opportunity? George Bromfield, Investment Director 16 November 2017 - - PowerPoint PPT Presentation

Financial markets post Brexit and Trump – apocalypse or

• pportunity?

George Bromfield, Investment Director

16 November 2017

2

• An update

– How have financial markets fared since Trump and Brexit? – How is the global economy performing?

• The key risks

– Politics – Inflation/Interest rates – Stretched valuations

• Looking forward – what happens next?

Agenda

3

2017 - a good year for financial markets

Source: Thomson Reuters, October 2017 Bond Returns in LCL currency, Equity Returns in Sterling

4

A perfect symphony of economic growth

Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17

Eurozone 52.3

52.8 53.2 52.3 51.2 51.6 51.7 51.5 52.8 52 51.7 52.6 53.5 53.7 54.9 55.2 55.4 56.2 56.7 57 57.4 56.6 57.4 58.1

France 50.6

50.6 51.4 50 50.2 49.6 48 48.4 48.3 48.6 48.3 49.7 51.8 51.7 53.5 53.6 52.2 53.3 55.1 53.8 54.8 54.9 55.8 56.1

Germany 52.1

52.9 53.2 52.3 50.5 50.7 51.8 52.1 54.5 53.8 53.6 54.3 55 54.3 55.6 56.4 56.8 58.3 58.2 59.5 59.6 58.1 59.3 60.6

Italy 54.1

54.9 55.6 53.2 52.2 53.5 53.9 52.4 53.5 51.2 49.8 51 50.9 52.2 53.2 53 55 55.7 56.2 55.1 55.2 55.1 56.3 56.3

Spain

51.3

53.1 53 55.4 54.1 53.4 53.5 51.8 52.2 51 51 52.3 53.3 54.5 55.3 55.6 54.8 53.9 54.5 55.4 54.7 54 52.4 54.3

Switzerland

49.6

49 49.9 50.2 51.1 53 53.1 55.3 51.5 51.5 51.6 54.4 55.2 55.9 56.2 54.6 57.8 58.6 57.4 55.6 60.1 60.9 61.2 61.7

UK 54.5

52.5 51.2 52.5 50.9 51.1 49.5 50.4 53.1 48.3 53.5 55.3 54.2 53.5 55.9 55.6 54.6 54 57 56.3 54.3 55.2 56.7 55.9

US

54.1

52.8 51.2 52.4 51.3 51.5 50.8 50.7 51.3 52.9 52 51.5 53.4 54.1 54.3 55 54.2 53.3 52.8 52.7 52.1 53.3 52.8 53.1

Japan

52.4

52.6 52.6 52.3 50.1 49.1 48.2 47.7 48.1 49.3 49.5 50.4 51.4 51.3 52.4 52.7 53.3 52.4 52.7 53.1 52.4 52.1 52.2 52.9

Brazil 44.1

43.8 45.6 47.4 44.5 46 42.6 41.6 43.2 46 45.7 46 46.3 46.2 45.2 44 46.9 49.6 50.1 52 51.5 50 50.9 50.9

Russia 50.2

50.1 48.7 49.8 49.3 48.3 48 49.6 51.5 49.5 50.8 51.1 52.4 53.6 53.7 54.7 52.5 52.4 50.8 52.4 50.3 52.7 51.6 51.9

India 50.7

50.3 49.1 51.1 51.1 52.4 50.5 50.7 51.7 51.8 52.6 52.1 54.4 52.3 49.6 50.4 50.7 52.5 52.5 51.6 50.9 47.9 51.2 51.2

China

48.3

48.6 48.2 48.4 48 49.7 49.4 49.2 48.6 50.6 50 50.1 51.2 50.9 51.9 51 51.7 51.2 50.3 49.6 50.4 51.1 51.6 51

Korea

49.1

49.1 50.7 49.5 48.7 49.5 50 50.1 50.5 50.1 48.6 47.6 48 48 49.4 49 49.2 48.4 49.4 49.2 50.1 49.1 49.9 50.6

