[PPT] - Global Economic and Financial Market Overview Q3 2019 Neal Bailey PowerPoint Presentation

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Global Economic and Financial Market Overview

Q3 2019

This marketing document is for use by Professional Clients

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Neal Bailey Market Insights Team

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Global Economic and Financial Market Overview

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1. Performance in 2019 YTD
2. Economic outlook
3. Current financial market backdrop

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1. Performance in 2019 YTD

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2019 YTD market highlights Summary

▪ Positive performance across all asset classes ▪ Strong performance across equity markets. Developed markets outperform, led by the US and Europe ex UK ▪ DM government bond yields fall sharply, but underperform rest of FI ▪ Credit markets positive on lower yields and spreads. HY outperforms IG ▪ Low or negative rates weighed on cash returns ▪ Oil gives up some of gains. Gold rallies

Source: Invesco as at August 2019. Where Invesco has expressed views and opinions these may change. 4

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5 10 15 20 25 Global Equities DM Equities EM Equities Global Govt. Bonds Global IG Global HY Global Cash Oil Gold Global Asset Classes – Total Return performance in 2019 YTD (local currency %)*

Source: Datastream as at 1 August 2019. *Indices used are: Global Equities – MSCI ACWI, DM Equities – MSCI World, EM Equities – MSCI EM, Global Govt. Bonds – ICE BofA ML Global Government, Global IG – ICE BofA ML Global Corporate, Global HY – ICE BofA ML Global High Yield, Global Cash – JPM Global Cash 1m, Oil – Crude Oil BFO M1 Europe FOB $/bbl, Gold – Gold Bullion LBM U$/Troy Ounce. 5

2019 YTD market highlights Performance Overview

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86 88 90 92 94 96 98 100 102

160
140
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100
80
60
40
20

20 Sep 18 Nov 18 Jan 19 Mar 19

Global equity flows and MSCI ACWI performance

98 99 100 101 102 103 104 105 106

80
70
60
50
40
30
20
10

10 Sep 18 Nov 18 Jan 19 Mar 19

Flows (Cumulative $bn) Global IG flows and ICE BofAML Global Corporate TR performance

Asset class flows The rally has not been reflected in equity fund flows…but FI has seen substantial inflows

Source: BofAML as at 2 August 2019. *Rebased 100 = 19 September 2018. $ = US. 6

Perf. (RHS)* Flows (Cumulative $bn)

Correct colour for labels on RHC – Update Friday

Perf. (RHS)*

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3.0%

0.4%
0.2%
4.1%
2.5%

3.4%

3.0%

0.8%

9.1%
12.0%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%

0.00% 2.00% 4.00% 6.00% Fixed Income Equity Asset Allocation Alternatives Commodities 8.76bn 7.49bn 5.28bn 4.01bn 3.78bn

2.71bn
3.11bn
3.32bn
3.96bn
8.32bn
10bn
8bn
6bn
4bn
2bn

0bn 2bn 4bn 6bn 8bn 10bn Global Flexible Bond-USD Hedged EUR Corporate Bond Global Bond USD Flexible Bond Global Large-Cap Blend Equity Asia ex Japan Equity US Large- Cap Value Equity Global Emerging Markets Equity Alt - Market Neutral - Equity Eurozone Large-Cap Equity 7

Market highlights Flow summary

Source: Morningstar Direct, Estimated Net Flows from 01/01/2019 to 30/06/2019, Net Flows/Total Net Assets in EURO as stated in Morningstar Direct Asset Flow application.

2019 Q2: ▪ Investors have switched to the “save mode”. Less risky asset classes (government bonds, corporate bonds) are preferred ▪ Market inflows continue to be positive during 2nd quarter (EUR 32bn) ▪ Fixed income investments attracted the most flows (EUR 64bn) whereas

utflows in equities

accelerated (EUR -25bn) ▪ After being a “top sector” by net flows in Q1, Emerging Markets (equities & bonds) lost in Q2

YTD – Top/Bottom 5 sectors by Net Flows YTD net flows (quarterly flow growth rate %)

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2. Economic outlook

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50 100 150 200 250 300 350 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

GFC EZ crisis China growth Brexit vote Trump election Trade tensions

Global Economic Policy Uncertainty index*

The global macro backdrop Heightened levels of uncertainty…

Source: Bloomberg as at 6 August 2019. *Based on current price GDP weights. GFC = Global Financial Crisis. 9

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20
15
10
5

5 10 15 20 01 03 05 07 09 11 13 15 17 19 49 50 51 52 53 54 55 56 14 15 16 17 18

JPM Global Purchasing Managers Index (PMI) World trade volume (3mma yoy%)

The global macro backdrop …has led to further weakness in PMIs and a sharp fall in global trade…

