– GIST –
GLOBAL INVESTMENT STRATEGY THEMES
DANIEL MORRIS Senior Investment Strategist
This document is for professional investors
TOPICS Macro outlook
U.S.
EUROPE
JAPAN
EMERGING MARKETS
Asset classes
EQUITIES
FIXED INCOME
2
INVESTMENT THEMES
Macro
Bear watch
Equity
Show me the money
Bonds
It’s all about inflation
3
Lofty PMIs in Europe and US Composite PMIs (Purchasing Manager Indices) Index level; value greater than 50 indicates expansion 58 57 56
European Union United States Emerging markets Japan
58 57 56
55
55
54
54
53
53
52
52
51
51
50
50
49
49
48 ott 15
48
apr 16
ott 16
apr 17
• US data a bit weaker but still and high level • EU on an upswing • More ammunition for both Fed and ECB
ott 17
Data as at 1 December 2017. Note: US average of ISM and Markit series; China average of Caixin and China Federation of Logistics series. Latest emerging markets reading for China if EM composite unavailable. Latest reading for European Union is eurozone and UK (if available) if EU not yet published. Sources: Markit, ISM, BNP Paribas Asset Management.
4
Good time for the markets with results beating forecasts Surprise indices
150
US hard data Eurozone hard data
US soft data Eurozone soft data
150
120
120
90
90
60
60
30
30
0
0
-30
-30
-60 nov 16 gen 17mar 17mag 17 lug 17 set 17 nov 17
-60
• Best combination of hard and soft data surprises, both in Eurozone and US • Note: Soft data are sentiment indicators, hard data is real money
Data as at 7 December 2017. Sources: Citigroup, BNP Paribas Asset Management.
5
Flattening yield curve doesn’t mean recession imminent US yield curve Number of months is time from spread at current level to subsequent recession
bps
Recession
• Yield curve has to decline before it can turn negative
350 300
2-30 year spread
250 200 150
14 months
28 months
79 months
36 months
100 50 0 -50
• But based on past experience, a recession is likely not on the immediate horizon
-100 -150 -200 -250 1978
• Yield curve has been flattening as market prices in short-term rate hikes
1988
1998
2008
Data as at 11 December 2017. Sources: Factset, NBER, BNP Paribas Asset Management.
6
Third quarter US GDP not quite as good as headline Composition of 3q US GDP growth and forecasts Net Exports
%
0.4
Gov't. Residential Spending Invest. -0.2 0.1
3.0
Forecast*
0.6 2.5 2.0
0.8
Business Invest.
Inventory Change
3.3
1.5
2.6 2.2
1.0 1.6
2.4
Consumer Demand
0.5 0.0 Total
4q17
2017
2018
Data as of 30 November 2017. *Consensus forecast. GDP = Gross Domestic Product. Note: Data is SAAR (seasonally adjusted annual rate). Any economic and market trend, prediction, projection, or forecast is not necessarily indicative of future or likely performance. Sources: BEA, Focus Economics, BNP Paribas Asset Management.
7
Falling savings boosting consumer spending in US Retail sales and savings rate % 5%
Retail sales change YoY (2-mo MA, left)
4,5
Savings rate (reverse, right)
3,5 4,0
4,0
4,5
• Stock market gains, home price appreciation, rising income expectations could keep savings rate low, but not indefinitely
3,5 5,0 3,0 5,5
2,5
6,0
2,0 1,5 mag 15
nov 15
mag 16
nov 16
mag 17
6,5 nov 17
• Ultimately, need pickup in hiring/participation, and/or stronger productivity to maintain current levels of consumption growth
Data as at 15 November 2017. Sources: BEA, US Census Bureau, BNP Paribas Asset Management.
8
CapEx outlook has brightened Business investment Private fixed investment quantity indices, seasonally adjusted, rebased
190
Election
Intellectual property products 25%
190
Equipment 35% 175 160
175
Structures (ex-energy) 14% Structures (energy) 2%
160
145
145
130
130
115
115
100
100
85
85
70 2002
70 2004
2006
2008
2010
2012
2014
• End of corporate profit recession – especially for energy firms – continues to bode well for capital spending • Survey measures of CapEx plans point in the same direction • Follow-through on tax reform would also provide a tailwind
2016
Data as at 6 November 2017. Note: Energy Includes petroleum and mineral exploration. Sources: US BEA, BNP Paribas Asset Management.
