Global Equities Q&A roadshow 216 #QAroadshow216 Gavin Marriott Product Manager June 216 For professional advisers only. This material is not suitable for retail clients
Questions What will drive global equity returns? What is the outlook for US? Where are the current opportunities? Source: Schroders 1
What will drive global equity returns?
Market environment The outlook remains finely balanced Earnings Liquidity Asset class preference and Flows Revisions Valuations Geopolitical risk Currencies Source: Schroders 3
Market environment A challenging earnings environment Annual S&P5 Consensus EPS $145 $14 $135 215 216E 217E $135.93 $13 $125 $12 $115 $11 212 213 214 $11.67 $119. $119.31 $118.48 $15 $13.21 $1 Jan-11 Nov-11 Sep-12 Jul-13 May-14 Mar-15 Jan-16 Source: Morgan Stanley Research, Thomson Reuters. As of 3 April 216. Forecast risk warning: Please refer to the important information slide at the end of this presentation 4
Market environment A challenging earnings environment Earnings Revision Ratio by region last three months 3m Earnings Revision Ratio 1..9.8.86.7.6.65.65.5.58.56.55 Source: BofA Merrill Lynch Global Quantitative Strategy, MSCI, IBES, 31 May 216. The Earnings Revision Ratio is a breadth measure of the direction of consensus earnings expectations. The stocks included in this analysis are selected from the constituents of the MSCI AC World universe where IBES consensus estimates data is available. Each month the number of stocks for which consensus earnings estimates have been upgraded and divide that by the number downgraded. For example, a Ratio of.8 indicates eight stocks upgraded for every ten downgraded. For illustrative purposes only and should not be viewed as a recommendation to buy or sell. 5.4 USA Europe World GEM Japan Asia Pac ex-japan
Market Outlook Earnings outlook becoming less bad 15/6/216 9:55:38 EPS revisions for MSCI World vs Market 5% % -5% -1% -15% -2% -25% -3% -35% -4% Dec 13 Jun 14 Nov 14 May 15 Oct 15 Apr 16 MSCI World +ve to -ve EPS revisions 6 Sources: IBES, Datasteam, as at 7 June 216
The importance of earnings The persistent inefficiency of markets The power of earnings surprise Relative returns to the best and worst quintiles of smoothed earnings revisions % 6 4 2 (2) (4) (6) (8) (1) (12) 215 3 Years (annualized) 5 Years (annualized) Best Quintile Worst Quintile Earnings Revisions a consistent source of alpha % 35 3 25 2 15 1 5 (5) (1) (15) 24 25 26 27 28 29 21 211 212 213 214 215 216 to Best Quintile Worst Quintile Date Source: 2 Empirical Research Partners Analysis. Equally-weighted USD-hedged returns. Stocks are ranked across, returns are relative to the universe. To 31 March 216 7
What drives share prices Amazon, a textbook example Share price and Consensus 216 EPS estimates (US$) 7 65 6 55 5 45 4 35 3 25 Nov 14 Jan 15 Mar 15 May 15 Jul 15 Sep 15 1. 9. 8. 7. 6. 5. Amazon share price Standard EPS Adjusted Source: Thomson Datastream, as at 16 November 215. Securities shown are for illustrative purposes only and should not be viewed as a recommendation to buy or sell. 8
What is the outlook for US equities?
Outlook for US equities Dominance of the US set to continue? Global Stock Market Returns (annualised, USD) % 3 25 2 15 1 5-5 1995 21 22 27 28 215 Source: Thomson Datastream, Schroders 1 US Developed International Emerging Markets
India US Global UK France EMU Taiwan Korea Germany GEM Japan LatAm NJA China Outlook for US equities The underpinnings of US equity outperformance 215 Non-financial net margin 12% 1% 8% 6% 4% 2% % Source: Credit Suisse Research as at 31 December 215. For illustrative purposes only and should not be viewed as a recommendation to buy or sell 11
Energy Materials Industrials Cons Disc Tech Staples Health Care Telecoms Utilities S&P5 ex-financials Financials S&P5 Outlook for US equities US Margins could go higher still 5 4 Q2 7 3 2 1 Q1 7 Q3 11 Q3 7 Q4 15 Q3 14 Q4 2 Q4 95 Q2 14 Q4 95 Q3 11 Q2 7-1 Current Margin % Peak Margin % (Date) Source: S&P, Compustat, FactSet and RBC Capital Markets. Data as of 31 December 215. For illustrative purposes only and should not be viewed as a recommendation to buy or sell 12
Outlook for US equities S&P5 Q1 216 results - has the earnings cycle troughed? Companies deliver positive surprise relative to lowered expectations 7% 65% 6% 55% 5% 45% 4% 35% 3% 25% 2% Q4 25 Q4 27 Q4 29 Q4 211 Q4 213 Q4 215 S&P 5: net positive earnings surprises Source: The Bloomberg Professional TM service, Credit Suisse research, as at March 216. 13
Outlook for US equities Valuations remain un-compelling Trailing 12-month P/Es (current versus 1-year average) 12-month trailing P/E (X) 3 25 2 15 1 5 World S&P FTSE Eurostoxx ASX EM Topix Mean Current PE Source: Thomson DataStream, as at 31 March 216 14
Where are the current opportunities?
