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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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
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
2 NOVEMBER 2016 LGIM MARKET VIEWS
Risks we are most focused on
Recent changes
Overweight
Japanese equities
+
Global REITS
+
Emerging market $ debt
+
US inflation-linked bonds
+
GBP
+
Underweight
Emerging market local currency debt
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
3
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 200 150 100 50 Days until the event Brexit odds Trump odds
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
4
globalisation, automation, quantitative easing
the rise in many countries
Corbyn, Front National, AfD) are symptoms, not causes
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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“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
NOVEMBER 2016 LGIM MARKET VIEWS
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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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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
%
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
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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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
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 …
(1a) Recovery is already here: the US labour market
11 NOVEMBER 2016 LGIM MARKET VIEWS
(1b) Recovery is already here: the global picture
12 NOVEMBER 2016 LGIM MARKET VIEWS
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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
(2) Inflation already set to increase
14
(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
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
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
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Confidence in the French presidential elections now shaken
NOVEMBER 2016 LGIM MARKET VIEWS
18 NOVEMBER 2016 LGIM MARKET VIEWS
https://macromatters.lgim.com/categories/macrobites/would-a-hard-brexit-really-be-worse-than-napoleon/
19 NOVEMBER 2016 LGIM MARKET VIEWS
Risks we are most focused on
Recent changes
Overweight
Japanese equities
+
Global REITS
+
Emerging market $ debt
+
US inflation-linked bonds
+
GBP
+
Underweight
Emerging market local currency debt
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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20 Source: LGIM as at 1 March 2015
NOVEMBER 2016
LGIM MARKET VIEWS