Appendix June 2020 Market update for Leicestershire CCPF Committee 15 John Roe, Head of Multi-Asset Funds INTENDED FOR PROFESSIONAL CLIENTS ONLY. NOT TO BE DISTRIBUTED TO RETAIL CLIENTS.
April 2019 | Portfolio strategy Financial markets have reacted in four acts Market panic briefly challenged the principles of diversification Global spread Covid- 19 a localised “China” problem Panic selling Fiscal and monetary policy stimulus supports markets anticipated Equities ↑ Equities ↓↓↓ Equities ↓↓↓ Equities ↑↑ Alternatives ↑ Alternatives ↓ Alternatives ↓↓↓ Alternatives ↑↑ Bonds ↑ Bonds ↑ Bonds ↓↓ Bonds ↑ 10% MSCI World Index 5% 0% -5% 16 Index return over period 1 MSCI World -10% 1 year 10.9% 2 year 15.7% -15% 3 year 24.2% 4 year 64.5% -20% 5 year 66.3% -25% 31 Dec 2019 19 Feb 2020 8 Mar 2020 24 Mar 2020 An act-by-act review of the first quarter CC_234_04_2020 1 Source: LGIM, Bloomberg LP, as at 3 June 2020. MSCI World is price index in GBP. Past performance is not a guide to the future. There is no guarantee that any forecasts made will come to pass. 1 21 May 2015 to 21 May 2020.
Assets have recovered in line with their drawdowns Market panic briefly challenged the principles of diversification in March, but broadly speaking asset class performance reflects levels of risk Asset class performance in drawdown and recovery Returns since 19 Feb 2020 50% Equities -11% 40% Recovery Period (23/3 – 3/6) Listed Alternatives 30% -13% 17 20% Credits, High Yield & EMD -2% 10% Government Bonds 0% -50% -40% -30% -20% -10% 0% 10% 2% -10% Drawdown Period (19/2 - 23/3) Equities Listed Alternatives Credit, High Yield & EMD Government Bonds CC_330_05_2020 2 Source: Bloomberg, as at 3 June 2020, local-currency terms. Past performance is not a guide to the future. 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. There is no guarantee that any forecasts made will come to pass.
Investors seemingly looking through current earnings drop Our central scenarios see US corporate earnings to fall c. 40% in 2020, anchoring the downside risk for equities. Markets are currently pricing the upside scenario of a quick earnings recovery Scenario 1: Markets look through earnings drop Index performance since the start of 2020 • Earnings trough much less important 10% • Focus on the shape of the earnings rebound 5% • Return to peak earnings late 2021 0% -5% -10% Scenario 2: Markets anchor to earnings drop -15% • Peak to trough earnings decline c. 40% -20% • Energy sector worst hit -25% • Defensives sectors still suffer 18 -30% -35% Jan 20 Feb 20 Mar 20 Apr 20 May 20 Jun 20 S&P 500 TR FTSE 100 TR MSCI EM TR Index return over period 1 S&P 500 TR FTSE 100 TR MSCI EM TR 1 year 16.1% -7.7% 0.5% Earnings season brings micro relief 2 year 18.8% -10.0% -8.0% 3 year 35.9% -4.5% 4.7% 4 year 61.2% 20.7% 33.3% 5 year 63.6% 12.2% 11.9% CC_201_04_2020 3 Source: LGIM, Bloomberg, as at 3 June 2020, Past performance is not a guide to the future. Opinions and estimates are provided for illustrative purposes only. There is no guarantee that any forecasts made will come to pass. 1 21 May 2015 to 21 May 2020.
Could we see the end of the 40-year bond bull market? The world is changing with huge fiscal deficits, rate cuts, quantitative easing and weak economic growth, while the US Fed and BoE’s resolve to avoid negative interest rates is being tested Government bond yield, % 14 12 10 8 19 6 4 2 0 -2 1990 1995 2000 2005 2010 2015 2020 10Y US Treasury 10Y UK Gilt 10Y German Bund CC_201_04_2020 4 Source: Bloomberg, as at 3 June 2020. There is no guarantee that any forecasts made will come to pass.
Investment grade credit spreads have partially recovered Targeted central bank buying has driven a market recovery. Record issuance as companies raised cash has checked the market recovery somewhat despite significant inflows Spreads to government bonds (bps) Spreads to government bonds (bps) 700 700 USD Investment Grade Corporates USD Investment Grade Corporates GBP Investment Grade Corporates GBP Investment Grade Corporates 600 600 EUR Investment Grade Corporates EUR Investment Grade Corporates 500 500 400 400 20 300 300 200 200 100 100 0 0 2008 2010 2012 2014 2016 2018 2020 Dec 19 Jan 20 Feb 20 Mar 20 Apr 20 May 20 CC_201_04_2020 5 Source: Bloomberg Barclays indices, LGIM, as at 3 June 2020, Past performance is not a guide to the future.