9
For internal use only
Inflation: Sort-term and structural factors Core CPI components Year-on-year and last three month annualised percent change
Last 12 months
Last 3 months (annualised) 1.8% 2.7%
CORE CPI Housing
50%
Other
4%
Education
4%
Medical
• Recent weakness suggests no progress this year toward Fed’s 2% inflation objective • In theory, fundamentals in place for gradually firming inflation
11%
Recreation 7%
• tightening labor market
Transport 15%
• weaker dollar
Apparel
4%
Comm
5%
• firming purchaser prices -5
-4
-3
-2
-1
0%
1
2
3
Data as at 24 November 2017. Sources: Bureau of Economic Analysis, Federal Reserve Bank of Dallas, Bureau of Labor Statistics, BNP Paribas Asset Management.
10
Wage growth has disappointed Wage indicators %
%
Atlanta Fed wage growth tracker Average hourly earnings
4,0
4,0
3,5
3,5
3,0
3,0
2,5
2,5
2,0
2,0
1,5 2007
1,5 2009
2011
2013
2015
• With labor market tightening, wages should be picking up
• But trend is at best flat
2017
Data as at 11 December 2017. Sources: Bureau of Labor Statistics, Federal Reserve Bank of Atlanta, BNP Paribas Asset Management.
11
But it’s not completely a mystery Growth in real compensation and productivity during expansions
• Disappointing wage growth stems in part from low productivity gains in this expansion, and recent profit recession
Recession Productivity Real compensation
125
120
115
110
105
100 1991
1996
2001
2006
2011
2016
Data as at 30 June 2017. Note: Shading indicates NBER recessions. Sources: US Bureau of Labor Statistics, BNP Paribas Asset Management.
12
Outlook for tax reform? Two out of three chance US budget surplus / deficit and Treasury yields Budget deficit/surplus as % of GDP; 10-year Treasury yields Obama
% 8 7 6 5 Trump?
4
GW Bush
3 2
Yes • Republicans love tax cuts • They need a win • May loose control of Congress • Could get some Democratic support
1 0
Reagan
-1
-2 -3 1950
Clinton
1960
1970
1980
1990
2000
2010
2020
Data through FY 2017 (est.). Sources: Federal Reserve of St. Louis, US Treasury, BNP Paribas Asset Management.
No • Busy calendar • Conflicting objectives • Procedurally difficult • Vested interests 13
TOPICS Macro outlook
U.S.
EUROPE
JAPAN
EMERGING MARKETS
Asset classes
EQUITIES
FIXED INCOME
14
Eurozone growth outlook broadly positive Forecasted 2018 GDP growth rates
• Consensus growth rate in 2018 expected to be 2.0%, above trend
Ireland Sweden Spain Austria Greece Norway Germany Portugal Netherlands Denmark Euro Area Finland Switzerland France Belgium Italy UK
Euro
• Demand growth remains strong and almost certainly stronger than growth in supply
Non-euro
2.0%
0%
0,5
1,0
1,5
2,0
2,5
3,0
3,5
Data as of 27 November 2017. Sources: FocusEconomics, BNP Paribas Asset Management.
15
Japan’s QE has been the biggest Central bank balance sheet as % of GDP %
Eurozone (left) %
US (left)
85
UK (left) 30
Japan (right)
75 65
25
55 20
45
• Discussion now is sequencing of ECB tapering and raising the deposit and refi rates • Japan cannot maintain the current pace, but BoJ is committed for now
15 35 10 5 2008
25 15 2010
2012
2014
• US will be running down its balance sheet this year
2016
Data through March/June 2017. Sources: US Federal Reserve, European Central Bank, Bank of Japan, Bank of England, Haver, BNP Paribas Asset Management.
