LGIM current market views Cuts through the haze of investment - - PowerPoint PPT Presentation

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LGIM current market views Cuts through the haze of investment - - PowerPoint PPT Presentation

1 NOVEMBER 2016 LGIM MARKET VIEWS LGIM current market views Cuts through the haze of investment commentary macromatters.com For professional investors only, not to be distributed to retail clients NOVEMBER 2016 LGIM MARKET VIEWS 2 Asset


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LGIM current market views

Cuts through the haze of investment commentary

macromatters.com

NOVEMBER 2016 LGIM MARKET VIEWS 1

For professional investors only, not to be distributed to retail clients

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SLIDE 2

2 NOVEMBER 2016 LGIM MARKET VIEWS

Asset allocation core views

Risks we are most focused on

  • Brexit fallout
  • Politics & populism
  • Central banks/ inflation
  • Chinese Growth / EM Risks

Recent changes

  • GBP from neutral to positive
  • US treasuries from neutral to negative
  • EM equities from neutral to negative

Overweight

Japanese equities

+

Global REITS

+

Emerging market $ debt

+

US inflation-linked bonds

+

GBP

+

Underweight

Emerging market local currency debt

  • Emerging market equities
  • European equities
  • US treasuries
  • Cautious overall

Economic Cycle Valuations Systemic Risk

Economy remains mid cycle, but getting closer to late cycle Risk asset valuations are not excessive Material risks from the US Federal Reserve, emerging market debt levels and Brexit fallout Source: LGIM, as at 14 November 2016

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3

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 200 150 100 50 Days until the event Brexit odds Trump odds

Déjà vu all over again?

The favourite doesn’t always win…

18/10/2016 17/11/2016 18 19.5 21 22.5 1.2 1.3 1.4 1.5 01/06/2016 01/07/2016 31/07/2016 British Pound vs US dollar (lhs) Mexican Peso vs US dollar (rhs)

… and markets don’t always get it right!

   GBP & MXN both rally (c. 4%) going in to the event in anticipation of Remain/Clinton  GBP & MXN both collapse (c. 10%) faced with the reality of Leave/Trump

GBPUSD USDMXN, inverted

Source: Bloomberg LP, Pivit, LGIM

NOVEMBER 2016 LGIM MARKET VIEWS

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4

Trump (and Brexit) represent the shifting centre-ground

  • Not everyone is a winner of

globalisation, automation, quantitative easing

  • Anti-establishment and populism are on

the rise in many countries

  • Trump and Brexit (and Sanders,

Corbyn, Front National, AfD) are symptoms, not causes

  • Is the centre-ground of policy making

shifting to the left? Independent of the protagonists?

Mainstream politics does not have a good answer to rising inequality

Source: LGIM, BCA

$351,000 $34,000

90 110 130 150 170 190 210

Bottom 60% of income distribution Top 5% of income distribution

Index, 1967 = 100 US average household real income:

2015

NOVEMBER 2016 LGIM MARKET VIEWS

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5

What cards will Trump be playing?

“Known knowns” – Core beliefs “Known unknowns” Recent positions “Unknown unknowns” Capitalist

Repeal Obamacare Lower tax

(income and corporate)

 Infrastructure spending

Protectionist

Tighter immigration laws  Import tarrifs Renegotiate trade agreements

Anti-Green

Pro-fossil fuel Pro-nuclear Pro-gun rights

Trump –

Unexpected announcements Sudden policy changes Ill-advised comments

“ ” “ ”

behaviour

I’m totally flexible on very, very many issues. All policy proposals are just flexible suggestions.

NOVEMBER 2016 LGIM MARKET VIEWS

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1987 1999 2001 Republican Party Reform Party Democratic Party 2011 Independent Republican Party Republican Party 2009 2012

The shifting allegiances of the President-elect

NOVEMBER 2016 LGIM MARKET VIEWS

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7

Potential asset class impact of a Trump Presidency

US infrastructure US dollar Mexico

─ US equities

Other impacts

Increasing inflation

!

