CIPFA Meeting the Challenge of Good Governance Macro & Economic Update London / Manchester June 2016 Neil Dwane | Global Strategist 1
Agenda 1 2 3 Setting the Key macro Investment scene Topics Conclusions 2
1 Setting the scene 3
Our Clients’ Strategic Challenge 5 key conclusions from a UK perspective… Understand. Act. 1. The “Hunt for Income” or capital appreciation 1. Financial Repression remains in place globally are now global challenges 2. Global growth low, slow and fragile 2. As China rebalances, the World will have to create its own growth 3. BREXIT it is ! 3. The UK and Europe face 2-3 years of political and economic uncertainty which might be worse for the EU as Sterling will take the strain for the UK - but a prolonged period of UNCERTAINTY will ensue 4. Only a minor devaluation further expected 4. Concerns over Chinese Renminbi overdone from here 5. The UK has performed OK since GPC but 5. The UK needs to keep reforming to promote structural flaws persist… investment over consumption With Volatility rising, be ACTive - Agile Confident Thorough Source: Allianz Global Investors, 2015. 4
2 Key Macro Topics 5
The Trailing New Normal - what reversion to the mean or recovery to come ? Data sourced on May 2016 Post the GFC, US potential growth now seems to be …… 6
Global Monetary Policy Divergence …Financial Repression at work …. Median Year- end Fed Funds Rate Projection (Per the FOMC “Dots”) 16 Mar 2016 16 Dec 2015 17 Sept 2015 17 Jun 2015 18 Mar 2015 17 Dec 2014 0.875% 1.375% 1.375% End 2016 1.625% Longer term 1.875% 2.500% peak rates 1.875% is supportive 2.375% 2.625% End 2017 of higher 2.875% 3.125% equity 3.625% valuations… 3.000% 3.250% 3.375% End 2018 3.250% 3.500% 3.500% Long Run 3.750% 3.750% 3.750% 0.000% 0.500% 1.000% 1.500% 2.000% 2.500% 3.000% 3.500% 4.000% US policymakers have slashed their interest rate expectations amid continuing inflation disappointments and rising “international” risks…lower for longer Source: Allianz Global Investors Global Economics & Strategy, as of March 2016 7
RMB – Not the start of a currency war CNY Trade Weighted Index – 5 years 135 130 Trade Weighted Index Level 125 Note - China has been a good global citizen allowing Renminbi strength 120 Change of currency 115 regime from August 2015 Expect more volatility, 110 greater sensitivity to market forces 105 Do not expect sharp 1-off 100 devaluations or start of a currency war 95 Jan-2011 Jan-2012 Jan-2013 Jan-2014 Jan-2015 Jan-2016 Despite global fears, it is not in China’s self -interest to devalue substantially, as it would lessen consumer spending power Source: Bloomberg, Allianz Global Investors, as of 5 January 2016. Past performance is not indicative of future results. 8
Oil Market • 1) Oil demand is still growing 1-1.2Mb/d • EM demand for oil remains strong, IEA’s “missing barrels” suggests demand is being under-estimated ; • 2) US shale oil production is in accelerating decline • 3) Oil supply/demand crosses over in 2H16 , 2017 in deficit by up to 2Mb/d 1) IEA 2016 oil demand growth = +1.2Mb/d 2) US shale production forecasts going down 3) Global oil market in balance in 2H16 1.50 1.25 2016 growth in oil consumption 1.00 million barrels oil per day other non-OECD 0.75 Brazil/Russia/India 0.50 China 0.25 OECD 0.00 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Date of forecast -0.25 • OPEC production freeze is precursor to further talks, could see some production curtailed mid-2016. Saudi anticipated an oil price decline as a consequence of their actions, but not this collapse- they need to fix the oil market too Positioning for the 2016 inflation spike is the DEFENSIVE trade NOT the AGGRESSIVE trade 9 Allianz Global Investors Equity Research compilation as of March 2016, sources : IEA; Wood Mackenzie.
