Global Macroeconomic & Market Outlook The T emperature is - - PowerPoint PPT Presentation

Crown Agents Macroeconomic & Market Outlook Private & Confidential

July 2018

Global Macroeconomic & Market Outlook

The T emperature is Rising

Neil Michael Chief Investment Strategist

Crown Agents Macroeconomic & Market Outlook Private & Confidential 1

Table of Contents

Trade Tensions European Political Uncertainty Global Labour Markets Global Product Markets Inflation The Yield Curve Market Outlook Summary of House View

Crown Agents Macroeconomic & Market Outlook Private & Confidential

Macro Outlook

Crown Agents Macroeconomic & Market Outlook Private & Confidential

Actual and Proposed New Tariffs

3

Trade Tensions Are Heating Up

Source: CAIM.

Crown Agents Macroeconomic & Market Outlook Private & Confidential

Tariff Announcement & US/China Imports

4

New Tariffs Are A Small % GDP But Could Become Non-Trivial

Source: CAIM.

Tariff Announcement % of US/China GDP

Crown Agents Macroeconomic & Market Outlook Private & Confidential

US Average Tariff Rates (1821 – 2016)

5

Average Tariffs Unlikely To Rise To 1930s Levels

Source: Barclays Capital.

Change in World GDP (%)

Crown Agents Macroeconomic & Market Outlook Private & Confidential

World Trade & Industrial Production

6

World Trade Is Slowing Down With Implications For Industrial Production & Tariffs Could Exacerbate Inflation

Source: Bloomberg. Data from December 2010 to April 2018.

Impact on US of $200 Billion Tariffs

Crown Agents Macroeconomic & Market Outlook Private & Confidential

Italy & Euro 10Yr Gov Bond Yields

7

European Political Uncertainty Is Heating Up - Quitaly!?

Holdings Of Italian Gov Bonds % Total

Source: Bloomberg. Data from July 2010 to July 2018. Source: Bruegel. Data from 1997Q1 to 2017Q4.

Crown Agents Macroeconomic & Market Outlook Private & Confidential

Brexit Models

8

European Political Uncertainty Is Heating Up – Brexit – A New Model

EU27 Exports To UK

Crown Agents Macroeconomic & Market Outlook Private & Confidential

Global Unemployment Rates (%)

9

Global Labour Markets Are Heating Up

Source: Bloomberg. Data from September 2002 to May/June 2018. Source: Bloomberg. Data from March 2007 to April/May 2018.

Global Wage Rates (%YoY)

Crown Agents Macroeconomic & Market Outlook Private & Confidential

Advanced Economies Output Gap

10

Global Product Markets Are Heating Up – Positive Output Gaps

Source: Bloomberg; IMF. Data from January 1980 to December 2019.

Global Output Gaps

Source: Bloomberg. IMF.

Crown Agents Macroeconomic & Market Outlook Private & Confidential

Developed & Emerging Economies Composite PMIs

11

Developed Economies Hotter Than Emerging Economies

Source: Bloomberg. Data from July 2015 to June 2018.

Crown Agents Macroeconomic & Market Outlook Private & Confidential

DM & EM Manufacturing PMIs

12

Rebounding Services Making Up For Softer Manufacturing

Source: Bloomberg. Data from July 2015 to June 2018.

DM & EM Services PMIs

Crown Agents Macroeconomic & Market Outlook Private & Confidential

US-Eurozone PMIs Vs USDEUR Exchange Rate

13

The Pause That Rebalances – Weaker Euro Should Help Eurozone Catch-Up With US

Source: Bloomberg. Data from July 2015 to June 2018.

US-Eurozone PMIs Vs US-Eurozone 10Yr Government Bond Yield

Source: Bloomberg. Data from July 2015 to June 2018.

Crown Agents Macroeconomic & Market Outlook Private & Confidential

US Fiscal Balance & Unemployment

14

US Fiscal Stimulus Amid Full Employment Raises Overheating Risk

Crown Agents Macroeconomic & Market Outlook Private & Confidential

Global Headline Inflation Rates (%)

15

Inflation Is Getting Hotter

Source: Bloomberg. Data from December 2000 to May 2018.

