October 2018 Legal & General Investment Management Asia Limited View from the top: Think long term Anton Eser, Chief Investment Officer, Legal & General Investment Management For Professional Investor use only. Not for onward forwarding.
Tackling long-term challenges together Building a connected view of the world The world is Ageing The Energy revolution is here Technology is changing the way we live Politics and unconventional policy play an increasingly more prominent role Long-term thinking is key to success
The world we live in…. …debt remains very high…while asset prices have soared Non-financial debt/GDP (%) US household net worth 280 260 240 220 200 180 160 140 120 100 1996 1999 2002 2005 2008 2011 2014 2017 United States China Source: Bank for International Settlements, Macrobond
Trend growth has fallen We’re running out of workers and productivity has slowed Working age population growth Advanced economy labour productivity Source: LGIM
The implications of the long-term themes Demographics Energy Technology Politics • • • Weaker global growth Technology change Unconventional • Revolution is here impacts all sectors monetary policy • Low interest rates and • Different implications • • Productivity potential Anti-Globalisation inflation for commodities • • • Hard choices for Deflationary Populism • Huge renewables politicians capital requirement • Stranded labour
Short-term solutions Central bank balance sheets Debt mountain 20 280 USD trn 260 15 240 220 10 200 180 5 160 140 0 2008 2010 2012 2014 2016 2018 120 China FX Reserves 100 BoE Purchase Programme 1952 1962 1972 1982 1992 2002 2012 ECB Balance Sheet BoJ Balance Sheet US non-financial debt to GDP (%) Fed Balance Sheet Source: Bloomberg L.P., BIS
Politics – New political paradigm Income inequality is a key tail risk EM middle class The global ‘elite’ 3.0% 2.5% Annualised real income growth 2.0% 1.5% 1.0% 0.5% 0.0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 99% Percentiles of the global income distribution DM middle class Source: “Global Income Distribution: From the fall of the Berlin Wall to the Great Recession” (Period covered 1988 to 2008) Lakner and Milanovic, World Bank Economic Review, September 2015
Seismic shifts or tiny twists? Brexit uncertainty very divisive Trump epitomises populism in action Far-right is part of the coalition government Parties from opposite ends of the political spectrum, united by fiscal expansion Centre-left losing century old grip 50% voted for populist parties in election 1 st round Source: LGIM, as of 31 July 2018
Unconventional policy in the next downturn Average global central bank policy rate (%) “The effectiveness of anti -deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities.” – Ben Bernanke, November 2002 Source: BIS, average cetral bank rate of Australia, Canada, Switzerland, China, UK, Japan, Sweden, USA and Euro area
Solid global growth, boosted by US fiscal stimulus Contribution to world GDP growth % YOY Contribution to world GDP growth % YOY 5 4 3 2 1 0 -1 -2 -3 -4 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 BRIC US EU5 Japan Source: LGIM, Macrobond. Historical analysis and current forecast do not guarantee future results.
Quantitative tightening is accelerating Net asset purchases for the three major central banks (US $ bn) 2000 1500 1000 500 0 -500 -1000 2011 2012 2013 2014 2015 2016 2017 2018 US ($ bn) Japan ($ bn) UK ($ bn) Euro ($ bn) Total Source: Morgan Stanley, LGIM estimates. Historical analysis and current forecast do not guarantee future results.
Signs of stress 200 150 150 180 Rebased to 100 Rebased to 100 125 125 160 140 100 100 120 75 75 100 80 50 50 Jan-17 Jul-17 Jan-18 Jul-18 Jan-16 Jan-16 Jan-17 Jan-17 Jan-18 Jan-18 Argentine Peso Turkish Lira European bank equity European bank equity S&P 500 Source: Bloomberg L.P., number per US dollar rebased to 100 in January 2017
Focus on valuations Expected Risk Premia Relative to 15 Year Distribution 9 8 7 6 Risk Premia (%) 5 4 3 2 1 0 US Euro-zone Emerging Market US US High Emerging Market EM Equities Equities Equities Investment Grade Yield Debt (Hard) Local Credit MAX INTERQUARTILE RANGE MIN 31/08/2018 Source: LGIM, Risk free rate UK equivalent. Current forecast does not guarantee future results.
