The outlook for UK savers: Markets, Politics and Policy Rupert Harrison, Portfolio Manager Multi-Asset Strategies Tuesday 21 st November, 2017
Not a bad year so far for a UK investor Asset performance in GBP and local currency, 2017 YTD Asia ex-japan Equities EM Equities European Equities Japan Equities DM Equities U.S. Equities UK Equities German Bunds Global High Yield bonds UK Gilts Global IG Corporate Bonds U.S. Treasuries -10-5 0 5 10 15 20 25 30 35 40 RETURN (%) Sterling Local Currency Sources: BlackRock Investment Institute with data from Thomson Reuters Datastream, 9 th November 2017. Note: The bars show the total return in sterling and local currency terms. Government bonds are 10-year benchmark issues. Equities are represented by the relevant MSCI index. IG and HY bonds are represented by the Merrill Lynch indexes, and local currency is shown in USD.. Past performance is not a reliable indicator of future results. It is not possible to invest directly in an index. 2
REAL GDP GROWTH (%) A sustained global economic expansion BlackRock s growth indicator points to above-trend growth BlackRock Growth GPS for G7 nations, 2015-2017 2.5 2 1.5 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 BlackRock s proprietary growth indicator suggest that global growth has been cruising along at strong levels We combine regular economic data with big data such as Google searches to gauge where the global economy is heading G7 Growth GPS G7 12m Forward Consensus Sources: BlackRock Investment Institute with data from Consensus Economics, November 2017. Notes: The GPS (blue lines) shows where the 12-month consensus GDP forecast may stand in three months time. Consensus forecasts are measured by Consensus Economics. G7 country components are weighted by country GDP. The green lines shows the current 12-month economic consensus forecast. The GPS builds on existing nowcasting models that exploit the information from dozens of macroeconomic indicators to forecast GDP growth including realized activity, employment, sentiment and survey data. It draws on a wider set of information sources by incorporating proprietary big data insights from BlackRock s Scientific Active Equity team. These include micro insights, such as consumer behavior captured through internet searches, and macro insights such as country business sentiment measured through the text-mining of corporate managers conference calls. Other big data inputs include online job postings, inflation chatter, satellite images, e-invoicing and traffic patterns. 3
U.S. REAL GDP (100=PRIOR CYCLE PEAK) Our analysis of economic cycles suggests that there is room to run U.S. GDP growth points to a period of sustained expansion U.S. GDP versus other cycles 160 150 140 130 120 110 100 We think about economic cycles based on how close the economy is to running at full steam, not just the time since the last recession 90 80 Prior Trough At Potential Peak Peak 1953 1957 1960 1969 1973 1981 1990 2000 2007 Source: BlackRock Investment Institute with data from BEA, NBER, CBO, as of 6 th September 2017 Note: This chart compares the level of real U.S. GDP across different cycles. The peak is quarter when GDP peaks before each recession. The trough refers to the trough in GDP each recession. At potential refers to the quarter when the output gap has been closed each cycle. All series have been stretched or wrapped so as to fit onto the same scale. A dot represents one quarter. 4
YIELD (%) Given lower growth going forward, we expect a gradual rise in bond yields We see rates remaining below long-term averages over next five years U.S. and German 10-year government bond yields, 1980-2017 18 16 14 12 10 8 6 4 2 5-year expectation 0-2 1980 1985 1990 1995 2000 2005 2010 2015 2020 U.S. Germany UK Source: BlackRock Investment Institute with data from Thomson Reuters, November 2017. Notes: 5-year expectations are based on BlackRock Capital Market Assumptions. Forward looking estimates may not come to pass. Yield data based on Thomson Reuters 10-year government bond indexes. Averages are calculated over the full period from 1980-2017. Forward looking estimates may not come to pass. 5