Global Core Inflation Rates (%)

Source: Bloomberg. Data from December 2000 to May 2018.

Crown Agents Macroeconomic & Market Outlook Private & Confidential

FOMC Fed Funds Rate Expectations

16

The Yield Curve Is Flattening

Source: Bloomberg. Data from Dec 1990 to Apr/Dec 2018 (Est).

US Yield Curve (10Yr-2Yr), GDP & Oil Price

Source: Bloomberg. Data from Jan 1990 to Mar 2018/Dec 2018 (Est).

Crown Agents Macroeconomic & Market Outlook Private & Confidential

US Natural Growth Rate & 10Yr Government Bond Yield

17

Yield Curve Might Not Invert If Natural Growth Rate and R* Rises

Trends In US Factors Of Production

Source: Bloomberg. Data from December 1971 to December 2020 (Est) Source: Bloomberg. Data from December 1971 to December 2020 (Est)

Crown Agents Macroeconomic & Market Outlook Private & Confidential

Market Outlook

Crown Agents Macroeconomic & Market Outlook Private & Confidential

Market Performance % Year-to-Date Market Performance %

19

Market Performance – Riskiest Markets Have Outperformed YTD

Source: Bloomberg. Data to 29 June 2018.

Crown Agents Macroeconomic & Market Outlook Private & Confidential

Weighted Ave 2Yr Govt Bond Yield & PMIs Weighted Ave 2Yr Govt Bond Yield & Inflation

20

Government Bonds - Inflation & Growth Pushing Up Bond Yields

Source: Bloomberg. Data to June 2018. Note: Ave = GDP weighted Average of US, UK, Eurozone, Japan & Canada

Crown Agents Macroeconomic & Market Outlook Private & Confidential

Government Bond Yields 2Yr % Government Bond Yields 10Yr %

21

Government Bonds – US Offers the Best Carry & Compensation for Inflation in the Developed World

Source: Bloomberg, Data from 12 Jan 2001 to 6 July 2018.

Crown Agents Macroeconomic & Market Outlook Private & Confidential 22

Bond Yields & Inflation/PMIs – US & Canada Bond Yields Have Adjusted the Most to Economic Reality

Source: Bloomberg, Data to May/June 18.

2Yr Government Bond Yield vs. Headline Inflation & Composite PMIs

Crown Agents Macroeconomic & Market Outlook Private & Confidential 23

Central Bank Rates – US Expected To Increase Rates the Most In 2018 But Will Be Overtaken By UK & Eurozone in 2020

Expected Change in Central Bank Rates

Source: Bloomberg. Consensus of Economists Surveyed.

Crown Agents Macroeconomic & Market Outlook Private & Confidential 24

Sharp Increase in Supply of Treasuries Could Push Up Bond Yields

Crown Agents Macroeconomic & Market Outlook Private & Confidential

US 5Yr Gov Bond Yield Econometric Model Performance of Duration Management Strategy vs 3-5Yr Gov Bond Index

25

Duration Management Strategy – Positive Alpha Over Time

Source: Bloomberg. Data from Dec 1998 to June 2018. Note: Based on regression (line of best fit) of 5Yr Govt Bond Yield on Equity Index, IG Bond Index, HY Bond Index, EM Bond Index, 2Yr Govt Bond Yield, Oil Price, Currency and PMI. Strategy: If spread below 1SD then 1-3Yr; if spread above 1SD then 5-7Yr; otherwise 3-5Yr Index.

