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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Yearning for mediocracy
Matt Sherwood Head of Investment Strategy, Multi Asset, Perpetual Investments July 2020
7
WHAT’S MORE IMPRESSIVE – THE PLUNGE OR THE RECOVERY…? REGIONAL SHAREMARKET PEAK TO TROUGH AND NOW (%); US CREDIT SPREADS TO SWAP RATES (BPTS) … BUT CENTRAL BANK QE PROGRAMS SAW A RECORD RECOVERY IN BOTH
A RECORD PLUNGE IN EQUITY AND CREDIT MARKETS… 0%
360
1160
-5%
330
1060
-10%
300
960
-15%
270
-20%
240 210
-30%
180
-40%
8.
860 760
-25%
-35%
High yield (RHS)
Peak to trough Peak to now Canada Japan
MSCI UK EM World US Europe Australia Small Caps Source: Bloomberg as at 1st July 2020.
US
Perpetual's DRRF
150 120
660 Investment Grade (LHS)
560 460
90 360 02- 18- 03- 19- 06- 22- 07- 23- 09- 25Jan Jan Feb Feb Mar Mar Apr Apr May May
WHAT’S GONE RIGHT 1: THE FISCAL RESPONSE WAS QUICKER AND LARGER THAN THE GFC GLOBAL FISCAL IMPULSE BY SOURCE (% GDP); GLOBAL FISCAL IMPULSE BY YEAR (% GDP) IN 2021 FISCAL POLICY WILL RECORD ITS LARGEST GROWTH DRAG IN 50 YEARS
THE FISCAL RESPONSE WAS LARGER THAN WHAT WAS PROVIDED IN 2008/09
Change in cyclically adjusted primary fiscal balance as % global GDP
4.5%
5.00
4.0% Healthcare
3.5%
Loan guarantees (on-budget)
2.00 Job retention schemes
2.5%
forecast -->
0.00 Other
Other
1.5%
Public Invest.
1.0% housing
0.0%
ROW EM ex China and India Eurozone China US World
1.00
2.0%
0.5%
4.00
3.00
Direct cash payments
3.0%
Loosening
Unemployment insurance
-1.00 Public Invest. Business loans/grants Unemployment insurance strategic sectors Business loans/grants
other expenditure
personal inc. tax indirect taxes corporate tax
2009
other revenue
-2.00 strategic sectors
other revenue
2020
9. Source: UBS Australia Limited and Bloomberg as at 2nd June 2020.
-3.00
Tightening
-4.00 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21
WHAT’S GONE RIGHT 2: CENTRAL BANKS WENT ‘ALL IN’
INCREASE IN CENTRAL BANK ASSET PURCHASES (USD TRILLION); CITIGROUP’S MONETARY CONDITIONS INDEX A COLLECTIVE USD 6 TRILLION COMMITMENT TO PROP-UP MARKETS, WON’T PREVENT THE COLLAPSE IN EARNINGS, BUT IT SHOULD STOP THE COLLAPSE IN SHARE PRICES
10. Source: Citigroup as at 29th May 2020.
WHAT’S GONE RIGHT 3: ECONOMIES ARE OPENING UP QUARTERLY AND ANNUAL GROWTH FOR US, EUROPE, CHINA, AUSTRALIA FOR 2020 AND 2021 (%)
GROWTH IS EXPECTED TO BOUNCE IN Q3 2020 AND THEN FLATTEN OUT
GROWTH WILL SUFFER STRUCTURAL DAMAGE, AND THE RECOVERY WILL BE WEAKER THAN NORMAL
12%
10%
9%
8%
6%
6%
4%
3%
2% 0% 0% -3%
-2%
-6% -9% -12%
China
Europe
US
Mar'20 Jun'20 Sep'20 Dec'20 Australia World
. 11.
Source: Perpetual Investments as at 13th July 2020.
-4%
2019 2020 2021
-6% -8%
China
Europe
US
Australia
World
WHAT’S GONE RIGHT 4: EPS DOWNGRADES AND EQUITY OUTFLOWS HAVE CEASED MSCI WORLD EARNINGS REVISION INDEX (%); US EQUITY INFLOW BY SOURCE (USD BILLION)
… AND ‘TINA’ MEANT INVESTORS PUT THEIR MONEY TO WORK
EQUITY ANALYSTS HAVE STOPPED DOWNGRADING 2020 EPS ESIMATES…
current
12.