16
Real trade-weighted exchange rate has jumped Eurozone net exports and currency 1,6 1,4 1,2 1,0 0,8 0,6 0,4 0,2 0,0 -0,2 -0,4 -0,6 -0,8 -1,0 -1,2 -1,4 2007 2009 2011 2013
Net exports GDP contribution (left)
112 110 108
Euro REER (right)
106 104
• Net trade did not make a positive contribution to growth over the recent past despite the weak exchange rate
102
100 98 96
• Now a stronger euro poses a potential downside risk to growth
94 92 90 88 2015
2017
Data through 27 November 2017. REER = Real effective exchange rate index. Sources: Haver, Factset, BNP Paribas Asset Management.
17
But growth outlook is getting worse UK indicators GDP NTM forecast (right)
110 108
Sterling REER (left)
106
104
%
2,5
2,0
102 Referendum
100
1,5
• GDP growth estimates recovered sharply from Brexit overreaction
• Now a more sobre evaluation is bringing forecasts back down
98 96
1,0
94 92
0,5
90 88 2013
0,0 2014
2015
2016
2017
Data as at 10 November 2017. REER = Real effective exchange rate index. Sources: Haver, JP Morgan, BNP Paribas Asset Management.
18
TOPICS Macro outlook
U.S.
EUROPE
JAPAN
EMERGING MARKETS
Asset classes
EQUITIES
FIXED INCOME
19
Japanese GDP growth currently best in a decade Japan GDP composition and consensus forecasts Business invest
4,2 3,6
Government
%
Household demand
3,0
Household invest
3,0
2,5
Net exports
2,4
2,0
Inventories
GDP
1,8
1,5
1,2
1,0
0,6
0,5
0,0
0,0
-0,6
-0,5
-1,2
-1,0
-1,8
-1,5 3q17
2017
2018
2019
2020
• Japan is benefitting from the global, cyclical upswing
• Net exports a big boost despite 3% gain in yen this year • Forecasts still downbeat, however
2021
Data as at 11 December 2017. Note: Values for most recent quarter are versus prior quarter annualised, yearly figures are annual change. Sources: Japanese Cabinet Office, Factset, FocusEconomics, BNP Paribas Asset Management.
20
TOPICS Macro outlook
U.S.
EUROPE
JAPAN
EMERGING MARKETS
Asset classes
EQUITIES
FIXED INCOME
21
Depreciating dollar helping EM returns Dollar indices Yuan indexed to 100 as of latest value
164
164
US$ vs EM currencies US$ vs DM currencies Yuan
148
148
132
132
116
116
100
100
84
84
68 2000
2003
2006
• Post-election rally in dollar has stalled
2009
2012
2015
• At least against EM currencies, dollar looks overvalued • Fed hikes crucial, but so is ECB policy
68 2018
Data as at 1 December 2017. Sources: J.P. Morgan, Thomson Reuters, BNP Paribas Asset Management.
22
Changes in Standing Committee and reform outlook Current Standing Committee (July 2017)
Former
Xi Jinping
Li Keqiang
Wang Qishan
Yu Zhensheng
Zhang Dejiang
Zhang Gaoli
Liu Yushan
• Before, only 3 proreform members
• Xi’s supporters now 5 = reformer and Xi supporter = erring on the side where the wind blows
source: BNPP AM (Asia)
New
• Reform will progress faster and deeper than in the first term
Chart 2: The new Standing Committee (announced on 25 October 2017) Xi Jinping 64
Li Keqiang 62
Li Zhanshu 67
Wang Huning 62
Wang Yang 62
Zhao Leji 60
Han Zheng 63
• Growth to slow towards 6.5% by year-end; 6.0%-6.5% in 2018
= reformer and Xi supporter numbers under names = age of the SCP member
source: BNPP AM (Asia)
Data as at 31 October 2017. Sources: CEIC, BNP Paribas Asset Management.
23
Steady expansion in service sector Manufacturing and services PMIs Index level; value greater than 50 indicates expansion
62
Services
62
60
Manufacturing
60
58
58
56
56
54
54
52
52
50
50
• Services account for 50% of China GDP, though most people focus on manufacturing • Sector has been steady for the last several years • Need stronger growth to compensate for manufacturing weakness
48 48 2003 2005 2007 2009 2011 2013 2015 2017 Data as at 8 December 2017. Note: Manufacturing values are average of official government series and HSBC series. Sources: National Bureau of Statistics of China, HSBC, BNP Paribas Asset Management.
