global equities outlook: where are the opportunities?

For 2018 Invesco Roadshow in Hong Kong only. Circulation, disclosure, or dissemination of all or any part of this document to any unauthorized persons is prohibited.

Global Equities Outlook: Where are the opportunities?

Paul ChanHead of Multi-Asset and Hong Kong Pensions

12 January 2018 This document is intended only for 2018 Invesco Roadshow in Hong Kong. This is not an invitation to subscribe for shares in a fund nor is it to be construed as an offer to buy or sell any financial instruments. Nor does this constitute a recommendation of the suitability of any investment strategy for a particular investor. Circulation, disclosure, or dissemination of all or any part of this document to any unauthorized persons is prohibited.


2017 saw

2

Source: Invesco Hong Kong Limited, as of 27 December 2017.Opinions and forecasts are based on current market conditions and subject to change without notice.

Co-ordinated recovery in economic growth despite the Fed hiked three times

Smooth uptrend with falling volatility

Positive returns for major asset classes, higher in USD terms

Recovery in exports growth in Asia

Recovery of commodity prices lifted Europe

Growth and momentum outperformed value and yield

High yield outperformed sovereign debts


Questions for 2018

3


Would great moderation continue?

Would three rate hikes in the US slow or reverse the ongoing business cycle expansion and recovery?

What is the impact of liquidity withdrawal and attempts by central banks in trying to raise cost of capital?

What does deleveraging mean for China?

Another down year for the USD?

Would US 10-year government bond yield hit 3%?


A history of the Fed Funds Rate since 1979

4

Source: http://www.minyanville.com/business-news/markets/articles/2524USD-2523rate-2523hike-2523dollar-2523gold-2523economy/2/24/2017/id/59492, courtesy of @HedgeEye, as of 24 February 2017.Source: [Jerome Powell] https://www.mt5.com/forex_humor/image/32549#18, as of 9 November 2017.

February 2018

to ??

JEROMEPOWELL—— 6’0”


What happens to S&P500 if the Fed starts hiking?US equities: Room to expand?

5

Source: Pavilion Global Markets, Thomson Reuters Datastream, Bloomberg, as of 21 December 2017.

Fed Funds rate at the start of tightening

Fed Funds rate at the end of tightening

1983–84 8.50% 11.75%

1986–87 5.88% 7.25%

1988–89 6.50% 9.75%

1994–95 3.00% 6.00%

1999–00 4.75% 6.50%

2004–06 1.00% 5.25%

2015– 0.25% 1.50%

Average 4.27% 7.75%


150

200

250

300

350

400

450

500

550

0

50

100

150

200

250

300

350

400

90 95 00 05 06 07 08 09 10 11 12 13 14 15

Shadow banking (USD tn)

Global financial assets (USD tn)

Global financial assets (incl. shadow banking), % of GDP (RHS)

0

3,000

6,000

9,000

12,000

15,000

18,000

21,000

1999 2002 2005 2008 2011 2014 2017

Fed ECB BoJ BoE PBoC

G5 central bank assets(USD billion)

Estimated value of global financial instruments(USD trillion)

Central bank assets keep rising

6

Source: Macquarie Research, Bloomberg, as of 20 December 2017.


Great moderation or …

7

Source: Bloomberg, as of 8 December 2017.

-6

-3

0

3

6

500

1,100

1,700

2,300

2,900

12/07 12/08 12/09 11/10 11/11 11/12 11/13 11/14 11/15 11/16 11/17

daily move % (RHS) daily move >2% (RHS)

S&P 500 index (LHS)

0

30

60

90

12/07 12/08 12/09 11/10 11/11 11/12 11/13 11/14 11/15 11/16 11/17

VIX index


JP Morgan Markets trading book Average daily revenue and volatility

8

Source: [top chart] JP Morgan Chase & Co. [2016 Business Updates], as of 28 February 2017.ǂ Markets: Offering research, proprietary pricing data and analytics, and trade execution across multiple asset classes, including credit, equities and FX.

* Volatility measured as standard deviation. Average daily revenue and volatility exclude business simplification# For 2014–2016, loss days represent the number of days Markets posted losses. For 2012–2013, loss days represent the number of days for which the Corporate

and Investment Bank (CIB) posted losses under the market risk-related revenue measures.Source: [bottom chart] Bloomberg, as of 12 December 2017.

6972

6770

80

7 0 0 2 0

2012 2013 2014 2015 2016

Marketsǂ average daily revenue (USDmn) Markets volatility*

Loss days#

5

15

25

35

45

12/11 6/12 12/12 6/13 12/13 6/14 12/14 6/15 12/15 6/16 12/16

VIX index


0

4,000

8,000

12,000

16,000

20,000

10/08 10/09 10/10 10/11 10/12 10/13 10/14 10/15 10/16 10/17

FBI shuts down Silk RoadCoinbase & other digit currencies

PBoC bans bitcoins at banks

Newsweek finds Satoshi Nakamoto

US auction 29,656 bitcoins

Microsoft accepts bitcoins

Gemini launched, bitcoin trading platform

Bitcoin Foundation formed

US seizes Mt. Gox accounts

CBOE Futures

PBoC investigation

Japan legalization

New Altcoins

China ICO bans

Bitcoin Savings & Trust halts payments

1st Mt. Gox hack

Mt. Gox begins trading bitcoin

Silk Road opens

Pizza Day

GFC, White paper, QE, TARP

Bitcoin storms Wall Street

XBT-USD cross rate, USD

Bubble – Bitcoin

9

GFC=Global financial crisis, QE=Quantitative easing, TARP=The Troubled Asset Relief Program.Source: Bloomberg, as of 13 December 2017; [Bitcoin image] https://www.123rf.com/profile_yourg.