US treasuries

!

China Japan

Source: LGIM NOVEMBER 2016 LGIM MARKET VIEWS

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8

http://macromatters.lgim.com/tags/donald-trump/

NOVEMBER 2016 LGIM MARKET VIEWS

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0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 2012 2014 2016 10 year US yields 10 year US inflation

%

Primary market focus has been on reflation trades

US inflation breakevens and US nominal yields are now more than 70bp off the low

The bond market reaction to Trump The cost of Trump’s campaign promises

NOVEMBER 2016

  • 1.5
  • 1.0
  • 0.5

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5

$ trillion (over ten years)

Tax cuts of $4.5 trn (2.5% of GDP) Spending increases of $1.3 trn (0.7% of GDP)

Source: Committee for a Responsible Federal Budget

Source: Bloomberg LP, LGIM

LGIM MARKET VIEWS

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Secondary market focus on emerging markets

NOVEMBER 2016

85 90 95 100 105 110 115 MSCI Emerging total return / MSCI World total return JP Morgan Emerging Market Currency Index

Index, 01/01/16 = 100

The EM reaction to Trump

7% hit to emerging market equities 4% hit to emerging market FX

LGIM MARKET VIEWS

  • 80
  • 60
  • 40
  • 20

20 40 60 80 Clinton supporters Trump supporters Total

US involvement in the global economy is a...

Bad thing, lowers wages, costs jobs Good thing, creates new markets, growth 65% 49% 37% 44% 31% 55%

Source: Pew Research Centre, May 2016

US involvement in the world economy is a …

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The wrong time to add stimulus

(1a) Recovery is already here: the US labour market

11 NOVEMBER 2016 LGIM MARKET VIEWS

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The wrong time to add stimulus

(1b) Recovery is already here: the global picture

12 NOVEMBER 2016 LGIM MARKET VIEWS

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  • 3
  • 2
  • 1

1 2 3 4 5 6 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

% change on a year earlier

US CPI inflation

Headline inflation Core inflation

Forecast NOVEMBER 2016 LGIM MARKET VIEWS

The wrong time to add stimulus

(2) Inflation already set to increase

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The wrong time to add stimulus

(3) Federal Reserve likely to respond by tightening more

https://macromatters.lgim.com/categories/macrobites/and-then-there-were-nine/

NOVEMBER 2016 LGIM MARKET VIEWS

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What are the greatest risks?

Politics & populism

De Decembe mber 2016 2016

May May 2017 2017 Q1 2017 2017 Octob tober 2017 2017 It Italian refe referen rendum UK tr triggers rs Art rticle 50(?) (?) Fren rench Pres residenti tial electi tion German rman Federal ral electi tion

Novembe mber 2016 2016

US Pres residenti tial electi tion

March 2017 2017

Dutc Dutch general ral electi tion

Source: LGIM

15

June 2016 2016

UK UK refe referen rendum

NOVEMBER 2016 LGIM MARKET VIEWS

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16

Italian referendum is the next potential flashpoint

17/10/16

5 10 15 20 25 30 35 40 45 Yes No Don't know

%

Average of last five opinion polls

NOVEMBER 2016 LGIM MARKET VIEWS

Political focus to shift back to Europe

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17

Political focus to shift back to Europe

Confidence in the French presidential elections now shaken

NOVEMBER 2016 LGIM MARKET VIEWS

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18 NOVEMBER 2016 LGIM MARKET VIEWS

The Trump silver-lining: takes the focus off Brexit!

https://macromatters.lgim.com/categories/macrobites/would-a-hard-brexit-really-be-worse-than-napoleon/

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SLIDE 19

19 NOVEMBER 2016 LGIM MARKET VIEWS

Asset allocation core views

Risks we are most focused on

  • Brexit fallout
  • Politics & populism
  • Central banks/ inflation
  • Chinese Growth / EM Risks

Recent changes

  • GBP from neutral to positive
  • US treasuries from neutral to negative
  • EM equities from neutral to negative