24
Emerging markets — and China — now a tech index Sector weightings in MSCI Emerging Markets
Technology
%
% Commodities
30
30
25
25
20
20
15
15
10
10
5
5
0 dic 94
0 dic 99
dic 04
dic 09
• Technology is now the dominant sector in the EM index • We need to think differently about EM, and about China
dic 14
Data as at 30 August 2017. Sources: MSCI, BNP Paribas Asset Management.
25
Chinese debt levels are average, and growth is better Debt levels and GDP growth 400
• China’s level of foreign debt is low and the country is a net creditor to the world
Eurozone United States China
350
Debt / GDP (%)
300 250
• Foreign exchange reserves are very high
200 150
• Domestic savings rate is nearly 50% of GDP (if anything, too high)
100 50 0
-5
-4
-3
-2
-1
0
1
2
3
4
5
GDP growth rate (average last 4 quarters, YoY, %)
6
7
8
• Closed capital account limits risk of debt crisis
Data as at 14 June 2016. Sources: Factset, BIS, BNP Paribas Asset Management.
26
TOPICS Macro outlook
U.S.
EUROPE
JAPAN
EMERGING MARKETS
Asset classes
EQUITIES
FIXED INCOME
27
Equity shows value vs bonds, less vs inflation Expected earnings risk premium and real earnings yield
%
Equity risk premium Real earnings yield
7
Median Median
% 2011
1974 2008
7
6
6
5
5
4
4
3
3
2
2
1
1
0
0
-1
-1
-2 -3 -4 1955
• How expensive bonds are depends on estimations of future GDP growth and inflation
-2
1999
1987
• Equity price-to-earnings and price-to-book multiples are high
-3 -4
1965
1975
1985
1995
2005
2015
Data through 24 October 2017. Note: S&P 500 earnings yield less 10-year US government bond yield; earnings yield based on earnings exectations from 1984, trailing earnings prior. Sources: Robert Shiller, US Federal Reserve, Standard & Poor’s, IBES, BNP Paribas Asset Management.
28
Volatility remains subdued Equity and bond market expected volatility VIX and MOVE indices
0,00
0,00 Equities
-0,25
-0,25
Treasuries -0,50
-0,50
-0,75
-0,75
-1,00
-1,00
-1,25
-1,25
-1,50
-1,50
-1,75
-1,75
-2,00 dic 16
mar 17
giu 17
set 17
• There are occasional jumps in vol, but the quickly pass
-2,00 dic 17
Data as of 11 December 2017. Note: Normalised 2-day moving average. Equity volatility average since 1990, fixed income since 2002. Sources: CBOE, BofA Merrill Lynch, BNP Paribas Asset Management.
29
VIX correlation with future returns is positive Vix and forward 1-month S&P 500 returns
VIX
• Not clear that low VIX presages a market correction
%
65 55
• It signals more that realised vol has been low
45
35 25 15
5 -30 -25 -20 -15 -10
-5
0
5
10
15
% S&P
Data as of 2 August 2017. Sources: CBOE, BNP Paribas Asset Management.
30
Equity markets pricey on most metrics Region and country relative valuations Chart shows P/E, table shows z-score
United States
26
US ex-Tech+
19
P/E
P/B
P/S
P/CE
PEG
DY
ROIC
1.0
0.8
1.3
1.5
0.2
0.9
0.3
0.9
US Tech+
11
-0.1
Europe
11
0.3
0.1
0.7
1.1
-0.8
0.5
0.7
Asia ex-Japan
9
0.7
-0.4
0.9
-0.2
0.0
0.0
0.7
Developed Markets
9
0.0
0.5
1.5
1.3
-0.6
0.6
0.2
-0.2
0.0
0.6
0.9
-0.2
0.5
0.2
-0.9
-0.7
1.4
-0.1
-0.7
-0.4
-0.7
Emerging
3
Japan** (11)
-18 -12 -6 0% 6
12 18 24 30
Data through 1 December 2017. Note: Valuation based on current price to next-twelve-month earnings relative to long-run median. *MSCI World ex-US until 2001, ACWI thereafter. For priceto-book, multiple based on IMI indices from 1974. **Japan value calculated only since 2001, otherwise from 1987. Price-to-book ratio is relative to median since 1974 except EM which is from 1995. Colors indicate z-score, with threshold at +/- 1 and +/- 0.5. Tech+ = IT sector plus Internet & Direct Marketing Retail. Sources: IBES, MSCI, FactSet, BNP Paribas Asset Management.
