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A turning point for the global economy SimplyBiz Investment Forum February 2017 11084/SC/MP/SimplyBiz/Feb17 Matt Parlour Market Insights Team This presentation is for Professional Clients only and is not for consumer use. Learning outcomes Following this presentation, you will understand: How the UK economy is performing post the EU referendum. 11084/SC/MP/SimplyBiz/Feb17 The current global macro backdrop and its key drivers. The implications of the outlook for financial markets. 2 11084/SC/MP/SimplyBiz/Feb17 The UK economy post referendum The UK economy post referendum PMI signals stable growth Real GDP PMI 65 5 4 60 3 2 55 1 0 50 -1 -2 45 -3 -4 40 -5 11084/SC/MP/SimplyBiz/Feb17 -6 35 2001 -7 2003 2005 2007 2009 2011 2013 2015 Source: Bloomberg and Datastream as at 1 February 2017. Real GDP YoY% 6 mth lag. PMI = Markit - Composite Purchasing Managers’ Index. 4 The UK economy post referendum Consumer confidence decline signals lower retail sales UK GfK Consumer Confidence Index 30 Retail sales* 8 20 6 10 4 0 2 -10 0 -20 -2 11084/SC/MP/SimplyBiz/Feb17 -30 -4 -40 -6 -50 -8 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 Source: Datastream as at 1 February 2017. *3 month moving average, Yoy%, 3m lag. 5 10 The UK economy post referendum Property prices under pressure? Month on Month %* 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 11084/SC/MP/SimplyBiz/Feb17 -2.5 -3.0 Commercial Residential Source: Datastream as at 1 February 2017. *Commercial = IPD Capital Index, Residential = Nationwide monthly average house price. 6 The UK economy post referendum A weaker £ should help exporters…but not importers and inflation £ Trade Weighted Index 110 105 100 95 90 85 80 11084/SC/MP/SimplyBiz/Feb17 75 70 1990 1992 1994 1996 Source: Datastream as at 31 January 2017. 7 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 The UK economy post referendum Inflation is starting to pick up….but by how much? Consumer Price inflation (% yoy) 9 8 7 6 5 4 3 2 ? 1 11084/SC/MP/SimplyBiz/Feb17 0 -1 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Source: Datastream as at 31 January 2017. 8 Policy support – Monetary Rate cuts and asset purchases UK base rate (%) 6 5 4 £70bn bond purchases (including up to £10bn corporate bonds) – August 2016 3 2 11084/SC/MP/SimplyBiz/Feb17 1 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Datastream as at 1 February 2017. 9 Policy support – Fiscal Austerity lighter with a new Chancellor Change in cyclically-adjusted public sector net borrowing (% of GDP) 1.0 Looser fiscal policy 0.5 0.0 -0.5 -1.0 11084/SC/MP/SimplyBiz/Feb17 -1.5 Tighter fiscal policy -2.0 10-11 11-12 12-13 13-14 14-15 15-16 16-17* 17-18* 18-19* 19-20* 20-21* 21-22* Mar-16 Nov-16 Source: OBR (Office for Budgetary Responsibility) as at 22 November 2016. *OBR forecasts. 10 11084/SC/MP/SimplyBiz/Feb17 The UK economy post referendum Source: Getty Images 11 11084/SC/MP/SimplyBiz/Feb17 The global macro backdrop Source: Getty Images 12 11084/SC/MP/SimplyBiz/Feb17 The global macro backdrop Economic growth GDP recovery has been disappointing… Real GDP recovery from last cycle peaks 114 112 110 108 106 104 102 US UK Germany France Japan 100 98 Spain 96 94 11084/SC/MP/SimplyBiz/Feb17 92 90 Q3 2007 Q3 2008 Q3 2009 Q3 2010 Q3 2011 Q3 2012 Q3 2013 Q3 2014 Q3 2015 Q3 2016 Source: Datastream as at 1 February 2017. Rebased to 100 at last cycle peaks. 14 Italy Economic growth …particularly compared to previous recoveries UK real GDP recoveries post recessions since 1955 160 1961 1992 150 140 1981 130 1957 120 1975 2009 11084/SC/MP/SimplyBiz/Feb17 110 100 0 5 10 15 20 25 30 35 Quarters Source: Datastream as at 1 February 2017. Rebased to 100 at start of recovery. 15 40 45 50 55 60 65 Why has growth disappointed? Cyclical – Households are still de-leveraging Household debt as a % of GDP 110 100 UK 90 80 70 US Japan EZ 11084/SC/MP/SimplyBiz/Feb17 60 50 Q2 1997 Q2 1999 Q2 2001 Q2 2003 Q2 2005 Q2 2007 Q2 2009 Q2 2011 Q2 2013 Q2 2015 Source: Datastream as at 9 January 2017. 