Crown Agents Macroeconomic & Market Outlook Private & Confidential

Number of Standard Deviations Above/Below Equilibrium Yield

26

Econometric Model of 2 Year Government Bond Yields – UK & Canada Relatively Undervalued; Eurozone Relatively Overvalued

Source: Bloomberg. Dec 1998 to June 2018. Note: Based on regression (line of best fit) of 2Yr Govt Bond Yield on Equity Index, IG Bond Index, HY Bond Index, EM Bond Index, 10Yr Govt Bond Yield, Oil Price, Currency and PMI

Crown Agents Macroeconomic & Market Outlook Private & Confidential

US 1-3Y Quasi Government Bond Spread US 7-10Yr Quasi Government Bond Spread

27

Quasi Government Bonds – Tight Spreads But Starting To Widen

Source: Bloomberg, Bank of America Merrill Lynch US Foreign Government & Supranational Indices. Data from 12 Jan 2001 to 6 July 2018

Crown Agents Macroeconomic & Market Outlook Private & Confidential

EM 10 Yr Gov Bond Yield vs US 10 Yr Gov Bond Yield

28

Emerging Market Bonds – Spreads Have Blown Out & External Vulnerabilities Have Increased

Source: Bloomberg. Data from Jan 2001 to 6 July 2018. Source: Bloomberg.

Emerging Markets Current Accounts & External Debt

Crown Agents Macroeconomic & Market Outlook Private & Confidential

US 2Yr IG Corp Spread UK 2Yr IG Corp Spread

29

2Yr Investment Grade Corporate Bonds –Tight Spreads But Starting To Widen

Source: Bloomberg, Bank of America Merrill Lynch. Data from 12 Jan 2001 to 6 July 2018

Crown Agents Macroeconomic & Market Outlook Private & Confidential

US 10 Yr IG Corp Spread UK 10Yr IG Corp Spread

30

10Yr Investment Grade Corporate Bond –Widening Spreads

Source: Bloomberg, Bank of America Merrill Lynch. Data from 12 Jan 2001 to 6 July 2018

Crown Agents Macroeconomic & Market Outlook Private & Confidential

US IG Corp Leverage US IG Corp Credit Quality

31

IG Corporate Bond – Leverage is Higher & Quality Lower

Source: JP Morgan. Source: HSBC.

Crown Agents Macroeconomic & Market Outlook Private & Confidential

US HY Corp Spread UK HY Corp Spread

32

High Yield Corporate Bond – Tight Spreads

Source: Bloomberg, Bank of America Merrill Lynch. Data from 12 Jan 2001 to 6 July 2018

Crown Agents Macroeconomic & Market Outlook Private & Confidential

US HY Corp Default Rate US HY Corp Leverage

33

HY Corporate Bond – Default Rates Low But Rising & Leverage Lower Than Before Crisis

Crown Agents Macroeconomic & Market Outlook Private & Confidential 34

Equities – Robust Earnings & Sales Growth But Moderating In Some Regions

Source: Bloomberg. Data from Dec 2011 to June 2018..

Company Earnings Growth, Year on Year % Company Sales Growth, Year on Year %

Crown Agents Macroeconomic & Market Outlook Private & Confidential

Global Composite Valuation Ratios

35

Equities –Valuations - US Expensive, UK Cheap

Source: Bloomberg. Data from Jan 01 to June 18. Equally weighted composite of Price to Book, Price to Earnings & Price to Sales.

Crown Agents Macroeconomic & Market Outlook Private & Confidential 36

Equities – Relative to Bonds - US Expensive, Europe Cheap

Equity Dividend versus Bond Yields

Source: Bloomberg. Data as at June 2018.

Crown Agents Macroeconomic & Market Outlook Private & Confidential

Number of Standard Deviations Above/Below Equilibrium Value Econometric Model of S&P 500 Index

37

Econometric Model of Equity Markets – Eurozone Relatively Cheap

Source: Bloomberg. Dec 1998 to June 2018. Note: Based on a multiple regression (line of best fit) of Equity Market Index on 10 Yr Government Bond Index, IG Corp Bond Index, HY Corp Bond Index, EM Bond Index, 2 Yr Government Bond Index, Oil Price, Currency and OECD Composite Leading Indicator

Crown Agents Macroeconomic & Market Outlook Private & Confidential 38

Emerging Market Equities – Stronger Dollar & Sluggish Commodities (Soft & Industrial) Weighing On EM Equities

Source: Bloomberg. Data from Jan 2001 to 6 July 2018.