Source: Citigroup as at 13th July 2020.
THE RESULT: GROWTH SECTORS AND GROWTH MARKETS HAVE OUTPERFORMED US TECH, EX-TECH RELATIVE TO MSCI WORLD EX-US (INDEX); GROWTH VS VALUE: WORLD AND US (RATIO) THE US (ex-TECH) MARKET RECOVERY IS THE SAME AS THE MSCI WORLD (ex-US)
OF THE THREE STANDARD EQUITY ROTATIONS, GROWTH INTO VALUE HAS NOT WORKED IN 2020
S&P Magnificent 5 Tech Stocks*
200
220 200
180 160
Global 180
S&P 500 (ex-Magnificent 5)
160
140
140
120
120
100
100
80
United States
MSCI World Index (ex-US)
80 60
Jan-19 Apr-19 Jul-19
Oct-19 Jan-20 Apr-20 Jul-20
1997
13. Source: Bloomberg as at 13th July 2020. * The Magnificent 5 are Microsoft, Apple, Facebook, Amazon and Google
2001
2005
2009
2013
2017
REASONS TO REMAIN CAUTIOUS 1: COV-19 RESURFACED AFTER ONLY 9 WEEKS DAILY INCREASE IN COV-19 CONFIRMED CASES; COV-19 INFECTION RATE STATISTIC (LOG SCALE, X)
COV-19 HAS GONE THROUGH FOUR PHASES AND ENGULFED THE ENTIRE GLOBAL ECONOMY
240,000
China Asia ex-China
Rest of World
Europe 160,000 120,000
US UK
Australia
3.0
Rest of World 200,000
COV-19 CASES ARE RISING SHARPLY, BUT THEY ARE NOT OUT OF CONTROL
Phase 4: Rest of World (particularly EM) Phase 3: US
Asia
1.0 Europe
Phase 2: 80,000 Europe Phase 1: China 40,000 -
01-Feb
14-Mar
25-Apr
06-Jun
0.3 01-Apr
29-Apr .
14.Source: Bloomberg as at 15th July 2020.
United States
27-May
24-Jun
REASONS TO REMAIN CAUTIOUS 2: A V-SHAPED EARNINGS RECOVERY IS TOO OPTIMISTIC US EPS DECLINES IN RECESSIONS 1874-2020 (%); ANNUAL US EPS GROWTH: ACTUAL VERSUS MODEL
AS AT MAY, OUR US EARNINGS MODEL SUGGESTS A CIRCA -27% EPS DECLINE
BETTER MACRO POLICY AND COST CONTROLS HAS SEEN POST-WW2 EPS DECLINES LESSEN, BUT … 45% -10%
-12% -13% -17% -12% -18% -15% -20% -20% -22% -29%
-23% -28%
-30%
-36%
-38% -40% -50% -56%
-57%
Historical average (-33%) -61%
36% 27% 18% 9% 0% -9% -18%
-70%
-27% -90%
S&P 500 EPS growth
-85% 74- 80- 92- 02- 12- 16- 29- 37- 41- 50- 55- 60- 69- 74- 81- 89- 00- 07- 2076 85 94 04 14 21 32 38 44 52 58 61 70 75 83 91 02 09
15. Source: UBS Australia Limited and Perpetual Investments at 2nd July 2020.
-36%
Model (with a 10-month lead)
1995 1999 2003 2007 2011 2015 2019 1993 1997 2001 2005 2009 2013 2017 2021
REASONS TO REMAIN CAUTIOUS 3: MARKETS ARE RICHLY PRICED MSCI WORLD 12-MF PE RATIO AND EPS ESTIMATES; US SHAREMARKET PE RATIO AND 5-YEAR RETURN (X, %)
HIGH VALUATIONS ONLY MEAN ONE THINGS – LOWER FUTURE RETURNS AND HIGHER RISK
A COMPLETE EPS RECOVERY BY END-2020 HAS MARKETS TRADING AT 18 YEAR HIGHS… BUT
17.5% Price Citigroup (-50%, +40%) Perpetual (-30%, +20%)
Dividend Total Return
14.0% 10.5%
Consensus (-20%, +25%)
Average return +9.6%
7.0% 3.5% 0.0%
Current valuation: 22.0x
-3.5% <8x 8x 11x 16. Source: Citigroup and Perpetual Investments as at 8th July 2020.
