\\ Global equity markets Is the sweet spot behind us? June 2018 Nick Mustoe Chief Investment Officer \\\\ This presentation is for Professional Clients only and is not for consumer use.
Themes World growth drives earnings Trade war concerns cloud outlook Technology and growth companies continue to dominate market returns European politics unsettles markets 2
Developed world Stock market performance over the past 12 months Source: Bloomberg as at 26 June 2018. Indices rebased in GBP terms. 26 June 2017 = 100. 3
Emerging countries Stock market performance over the past 12 months Source: Bloomberg as at 26 June 2018. Indices rebased in GBP terms. 26 June 2017 = 100. 4
Developed world Stock market performance since 2007 Source: Bloomberg as at 26 June 2018. Indices rebased in GBP terms. 2 January 2007 = 100. 5
Emerging countries Stock market performance since 2007 Source: Bloomberg as at 26 June 2018. Indices rebased in GBP terms. 2 January 2007 = 100. 6
A rare environment Growth for almost everyone Number of countries with negative real GDP growth by year 90 80 70 60 50 40 30 20 10 0 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E Source: Goldman Sachs Global Investment Research as at 5 June 2018. 7
2017: A near perfect year Most assets ended 2017 in positive territory 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% -5% Corp Bond Govt Bond Equity EM Equity EM Bond Commodity FX Greece Athex Hang Seng MSCI EM Equities Portugal General FTSE-MIB Copper DAX DJStoxx 600 Banks IBEX 35 DJStoxx 600 Nikkei Bovespa EU Fin Sub FTSE 100 S&P 500 EU HY EU IG Non-Fin EU Fin Sen Shanghai Comp Spanish bonds BTPs EM Bond EU Sovereign Brent EUR/USD Gold Bunds US WTI Oil Gilt GBP/USD US Fin Sub US IG Non-Fin Micex (Russia) Silver US HY US IG Corp Wheat US Fin Sen JPY/USD Treasury CRB Index Corn Source: Deutsche Bank as at 31 December 2017 8
The VIX spiked in February, from all-time lows Chicago Board Options Exchange SPX Volatility Index 60 50 40 30 Concerns of overheating in the US economy 20 10 Jun 90 Jun 94 Jun 98 Jun 02 Jun 06 Jun 10 Jun 14 Jun 18 VIX Index Source: Bloomberg as at 25 June 2018. 9
Global equity market valuations MSCI World Composite Valuation Indicator (Z Score)* 3.0 Standard Deviation 2.0 1.0 0.0-1.0-2.0 R squared 86% Current 0.35 Source: Datastream as at 31 May 2018. Past performance is not a guide to future returns. *Equally weighted Z Score of trailing PE, DY and PBV. R Squared based on 10 year subsequent returns. Data is monthly. 10-3.0 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 Components of composite valuation indicator Current Average Z score Price to Earnings 19.29 18.15 0.19 Dividend Yield 2.41 2.88 0.45 Price to Book Value 2.37 2.10 0.42
Global equity market performance contribution Earnings improvement offset by valuation de-rating in 2018 MSCI ACWI annual breakdown of total returns in local currency (%) 30 25 20 15 10 5 0-5 -10-15 2012 2013 2014 2015 2016 2017 2018 YTD* Dividends PE change EPS change Total return Source: Datastream as at 1 June 2018. Past performance is not a guide to future returns. *YTD = to 31 May 2018. 11
Growth has out-performed since the financial crisis MSCI ACWI Growth index versus MSCI ACWI Value index 1.5 1.4 1.3 1.2 1.1 Growth outperforms Value Value out-performs Growth Growth out-performs Value 1.0 0.9 0.8 Dec 96 Dec 99 Dec 02 Dec 05 Dec 08 Dec 11 Dec 14 Dec 17 MSCI ACWI Growth/Value Source: Bloomberg as at 22 June 2018. 12
Has the cyclical/defensive sector rotation begun? Book value ratio of economically cyclical sectors versus defensives 10 5 0-5 -10-15 -20-25 -30 1980 1985 1990 1995 2000 2005 2010 2015 Source: Invesco and Datastream as at 31 May 2018. Data is monthly and shows price/book value ratio between 4 cyclical sectors (oil, industrials, basic materials, consumer discretionary) against four defensive sectors (utilities, consumer staples, pharmaceuticals, telecoms). 13
There is still significant valuation disparity Technology sectors are highly valued Standard deviation relative to 10 year average 3.0 2.5 2.0 1.5 1.0 0.5 0.0-0.5-1.0-1.5 Bubble threshold Software Retailing Semiconductors Tech Cons Services Cons Durables Comm Services Health Care PBV Z-Scores (Global Industries) Div Fin Capital Goods Household Transportation Food & Staples Pharma & Biotech Insurance Utilities Real Estate Materials Energy Media Banks Food Bevs Autos Telecoms Source: Citi as at 22 June 2018. Global sectors are as defined by the GICS industry group. 14
The sources of market return have been narrow over the last 18 months S&P 500 sector performance 1 January 2017 to 22 June 2018 IT Consumer Disc. S&P 500 index Health Care Materials Financials Industrials Real Estate Utilities Energy Consumer Staples Telecom Services % of S&P 500 return 44% 17% 14% 2% 11% 7% 1% 1% 1% 2% -1% -20% -10% 0% 10% 20% 30% 40% 50% 60% Source: Bloomberg as at 22 June 2018. Performance shown if for the period from 1 January 2017 to 22 June 2018. 15
Is e-commerce the next market bubble? 900 800 700 600 500 400 Gold Nikkei Thailand US Housing Tech China e-commerce Biotech 300 200 100 0 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 Source: BofA Merrill Lynch Global Investment Strategy, Bloomberg; Note: Gold (XAU Currency), Japanese Equities (NKY Index), The Equities (SET Index), Tech (NDX Index), US Housing (5SHOME Index), Commodities (SHCOMP Index), Biotech (NBI Index), e-commerce (DJECOM Index), as at 25 June 2018. 16
European equities Europe still offers value despite earnings at depressed levels Significant earnings gap between Europe and US 1 160 150 140 130 120 110 100 90 80 70 60 Global Financial Crisis Dec 06 Oct 07 Aug 08 Jun 09 Apr 10 European Sovereign Debt Crisis Feb 11 Dec 11 Oct 12 Aug 13 Emerging market/ commodity crisis Jun 14 Apr 15 Feb 16 Dec 16 Oct 17 Significant valuation gap between Europe and US 1.1 1.0 0.9 0.8 0.7 0.6 0.5 Dec 74 Dec 78 Dec 82 Dec 86 Dec 90 Dec 94 Dec 98 Dec 02 Dec 06 Dec 10 Dec 14 STOXX 600 Europe in EUR S&P 500 Composite in USD Europe/US Price to Book relative (x) Average Source: LHC Datastream, UBS European Equity Strategy and Invesco as at 31 March 2018. 1Rebased to 31 December 2006. 12 month trailing earnings based on Stoxx Europe 600 index. RHC Datastream, Invesco as at 31 March 2018. 17
Conclusion Equity markets in 2018 are likely to be sensitive to changes in bond yields Technology and growth stocks vulnerable given high valuations European equities offer good combination of improving growth and valuation, despite European politics Sector rotation likely to continue 18
Important information This presentation is for Professional Clients only and is not for consumer use. Please do not redistribute. 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. Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice. Further information is available using the contact details below. Issued by Invesco Asset Management Limited, Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH, UK. Authorised and regulated by the Financial Conduct Authority. 19