EM/DM Equity Ratio & Dollar EM/DM Equity Ratio & Commodities

Crown Agents Macroeconomic & Market Outlook Private & Confidential 39

Equities – Not So Exuberant Anymore

Source: Bloomberg. Data from 3 Feb 2006 to 6 July 2018.

T echnical Indicators

Crown Agents Macroeconomic & Market Outlook Private & Confidential

US vs UK 2 Year Yield US vs Eurozone 2 Year Yield

40

US vs Jap 2 Year Yield

Currencies – Interest Rate Differentials Starting To Work Again

Source: Bloomberg. Weekly data from Jan 2006 to 6 July 2018.

Crown Agents Macroeconomic & Market Outlook Private & Confidential 41

Currencies – Twin Deficits Are Important

US Budget Plus Current Account Balance (% GDP) vs Trade-Weighted Dollar

Source: Bloomberg. Data from Dec 1987 to June 18

UK Budget Plus Current Account Balance (% GDP) vs Trade-Weighted Pound

Crown Agents Macroeconomic & Market Outlook Private & Confidential 42

Oil – US Supply Offsetting OPEC Cuts But Global Economic Activity & Geopolitical Risk Supportive

Source: Bloomberg. Data from Jan 2015 to June 2018.

Oil Demand-Supply & Oil Price Global Composite PMI & Oil Price

Source: Bloomberg. Data from Jan 2000 to June 2018.

Crown Agents Macroeconomic & Market Outlook Private & Confidential 43

Gold – Rising Rates A Drag But Uncertainty & The Dollar A Tailwind

Source: Bloomberg. Data to June 2018.

Crown Agents Macroeconomic & Market Outlook Private & Confidential

Summary of Outlook

Crown Agents Macroeconomic & Market Outlook Private & Confidential 45

Summary of Macro Outlook

Source: CAIM

Crown Agents Macroeconomic & Market Outlook Private & Confidential 46

Summary of Bond Outlook

Source: CAIM

Crown Agents Macroeconomic & Market Outlook Private & Confidential 47

Summary of Equity Outlook

Source: CAIM

Crown Agents Macroeconomic & Market Outlook Private & Confidential

This communication is intended for professional clients and eligible counterparties only. Past performance is not a reliable indicator of future results. Performance results are calculated before management fees and after trading expenses. Information contained in this publication is compiled from industry sources which we consider to be accurate and reliable. There is no representation or warranty of any kind, whether express or implied, regarding the accuracy or completeness of the information given. The information provided does not constitute advice and it should not be relied on as such. Any views or opinions expressed are those of Crown Agents Investment Management Ltd and are subject to change due to market and

• ther conditions and should not be taken as statements of policy or intent.

Crown Agents Investment Management Ltd accept no liability for the impact of any decisions made based on the information provided in this publication. Crown Agents Investment Management Limited. Registered in England & Wales. No: 2169973. Vat Reg No: GB 340 679841. Authorised and regulated by the Financial Conduct Authority.

48

Disclaimer

Neil Michael Chief Investment Strategist neil.michael@caiml.com Robin Woodall Senior Equities Fund Manager robin.woodall@caiml.com Charles Thomson Senior Fixed Income Fund Manager charles.thomson@caiml.com

Contact

http://www.caiml.co.uk/ caimlenquiries@caiml.com +44 (0)20 3903 2500 +44 (0)20 8643 9113 Crown Agents Investment Management

• St. Nicholas House,
• St. Nicholas Rd,

Sutton, London. SM1 1EL. United Kingdom

Ritesh Anand Executive Vice President ritesh.anand@caiml.com Simon Price Senior Equity Fund Manager simon.price@caiml.com Slawomir Soroczynski Senior Fixed Income Fund Manager slawomir.soroczynski@caiml.com