Source: Bloomberg and Datastream as at 6 August 2019. 10

Composite Services Manufacturing

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100
80
60
40
20

20 40 60 80 100 120 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17 Jan 18 Apr 18 Jul 18 Oct 18 Jan 19 Apr 19 Jul 19 G10

Citi Economic Surprise Indices

The global macro backdrop …and a record period of negative G10 economic newsflow

Source: Datastream as at 1 August 2018. 11

EZ Japan UK China US

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1 2 3 4 5 6 7 US EZ Germany France Italy UK Japan China 2019 2020 Trend

5 10 15 20 25 30 35 40 45 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018e 2019f 2020f Contraction Slowing growth Accelerating growth

Country GDP growth performance (number) Consensus GDP forecasts for 2019 and 2020 (%)*

The global macro backdrop A synchronised slowdown in 2019…but with the global outlook currently forecast to improve in 2020

Source: LHS: OECD Economic Outlook 2018 as at 20 May 2019. e = estimate f = Forecast. *Brackets show OECD November 2018 Economic Outlook forecasts. RHS: Consensus Economics and OECD as at 12 July 2019. * Trend growth is the 10yr CAGR for the period 2020 – 2030 calculated from the OECD’S Long-term baseline real GDP projections from Economic Outlook – July 2018. **IMF WEO, July 2019. Brackets show April 2019 Economic Outlook forecasts. 12

IMF World Real GDP forecasts**

2018

3.6%

2019f

3.2% (3.3%)

2020f

3.5% (3.6%)

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20 40 60 80 100 120 140 45 49 54 58 61 70 75 80 82 91 01 09 to date Months Year started 1 2 3 4 5 6 58 61 70 75 80 82 91 01 09 Year started

Duration of US economic expansions since WW2 (months) US recoveries – Real GDP (% annualised)

US recession risk A record US recovery…but at much slower growth rates than in previous cycles

Source: LHC: NBER (National Bureau of Economic Research) as at 1 August 2019. RHC: NBER and Datastream as at 1 August 2019.

Avg. =

58 months

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3
2
1

1 2 3 4 77 81 85 89 93 97 01 05 09 13 17 Recessions

Yield curve inversion – 10yr-2yr UST spread (%)

20 30 40 50 60 70 80 90 100 110 120 59 64 69 74 79 84 89 94 99 04 09 14 Recessions

Conference Board Lead Indicator (CLI)*

US recession risk Near-term recession risks appear low currently (1/2)

Source: Datastream as at 1 August 2019. *The CLI is the composite average of the following: Average weekly hours, manufacturing; Average weekly initial claims for unemployment insurance; Manufacturers' new orders, consumer goods and materials; Vendor performance, slower deliveries diffusion index; Manufacturers' new orders, nondefense capital goods; Building permits, new private housing units; Stock prices, 500 common stocks; Money supply, M2; Interest rate spread, 10-year Treasury bonds less federal funds; Index of consumer expectations.

▪ Historically an inversion of the yield curve has been the most consistent lead indicator of a recession with an average 21 month lead (10 – 34m range) over the past 40 years ▪ Not yet inverted this cycle, but at 12bp back close to flattest it has been (11bp) ▪ The CLI has historically peaked on average 15 month ahead

f a recession (9 - 22m range)

▪ Currently the CLI has declined marginally from its recent peak

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2 4 6 8 10 12 50 55 60 65 70 75 80 85 90 95 00 05 10 15 Recessions 20 40 60 80 100 120 140 160 67 72 77 82 87 92 97 02 07 12 17 Recessions

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Unemployment (%) Conference Board Consumer Confidence Index (CCI)

US recession risk Near-term recession risks appear low currently (2/2)

Source: Datastream as at 1 August 2019.

▪ Unemployment has historically troughed on average 10 months ahead of a recession (2 - 17m range) ▪ The latest unemployment figure shows a rise from cyclical low

f 3.6% to 3.7%.

▪ The CCI has historically peaked on average 15 month ahead of a recession (6 - 22m range) ▪ Currently the index is rising and close to cycle highs

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40 45 50 55 60 65 48 49 50 51 52 53 Dec 17 Apr 18 Aug 18 Dec 18 Apr 19 CKGSB* Bus Conditions (RHS) Caixin Manuf.

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5 10 Dec 14 Dec 15 Dec 16 Dec 17 Dec 18

Positive developments? Chinese green shoots?