Europe: not running short of political risks EMU member state Eurozone EU, non-EMU member state Refugee crisis. Growing centrifugal political forces. Watering down of SGP/MIP. Incomplete banking union. EU member state with an opt-out EU-wide stress test results in q3 2016. Germany Finland Refugee crisis. Stability of current FIXIT movement government. Regional/local elections in Mar 2016. General elections in Oct 2017 Hungary/Poland UK Nationalist / Anti-EU governments BREXIT referendum on 23 Jun 2016 Ireland General elections – NO Continued conflict over Ukraine RESULT ! France Greece Reform fatigue. Slowdown of fiscal Fragile government. Huge pending consolidation. Rise of Front National. reform agenda (e. g. pension Presidential elections Apr/May 2017 reform). Unresolved fiscal sustainability issue. IMF loan expires Portugal end of Mar 2016. IMF participation in Unstable minority government. third programme still uncertain Budget clash with Brussels. Novo Banco bond turmoil Cyprus Parliamentary elections on 22 May 2016 Italy Spain Re- run elections in June likely …End NPL/Bad bank problems. Fiscal consolidation fatigue. Constitutional of Mar/Apr 2016 deadline for government ratification. Catalonia‘s reform: parliament vote on 12 Apr, national referendum in Oct 2016 independence aspirations Sources: AllianzGI Global Economics & Strategy, AllianzGI Global Capital Markets & Thematic Research. As of February 2016. 10
Percentage of global population aged 65+ - 2010 2050 2100 Ageing and longer life expectancy have gone global……. Source: UN DESA, May 2016 11
Navigating the disruption theme Why is it so hard to anticipate disruption…? Happens when a new product or service creates a new market, weakens an existing one, Disruption models transforms it, destroys an existing product, market or industry. It also lowers the cost of capital needed to compete, therefore allowing more competition and innovation. Moore’s Law + Kryder’s Law + Hendy’s Law + Butter’s Law of Exponential technologies Photonics - all generate exponential rate of improvements, not merely linear ones Generally new entrants who radically challenge the status quo of an industry, such as SaaS or Uber. The “Sharing Economy” may alter capital allocations to Autos, Real estate, Utilities etc in Business Model innovation the next 20 years dramatically Current cars have 2000 moving parts and are expensive to maintain …Electric Vehicles have only 20 moving parts…and they convert c 90% of electricity to power, whilst petrol only uses Product innovation 20%...and as for Phones … In my The coming exponential time Sensors+Internet of Things/3D Printing/AI/Robotics/SolarPV technologies – how will we Energy Storage/the Cloud/Big data/E-Money + E-Finance be affected? Differentiating between new products and new exponential technologies and their applications always leads to underestimating the potential for change and market or industry disruption… 12
It’s all about yield – if you can find it Yields in local currency terms 2 (%) Negative interest rates on 40% of outstanding European government bonds 1 10.0 8.0 6.0 4.0 2.0 0.0 Asian LC Bonds… Bund 5Y France 5Y Italy 5Y UK 5Y UST 5Y CNY 5Y Asia USD IG Asia USD BB INR 5Y IDR 5Y Asia USD B CNH 5Y MYR 5Y -2.0 Most developed market yields to remain low - the search for yield will remain a theme in 2016 1. Source: Jack Di-Lizia, Bloomberg Finance LP, Deutsche Bank Research, as at 1 December 2015. 13 2. Source: Bloomberg, Allianz Global Investors, as at 4 December 2015.
However, “ Hunt for Income “ grows in Europe Yield Curves Government Bonds in Europe 3.0 2.5 2.0 1.5 1.0 % 0.5 0.0 -0.5 -1.0 -1.5 1y 2y 3y 4y 5y 6y 7y 8y 9y 10y 15y 20y 30y Germany Switzerland France Italy Denmark Ireland Ex Bank bonds, the income comes only from Equities in Europe Source: Bloomber/AGI, 29. February 2016. Past performance is not a reliable indicator of future results. Forecasts are not a reliable indicator of future results. 14
Capital appreciation still needed - Some Equity markets offer better valuation opportunities Overview of Global equity markets cyclically adjusted P/E (S&P 500, otherwise MSCI indices in local currency) Expected per annum returns 1-2% 8-10% 15-17% 30 25 20 130-year US historic average 15 10 5 0 Many Asian equity markets look attractive Source: AllianzGI, Datastream, *numbers for regional indices without inflation adjustment. Latest available data used (May1 st 2016) 15
Dividends – A Stabilising Factor for Investors Performance contribution from dividends and MSCI Europe share prices since 1970 in five-year periods (% p.a.) Dividends are a constant source of positive returns, increasingly…. 16 Past performance is not an indication of future results. Source: Datastream, Allianz GI Capital Markets & Thematic Research, as of 30.12.2015
3 Investment Conclusions 17
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