31
Little value left in the market Relative forward P/Es S&P 500 Energy
Industrials Capital Goods
Discretionary* Autos & Compon. Cons. Durables & Apparel Consumer Services Media
Staples Food & Staples Retailing Food, Beverage & Tobacco
Health Care Health Care Equipment & Services
Financials Banks
Pharmaceuticals, Biotechnology & Life Sciences
Diversified Financials
InformationTechnology Software & Services
Utilities
Retailing*
Insurance
Technology Hardware & Equipment
Materials C&P Svcs Transportation
Relative P/E: -35% -30%
-25%
Household & Personal Products
-20%
-15%
-10%
Telco Svcs
Real Estate Semiconductors & Semiconductor Equip. -5%
0%
5%
10%
15%
20%
25%
30%
35%
Data as of 23 October 2017. C&P Svcs = Commerical and Professional Services; Telco Svcs = Telecommunication Services. Note: Valuation based on current price to next-twelve-month earnings relative to long-run average (trimmed mean) since 1984, except Energy and Materials (Price-FY3 earnings) and Real Estate (Price-FFO). *Exluces Amazon. Size of rectangles reflects market capitalisation. Sources: Standard & Poor’s, IBES, BNP Paribas Asset Management.
32
US corporate leverage has jumped Leverage ratios S&P 500 ex-financials
%
Debt / equity (left) Average debt/equity (left) Interest expense / EBITDA (right)
%
110
26
100
22
90
18
80
14
70
10
60
6
• Debt levels rose sharply in 2015, but levels are not average
• With low interest rates, the ability of companies to service debt is high • Reduces risk (or at least impact) of a rise in rates
1992 1995 1998 2001 2004 2007 2010 2013 2016 Data as at 12 October 2017. Sources: Standard & Poor’s, Factset, BNP Paribas Asset Management.
33
Companies have used the debt to buy back shares Debt levels and share buybacks S&P 500 ex-financials
• Companies have substituted (cheap) debt for equity
Change in debt level $bn
Share buybacks
400
• Whether this is good or bad depends on which one you own
300 200 100 0
*
-100 2000 2002 2004 2006 2008 2010 2012 2014 2016 Data as at 30 October 2017. *Latest quarterly data available. Sources: Standard & Poor’s, Factset, BNP Paribas Asset Management.
34
Impact of share buybacks on earnings growth falling Earnings growth and share buybacks MSCI USA Index (excludes Energy sector)
Buybacks
%
%
Net income growth
9
9
EPS growth
8
8
1
1
0
0
-1
-1
• Share buybacks were crucial in 2016 to boosting earnings growth, but less so now
3q17
2
1q17
2
3q16
3
1q16
3
3q15
4
1q15
4
3q14
5
1q14
5
3q13
6
1q13
6
3q12
7
1q12
7
• Before the GFC, companies were you diluting shareholders; not now
Data as at 30 October 2017. Sources: MSCI, Factset, BNP Paribas Asset Management.
35
Risk in US small caps can be valuation Relative forward PEs Forward PE relative to S&P 500 vs long run average (average=100)
115
115
112
112
109
109
106
106
103
103
100
100
97
97
94
94
91
91
88
Small cap relative PE
88
85
Mid cap relative PE
85
• Mid caps should benefit from the same factors as small caps: domestic focus for investment, strong dollar, trade worries — but they get less attention from investors
• Relative valuations currently favour mid caps
82 82 2002 2004 2006 2008 2010 2012 2014 2016 2018 Data as at 11 December 2017. Sources: IBES, BNP Paribas Asset Management.