A word on market risk Volatility spikes in Q1 VIX index (%) 45 4 35 3 25 2 15 1 5 Feb 14 Jun 14 Oct 14 Jan 15 May 15 Aug 15 Dec 15 Apr 16 Source: Thomson Reuters, Credit Suisse Research, as at 3 April 216 16 VIX indicator
Where are the current opportunities? Where are consensus expectations World FY216e 4 3 2 1-1 -2-3 -4 Oil & Gas Basic Materials Industrials Consumer Goods Health Care Consumer Services Telecom Utilities Financials Technology Source: SG Research. June 216. Forecast risk warning: Please refer to the important information slide at the end of this presentation. For illustrative purposes only and should not be viewed as a recommendation to buy or sell 17 Regional earnings growth %
Looking forward Global Equities: there are always opportunities Disruptive technologies Self help/cost discipline Secular growth Innovation Pricing power Source: Schroders. For illustrative purposes only and should not be viewed as a recommendation to buy or sell 18
Africa/Middle East Continental Europe Emerging Markets Japan North America Pacific X Japan United Kingdom Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecommunication Services Utilities Where are the current opportunities? Positioning Global Alpha Plus Geographical allocation 7 6 5 4 3 2 1 Sector allocation 25 2 15 1 5 Global Equity Alpha Plus Fund MSCI World Global Equity Alpha Plus Fund Source: Schroders, As at 31 March 216. Regions and sectors shown are for illustrative purposes only and should not be viewed as a recommendation to buy or sell MSCI World 19
Appendix
Performance record As at 3 April 216 in GBP (gross) 1 Year (%) 3 Year (%p.a.) 5 Year (%p.a.) Global Alpha Plus Fund +3.6 +11.1 +8.4 MSCI World +.5 +8.4 +8.7 Relative +3.1 +2.7 -.3 1 Year (%) 3 Year (%p.a.) 5 Year (%p.a.) Global Equity Composite +1.4 +9.6 +8. MSCI World +.5 +8.4 +8.7 Relative +.9 +1.2 -.7 As at 3 April 216 in GBP (net) 7 6 5 4 3 2 1-1 -2-3 -4-5 -6-7 -8-9 -1 Peer Group Ranking relative to Peer Group universe 1 Year to 3 April 216 +1. -1. 11 1 Peer Group Ranking relative to Peer Group universe 3 Years pa to 3 April 216 9 8 7 6 5 4 3 2 1-1 +9.1 +7.9 1 Peer Group Ranking relative to Peer Group universe 5 Years pa to 3 April 216 9 8 7 6 5 4 3 2 1-1 +6.6 +6.4 1 st Quartile 2 nd Quartile 3 rd Quartile 4 th Quartile Source: Schroders. The results are past performance and are presented gross of fees. *The inception date of the Schroder Global Alpha Plus Fund was 3 April 21. Past performance is not a guide to future performance and may not be repeated **Schroder Global Equity Composite Inception date 31 December 1998. 21 Schroder ISF Global Equity Schroder Global Alpha Plus Source: Morningstar. Universe = Offshore, Global Large-Cap Blend Equity, Primary A Acc share class in GBP, net, for Schroder ISF Global Equity and Schroder Global Alpha Fund. We have excluded the top 5 and bottom 5 percentiles from the peer group charts above.
15/6/216 9:55:38 For professional advisers only. This material is not suitable for retail clients. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. Schroders has expressed its own views and these may change. The data contained in this document has been sourced by Schroders and should be independently verified before further publication or use. This presentation is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Unit Trusts Limited (Schroders) does not warrant its completeness or accuracy. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. The forecasts included in this document should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. We accept no responsibility for any errors of fact or opinion and assume no obligation to provide you with any changes to our assumptions or forecasts. Forecasts and assumptions may be affected by external economic or other factors. The fund holds investments denominated in currencies other than sterling, changes in exchange rates will cause the value of these investments, and the income from them, to rise or fall. Potential investors in emerging markets should be aware that this can involve a higher degree of risk. Less developed markets are generally less well regulated than the UK, investments may be less liquid and there may be less reliable arrangements for trading and settlement of the underlying holdings. Funds which invest in a smaller number of stocks can carry more risk than funds spread across a larger number of companies. Investments in smaller companies can be less liquid than investments in larger companies and price swings may therefore be greater than in larger company funds. The fund can use derivatives for investment purposes. These instruments can be more volatile than investment in equities or bonds. The fund can use derivatives for specific investment purposes but currently does not. If we decide to use derivatives this way, this may result in a more volatile unit price and so result in a higher degree of market risk, therefore we will give unitholder appropriate notice if we decide to do so. The fund is not tied to replicating a benchmark and holdings can therefore vary from those in the index quoted. For this reason the comparison index should be used for reference only. Issued in June 216 by Schroder Unit Trusts Limited, 31 Gresham Street, London EC2V 7QA. Registered No: 419173 England. Authorised and regulated by the Financial Conduct Authority. UK18 22