Global economic outlook: what risks and implications investors need to consider

Presented by Sebastian Mullins, Multi-Asset Portfolio Manager at Schroders 17 June 2020

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This webinar and information has been prepared and issued by Netwealth Investments Limited (Netwealth), ABN 85 090 569 109, AFSL 230975. It contains factual information and general financial product advice only and has been prepared without taking into account the objectives, financial situation or needs of any individual. The information provided is not intended to be a substitute for professional financial product advice and you should determine its appropriateness having regard to you or your client’s particular circumstances. The relevant disclosure document should be obtained from Netwealth and considered before deciding whether to acquire, dispose of, or to continue to hold, an investment in any Netwealth product.

While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), no person, including Netwealth, or any other member of the Netwealth group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information.

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Portfolio Construction Podcast Series Fortnightly Australian and global economic updates • Roger Montgomery • Ausbil • Coolabah Capital • Russell Investments

• Magellan • Schroders

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Meet today’s speakers

Sebastian Mullins Multi-Asset Portfolio Manager at Schroders

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Schroder Multi-Asset Webinar Is the worst yet to come?

Sebastian Mullins, Portfolio Manager

June 2020 For professional investors only. Not for retail clients

Divergent market performance Markets responding to divergent influences Bonds – 10Y UST Yields

150

3.0

2.5

130

110

1.5

1.0 100

High Yield OAS (bps)

120

74

1,100

72

1,000

70

900

68

800 700 600 500

80

0.0

S&P 500

NASDAQ

ASX 200

Source: Refinitiv, Schroders as at 31 May 2020. Past performance is not an indicator of future performance.

66 64 62 60

400

58

300

56

200

54

0.5

90

FX – AUD/USD

1,200

2.0

10Y Yields (%)

Price Index (100 as at 31 Dec 2018)

140

8

Credit – US HY Spreads

Exchange Rate (AUD/USD)

Equities – US and Australia

Where to from here?

The three phases of the COVID-19 crisis Phase 2: Recovery

Phase 1: Survival

Phase 3: The new normal

We are here?

– Shock to the economy – Massive monetary & fiscal support

– V, W, U or hybrid?

– When (2nd wave)?

– Liquidity crisis averted – Economic & health crisis still playing out

– Solvency crisis in corporates?

– Geo-politics (US/China/Australia)?

Source: Schroders

9

– – – – –

Inflation?

End of globalisation?

Big government?

Nationalisation of asset markets Low / zero rates in perpetuity?

Forecasts point to a significant hit to growth And how the recovery plays out will be critical

Source: IMF, BCA, Strategas, ISM

10

Equity markets have rallied from their lows Have US equities disconnected from reality?

Fundamentals seen to be improving

The economy is not the sharemarket

Investors flip from Panic to Euphoria

Source: Strategas, Haver Analytics, Pinnacle Data, Citi Research, Calculated Risk.

‘Don’t fight the Fed’ ingrained?

US$17tn in Fiscal and Monetary Support and counting Policy support has been fast and furious

Source: Citi, Bloomberg, Schroders

Fed Balance Sheet Expansion US$bn

Credit Has Been Supported But a deeper & protracted recession will lead to rising corporate defaults Central banks have underwritten investor confidence‌

Source: Schroders; Datastream, State Street, Charles Schwab, Bloomberg.

13

But, US default rates set to rise

The impact on profits is still unknown Negative impacts only just starting to show Scenario

Schroders Global Equity Earnings Model Growth

Mortality Rate

2020 Growth Shock

Implied Earnings Growth

Implied Equity Return

n/a

-5.9%

-48%

-54%

M&S Mild – Hong Kong Flu 1968-69

0.02%

-0.8%

-2%

-5%

M&S Moderate – Asian Flu 1957

0.22%

-2.2%

-15%

-19%

M&S Severe – Spanish Flu 1918-19

1.10%

-5.1%

-41%

-46%

IMF

Source: IMF World Economic Outlook – Interim Report March 2020; McKibbin, W., & A. Sidorenko (2006) “Global Macroeconomic Consequences of Pandemic Influenza”, CAMA Miscellaneous Publications, February; Schroders; Datastream.