36
Flattening yield curve has boosted growth stocks Yield curve and equity style returns US Treasuries and Russell 1000 indices
bps
200
350
190
300
180
250
170
200
160
150
150
100
140
50
130
0
120
-50
2-30 year spread (left)
-100 -150
Value vs growth (right)
-200 -250 1978
110
• Growth generally outperforms value when the yield curve is flattening • Given potential for further gains in short rates, growth may continue to outperform
100 90 80 70
1988
1998
2008
Data as at 11 December 2017. Sources: Factset, BNP Paribas Asset Management.
37
Expectations for margin expansion Forecasted net margins Emerging % % markets 12 12 11 11 10 10 US* 9 9 UK 8 8 7 7 Europe ex-UK 6 6 5 5 Japan 4 4 3 3 2 2 1 1 2004 2006 2008 2010 2012 2014 2016 2018
• EM margins are below the long-run average • US margin expectations have not risen for 4 years • Europe finally starting to recover
Data through 27 November 2017. *Excludes Tech and Internet and Direct Marketing Retail. Sources: Factset, BNP Paribas Asset Management.
38
Steady increase in earnings revisions Forward earnings estimates Emerging markets
115 112
115
Japan
US Tech+
112
Europe ex-UK
109
• Slope of the line represents year-on-year EPS growth rate
US ex-Tech+
109
• Big divergence in US by sector
UK
106
106
103
103
100
100
97 nov-16
• UK hindered by energy sector • Japan earnings rising despite yen strength
97 feb-17
mag-17
ago-17
nov-17
Data through 27 November 2017. *Excluding Energy sector. Note: Indices in local currency, 100=31-Dec-2016. Sources: Bloomberg, BNP Paribas Asset Management.
39
For internal use only
Analysts very optimistic for next year 2018 earnings growth forecast (bottom up, year-on-year) 13,4
EM Asia
12,9
Emerging Markets United States
11,4
Bottom up Top down
• Japan forecast similar to Asia ex-Japan, so Japan year-to-date market performance difficult to sustain
8,7 10,8
EM Latin America 9,7
Developed Markets
8,9
Europe
8,3
EM Europe
Ex Tech+ 10.6% Tech+ 13.8%
3,9
Asia 0
• Growth rates are generally lower than for 2017 but still high
5
10
• In Europe, divided between the continent (+10.1%) and UK (6.4%)
15
Data as at 1 December 2017. Note: US dollar terms. Sources: IBES, Factset, BNP Paribas Asset Management.
40
US outperformance explained by tech Equity indices US Tech+ 140
USA
140
135
Europe
135
US ex-Tech+*
130
130
125
125
120
120
115
115
110
110
105
105
100 dic 16
100 feb 17
apr 17
giu 17
ago 17
• European equities had actually outperformed US equites this year, excluding the Tech+ sector • More recently, tax reform has dominated
• But hard to be underweight US given importance of Tech+
ott 17
Data as at 8 December 2017. Note: Tech+ = Information Technology sector + Internet Retail industry. Sources: Bloomberg, BNP Paribas Asset Management.
41
Bank of Japan has stepped up its buying Stock market purchases and index level ¥bn
BoJ ETF purchases (left)
40
Foreign purchases (left)
35
Nikkei 225 (right)
30
k 20
Yen index (right)
• BoJ purchases have heavily outpaced foreign investor purchases of Japanese equities
18
25
16
• Target is ¥6 tr. a year vs. a market cap of ¥400 tr.
20 14 15 12
10
5
10
0 2010
8 2011
2012
2013
2014
2015
• BoJ now owns 74% of ETFs • But it could slow next year
2016
Data as at 8 November 2017. Sources: Ministry of Finance, Bank of Japan, BNP Paribas Asset Management.
