\\ Personal Finance Society 2017 A year of living dangerously? \\\\ Market Insights Team This presentation is for Professional Clients only and is not for consumer use.
2017 A year of living dangerously?
What we said at start of 2016 Growth and US interest policy key variables for 2016 Political and geo-political risks Low yields weigh on fixed income markets Better opportunities in equities than fixed income 3
2017 A year of living dangerously? 2016 review Political uncertainty Macro economics Markets and strategies 4
Learning objectives Following this presentation, you will: Understand what will influence the prospects for the global economy in 2017. Outline the key fundamental drivers likely to drive asset class performance. Logo demonstrates the quality of an event and that it meets CII member CPD scheme requirements. The Chartered Institute for Securities & Investment has a policy of formally recognising those organisations who meet the Chartered Institute for Securities & Investment s stringent quality assurance requirements for the provision of CPD. 5
2017 A year of living dangerously? 2016 review 6
Global 2016 Performance overview An excellent year for denominated investors Total returns (%) 40 35 30 25 20 15 10 5 0-5 Global Equities Local Global Govt. Bonds Global IG Global HY Global Cash Commodities Source: Datastream as at 3 January 2017. Indices used: Global Equities MSCI AC World, Global Govt. - JPM GBI Global All Mats., Global IG BofA ML Global Corporate, Global HY BofA ML Global High Yield, Cash JPM Global Cash 1m, Commodities Thomson Reuters Equal Weight Continuous Commodity Index. 7
UK 2016 Performance overview A good year for most asset classes too Total returns (%) 40 35 30 25 20 15 10 5 0 Equities Gilts IL IG HY Cash Property Source: Datastream as at 17 January 2017. Indices used: Equities FTSE All Share, Gilts BofA ML UK Gilt, IL - BofA ML Inflation Linked Gilt, IG - BofA ML Sterling Corporate, HY BofA ML Sterling High Yield, Cash JPM UK Cash 1m, Property IPD Total Return Index. 8
2017 A year of living dangerously? 2016 review Political uncertainty 9
2017 A year of living dangerously? 2016 review Political uncertainty Trump 10
The Trump policy conundrum Reward Trade Tax cuts Deregulation Fiscal stimulus Geopolitics Immigration Risk Source: Invesco Perpetual. For illustrative purposes only. 11
2017 A year of living dangerously? 2016 review Political uncertainty Trump European politics 12
Euro zone upcoming political events 2017-2018 France Presidential election Germany Federal elections Austria General election by spring 2018 Mar 2017 Apr 2017 May 2017 Jun 2017 Jul 2017 Aug 2017 Sep 2017 2018 Netherlands Parliamentary election France National Assembly elections Italy General election by May 2018 Source: Invesco Perpetual as at end December 2016. For illustrative purposes only. 13
How vulnerable is Europe to political upheaval in 2017? Stephanie Butcher Fund Manager, European Equities 14
How vulnerable is Europe to political upheaval in 2017? Stephanie Butcher Fund Manager, European Equities 15
2017 A year of living dangerously? 2016 review Political uncertainty Trump European politics Brexit 16
The Brexit rollercoaster A lengthy and uncertain process June 2016 Jan 2017 Mar 2017 Mar 2019 May 2020 2025? Referendum Supreme Court decision on Article 50 Article 50 activated Two years to negotiate terms of withdrawal hard or soft Brexit? The UK formally exits the EU at earliest UK General Election at latest. Negotiations with EU and Rest of World to replace treaties that no longer apply. Source: Invesco Perpetual and Global Counsel as at 5 January 2017. 17
2017 A year of living dangerously? 2016 review Political uncertainty Macro economics Overview 18
What is the economic growth outlook for developed markets in 2017? John Greenwood Chief Economist, Invesco Ltd. 19
What is the economic growth outlook for developed markets in 2017? John Greenwood Chief Economist, Invesco Ltd. 20
Economic growth news flow Better than expected currently G10 Citi Economic Surprise Index 60 40 Data better than expected 20 0-20 -40 Data worse than expected -60 2011 2012 2013 2014 2015 2016 Source: Datastream as at 1 February 2017. 21