Equities have disconnected from 12m EPS

60

YoY EPS Growth (%)

Pandemic Mortality rates v Implied Earnings Growth

40 20 0 -20 -40 -60 2000

2003

Earnings 2006

Model 2009

Model Projection 2012 2015

2018

2021

Model Inputs = Baa credit spreads, Global Manufacturing PMI (level & chg), Gold v Nickel, Cyclical v Defensive Equities

Analysts are still playing catch-up

1-Apr 8-Apr 22-Apr 29-Apr 6-May 13-May

Source: Schroders; Datastream, State Street, Charles Schwab, Bloomberg.

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COVID-19 complacency?

We are wary of a 2nd wave!

US Flattening Improved by NY‌

Source: Alpine Macro, Oxford Economics, BCA Research. As at 31/05/2020.

But cases remain elevated and have failed to follow others down.

Spanish Flu: 2nd wave could be worse than the first

Geo-politics – Trade Wars and Civil Unrest The impact on the US election is central

Source: ABS, Deutsche Bank, Goldman Sachs

History says be wary of the US Valuations drive risk & return over the medium term US Equities: Shiller PE v 10Yr Returns

S&P 500 – Top 5 Stocks as a % of the Total Index

25%

-5 0

20% 5 10

10Y Returns (% p.a.)

15%

15 10%

20 25

5%

30 0%

35 40

-5% 45 -10% 1950

50 1960

1970

Rolling 10 Yr Returns p.a.

1980

1990

2000

2010

2020

2030

Shiller PE - Pushed Forward 10 Yrs (RHS, Inverted)

Source: Schroders, Datastream as at 28 April 2020. For illustrative purposes only and should not be viewed as a recommendation to buy/sell. Past performance is not indicative of future performance.

Where are the opportunities?

Valuations drive risk & return over the medium term Expected return vs probability of loss – Dec 2019

Expected return vs probability of loss – May 2020

15%

15% EM Equities (H)

10%

Expected Return p.a over 3 yrs

Expected Return p.a over 3 yrs

Aus. Equities

Aus. Equities

EM Equities (H) Japan Equities

5%

UK Equities

Aus. High Yield Global Equities (H) Aus. Cash

Aus. IG Credit

0%

EM Bonds

US Equities US IG Credit A-REITs

Global High Yield (H) Euro Equities Aus. Gov't Bonds

US Gov't Bonds

10% UK Equities Global Equities (H)

US Equities Japan Equities

Global High Yield (H) Aus. High Yield

5%

Euro Equities EM Bonds

A-REITs

Aus. IG Credit US IG Credit Euro IG Credit

Aus. Cash 0%

US Gov't Bonds

Aus. Gov't Bonds

Japanese Gov't Bonds

Euro IG Credit

German Gov't Bonds Japanese Gov't Bonds -5% 0%

10%

20%

30%

40% Probability of Loss

50%

60%

70%

80%

German Gov't Bonds

-5% 0%

10%

20%

30%

40%

50%

60%

70%

80%

Probability of Loss

Source: Schroders as at 30 May 2020. Countries, stocks and sector weightings and returns are mentioned for illustrative purposes only and should not be viewed as a recommendation to buy/sell. Past performance is not indicative of future performance. Forward looking projections are not a guarantee of future performance.

How we’ve been managing the portfolio through the crisis Key Views and Changes Schroder Real Return CPI + 5% Fund We were relatively defensively positioned reflecting concerns about valuations, particularly in equity and credit markets.

10.00%

0.00%

Prices have fallen but valuations have not improved as much (given impact on earnings). Policy response significant and may mitigate the downside, but damage will likely be long lasting.

Added equities (+10%) mainly in Australia, bought some Australian HY debt, and took profits on USD, trimmed GBP and added JPY. Duration reduced by <0.5 yrs. Added downside option protection.

Returns

Initially cut risk further (reducing equities & HY credit) and added to hedges (duration and USD).

-10.00%

-20.00%

-30.00% Source: Schroders, CYTD as at 30 May 2020. Past Performance is not a reliable indicator of future performance. Countries, stocks and sector weightings and returns are mentioned for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The type and level of risks associated with each product represented above will differ and, as a general rule, the higher the potential return of a product, the more risks associated with that product.