42
What happened to eurozone equity outperformance? Relative equity returns and exchange rate
106 105
US vs eurozone equities (left) Dollars per euro (right)
104
$/€ 1,19 1,17
103 102
1,15
101
1,13
• After politics drove the markets for the first half of the year… • It’s been all about currencies and now tax cuts in US
100 99 98
1,11 1,09
97
96 95 dic 16 feb 17 apr 17 giu 17 ago 17 ott 17
1,07 1,05
Data as of 11 December 2017. Sources: Bloomberg, MSCI, BNP Paribas Asset Management.
43
EM still has a lot of catching up to do Relative emerging market profitability and index return
350
300
Index return: EM vs DM (left) Return-on-equity: EM less DM (right)
%
2,4 1,8 1,2
250
0,6 200
0,0
• EM had underperformed for years
• Recent recovery is small in comparison • Turnaround in ROE bodes well for the future
-0,6 150 -1,2
100 1999
-1,8 2002
2005
2008
2011
2014
2017
Data through 1 December 2017. Note: Index returns in US dollar terms. DM = Developed Markets. ROE based on next-twelve-month consensus estimates. Sources: Factset, BNP Paribas Asset Management.
44
TOPICS Macro outlook
U.S.
EUROPE
JAPAN
EMERGING MARKETS
Asset classes
EQUITIES
FIXED INCOME
45
Robust demand ahead, especially from non-OECD Oil supply / demand and prices 4
160
Supply / demand (left)
mil. bbl/ day
$/bbl
Oil price (right)
3 2
80
• Market balance going into slight deficit in H2
40
• See OPEC supply rising 1% / year, OECD supply 5% / year through 2018
1 0 -1 -2
20
• Expect crude $40-60 per bbl in next few months
-3 -4 1996
• US shale is winning the tug of war vs OPEC
10 1999
2002
2005
2008
2011
2014
2017
Data as at 10 October 2017. Sources: IEA, BNP Paribas Asset Management.
46
High yield default rates rising in the US High yield default rates %
% US excommodities
14
Europe
12
14 12
10
10
8
8
6
6
4
4
2
2
0 1998
0 2001
2004
2007
2010
2013
• Excluding commodities, default rates in US rising • Not surprising given how late economy is in the cycle • Europe, on the other hand, is improving, though spreads reflect this
2016
Data as at 27 November 2017. Sources: BofA Merrill Lynch, BNP Paribas Asset Management.
47
IG credit outlook improving in Europe Investment grade credit upgrade/downgrade ratio Trailing six months
%
US recession
• Accelerating eurozone recovery boosting outlook for IG credit
Europe US
1
• US is stable, though tax reform could be positive
0
-1
-2
-3
-4 1997
2000
2003
2006
2009
2012
2015
2018
Data as at 27 November 2017. Sources: BofA Merrill Lynch, BNP Paribas Asset Management.
48
Dovish ECB has pulled yields back down Government 10-year bond yield 2018 futures %
2,80
0,90
2,70
0,80
2,60
0,70
2,50
0,60
2,40
0,50 0,40 0,30 giu 17
2,30
Bunds year-end (left) Latest Bund yield Treasuries year-end (right) Latest Treasury yield lug 17
ago 17
set 17
2,20
• Market expects 10-year Bunds to be at 0.7% by 2018 year end and US Treasuries at 2.5% • Just 20-30bps higher than today • Perhaps low relative to inflation and stimulus risk in US
2,10 ott 17
nov 17
Data as at 24 November 2017. Sources: Bloomberg, BNP Paribas Asset Management.
49
Inflation expectations rising more in eurozone
%
Eurozone (left)
%
United States (right)
1,80
2,30
1,75
2,25
1,70
2,20
1,65
2,15
1,60
2,10
1,55
2,05
1,50
2,00
1,45 gen 17 mar 17 mag 17 lug 17
1,95
• Inflation expectations began to decline once Fed started withdrawing accommodation and signaling future rate hikes • Surveys also show a drop in inflation expectations
set 17 nov 17
Data through 7 December 2017. *Five-day moving average of average of 5-year 5-year currency inflation swap rate and breakevens. Sources: Bloomberg, BNP Paribas Asset Management.