Global economic impact scenarios Too early to tell if we are heading for Scenario 1 or 2, but the risk of Scenario 3 has diminished Probability Level of GDP scenarios 115 Scenario 1: Strong, partial rebound • Initial hit still twice as bad as global financial crisis ‘08 110 40 % • Relaxation of most economically damaging restrictions 105 • Return to normal by end 2021 100 Scenario 2: Some recovery, some scarring 21 95 • Restrictions slowly lifted, some re-imposition necessary 50 % • Unemployment remains high along with bankruptcies 90 • The world loses 2-3 years of output growth 85 Scenario 3: Persistent slump 80 • Restrictions lifted slowly, fully re-imposed later in Q3 10 % 19 20 21 • Understanding of Covid-19 progresses slowly Pre-virus baseline Scenario 1 Scenario 2 • Policy support is exhausted Scenario 3 Mean Escaping lockdown: revisiting the economic scenarios CC_201_04_2020 6 Source: BEA, ONS, LGIM estimates as at 19 May 2020. Assumptions, opinions and estimates are provided for illustrative purposes only. There is no guarantee that any forecasts made will come to pass.
Summary of views • Deep initial recession, uncertain rebound • Inflation further suppressed Economic cycle • Supported by enormous policy response Coronavirus pandemic has triggered a deep recession • Risk assets appear cheap versus government bonds • Equities pricing optimistic shorter term earnings fall Valuations • Credit spreads have tightened from wide levels on central bank support Bounce back in assets makes 22 valuations more balanced • High uncertainty around the longer term impact of coronavirus • Recession could expose the areas of excessive debt Systemic risk • Lack of conventional policy space Concern around interaction of recession and high global debt COVID-19 Markets Overly Sanguine CC_151_04_2020 7 Source: LGIM. Views current as at 19 May 2020 Forward-looking statements are, by their nature, subject to significant risks and uncertainties and are based on internal forecasts and assumptions and should not be relied upon.
June 2020 Investment Stewardship for Leicestershire CCPF Committee 23 Clare Payn, Senior Global ESG & Diversity Manager INTENDED FOR PROFESSIONAL CLIENTS ONLY. NOT TO BE DISTRIBUTED TO RETAIL CLIENTS.
LGIM’s approach to stewardship We integrate ESG We build trust We escalate We use our scale to make better and long-term to influence concerns investment decisions relationships • • • • Number one asset manager Firm-wide commitment Truly long-term views Using our votes in the UK 1 (not abstaining) • • Address emerging issues Influence rather than noise • • Number two institutional Collaborate with others • • Cross-team collaboration Manage conflicts of interest asset manager in Europe 2 24 Long-term returns for clients Recognised as industry leader, delivering on our vision 9 Investment Stewardship
Key Themes – risks and opportunities Identification of engagement priorities On-going engagement New areas of focus Fiscal imbalance Tax Health Demography Wealth inequality Executive Income Gender/Broader diversity Financial insecurity pay inequality Technology 25 Climate Low carbon Climate change and resource scarcity Change solutions Energy Cyber Privacy/data Digital disruption Security security Short-termism Board Market Lack of disclosure Transparency accountability Inadequate governance 10 Investment Stewardship
Engagement with consequences LGIM’s escalation procedure Name and shame Public pressure In 2019, LGIM named 11 companies as part of the Climate Impact Pledge In 2019, LGIM met regularly with Engage regulator key global regulators , governments and index providers Capital allocation drives change Capital allocation 26 In 2019, LGIM’s Future World fund range AUM passed £5bn LGIM does not sit on the fence and does not abstain Vote against In 2019, LGIM voted against at least one resolution at 71% of companies Collaborative Strengthening our voice engagement In 2019, LGIM was actively involved in numerous formal collaborative programs Quality over quantity Direct In 2019, LGIM had 739 engagements with 493 companies. 74% of engagements engagement were with companies based outside the UK 11 11 Investment Stewardship
These were our top engagement topics 86 86 Number of engagements on Future World Protection List 239 239 Number of engagements on 132 132 environmental topics Number of engagements on other topics (e.g. financial and strategy 27 274 274 Number of engagements on social topics 379 379 Number of engagements on governance topics Top 5 engagement themes Climate Remuneration Diversity Board Strategy CC195 210420 change composition 12 Source: LGIM April 2020.
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