 8-June, UK EU Economic Sanctions Renewal Deadline 31-Jul, Russia 19th National Congress of the Communist Party of China Oct-Nov, China US Debt Ceiling Extension Expires 15-Mar, USA US Budget Continuing Resolution Expires 28-April, USA G7 Summit 26 27-May, Italy NATO Summit 24-25 May Belgium G2 Summit 7 8-Jul, Germany Federal Election 24-Sep, Germany 2nd Round Presidential Election 7-May, France Source: GSAM. As of April 17, 217. The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation. 5
Corporate Credit: Late in the Credit Cycle We are Cautious on Corporate Credit Given Tight Valuations at this Stage of the Cycle Recent improvement in fundamentals, but still Late Cycle O'clock Tight spreads relative to history, reduced scope for further gains Current Spread Tightest Ever One Year Ago Widest Ever Index begins: Euro Investment Grade May- US Investment Grade Jun-89 US High Yield Energy Aug- US High Yield Jan-93 EM External Debt Dec-97 US High Yield Ex- Energy Jan-94 EM Corporates Dec-1 Euro High Yield Feb-1 25 5 75 1 Percentile Source: GSAM. As of March 217. Source: Bloomberg, Barclays US Corporate Index, Barclays US High Yield Index, Barclays Euro Corporate Index, Barclays Euro High Yield Index, JP Morgan Global Bond Index-EM, JP Morgan Emerging Market Bond Index Global Diversified. JP Morgan Corporate Emerging Market Bond Index. As of March 217. 6
Spread Dispersion is Low When Potential Policy Changes Create Greater Winners and Losers Barclays US$ IG Index: Dispersion over time Barclays US$ IG Index: Dispersion by OAS Spread Difference between 75th and 25th Percentile 12/31/215 3/31/217 12/31/26 35 9 3 8 7 25 6 OAS 2 15 # of CUSIPs 5 4 1 3 2 5 1 Dec-6 Dec-7 Dec-8 Dec-9 Dec-1 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 2 4 6 8 1 12 14 16 18 2 22 24 26 28 3 32 34 36 38 4 42 44 46 48 5 More Source: Barclays, GSAM Estimates. Data as of 31 March 217. 7
GSAM Insurance Asset Management 4 Fixed Income Strategies for Insurers Securitized Floating rate assets offer attractive carry and more domestic US Positively exposed to more aggressive Fed and LIBOR Bank Loans Floating rate asset offers exposure to corporate credit Benefits from credit cycle extension Emerging Markets (Corps and Blended) Selection opportunities increase the with concerns of trade disputes and fed rate hikes Demonstrated resilience through FX regimes, valuations tight but 217 should allow opportunities Macro Volatility High volatility allows for good selection and alpha opportunities Correlation reducer which helps de-risk balance sheet while maintaining risk allocation Source: GSAM. As of March 31, 217. The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation. Goldman Sachs does not provide accounting, tax or legal advice. Please see additional disclosures at the end of this presentation. 8
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