PERCENTILE Stock market valuations look reasonable given the low level of interest rates Valuations look more attractive in the context of structurally lower interest rates Global equity valuations relative to bonds, 2000-2017 100% 75% Stocks cheap 50% 25% Stocks expensive 0% 00 02 04 06 08 10 12 14 16 18 US Europe ex-uk Source: BlackRock Investment Institute, with data from Thomson Reuters, IBES, HaverAnalytics and Bloomberg, October 2017. Notes: U.S., Europe ex-uk, Japan and emerging market (EM) equities are represented by their respective MSCI equity indexes. Absolute valuation is based on earnings yield (the inverse of 12-month forward price-to-earnings ratios). Valuation relative to bonds is based on the earnings yield minus the real bond yield. The real bond yield is the 10-year government bond yield (or nearest equivalent) of each market minus the oneyear average inflation rate. Real bond yields for EM and Europe ex-uk are the GDP-weighted average of 10-year government bond yields of each country within each region. Valuations are shown in percentiles using a post-1990 history. For example, the current U.S. relative earnings yield is in the 72nd percentile, meaning it has been equal to or below that level 72% of the time. 6
ANNUAL EARNINGS GROWTH ESTIMATE (%) European earnings have been supported by improving growth This year is different for European earnings Annual earnings growth estimates for European equities, 2011-2017 20 15 10 2012 2013 2014 2015 2017 5 0 2016-5 -10 2011 2012 2013 2014 2015 2016 2017 Source: BlackRock Investment Institute with data from Thomson Reuters, November 2017. Notes: The lines show annual earnings growth estimates for MSCI Europe. 7
REAL GDP GROWTH (%) The UK has stabilised after a post-brexit slump The UK has stabilised after a post-brexit slump BlackRock Growth GPS for UK, 2015-2017 3.0 2.5 2.0 1.5 UK growth took a hit post-brexit, but has since stabilised 1.0 0.5 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 UK GPS UK 12m Forward Consensus GDP Sources: BlackRock Investment Institute with data from Consensus Economics, November 2017. Notes: The GPS (blue lines) shows where the 12-month consensus GDP forecast may stand in three months time. Consensus forecasts are measured by Consensus Economics. The green lines shows the current 12-month economic consensus forecast. The GPS builds on existing nowcasting models that exploit the information from dozens of macroeconomic indicators to forecast GDP growth including realized activity, employment, sentiment and survey data. It draws on a wider set of information sources by incorporating proprietary big data insights from BlackRock s Scientific Active Equity team. These include micro insights, such as consumer behavior captured through internet searches, and macro insights such as country business sentiment measured through the text-mining of corporate managers conference calls. Other big data inputs include online job postings, inflation chatter, satellite images, e-invoicing and traffic patterns. 8
CORE INFLATION (%) The UK inflation picture is different to global counterparts U.K. inflation has spiked Global core inflation, 2008-2017 4 3 2 1 0 2008 2010 2012 2014 2016 U.S. Eurozone UK Central bank target Source: BlackRock Investment Institute with data from Thomson Reuters, November 2017. 9
ANNUAL CHANGE (%) After considering inflation, UK wages are coming under pressure UK nominal and real (after inflation) wage growth, 2008-2017 6 4 Brexit 2 0-2 -4 2008 2010 2012 2014 2016 Nominal wage growth Real wage growth Source: BlackRock Investment Institute with data from Thomson Reuters, November 2017. 10
USD to GBP CO-EFFICIENT OF DETERMINATION Political risk has been most clearly demonstrated in Sterling Equity markets, unlike Sterling, were not hit by Brexit while UK rates are increasingly correlated to global markets USD vs. GBP and FTSE All-Share Index, 2016-2017 Co-movement of major bond yields, 1974-2017 1.5 Brexit 4200 80 60 1.4 3800 INDEX 40 1.3 3400 20 1.2 Jan 2016 Jul 2016 Jan 2017 Jul 2017 3000 0 1974 1982 1990 1998 2006 2014 USD to GBP (LHS) FTSE All-Share (RHS) Source: BlackRock Investment Institute, with data from Thomson Reuters, November 2017. Notes: FTSE All-Share performance in GBP. Past performance is not a reliable indicator of future results. Source: BlackRock Investment Institute, November 2017. Notes: This chart shows a seven-year rolling regression (R-squared, or coefficient of determination) of monthly changes in UK 10-year yields on a factor that captures the monthly change in German, Japanese and US 10-year yields. The regression shows what proportion of UK yield changes may be explained by a common global factor extracted from all the yield moves. 11
Politics not quite as usual U.S. Key Fed meetings 12-13 Dec Debt ceiling and 2018 budget Q4 2017 Potential tax reform 2017-2018 Mexico NAFTA renegotiation Q4 2017 North Korea Missile and nuclear tests China 19 th Party Congress Attempts to rein in credit South China Sea disputes ME European Union Key ECB meetings 14 Dec. Italy General elections before 20 May 2018 UK Brexit negotiations Ongoing Middle East Gulf conflicts Source: BlackRock Investment Institute, November 2017. 12
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