Download A turning point for the global economy

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