Performance vs Objective (since inception) Delivering capital growth whilst managing volatility and drawdowns 30%

RRF5 1 Y Rolling

CPI+5% 1Y Rolling

25%

1Y Rolling

20%

Period

Fund (%)

CPI

3 months

-1.5%

0.5%

CYTD

-1.2%

0.3%

1 Year

2.4%

1.8%

3 Year (p.a.)

3.7%

1.7%

5 Year (p.a.)

3.9%

2.0%

10 Year (p.a.)

6.3%

2.0%

Since inception (p.a.)1

6.4%

2.2%

3Y Vol (p.a.)

4.2%

Max Drawdown (excl. GFC)

-5.8%

15% 10% 5% 0%

-5% Sep 08

Sep 09

Sep 10

Sep 11

Sep 12

Sep 13

CPI Trimmed Mean + 5%

Sep 14

Sep 15

Sep 16

Sep 17

Sep 18

Sep 19

Schroder Real Return CPI Plus 5% Fund (Gross) - Professional Class

Cum. Return

22,000 18,000 14,000 10,000 6,000 Sep 08

Sep 09

Sep 10

Sep 11

Sep 12

Sep 13

Sep 14

Sep 15

Sep 16

Sep 17

Sep 18

Sep 19

Drawdown

0%

European debt crisis Apr 11 – Sep 11 ASX: -15.1% RRF: -0.6%

“Taper tantrum” May 13 – Jun 13 ASX: -6.7% RRF: -0.2%

ASX200 Drawdown

-10%

China crisis Apr 15 – Feb 16 ASX: -13.7% RRF: -2.5% RRF5 Drawdown

“Market Correction” Sept 18 – Dec 18 ASX: -9.4% RRF: -2.1%

-20%

COVID-19 Feb 20 – Mar 20 ASX: -26.8% RRF: -5.8%

-30%

-40%

Source: Schroders, ABS. Cumulative performance shown for the Schroder Real Return CPI+5% strategy (gross of fees) since inception (31 Oct 2008) to 31 May 2020. Past Performance is not a reliable indicator of future performance. CPI is measured by the RBA Trimmed Mean as published by the ABS, as at 31 March 2020.

20

Key position changes We have been active in the Real Return strategy but from a defensive standpoint.

Source: Aladdin, as at 31 May 2020. For illustrative purposes only.

RRF has performed well against different investments Consistent long run performance does pay dividends Since inception of RRF (Oct 2008-March 2020) Returns (% CYTD)

Returns (%p.a)

Std Dev (% p.a)

Max Drawdown (% p.a)

Barclays Global macro Index

-3.68%

2.56%

4.24%

-8.08%

Barclays Hedge Fund Index

-11.74%

3.91%

6.72%

-12.07%

Barclays Multi-Strategy Index

-8.89%

3.88%

4.74%

-9.99%

Bloomberg AusBond Composite Index

2.99%

5.97%

2.95%

-3.08%

HFN Hedge Fund Aggregate Index

-9.41%

3.60%

5.48%

-9.41%

-1.94%

2.74%

3.31%

-4.83%

MFN Multi-Strategy Index

-9.02%

2.53%

4.81%

-10.11%

Schroder Real Return CPI+5% Fund

-4.55%

6.14%

4.91%

-13.38%

30% ASX200, 30% Wld Ex Aus, 40% Aus Bond

-10.68%

6.17%

6.89%

-14.00%

S&P/ASX200

-23.10%

5.43%

14.31%

-26.75%

RRF

HFN Macro Index

Source: eVestment as at 31 March 2020 rebased to 10,000. Inception of RRF is October 2008. Returns are gross of fees in base currency. Past performance is not an indicator of future performance. Countries, stocks and sector weightings and returns are mentioned for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The type and level of risks associated with each product represented above will differ and, as a general rule, the higher the potential return of a product, the more risks associated with that product.

Where to from here?

–

COVID-19 is an extreme exogenous shock with profound implications for global growth, policy settings and portfolios.

–

COVID-19 occurred against a backdrop of complacency in asset markets dominated by optimistic assumptions leaving little room for error. We were relatively well positioned given our concerns about complacent pricing.

–

Policy makers responded quickly and at a large scale, with both monetary and fiscal levers delivering substantial stimulus to avoid a liquidity crisis, however this won’t avert deep recession in key economies nor prevent significant damage to many companies (particularly those with high leverage).

–

While markets have recovered somewhat the outlook remains challenging with little room for complacency as the impact continues to be felt.