Months US recessions concerns Current expansion looks long in the tooth Duration of US economic expansions (months) 140 120 100 80 60 Avg. = 58 months 40 20 0 1945 1949 1954 1958 1961 1970 1975 1980 1982 1991 2001 2009 to date Year started Source: NBER (National Bureau of Economic Research) and Invesco Perpetual as at 1 February 2017. 22
Can Trump double the rate of growth? John Greenwood Chief Economist, Invesco Ltd. 23
Can Trump double the rate of growth? John Greenwood Chief Economist, Invesco Ltd. 24
US long-term GDP Doubling growth may be ambitious US annual real GDP (%) 8 6 4 Trump target growth rate 2 0-2 -4 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 Source: Datastream as at 1 February 2017. 25
How is the UK economy coping post the referendum? John Greenwood Chief Economist, Invesco Ltd. 26
How is the UK economy coping post the referendum? John Greenwood Chief Economist, Invesco Ltd. 27
The UK economy post referendum Little change Indicator Q4 2015 Current GDP Unemployment rate Real wage growth House prices Consumer confidence Retail sales CPI Trade Weighted Index Broad money growth Public and private debt/gdp Trade balance Composite PMI Source: Invesco Perpetual for illustrative purposes. Red = negative; Amber = neutral; Green = positive. 28
Is fiscal stimulus the right policy to reinvigorate the global economy? John Greenwood Chief Economist, Invesco Ltd. 29
Is fiscal stimulus the right policy to reinvigorate the global economy? John Greenwood Chief Economist, Invesco Ltd. 30
Fiscal stimulus More, but still limited Change in OECD underlying fiscal balance as % of potential GDP 1.5 1.0 Tighter fiscal policy 0.5 0.0-0.5-1.0-1.5-2.0-2.5 Looser fiscal policy 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016e 2017f 2018f Source: OECD as at 23 November 2016. 31
Inflation expectations Deflationary impulse waning G10 Citi Inflation Surprise Index 50 40 30 20 10 0-10 -20 Inflation higher than expected -30 Inflation lower -40 than expected -50 1999 2001 2003 2005 2007 2009 2011 2013 2015 Source: Datastream as at 1 February 2017. 32
Rising inflation expectations for 2017 Major developed economies Consumer Price Inflation outlook (%) 3.0 2.5 Current 2017f 2.0 1.5 1.0 0.5 0.0 US UK Eurozone Japan Source: Datastream and Consensus Economics as at 1 February 2017. All annual inflation numbers are based on the average of the monthly year on year inflation numbers. 33
2017 A year of living dangerously? 2016 review Political uncertainty Macro economics Overview Monetary policy 34
US rate hike expectations Market expectations more in sync with the Fed s US rate hikes Fed and market expectations (%) 4.0 3.5 3.0 2.5 2.0 1.5 Fed Start 16 Fed Start 17 Futures Start 16 Futures Start 17 1.0 0.5 0.0 Dec 15 Dec 16 Dec 17 Dec 18 Dec 19 Dec 20 Source: Datastream as at 1 February 2017. Fed based on median Fed dots forecast. 35
What happens when the Fed hikes rates? Historic performance full rate hike cycle Asset Class Total Returns (%) 50 40 30 20 10 0-10 -20-30 Average Max/Min US Equities 10Yr UST IG Credit HY Credit US$ Source: Datastream as at 3 January 2017. Looks at 4 periods since 1986 with exception of HY credit, which looks at 3 periods from 1994. US Equities US DS Market (1986 cycle) and S&P500 (remainder), IG BofA ML US Corp. Mstr., HY BofA ML US High Yield. 36
Is the current monetary policy stance in the UK appropriate? John Greenwood Chief Economist, Invesco Ltd. 37
Is the current monetary policy stance in the UK appropriate? John Greenwood Chief Economist, Invesco Ltd. 38
UK base rates No hike for a while? Morgan Stanley Months to First Rate Hike Index 80 70 60 50 40 30 20 10 0 Jan 15 Mar 15 May 15 Jul 15 Sep 15 Nov 15 Jan 16 Mar 16 May 16 Jul 16 Sep 16 Nov 16 Jan 17 Source: Datastream as at 1 February 2017. 39
2017 A year of living dangerously? 2016 review Political uncertainty Macro economics Financial markets 40
Is the 30 years + bull market in bonds finally over? Paul Read Co-Head of Fixed Interest 41
Is the 30 years + bull market in bonds finally over? Paul Read Co-Head of Fixed Interest 42
TR CAGR (%) UK bond markets Low returns likely BofA Merrill Lynch Gilt Index Yield to Maturity (YTM) and 10 Year total return CAGR (%) since 1985 16% 14% 12% 10% R squared 89% 8% 6% 4% 2% 0% Current 1.28% 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 YTM (%) Source: Datastream as at 1 February 2017. TR = Total Return. CAGR = Compound Annual Growth Rate. 43