Taiwan

47.8

49.5 51.7 50.6 49.4 51.1 49.7 48.5 50.5 51 51.8 52.2 52.7 54.7 56.2 55.6 54.5 56.2 54.4 53.1 56.2 53.6 54.3 54.2

Global

51

51 50.7 50.9 50 50.7 50.2 50.1 50.4 51 50.7 51 51.9 52 52.7 52.7 53 53 52.7 52.6 52.6 52.7 53.2 53.2

Emerging

49

49.2 49 49.4 48.9 50.2 49.6 49.5 49.3 50.3 50.1 50.3 51 50.8 51.1 50.8 51.3 51.6 50.8 50.5 50.8 50.9 51.7 51.3

Developed 52.6

52.3 52 52.1 50.8 50.9 50.5 50.3 51.1 51.4 51.2 51.5 52.6 52.9 53.7 54.2 54.1 53.9 54.1 54.1 53.9 54 54.2 54.6

Manufacturing PMI data Source: JP Morgan Asset Management

5

• Some have receded

– European elections – UK election…

• China

– Xi the most powerful leader since Mao – Frictions over North Korea rumble on

• The Trump “slump”

– Expectations are extremely low – Some upside if anything gets done!

The key risks – Politics

6

• Every 5% cut in the US corporate tax rate has the potential to increase S&P 500 Index EPS by $5
• r 4.2%.
• On average, S&P 500 Index companies pay an overall effective tax rate of approximately 27%,

with around 60% of profits sourced domestically and taxed at an average of 33.3% (the current rate of tax is 35%).

• The US President has pledged to cut the federal business tax rate from 35% to 20%.

Optimism regarding Trump’s tax reform agenda builds

5 10 15 20 25 30 35 40

(%)

Corporate tax rate of major countries

Source: Deutsche Bank

7

• Rates are moving up in the UK and US but slowly…
• Inflation outside of the UK continues to be muted
• Central bank policy will remain accommodative
• The debt pile keeps growing…

The key risks – Interest Rates and Inflation

8

Carney’s rhetoric has lowered rate rise expectations

Source: Bloomberg, Nov 2017

9

Total global central bank assets will continue to climb in 2018

500 1000 1500 2000 2500 3000 3500 4000 4500 03 05 07 09 11 13 15 17 19

$Billion

Treasuries Agency & MBS Treasuries Forecast Agency & MBS Forecast

Dec 08

Fed announces QE1

Nov 10

Fed announces QE2

Sep 12

Fed announces QE3

Oct 18

Fed begins balance sheet normalization Source: Thomson Reuters Datastream Oct 2017

Central bank assets

$ Trillion

Federal Reserve(SOMA)

10

Debt continues to rise faster than GDP

20 40 60 80 100 120 140 160 90 92 94 96 98 00 02 04 06 08 10 12 14 16 (Trillions of U.S. dollars)

Global Gross Debt and GDP

General government Households Nonfinancial companies GDP

Change in Gross Debt, 2006-16 (Trillions of US dollars)

Source: IMF, Oct 2017

11

Debt continues to grow…

Japan Canada USA Great Britain Italy Austrailia Korea France Germany China Brazil India South Africa Turkey Mexico Russia Saudia Arabia Argentina Indonesia 2006 184 70 64 41 103 10 29 64 66 25 66 77 31 45 38 10 26 70 36 2016 239 92 107 89 133 41 38 96 68 44 78 70 52 28 58 16 13 54 28 2006 59 74 96 90 36 105 70 44 65 11 14 10 39 9 12 8 12 4 11 2016 57 101 79 88 42 123 93 57 53 44 23 10 35 18 16 16 15 6 17 2006 100 76 65 79 67 73 83 56 49 105 39 38 33 27 14 32 28 20 14 2016 92 102 72 73 71 79 100 72 46 165 44 45 37 67 28 52 50 12 23 2006 343 221 225 210 205 187 183 164 180 142 118 125 104 81 64 49 66 93 61 2016 388 295 259 250 246 243 232 226 168 254 145 125 124 113 103 84 78 73 68

Total

Sovereign and Nonfinancial Private sector Debt to GDP ratios Advanced Economies Emerging Economies

General Government Household Non Financial Corps

Sources: Bank of International Settlements; Haver Analytics, IMF World Economic Outlook Database and IMF staff calculations, Oct 2017.

