global macroeconomic & market outlook...private & confidential crown agents macroeconomic...

Crown Agents Macroeconomic & Market OutlookPrivate & Confidential

July 2019

Global Macroeconomic & Market OutlookA Tale of Two Markets

Neil Michael

Chief Investment Strategist

& Head of Multi-Asset Investments


• Bond and equity markets are sending different signals.

• Bond markets focused on slowing growth and trade uncertainty.

• Slowing world trade being compounded by strong Dollar.

• Equity markets focused on the fact that despite weak manufacturing, service activity continues to hold up reasonably well.

• Fed rate cut as an insurance policy could sustain the expansion as in 1994 and 1998.

• Bond and equity markets pricing in different recession probabilities.

• Personal incomes and labour market helping to keep recession probability low.

• Fed has gone from expected rate increases to possible rate cuts in 2019.

• Bond yields have probably over-reacted to recession fears; and inflation has likely bottomed-out.

• Rates expected to peak in the US, remain on the floor in the Eurozone & Japan, rise Post Brexit in UK, & nudge down in China.

• Equities supported by continued positive earnings growth, returns on capital greater than cost of capital and lack of compelling alternatives.

• However, after a very strong performance so far this year, equity valuations – particularly in the US - are looking stretched, and any negative news on trade tensions for example, could trigger some weakness.

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Executive Summary

Crown Agents Macroeconomic & Market OutlookPrivate & Confidential 2

Table of Contents

Macro Outlook

Bond Market Outlook

Equity Market Outlook


Macro Outlook


Bond and Equity Markets Sending Mixed Signals

Source: Bloomberg. Data to 28 June 2019.

S&P500, US 2Yr Treasury Yield & Fed Funds Rate


Fed Rate Cuts as an Insurance Policy Could Sustain the Expansion

as in 1994 and 1998

S&P500, US 2Yr Treasury Yield & Fed Funds Rate



Bond Markets Focused on Slowing Growth and Trade Uncertainty

Global Manufacturing PMIs

Source: Bloomberg. Data to June 2019.

Global Trade War Scenario – Impact on Global GDP


Slowing World Trade Compounded by Strong Dollar, Which is Also

Helping to Keep Inflation at Bay

World Trade & Trade-Weighted Dollar

Source: Bloomberg. Data to 30 March/June 2019.


US Trade & Budget Balance vs Dollar

8

Dollar Should Weaken Given Rate Differentials & Twin Balance

Ave US Interest Rate Differential & Dollar

Source: Bloomberg. 28 June 2019. Source: Bloomberg. 28 June 2019. Average of UK, Eurozone & Japan.


Global Composite PMIs

9

Equity Markets Focused on the Fact That Despite Weak Manufacturing,

Service Activity Continues To Hold Up Reasonably Well

Global Services PMIs

Source: Bloomberg. Data to June 2019.


Bond & Equity Markets Pricing in Different Recession Probabilities

Probabilities of Recession & S&P500

Source: Bloomberg and Federal Reserve. Data to 30 June 2019.


Personal Incomes & Labour Market Helping to Keep Recession

Probability Low

US Business Sales, Industrial Production, Personal Incomes & Non-Farm Payroll

Source: Bloomberg. Data to May/June 2019.


Global Consumer Confidence

12

Global Consumer Confidence Supported By Solid Labour Markets

Global Unemployment & Real Wages

Source: Bloomberg. Data from Sept 2002 to May 2019. Source: Bloomberg. Data from Dec 2000 to May/June 2019.


Global Inflation Forecasts

13

After A Slowdown, Global Growth Is Likely To Stabilise And Then

Pick-Up Again, With Rising But Contained Inflation

Global GDP Forecasts

Source: Bloomberg Consensus. July 2019. Average = Since March 1996. Source: Bloomberg Consensus. July 2019. Average = Since Dec 2000.


Market Performance


Market Performance % Year to Date Performance %

15

Risk Markets in Particular Have Had a Very Strong 2019H1 Thanks to Central Bank

Dovishness & Optimism Over Trade Negotiations (Despite Set-Back in May)

Source: Bloomberg, Data to 30 June 2019


Bond Market Outlook


Fed Has Gone From Expected Rate Increases to Probable Rate Cuts in

2019

Fed Dot Plot

Source: Bloomberg. June 2019.


Probability of 50bp July Rate Cut Has Dropped

0

20

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120

Rate cut probabilities for July

1.75-2 2-2.25

Source: Bloomberg. 8 July 2019.


Dot Plot Rate Outlook Longer Term



Falling Inflation Has Helped Ease Bond Yields

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Inflation versus 5-year UST

CT05 Govt - Mid Price CPI YOY Index - Last Price



US 5yr/5yr Forward Inflation – Inflation Expectations Have Likely

Bottomed

1.75

1.85

1.95

2.05

2.15

2.25

2.35

5yr5yr FWD



Rates Expected to Peak in the US, Remain on the Floor in the Eurozone &

Japan, Rise Post Brexit in UK, & Nudge Down in China

Expected Central Bank Rates

Source: Bloomberg Consensus. As at 2 July 2019.