2008Satoshi

Nakamoto

1998

Wei Dai B Money

1989

David Chaum Digicash

1997

Dr Adam Back Hashcash

2004

Hal Finney RPOW

2005

Nick Szabo Bit Gold


2.5

3.0

3.5

4.0

4.5

5.0

2010 2011 2012 2013 2014 2015 2016 2017

Date of forecast

2011

2012

2013 20142015

2016

2017 2018

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2010 2011 2012 2013 2014 2015 2016 2017 2018

Date of forecast

2011

2014

2013

2012

2015

2010

10-Year US Note yield

2016

2017

2018

Consensus forecast, 10-Year US Note yield, Year-end % IMF World Economic Outlook global growth projections

Global rates and inflation

10

Source: (left chart) Bloomberg, The National Bureau of Economic Research (NBER), OECD, Minack Advisors, as of 21 December 2017.Source: (right chart) State Street Global Markets, IMF, Bloomberg; data as of 15 May 2017.


7.5

0.5

1.5

2.5

3.5

4.5

2

6

10

14

18

Mar-00 Sep-02 Mar-05 Sep-07 Mar-10 Sep-12 Mar-15 Sep-17

Unemployment rate, %

Unemployment+Underemployment, %

Avg. Hourly Earnings (RHS)

13.4

0.0

1.5

3.0

4.5

6.0

2

6

10

14

18

Mar-00 Sep-02 Mar-05 Sep-07 Mar-10 Sep-12 Mar-15 Sep-17

Unemployment rate, %

Unemployment+Underemployment, %

Wages and Salaries (RHS)

USA: Disguised Unemployment 7.5% Euro Area: Disguised Unemployment 13.4%

Disguised unemployment= un + under-employed

11

Source: UBS, as of 15 November 2017.


Impact on S&P500 earnings forecasts of limiting effective tax rate to 20%

12

Source: ASR Ltd., Thomson Reuters Datastream, as of 9 November 2017.

0

10

20

30

40

50

60

Real esta

te

Technolo

gy

Insura

nce

Health c

are

Chem

icals

Auto

s

Pers

onal goods

Food &

bevera

ge

Industr

ial goods

Tra

vel and leis

ure

Fin

anic

al serv

ices

Utilities

Constr

uction

Reta

il

Banks

Media

Tele

com

s

Basic

resourc

es

Oil &

gas

Tota

l


Performance of high and low tax rate companiesRebased (2015 = 100)

13

Source: ASR Ltd., Thomson Reuters Datastream, as of 9 November 2017.

94

96

98

100

102

104

106

108

110

1/15 5/15 9/15 1/16 5/16 9/16 1/17 5/17 9/17

ASR High Tax Rate vs. S&P 500 ASR Low Tax Rate vs. S&P 500


0

50

100

150

200

250

300

350

400

1/11 9/11 5/12 1/13 9/13 5/14 1/15 9/15 5/16 1/17 9/17

Top 10 stocks

S&P 500

Equal weight price index of top-10 performing stocks (since May 2016) vs. S&P 500, rebased index

A very narrow marketThe few vs. the many

14

Source: Pavilion Global Markets, Bloomberg, as of 11 October 2017.


28.2

23.2

0

5

10

15

20

25

30

35

40

2/95 5/97 8/99 11/01 2/04 5/06 8/08 11/10 2/13 5/15 8/17

MSCI EM IT index weight %, market cap based

MSCI EM IT index weight %, earnings based

4.8

2

4

6

8

10

12

14

2/95 5/97 8/99 11/01 2/04 5/06 8/08 11/10 2/13 5/15 8/17

MSCI Europe index weight %, market cap based

23.3

22.8

5

10

15

20

25

30

35

2/95 5/97 8/99 11/01 2/04 5/06 8/08 11/10 2/13 5/15 8/17

MSCI USA IT index weight %, market cap based

MSCI USA IT index weight %, earnings based

12.6

5

10

15

20

25

2/95 5/97 8/99 11/01 2/04 5/06 8/08 11/10 2/13 5/15 8/17

MSCI Japan IT index weight %, market cap based

A bet on EMs is a bet on … tech? Europe does not share this tech risk

If tech falls …

15

Source: Pavilion Global Markets, Thomson Reuters Datastream, as of 11 October 2017.Note: US recessions shaded.