16 Why has growth disappointed? Cyclical – Financials are still de-leveraging Financials debt as a % of GDP 300 250 200 150 EZ UK Japan 100 11084/SC/MP/SimplyBiz/Feb17 US 50 Q2 1997 Q2 1999 Q2 2001 Q2 2003 Q2 2005 Q2 2007 Q2 2009 Q2 2011 Q2 2013 Q2 2015 Source: Datastream as at 9 January 2017. 17 Economic growth expectations The lacklustre outlook continues… Major economies – Real GDP growth forecasts (%) 10.0% 10 8 6 4 3.0% 2017f 2 11084/SC/MP/SimplyBiz/Feb17 2016e 2.9% 2.4% 1.0% 10yr preGFC* 0 US Eurozone Japan UK China Source: Consensus Economics as at 1 February 2017. *Figures show average yoy % growth on a quarterly basis for the period Q1 98 – Q4 07. GFC = Global Financial Crisis. 18 Economic growth expectations …but data has been getting better G10 Citi Economic Surprise Index 60 Data better than expected 40 20 0 -20 11084/SC/MP/SimplyBiz/Feb17 -40 -60 2011 Data worse than expected 2012 Source: Datastream as at 31 January 2017. 19 2013 2014 2015 2016 Fiscal support? More, but still limited Change in OECD underlying fiscal balance as % of potential GDP 1.5 Tighter fiscal policy 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 11084/SC/MP/SimplyBiz/Feb17 Looser fiscal policy -2.5 2006 2007 2008 Source: OECD as at 23 November 2016. 20 2009 2010 2011 2012 2013 2014 2015 2016e 2017f 2018f Inflation expectations Rising forecasts… Major developed economies: Consumer Price Inflation forecasts for 2016 and 2017 (%) 3.0 2.6% 2.5 2.0% 2.0 Central Bank inflation targets 1.6% 1.5 Current 1.0 2017f 0.5 0.2% 10yr preGFC* 11084/SC/MP/SimplyBiz/Feb17 0.0 -0.5 US UK Eurozone Japan Source: Datastream and Consensus Economics as at 1 February 2017. All annual inflation numbers are based on the average of the monthly year on year inflation numbers. *Figures show average yoy % growth on a quarterly basis for the period Q1 98 – Q4 07. GFC = Global Financial Crisis. 21 Inflation expectations …as deflationary impulse wanes G10 Citi Inflation Surprise Index 50 Inflation higher than expected 40 30 20 10 0 -10 -20 -30 Inflation lower than expected 11084/SC/MP/SimplyBiz/Feb17 -40 -50 1999 2001 2003 Source: Datastream as at 1 February 2017. 22 2005 2007 2009 2011 2013 2015 11084/SC/MP/SimplyBiz/Feb17 The Trump policy conundrum Tax cuts Trade Fiscal stimulus Geopolitics Deregulation Immigration Reward Risk Source: Invesco Perpetual. For illustrative purposes only. 23 Euro zone upcoming political events 2017-2018 France Presidential election Mar 2017 11084/SC/MP/SimplyBiz/Feb17 Netherlands Parliamentary election Apr 2017 Germany Federal elections May 2017 Jun 2017 Jul 2017 France National Assembly elections Source: Invesco Perpetual as at end December 2016. For illustrative purposes only. 24 Aug 2017 Sep 2017 Austria General election by spring 2018 2018 Italy General election by May 2018 11084/SC/MP/SimplyBiz/Feb17 The global macro backdrop Source: Getty Images 25 11084/SC/MP/SimplyBiz/Feb17 What does this mean for financial markets? Source: Getty Images 26 11084/SC/MP/SimplyBiz/Feb17 What does this mean for financial markets? The bond bull market – The UK example UK 10yr Gilt yield to maturity (%) 18 16 14 12 10 8 6 4 11084/SC/MP/SimplyBiz/Feb17 2 0 35 38 41 44 47 50 53 56 59 62 65 68 71 74 77 80 83 86 89 92 95 98 01 04 07 10 13 16 Source: Bank of England and Datastream as at 1 February 2017. 28 UK bond markets Low returns likely BofA Merrill Lynch Gilt Index Yield to Maturity (YTM) and 10 Year total return CAGR (%) since 1985 16% 14% R squared 89% TR CAGR (%) 12% 10% 8% 6% 4% Current 1.28% 11084/SC/MP/SimplyBiz/Feb17 2% 0% 0 2 4 6 8 YTM (%) Source: Datastream as at 1 February 2017. TR = Total Return. CAGR = Compound Annual Growth Rate. 29 10 12 14 Government bond market yield pullbacks are not unusual 10yr Gilt yield (%) and major yield rises (bp) 6.0 +98bp 5.0 +108bp +87bp 4.0 +104bp +140bp 3.0 +85bp 2.0 +97bp 11084/SC/MP/SimplyBiz/Feb17 1.0 0.0 07 08 09 Source: Datastream as at 1 February 2017. 30 10 11 12 13 14 15 16 Equity market valuations are above long-term average Earnings growth needed MSCI World index Trailing PE (x) 35 A 24% premium to long-term average 30 25 20 Long-term average 15 11084/SC/MP/SimplyBiz/Feb17 10 5 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 Source: Datastream as at 1 February 2017. 