CAPE Fear Elevated cycle-adjusted PE ratio a definite worry 50 18 1981 Price-Earnings Ratio (CAPE, P/E10) 2000 45 16 Long-Term Interest Rates 40 14 35 1929 12 33.18 30 10 1901 1966 25 8 20 CAPE 6 15 4 10 Long-Term Interest Rates 2 5 1921 0 0 1860 1880 1900 1920 1940 1960 1980 2000 2020 2040 On this metric, US equity valuations have only been more stretched in 1929 and 1999/2000 Source: Robert Shiller, LGIM. Historical analysis and current forecast do not guarantee future results.
Europe and Asia sharing similar challenges Nordics Average guaranteed rate: 3-3.5% UK Ability to reduce guarantees: Medium Duration gap: >10y Average guaranteed rate: 0-1% China Ability to reduce guarantees: High Average guaranteed rate: 2-3% Duration gap: Low Guaranteed % Unit-linked % Ability to reduce guarantees: High Guaranteed % Unit-linked % Germany Guaranteed % Unit-linked % Average guaranteed rate: 3-3.5% South Korea Ability to reduce guarantees: Low Duration gap: >10y Average guaranteed rate: 5-6% Ability to reduce guarantees: Low Duration gap: 0-2y Unit-linked % Guaranteed % France Average guaranteed rate: 0-1% Unit-linked % Guaranteed % Ability to reduce guarantees: Medium Duration gap: 2-5y Taiwan Average guaranteed rate: 4-5% Unit-linked % Ability to reduce guarantees: Low Guaranteed % Duration gap: 5-8y Hong Kong Unit-linked % Guaranteed % Average guaranteed rate: 2.5-3.5% Ability to reduce guarantees: Medium → High proportion of guaranteed products on balance sheet Unit-linked % → High guaranteed rates Guaranteed % → Low interest rate environment → Duration mismatch Source: Moody’s Investor Service, 2013. Nordics represents markets in Sweden and Norway. For illustrative purposes only.
Seeking a balance of outcomes Outcomes ALM Match key duration and convexity risks Book yield maximisation (“amortised Holistic risk Diversification cost” assets) ALM Accounting management Controlling P&L volatility (“fair value” assets) Tax-efficient wrappers and strategies Outcome Controlling Net Surplus volatility Solvency risk Maximising Solvency Adjusted Sharpe Oriented Dynamic Capital Ratio (SASR)1 market optimisation exposure Controlling regulatory capital Regulatory consumption Maximising Return on Regulatory capital Active Capital (RORC)2 management Sustainable investing Active engagement (voting and ESG divestment process) Source: LGIM. For illustrative purposes only. 1. The Solvency Adjusted Sharpe Ratio (SASR) is the ratio between the asset portfolio return versus Solvency ratio volatility. 2. The Return On Regulatory Capital (RORC) is the ratio between the asset portfolio return versus the regulatory capital consumption.
Macro-thematic investment process Stable through-the-cycle returns Long-term themes Asset Allocation Fundamental Research Risk allocated by sector and Connected view of the world Global best ideas region • Tightening monetary policy • Underweight risk bites • Consider potential disruptors • • Significant underweight to Political uncertainty • Europe with a bias for US Stable cashflow • Mounting debt and deteriorating demographic • • Preference for non-cyclicals Integrated ESG - Sourcing trends leading to deflation sustainable investment ideas through strong corporate • Preference for domestic • Technology disruption access versus Emerging Markets • Energy transformation Source: LGIM. There is no guarantee that the investment strategies presented will yield future results.
Looking after your assets over the long term AUM growth by strategy ($bn) The growth of sustainable investments 15,023 Innovation in Innovation in ESG 2014 2016 ESG data data analytics and analytics and client reporting client reporting 12,046 Wider Consumers Consumers Wider market market and demand demand and investor 10,369 investor sustainable sustainable values align products values align products 8,365 7,527 6,210 5,919 $238bn→$579bn 4,385 Shift from Shift from Regulatory Regulatory ethics to ethics to pressures pressures +143% financial financial materiality materiality 1,030 890 331 Increasing 248 Increasing 137 101 demand for ESG demand for product ESG product Impact Sustainable Best-in-class Norms-based Corporate ESG Exclusionary Investing Investing Screening Screening Engagement Integration Screening Source: Morgan Stanley, 2016. Past performance is not indicative of future results.
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