12

....but this is not a regime shift as inflation remains contained for now

• 1.00
• 0.50

0.00 0.50 1.00 1.50 2.00 2.50

Percentage YoY

Sticky Price CPI less Food, Energy, and Shelter Flexible Price CPI less Food and Energy

Source: Thomson Reuters Datastream Oct 2017

Percentage YoY

13

Inflation and rates – what are the risks?

Interest Rates Goldilocks Policy Error End of Cycle Good for equities Behind the Curve Good for equities Bad for equities Bad for bonds Bad for equities Good for bonds Inflation Good for bonds Bad for bonds

14

• The “easy money” has been made in equity markets
• However corporate earnings continue to deliver

– With cost cutting remaining central to many corporate strategies

• Lack of alternatives – is it really different this time?

The key risks – Stretched valuations

15

Regional Valuations

Source: Thomson Reuters Datastream, Oct 2017

16

A synchronized recovery in corporate earnings

Source: Thomson Reuters Datastream Oct 2017

17

• “Asset valuations are somewhat rich if you use some traditional metrics like price

earnings ratios, but I wouldn’t try to comment on appropriate valuations, and those ratios ought to depend on long-term interest rates,” Yellen 27 June 2017

“It’s different this time…”

5 10 15 20 25 30 04/1991 04/1996 04/2001 04/2006 04/2011 04/2016

Price to Earnings Multiple

US Forward PE Median PE

Source: Thomson Reuters

18

Equity risk premium still attractive

Source: NYU Stern – School of Business (Aswath Damodaran) Updated to 1st October 2017

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 61 66 71 76 81 86 91 96 01 06 11 16 Percentage

US Equity Risk Premium

Equities less attractive Equities more attractive

19

Goldilocks Scenario Economic Data + Corp Earnings = +VE Yields remain range bound Growth continues to outperform Beneficiaries :Technology/Healthcare 40%

What happens next?

Normal late Cycle – Inflation pickup but not likely to get out of control Economic Data + Corp Earnings +VE Inflation moves higher Term Premium normalizes Real Yields pickup Value outperforms Growth Beneficiaries : Financials/ Energy

45%

Market - breather/ correction Chinese data turns over Peaking US/European Data Policy – US trade policy Equities – Risk off Inflation pick up ->?

15%

20

• In spite of Trump and Brexit, economic data has continued to be strong
• Corporate earnings are also exceeding expectations
• Brexit remains the great unknown – with a wide range of potential outcomes – we

wait and see

• Equities remain our preferred asset class, but diversification is crucial
• Continued trend of businesses needing to do more with less

Conclusion

21

The value of your investments and the income from them may go down as well as up, you could get back less than you invested. Past performance is not a guide to future performance. Changes in exchange rates may have an adverse effect on the value of an

• investment. Changes in interest rates may also impact the value of fixed income investments. The value of your investment may be

impacted if the issuers of underlying fixed income holdings default, or market perceptions of their credit risk change. There are additional risks associated with investments in emerging or developing markets. This documentation may contain confidential or legally privileged information that is intended for the addressee only. Any views or

• pinions presented are solely those of the author and do not necessarily represent those of Brooks Macdonald. If you are not the

intended recipient you are hereby notified that any disclosure, copying, distribution or reliance upon the contents of this documentation is strictly prohibited. If you have received this documentation in error, please notify the sender immediately, so that arrangements may be made for its proper delivery. The information in this document does not constitute advice or a recommendation and investment decisions should not be made on the basis of it. This document is for the information of the recipient only and should not be reproduced, copied or made available to

• thers.

Brooks Macdonald is a trading name of Brooks Macdonald Group plc used by various companies in the Brooks Macdonald group of companies. Brooks Macdonald Asset Management Limited is authorised and regulated by the Financial Conduct Authority. Registered in England No 3417519. Registered office: 72 Welbeck Street London W1G 0AY. More information about the Brooks Macdonald Group can be found at www.brooksmacdonald.com.

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