Source: Datastream and Bloomberg as at 1 August 2019. *CKGSB = Cheung Kong Graduate School of Business. 16

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5 10 15 20 25 Dec 14 Dec 15 Dec 16 Dec 17 Dec 18 Infrastructure Real Estate

Infrastructure and Real Estate investment (yoy 3mma %)

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10 20 30 40 Dec 14 Dec 15 Dec 16 Dec 17 Dec 18 US ASEAN Japan

Exports (yoy 3mma %) Credit impulse (yoy%) Business surveys

Official Manuf. EU

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7 8 9 10 11 12 13 1998 2001 2004 2007 2010 2013 2016 2019

Positive developments? Eurozone growth outlook - The backdrop remains challenging… particularly for the industrial sector

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5 10 15 2012 2013 2014 2015 2016 2017 2018 2019 Exports and Manufacturing production (yoy%) Unemployment and Consumer Confidence

Source: Datastream as at 27 July 2019.

Non-EZ exports Manufacturing Unemployment (%) Cons Conf (RHS)

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3
2
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1 2 3 4 5 30 35 40 45 50 55 60 65 70 91 94 97 00 03 06 09 12 15 18 98 99 99 100 100 101 101 14 15 16 17 18 19

GS Financial Conditions Index and ISM Manufacturing PMI

Positive developments? Financial conditions have eased further

Source: LHC: Bloomberg and Datastream as at 1 August 2019. RHC: Datastream as at 1 August 2019. 18

Goldman Sachs (GS) US Financial Conditions Index PMI (Lag 6m) Fin Cons (RHS – Inverted yoy chge)

Easing Tightening

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1.5
1.0
0.5

0.0 0.5 1.0 2015 2016 2017 2018 2019f 2020f 2021f Advanced G20 Emerging G20 Easier policy Tighter policy

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1 2 3 US Japan China EZ 2015 2016 2017 2018 2019f 2020f 2021f Easier policy Tighter policy

Positive developments? Fiscal policy is a tailwind in 2019…particularly in China and the EZ…and further easing may be in the pipeline

19 Source: Top chart: IMF and Datastream as at 10 April 2019. Bottom chart: IMF and Datastream as at 10 April 2019.

Change in cyclically-adjusted primary balance as % potential GDP (%) Regional change in cyclically-adjusted primary balance as % potential GDP (%)

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Positive developments? Potential for amelioration of tensions on the trade front?

Source: Invesco as at 1 August 2019. 20

USMCA ratification Section 232 auto tariff decision US – China trade negotiations US bi-lateral free trade negotiations with Japan and Europe

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Trade Exposure to US / China trade tensions varies hugely…and not every country is a loser?

Source: LHC: Source: HSBC as at 27 July 2019. Note that Mexico, Canada and Hong Kong figures have been adjusted to appear in the scatter chart – actual numbers are shown in parentheses). RHC: Source: Datastream as at 1 August 2019. 21

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5 10 15 20 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19

Share of country exports to China and US (%) Asian exports to US (yoy%) Taiwan Korea Thailand Vietnam China

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Brexit Increased risk of No Deal

22 Source: Top chart: Invesco for illustrative purposes only. Bottom LHC and MC: Dmitry Grozoubinski of ExplainTrade.com as at July 2019. *Based on average imports 2016 – 2018. UK data based on UK’s temporary No Deal tariff regime. Bottom RHC: OBR as at 17 July 2019.

Re-negotiation and new deal Referendum Cancel Brexit General election No-deal Brexit

82% 13% 5%

Tariff free Subject to tariff =<10% Subject to tariff >10% or non-ad valorum tariff

49% 45% 6%

Tariff free Subject to tariff =<10% Subject to tariff >10% or non-ad valorum tariff

EU27 import tariffs from the UK post No Deal (%)* UK import tariffs from the EU27 post No Deal (%)*

98 102 106 110 114 118 122 2013 2015 2017 2019 2021 2023

No Deal Brexit Real GDP stress test* Stress Test March 2019 Forecast Brexit options

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96 100 104 108 112 116 Dec 17 Apr 18 Aug 18 Dec 18 Apr 19 US$ Trade Weighted and JPMorgan EM Currency indices*

Positive developments? US$ relatively stable

Source: Datastream as at 1 August 2019. *Rebased 100 = 29 December 2017. 23

Broad Trade Weighted Index JPM EM currency index

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Positive developments? Markets expecting more dovish Central Banks, especially the Federal Reserve, but major additional QE not yet on agenda…

Source: LHC: Bloomberg as at 1 August 2019. *US – USD OIS Forward Swap 1y 1m minus US Fed Funds Effective Rate, Japan – JPY Forward Swap 1y 1m minus Bank of Japan Estimate Unsecured Overnight Call Rate, EZ – Eur Eonia Forward Swap 1y 1m minus EMMI Euro Overnight Index. RHC: Source: Datastream as at 1 August 2019. **US, EZ and Japan in US$. 24

1.0
0.8
0.6
0.4
0.2

0.0 0.2 0.4 0.6 0.8 1.0 2015 2016 2017 2018 2019 Expected interest rate change over next 12 months (%)*