US equities with more and more idiosyncratic tech risk Japan is somewhere in the middle on the tech risk


MSCI AC Asia ex JapanYearly total return (in USD)

16


-40%

-8%

65%

-35%

-3%-8%

46%

18%23%

33%40%

-52%

72%

19%

-17%

22%

3% 5%

-9%

6%

38%

-60%

-40%

-20%

0%

20%

40%

60%

80%

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017 Y

TD


Electronics exports % share of total exports

17

Source: CEIC, WTO, Morgan Stanley Research, Trade Map, International Trade Centre, as of 19 December 2017.Note: Electronics exports include electronic data processing and office equipment, telecommunication equipment, integrated circuits and electronic components. They are SITC divisions 75, 76 and 776. Data included China, HK, India, Korea, Singapore, Taiwan, Thailand which made up 91% of Asia ex Japan exports in 2016.

29%

20%

22%

24%

26%

28%

30%

32%

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016


China total aggregate financing and money supply

18


0

5

10

15

20

25

30

0

100

200

300

400

500

600

1/02 10/03 7/05 4/07 1/09 10/10 7/12 4/14 1/16 10/17

Money supply M2, USD tn (RHS)

Total aggregate financing, USD bn


Price to earnings

19

Source: Bloomberg, as of 15 December 2017.Note: Represented by MSCI indices.

average

15.6x

12/07 5/10 10/12 3/15 8/1740

60

80

100

120

140

10

12

14

16

18

20

EPS, index (RHS) 12M forward PE(X) (LHS)

average13.3x

12/07 5/10 10/12 3/15 8/176

8

10

12

14

16

8

10

12

14

16

18


average18.3x

12/07 5/10 10/12 3/15 8/170.00

0.17

0.34

0.51

0.68

9

15

21

27

33


average 13.0x

12/07 5/09 10/10 3/12 8/13 1/15 6/16 11/1715

21

27

33

39

45

51

8

10

12

14

16

18

20


average 11.7x

12/07 5/09 10/10 3/12 8/13 1/15 6/16 11/170.30

0.43

0.56

0.69

0.82

0.95

5

7

9

11

13

15

17

19

21

23

25


Asia ex Japan China

EuropeUS Japan


Price to sales

20

Source: Bloomberg, as of 15 December 2017.Note: Represented by MSCI indices.

average 1.1x

12/07 5/09 10/10 3/12 8/13 1/15 6/16 11/17200

290

380

470

560

650

0.7

1.0

1.3

1.6

1.9

2.2

Sales, index (RHS) Price/Sales(X) (LHS)

average 1.4x

12/07 5/09 10/10 3/12 8/13 1/15 6/16 11/173.0

4.5

6.0

7.5

9.0

0.5

1.4

2.3

3.2

4.1


average0.6x

12/07 5/10 10/12 3/15 8/177.0

9.0

11.0

13.0

15.0

0.30

0.45

0.60

0.75

0.90


average1.0x

12/07 5/10 10/12 3/15 8/1780

110

140

170

0.5

0.8

1.1

1.4


average1.5x

12/07 5/10 10/12 3/15 8/17760

870

980

1,090

1,200

0.6

1.0

1.4

1.8

2.2

Sales, index (RHS)

US Europe Japan

Asia ex Japan China


Takeaways for 2018

21


Stay fully invested in 2018

Policies to avoid capital market cycles

Central banks may be less accommodative but they are still friends of capital markets

Digital revolution emerging over the last 10 years is re-writing business models

In low growth world, stocks deliver top and bottom lines growth command a premium, i.e. prefer US, Asia and Japan


Important information

This document is intended only for 2018 Invesco Roadshow in Hong Kong. This is not an invitation to subscribe for shares in afund nor is it to be construed as an offer to buy or sell any financial instruments. Nor does this constitute a recommendation of the suitability of any investment strategy for a particular investor. Circulation, disclosure, or dissemination of all or any part of this document to any unauthorized persons is prohibited.

This document may contain statements that are not purely historical in nature but are “forward-looking statements.” These include, among other things, projections, forecasts, estimates of income, yield or return or future performance targets. These forward-looking statements are based upon certain assumptions, some of which are described herein. Actual events are difficult to predict and may substantially differ from those assumed. All forward-looking statements included herein are based on information available on the date hereof and Invesco assumes no duty to update any forward-looking statement. Accordingly, there can be no assurance that estimated returns or projections can be realised, that forward-looking statements will materialiseor that actual returns or results will not be materially lower than those presented.

All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. As with all investments there are associated inherent risks. Please obtain and review all financial material carefully before investing. The opinions expressed are based on current market conditions and are subject to change without notice. These opinions may differfrom those of other Invesco investment professionals.

It is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any investment strategy to any person in any jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it would be unlawful to market such an offer or solicitation. This document should not be distributed to retail clients whoare resident in jurisdiction where its distribution is not authorized or is unlawful. It should not be relied upon as the sole factor in an investment making decision. Circulation, disclosure, or dissemination of all or any part of this document to any unauthorizedperson is prohibited.

This document is issued in Hong Kong by Invesco Hong Kong Limited景順投資管理有限公司, 41/F, Champion Tower, 3 Garden

Road, Central, Hong Kong.

22

global equities outlook: where are the opportunities?

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