Do you still prefer equities? Nick Mustoe CIO and Fund Manager, Global Equities 44
Do you still prefer equities? Nick Mustoe CIO and Fund Manager, Global Equities 45
Equities outperform when growth outlook improves OECD Composite Leading Indicator and equity relative to bond performance (yoy%) 50 40 Equity relative to bond performance (%) 30 20 10 0-10 -20-30 -40 OECD CLI (6m mav, RHS) -50 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 4 3 2 1 0-1 -2-3 -4-5 Source: Datastream as at 1 February 2017. 46
What are the main issues facing equities in 2017? Nick Mustoe CIO and Fund Manager, Global Equities 47
What are the main issues facing equities in 2017? Nick Mustoe CIO and Fund Manager, Global Equities 48
Global equity market valuations above long-term average MSCI World index Trailing PE (x) 35 30 A 24% premium to long-term average 25 20 Long-term average 15 10 5 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 Source: Datastream as at 1 February 2017. 49
Potential for a large rotation Cumulative fund flows (global) since 2006 (US$tn) 1.6 1.4 1.5 1.2 1.0 0.8 0.6 Bond funds 0.4 0.2 0.0 0.0-0.2 Equity funds -0.4 06 07 08 09 10 11 12 13 14 15 16 17 18 Source: BofA Merrill Lynch using EPFR data as at 22 December 2016. 50
has been weak post the referendum. How do you see the currency s prospects now? Stuart Edwards Fund Manager, Fixed Interest 51
has been weak post the referendum. How do you see the currency s prospects now? Stuart Edwards Fund Manager, Fixed Interest 52
Sterling s decline has been material Sterling Trade Weighted Index 100-22% 95 90 85 80 75 70 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Source: Datastream as at 1 February 2017. 53
2017 A year of living dangerously? Key takeaways A potential shift in economic momentum - Reflation not low growth, lowflation? Political and geo-political risks remain material Reflation better for real assets Bond bull market over, but no bear market? Better opportunities in equities than fixed income 54
Learning objectives Following this presentation, you will: Understand what will influence the prospects for the global economy in 2017. Outline the key fundamental drivers likely to drive asset class performance. Logo demonstrates the quality of an event and that it meets CII member CPD scheme requirements. The Chartered Institute for Securities & Investment has a policy of formally recognising those organisations who meet the Chartered Institute for Securities & Investment s stringent quality assurance requirements for the provision of CPD. 55
Important information This presentation is for Professional Clients only and is not for consumer use. All information as at 1 February 2017 sourced from Invesco Perpetual unless otherwise stated. The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. Past performance is not a guide to future returns. Where the fund managers and John Greenwood have expressed views and opinions, they are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco Perpetual/Invesco investment professionals. Where Neal Bailey or Neil Dobson have expressed opinions, they are based on current market conditions and are subject to change without notice. These opinions may differ from those of Invesco Perpetual investment professionals. Where securities are mentioned in this document they do not necessarily represent a specific portfolio holding and do not constitute a recommendation to purchase, hold or sell. For the most up to date information on our funds, please refer to the relevant fund and share class-specific Key Investor Information Documents, the Supplementary Information Document, the Annual or Interim Short Reports and the Prospectus, which are available using the contact details shown. Information on our products is available at www.invescoperpetual.co.uk. Invesco Perpetual is a business name of Invesco Asset Management Limited, Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH, UK. Authorised and regulated by the Financial Conduct Authority. 56
\\ Personal Finance Society 2017 A year of living dangerously? \\\\ Market Insights Team This presentation is for Professional Clients only and is not for consumer use.