1.2
0.8
0.4

0.0 0.4 0.8 1.2 1.6 2.0 2.4 2.8 2013 2014 2015 2016 2017 2018 US Japan EZ Major DM Central Bank balance sheets (yoy $trn)** US EZ Japan UK

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100 200 300 400 500 600

Jun 89 - Sep 92 Jan 01 - Jun 03 Sep 07 - Dec 08 Current to zero bound

1

1 2 3 4 5 6 7 8 9 2008 2010 2012 2014 2016 2018

US EZ Japan UK Australia Canada NZ Sweden Switzerland

US rate cuts around recent recessions (%)

Monetary policy …and far less room on the conventional policy front too

Source: LHC: Bloomberg and Datastream as at 7 August 2019. RHC: Datastream as at 1 August 2019. 25

Major DM Central Bank policy rates (%)

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1.0
0.5

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 2014 2015 2016 2017 2018 2019 2020 95 100 105 110 115 120 125 130

Inflation relative to Central Bank inflation objectives since the GFC*

Inflation outlook Central Banks have struggled to hit their inflation targets since the GFC…and may continue to do so…

Source: LHC: Source: Datastream as at 1 August 2019. *Rebased 100 = 31 December 2008. RHC: Source: Datastream and Central Banks as at 1 August 2019. *Dashed lines are Central Bank forecasts to end of 2020. Japan forecast is ex Fresh Food and includes impact of consumption tax hike in October 2019. US is based on PCE inflation. 26

EZ US Japan UK Headline inflation and Central Bank forecasts (yoy %)* US Japan EZ 2% targets UK 2%

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Inflation outlook …as monetary pressures remain muted…while wage growth is only accelerating slowly…

Source: LHC: Datastream as at 1 August 2019. RHC: Source: Datastream as at 1 August 2019. OECD = Organisation for Economic Co-operation and Development. 27

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2 4 6 8 10 12 14 1995 1998 2001 2004 2007 2010 2013 2016

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2 4 6 2001 2004 2007 2010 2013 2016 2019

Money supply

CPI

Avg. 8.7% yoy

Avg. 6.3 yoy Avg. 3.4% yoy Avg. 1.7% yoy

OECD – Broad money supply and CPI (yoy %) Wage growth (3mma yoy%) UK Germany US Japan

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High debt levels High levels of debt remain a structural headwind to global growth… alongside weak productivity and demographics

Source: LHC: BIS as at 1 August 2019. RHC: IMF as at 10 April 2019. *Latest is April 2019.

100.0 110.0 120.0 130.0 140.0 150.0 160.0 170.0 180.0 190.0 200.0 200 210 220 230 240 250 260 270 280 290 300 2001 2003 2005 2007 2009 2011 2013 2015 2017

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Advanced Economies and Emerging Markets non-financial sector debt to GDP (%) Advanced Economies (LHS) Emerging Markets (RHS) Global financial vulnerabilities*

Sovereigns Non financial firms Households 2007 Latest 2007 Latest 2007 Latest US Euro area Other DM China Other EM

Quintiles

Highest Lowest

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Economic outlook Summary

Source: Invesco as at August 2019. Where Invesco has expressed views and opinions these may change. 29

▪ Remains strongest growing DM by a significant margin. ▪ Slowing growth from a high level as fiscal stimulus eases ▪ Record length of expansion, but recession risk appears low ▪ First rate cut since GFC. QT ended early ▪ Trump policy unpredictability creates uncertainty ▪ Growth outlook challenging with Germany and Italy the laggards ▪ Export rather than domestic led weakness ▪ Political risks remain elevated ▪ Inflation struggling to hit target ▪ ECB pointing to renewed policy easing ▪ Growth expectations under pressure ▪ Idiosyncratic risks weigh on a number of economies ▪ US$ stabilisation and a more dovish Fed helpful ▪ China policy response focused on stabilisation not reflation ▪ Economy struggling against Brexit uncertainty ▪ Consumer backdrop remains mixed ▪ BoE likely to normalise monetary policy slowly ▪ Brexit by 31 October whether deal or no-deal? ▪ Growth remains weak relative to other major economies ▪ Inflation struggling to hit 2% target ▪ Stimulative monetary policy remains in place ▪ Abenomics drives change

US Economy Eurozone Economy UK Economy EM Economies Japan Economy

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Investment risks 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. Important information This document is for Professional Clients only and is not for consumer use. All data is as at August 2019 and sourced from Invesco unless otherwise stated. Where individuals or the business have expressed

pinions, they are based on current market

conditions, they may differ from those of other investment professionals and are subject to change without notice. This document is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities.

Investment risks and important information

Issued in the UK 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.

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