Government Bond Yields 2Yr % Government Bond Yields 10Yr %

23

Government Bond Yields Have Probably Over-Reacted To

Recession Fears

Source: Bloomberg, Data to 28 June 2019


Nominal & Real Yields % (2Yr)

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US & China Are The Only Major Bond Markets Compensating For

Inflation

Source: Bloomberg, Data from 12 Jan 2001 to 28 June 2019


Investment Grade Spreads US IG Leverage Measures

25

IG Spreads Have Narrowed & US Leverage Has Risen

Source: Bloomberg, Bank of America Merrill Lynch. Data to 28 June 2019


High Yield Spreads US HY Default Rates

26

HY Spreads Narrower But Not Back To 2018 Lows & Leverage is

Picking Up

Source: Bloomberg, Bank of America Merrill Lynch. Data to 28 June 2019


EMB IG Spread (Versus 10Yr UST Yield)

27

Emerging Market Bonds – Spreads Just Above Average But

Countries With The Biggest CA Deficits Are Most Vulnerable


Current Accounts Balances & Changes In EMBI Spreads

Source: IMF. JP Morgan. April 2019.


Equity Market Outlook


Global Company Earnings Growth (%YoY)

29

Equities – Continued Positive Earnings Growth


Equities – Return on Capital Still Above the Cost of Capital

Global Return On Capital

Source: Bloomberg. Data from Jan 2006 to June 2019.


Equities – Equities Look Reasonable Relative to Bonds – UK Very

Cheap

Equity Dividend versus Bond Yields

Source: Bloomberg. Data as at June 2019.


Equities – US Large Cap Very Expensive Relative to Rest of World

Company Fundamental Valuations Ratios – Composite of Price/EBITDA, Price/Book & Price/Sales

Source: Bloomberg. Data from Jan 2001 to June 2019.


Number of Standard Deviations Above/Below

Equilibrium ValueEconometric Model of S&P 500 Index

33

Econometric Model of Equity Markets – US, UK, Jap & EM Look

Expensive Relative to Economic & Market Factors

Source: Bloomberg. Dec 1998 to 30 June 2019Note: Based on a multiple regression (line of best fit) of Equity Market Index on 10 Yr Government Bond Index, IG Corp Bond Index, HY Corp Bond Index, EM Bond Index, 2 Yr Government Bond Index, Oil Price, Currency and OECD Composite Leading Indicator


Topix Could Struggle Under Yen Strength But EM Would Benefit

From Any Dollar Weakness

Source: Bloomberg Data to 28 June 2019.

EM/DM Equity Ratio & Dollar


Japan Topix Index & Yen


US Small Cap Look Cheap Relative to Large & Mid Cap


Rolling One Moving Average of US Small/Mid Cap Equities


Rolling One Moving Average of US Small/Large Cap Equities


Equities – Complacency is Creeping In

Source: Bloomberg. Data from 3 Feb 2006 to 5 July 2019.

US Sentiment Indicators VIX S&P 500 Volatility Index


This communication is intended for professional clients and eligible counterparties only. Past performance is not a reliable indicator of future results. Performance results are calculated before management fees and after trading expenses. Information contained in this publication is compiled from industry sources which we consider to be accurate and reliable.

There is no representation or warranty of any kind, whether express or implied, regarding the accuracy or completeness of the information given. The information provided does not constitute advice and it should not be relied on as such.

Any views or opinions expressed are those of Crown Agents Investment Management Ltd and are subject to change due to market and other conditions and should not be taken as statements of policy or intent.

Crown Agents Investment Management Ltd accept no liability for the impact of any decisions made based on the information provided in this publication.

Crown Agents Investment Management Limited. Registered in England & Wales. No: 2169973. Vat Reg No: GB 340 679841.

Authorised and regulated by the Financial Conduct Authority.

37

Disclaimer

Neil Michael

Chief Investment Strategist

& Head of Multi-Asset Investments

[email protected]

Robin Woodall

Senior Equities Fund Manager

[email protected]

Charles Thomson

Senior Fixed Income Fund Manager

[email protected]

Contact

http://www.caiml.co.uk/

[email protected]

+44 (0)20 3903 2500

+44 (0)20 8643 9113

Crown Agents Investment Management

Quadrant House,

The Quadrant,

Sutton, London,

SM2 5AS,

United Kingdom.

Ritesh Anand

Executive Vice President

[email protected]

Simon Price

Senior Equity Fund Manager

[email protected]

Slawomir Soroczynski

Senior Fixed Income Fund Manager

[email protected]

mailto:[email protected]



http://www.caiml.co.uk/





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