–

We have responded cautiously adding Australian equities and some high yield Australian credit as distressed prices, but we view the recovery with caution. We’ve also added some downside protection through put options, JPY and have raised cash (and trimmed our duration).

–

We expect to add risk (equities) selectively through this volatility, but a clear opportunity is yet to emerge. This is evolving quickly but still has some way to play out.

–

We are drawing on our experience through the GFC to identify solid medium term investment opportunities, not trying to time the market bottom.

Important information The information contained in this presentation is current as at the date of publication and is provided by Schroder Investment Management Australia Limited (ABN 22 000 443 274, AFSL 226473)(Schroders). It is intended solely for Wholesale Clients (as defined under the Corporations Act 2001 (Cth)). The recipient of the information contained in this presentation agrees not to pass on any credit rating and/or related research to a party who is not a Wholesale Client. Investment in any of the Schroder funds may be made on an application form accompanying the relevant Product Disclosure Statement (PDS) which is available from Schroders.

This presentation does not contain and should not be taken as containing any financial product advice or financial product recommendations. In making this presentation, no consideration has been given to the recipientâ&#x20AC;&#x2122;s objectives, financial situation or needs. Before making any decision relating to a Schroders fund, you should obtain and read a copy of the relevant disclosure document for that fund to consider the appropriateness of the fund to your objectives, financial situation and needs.

Schroders does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this presentation. Except insofar as liability under any statute cannot be excluded, Schroders and its directors, employees, consultants or any company in the Schroders Group do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this presentation or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this presentation or any other person.

Total returns are calculated using exit price to exit price, after fees and expenses, and assuming reinvestment of income. Gross returns are calculated using exit price to exit price and are gross of fees and expenses. The repayment of capital and performance in any of the detailed funds are not guaranteed by Schroders or any company in the Schroders Group. Returns shown are before tax and fees and all income is reinvested.

Past performance is not a reliable indicator of future performance. Opinions constitute Schrodersâ&#x20AC;&#x2122; judgement at the time of issue and are subject to change. Schroders may record and monitor telephone calls for security, training and compliance purposes. Investment guidelines represented are internal only and are subject to change without notice.

Opinions, estimates and projections in this presentation constitute the current judgement of the presenter(s) as of the date of this presentation. They do not necessarily reflect the opinions of Schroders or any member of the Schroders Group and are subject to change without notice. Any references to securities, sectors, regions and/or countries are for illustrative purposes only and are not to be construed as a recommendation to buy, sell or hold.

Third party data including MSCI data is owned by the applicable third party identified in the presentation and is provided for your internal use only. Such data may not be reproduced or re-disseminated and may not be used to create any financial instruments or products or any indices. Such data is provided without any warranties of any kind. Neither the third party data owner nor any other party involved in the publication of this document can be held liable for any error. The terms of the third partyâ&#x20AC;&#x2122;s specific disclaimers, if any, are set forth in the Important Information section at www.schroders.com.au.

Credit ratings are scales by which the future relative creditworthiness of a security is measured and express an opinion about the vulnerability of default. Credit ratings may be issued by an independent credit rating agency, or represent internal ratings prepared by Schroders. A change in a published credit rating can impact the price and liquidity of the security(ies) being re-rated. Investors should not rely on credit ratings in making investment decisions or view them as assurances of credit quality or the likelihood of default. The ratings issued included in the monthly report are intended to be used by wholesale clients as a guide only and should not be relied on by retail investors when making a decision to buy, hold or sell any securities or make any other investment decisions.

Thank you

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Portfolio Construction Podcast Series Fortnightly Australian and global economic updates • Roger Montgomery • Ausbil • Coolabah Capital • Russell Investments

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Thank you Disclaimer This webinar and information has been prepared and issued by Netwealth Investments Limited (Netwealth), ABN 85 090 569 109, AFSL 230975. It contains factual information and general financial product advice only and has been prepared without taking into account the objectives, financial situation or needs of any individual. The information provided is not intended to be a substitute for professional financial product advice and you should determine its appropriateness having regard to you or your clientâ&#x20AC;&#x2122;s particular circumstances. The relevant disclosure document should be obtained from Netwealth and considered before deciding whether to acquire, dispose of, or to continue to hold, an investment in any Netwealth product.

While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), no person, including Netwealth, or any other member of the Netwealth group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information.

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