Overweight

Japanese equities

+

Global REITS

+

Emerging market $ debt

+

US inflation-linked bonds

+

GBP

+

Underweight

Emerging market local currency debt

  • Emerging market equities
  • European equities
  • US treasuries
  • Cautious overall

Economic Cycle Valuations Systemic Risk

Economy remains mid cycle, but getting closer to late cycle Risk asset valuations are not excessive Material risks from the US Federal Reserve, emerging market debt levels and Brexit fallout Source: LGIM, as at 14 November 2016

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Disclaimer and important legal notice

The information contained in this document (the “Information”) has been prepared by Legal & General Investment Management Limited (“LGIM”, “we” or “us”). Such Information is the property and/or confidential information of LGIM and may not be disclosed by you to any other person without the prior written consent of LGIM. No party shall have any right of action against LGIM in relation to the accuracy or completeness of the Information, or any other written or oral information made available in connection with this publication. Any investment advice that we provide to you is based solely on the limited initial information which you have provided to us. No part of this or any other document or presentation provided by us shall be deemed to constitute ‘proper advice’ for the purposes of the Pensions Act 1995 (as amended). Any limited initial advice given relating to professional services will be further discussed and negotiated in order to agree formal investment guidelines which will form part of written contractual terms between the parties. Past performance is no guarantee of future results. The value of an investment and any income taken from it is not guaranteed and can go down as well as up, you may not get back the amount you originally invested. The Information has been produced for use by a professional investor and their advisors only. It should not be distributed without LGIM’s permission. The risks associated with each fund or investment strategy are set out in this publication, the relevant prospectus or investment management agreement (as applicable) and these should be read and understood before making any investment decisions. A copy of the relevant documentation can be obtained from your Client Relationship Manager. Confidentiality and Limitations: Unless otherwise agreed by LGIM in writing, the Information in this document (a) is for information purposes only and we are not soliciting any action based on it, and (b) is not a recommendation to buy or sell securities

  • r pursue a particular investment strategy; and (c) is not investment, legal, regulatory or tax advice. Any trading or investment decisions taken by you should be based on your own analysis and judgment (and/or that of

your professional advisors) and not in reliance on us or the Information. To the fullest extent permitted by law, we exclude all representations, warranties, conditions, undertakings and all other terms of any kind, implied by statute or common law, with respect to the Information including (without limitation) any representations as to the quality, suitability, accuracy or completeness of the Information. Any projections, estimates or forecasts included in the Information (a) shall not constitute a guarantee of future events, (b) may not consider or reflect all possible future events or conditions relevant to you (for example, market disruption events); and (c) may be based on assumptions or simplifications that may not be relevant to you. The Information is provided “as is” and “as available”. To the fullest extent permitted by law, LGIM accepts no liability to you or any other recipient of the Information for any loss, damage or cost arising from, or in connection with, any use or reliance on the Information. Without limiting the generality of the foregoing, LGIM does not accept any liability for any indirect, special or consequential loss howsoever caused and on any theory or liability, whether in contract or tort (including negligence) or otherwise, even if LGIM has been advised of the possibility of such loss. Third Party Data: Where this document contains third party data (“Third Party Data”), we cannot guarantee the accuracy, completeness or reliability of such Third Party Data and accept no responsibility or liability whatsoever in respect of such Third Party Data. Publication, Amendments and Updates: We are under no obligation to update or amend the Information or correct any errors in the Information following the date it was delivered to you. LGIM reserves the right to update this document and/or the Information at any time and without notice. Although the Information contained in this document is believed to be correct as at the time of printing or publication, no assurance can be given to you that this document is complete or accurate in the light of information that may become available after its publication. The Information may not take into account any relevant events, facts or conditions that have occurred after the publication or printing of this document. Issued by Legal & General Investment Management Limited which is authorised and regulated by the Financial Conduct Authority. Legal & General Investment Management Limited, One Coleman Street, London EC2R 5AA

20 Source: LGIM as at 1 March 2015

NOVEMBER 2016

LGIM MARKET VIEWS