50
Inflation expectations also a function of oil prices Inflation expectations and oil prices US inflation expectations (left) Oil price change* (YoY, right)
2,30 2,25
% 70
60 50
2,20
40 30
2,15
20 2,10
10 0
2,05
-10 2,00 dic 16
-20 giu 17
dic 17
• Forward inflation expecations should be insenstive to short-term changes in oil prices • But there is nontheless a correlation • “Base effects” suggest oil prices, and hence inflation expectations, would be weaker from here
giu 18
Data through 7 December 2017. Note: Inflation is five-day moving average of average of 5-year 5-year currency inflation swap rate and breakevens. Sources: Bloomberg, BNP Paribas Asset Management.
51
Gap between Fed and market very wide Central bank benchmark rates Forecast %
%
US Federal Funds Target Rate
4,5 4,0
4,5 4,0
FOMC participants' median
3,5
3,5
3,0
Eurozone Main Refinancing Rate
3,0
2,5
Linear (Forecast)
2,5
2,0
2,0
1,5
1,5
1,0
1,0
0,5
0,5
0,0 2004
• Market is 50 bps below Fed forecast for 2018 • 99% probability of only one hike in December • 63% probability of a 2nd hike in March • Fed not likely to hit 2.9% by 2020 but futures market too pessimistic
0,0 2006
2008
2010
2012
2014
2016
2018
2020
Data as at 8 December 2017. Note: FOMC = Federal Open Markets Committee. Sources: Bloomberg, Federal Reserve, BNP Paribas Asset Management.
52
Loans, corp IG and emerging market debt appealing Government bond yields (10-year)
Bond spreads (10-year for government)
Max
%
%
bps
3,5
3,5
150
3,0
3,0
125
2,5
25th-75th percentile
2,0 1,5
2,5 2,0 1,5
Latest
1,0 0,5
Min
0,0 -0,5
1,0
0
-0,5 Trsy
Bunds
Gilts
800
400
400
200
200 100
25 US
Euro
CEMBI
EMBI
3,5
3,0
3,0
2,5
2,5
200
2,0
2,0
100
1,5
1,5
0
1,0 IT
ES
PT
High yield bond spreads
800
50
3,5
MBS
Investment grade bond spreads
100
4,0
300
-25
JGBs
4,0
400
50
0,0
%
500
75
0,5
%
bps
100
25
Breakeven inflation (5yr-5yr swaps)
1,0 US
Euro
UK
Leveraged loans and EMD* bps
bps
2400
2400
1400
1400
1200
1200
1200
1200
1000
1000
600
600 800
800
600
600
50
300
25
150
300 150 US
Euro
CEMBI EMBI
400
400 L-Loans
GBI-EM
Data as of 11 December 2017. Note: Range since index inception except for government bond yields, from 1-Jan10. *Spread for loans, yield for GBI-EM. Sources: J.P. Morgan, Barclays, BNP PAM.
53
Lower for ever High-quality bond yields
%
% High quality bond yield*
12
12 Average
10
10
8
8
6
6
The future? GFC
4 2
4 Average real yield
2
0 -2 1800
0 60 years
1825
1850
1875
1900
1925
1950
1975
-2
2000
Data as of 23 March 2017. Note: High-grade municipal bond yields used for certain years between 1800 and 1920. US government bond interest rate through 1975, then Bloomberg Barclays US Aggregate through 1989, the Global Aggregate to present. Sources: Jeremy Siegel, “The real rate of interest from 1800-1990”, Homer & Sylla, “A History of Interest Rates”, Ibbotson SBBI, Federal Reserve, Univ. of Michigan, Bloomberg, BNP Paribas Asset Management.
54
Summary
Macro Equities Bonds •
Global, sychronised, cyclical upswing
•
Important to remember in times of volatility
•
Biggest risk is inflation spike and overzealous central banks
•
US equities already priced in best case scenario
•
Central banks tightening despite apparent lack of inflation
•
Republicans have to deliver
•
Waiting for an opportunity to add risk
•
Tech+ in US but Europe otherwise
•
Opportunities in leveraged loans, IG credit and EMD
•
EM threats (dollar, trade) receeding and outlook positive
55
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