31 Equities as a source of income Competitive in many markets against government bonds… Equity yield pick-up relative to domestic government bond market (%)* 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 11084/SC/MP/SimplyBiz/Feb17 -2.0 -2.5 Eurozone UK Japan Developed Markets US Source: Datastream as at 1 February 2017. *Yield to Maturity. Indices used are BofA ML government bond indices for government bonds, for equities; Eurozone – MSCI EMU, UK – FTSE All Share, Japan – TOPIX, DM – MSCI World, US – S&P500, EM – MSCI EM World. 32 Emerging Markets Equities as a source of income …but not necessarily against all FI or other asset classes Yield range and current yield since end 1985 (%)* 30 25 20 15 10 11084/SC/MP/SimplyBiz/Feb17 5 0 Gilts IG Bar = high/low range HY Equities Cash = current Source: Datastream as at 1 February 2017. * Indices used are: Gilts – BofA ML Gilts, IG – BofA ML Sterling Corporate (from 31/12/96), HY - BofA ML Sterling High Yield (from 31/12/97), Equities – FTSE All Share, Cash – UK Base Rate, Property – IPD initial yield (from 31/12/87). 33 Property Equities as a source of income And you have to accept volatility… Sterling fixed income and FTSE All Share annualised volatility since index inception (%)* 16 14 12 10 8 6 4 2 11084/SC/MP/SimplyBiz/Feb17 0 Gilts Equities IG (since 1985) Equities (since 1996) Bond Volatility HY (since 1997) FTSE All-Share Volatility Past performance is not a guide to future returns. Source: Bloomberg and Datastream as at 9 January 2017. *Gilts – 31 Dec 1985, IG – 31 Dec 1996, HY – 31 Dec 1997. Indices used: Equities – FTSE All Share, Gilts – BofA ML UK Gilt, IG - BofA ML £ Corporate, HY - BofA ML £ High Yield Corporate. 34 Equities Equities as a source of income It’s about total return not just income Sterling fixed income CAGR Total Returns (TR) since index inception compared to FTSE All Share CAGR TR (%) 12 10 8 6 4 2 11084/SC/MP/SimplyBiz/Feb17 0 Gilts Equities (Since 1985) Income IG Equities (Since 1996) High Yield Equities (Since 1997) Capital Past performance is not a guide to future returns. Source: Bloomberg and Datastream as at 9 January 2017. Returns to end October 2016. *Gilts – 31 Dec 1985; Investment Grade (IG) – 31 Dec 1996; (High Yield) HY – 31 Dec 1997. Indices used: Equities – FTSE All Share, Gilts – BofA ML UK Gilt, IG – BofA ML £ Corporate, HY – BofA ML £ High Yield Corporate. CAGR = Compound Annual Growth Rate. 35 Summary Post-referendum economic performance so far has been better than initially expected A potential shift in economic momentum? Political uncertainty has risen Bond bull market over, but no bear market? Better opportunities in equities than fixed income 11084/SC/MP/SimplyBiz/Feb17 Equities have income attractions but need to be put in context 36 Learning outcomes Following this presentation, you will understand: How the UK economy is performing post the EU referendum. 11084/SC/MP/SimplyBiz/Feb17 The current global macro backdrop and its key drivers. The implications of the outlook for financial markets. 37 Live webcall: UK Equities 21 March 2017 Mark Barnett Head of UK Equities Martin Walker Fund Manager 11084/SC/MP/SimplyBiz/Feb17 www.invescoperpetual.co.uk/events 38 Live webcall: Multi Asset 18 April 2017 Clive Emery Product Director 11084/SC/MP/SimplyBiz/Feb17 www.invescoperpetual.co.uk/events 39 Important information This presentation is for Professional Clients only and is not for consumer use. All information as at 1 February 2016 sourced from Invesco Perpetual unless otherwise stated The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. Past performance is not a guide to future returns. Where Matt Parlour has expressed opinions, they are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco Perpetual investment professionals. Where Invesco Perpetual has expressed opinions, these may change. 11084/SC/MP/SimplyBiz/Feb17 Where securities are mentioned in this document they do not necessarily represent a specific portfolio holding and do not constitute a recommendation to purchase, hold or sell. Invesco Perpetual is a business name of Invesco Asset Management Limited, Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH, UK. Authorised and regulated by the Financial Conduct Authority. 40