11x - 14x - 17x - 20x 14x 17x 20x 23x
>23x
REASONS TO REMAIN CAUTIOUS 4: DIVIDENDS WILL DECLINE MORE THAN USUAL US EPS AND DPS DECLINES IN RECESSIONS (%); US PAYOUT RATIO START AND END OF RECESSION (%)
IN THE PAST 40 YEARS, DIVIDENDS HAVE OUTPERFORMED EARNINGS IN RECESSIONS 1200
Earnings
CORPORATE LEVERAGE AND A BROADER DISTRIBUTION DEBATE WILL MAKE THAT HARDER IN 2020
75% Starting Payout Ratio
1000 65%
Ending Payout Ratio
800 -36%
55%
600 Dividends
-17%
400 +9% 200 +2%
-24% -1%
-22% -20%
US recessions
0 1980 1985 1990 1995 2000 2005 2010 2015 2020 17. Source: UBS Australia limited at 30th June 2020.
45%
35%
25%
1941- 1950- 1955- 1974- 1981- 1989- 2000- 2007- 20201944 1952 1958 1975 1983 1991 2002 2009
REASONS TO REMAIN CAUTIOUS 5: FIRMS HAVE NOT FIXED THEIR BALANCE SHEETS CORPORATE NET DEBT TO OPERATING CASHFLOW (X); SECTOR NET DEBT TO OPERATING CASHFLOW (X)
US, EUROPEAN AND UK FIRMS HAVE RECORD DEBT TO OPERATING CASHFLOW
18. Source: UBS Australia limited at 1st June 2020.
THE DIFFERENCE BETWEEN CYCLICAL AND DEFENSIVE DEBT TO INCOME IS AT A 15-YEAR LOW
19
20
STABLE CHARACTERISTICS; DYNAMIC ALLOCATIONS A PORTFOLIO DESIGNED FOR DIFFERENT MARKET CONDITIONS MID CYCLE – FAIR VALUE
MATURE BULL MARKET
▪ Maintain return seeking exposures
▪ Add diversifying opportunities
▪ Build diversifying opportunities
▪ Reduce return seeking exposure
▪ Manage the risk of inflation
▪ Add downside protection
Inflation Protection
Diversifying Opportunities
Downside Protection
RECOVERY
BEAR MARKET
▪ Increase return seeking (value and small cap)
▪ Selectively increase return seeking
▪ Introduce inflation protection ▪ Diversifying opportunities less ▪ Very little downside protection 21
Return Seeking
WE ARE HERE
▪ Diversifying opportunities is at maximum ▪ Allow downside protection to reduce
BALANCING RETURNS WITH RISK MANAGEMENT
Source: Bloomberg, Perpetual Investments Disclaimer: This presentation has been prepared by Perpetual Investment Management Limited (PIML) ABN 18 000 866 535, AFSL 234426 for financial advisers only. It is general information only and is not intended to provide you with financial advice. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. The relevant product disclosure statement (PDS), should be considered before deciding whether to acquire or hold units in the Fund(s). The PDS for the Perpetual Diversified Real Return Fund can be obtained by calling 1800 062 725 or visiting www.perpetual.com.au. No company in the Perpetual Group (Perpetual Limited ABN 86 000 431 827 and its subsidiaries) guarantees the performance of any fund or the return of an investorâ&#x20AC;&#x2122;s capital. Except where gross returns are specifically highlighted as gross returns, returns shown in this presentation have been calculated using exit prices after taking into account all of Perpetualâ&#x20AC;&#x2122;s ongoing fees and assuming reinvestment of distributions. No allowance has been made for taxation. Past performance is not indicative of future performance.
PERPETUAL DIVERSIFIED REAL RETURN FUND PERFORMANCE AND VOLATILITY AS AT 30 JUNE 2020 PERFORMANCE 1 YEAR %
3 YEARS %
5 YEARS %
Since Inception^%
Real Return Fund (Gross)
1.7%
4.7%
4.5%
6.8%
Real Return Fund (Net)
0.8%
3.5%
3.6%
5.9%
2.2%
1.8%
1.8%
2.0%
-0.2%
3.8%
4.0%
N/A
-7.6%
5.2%
6.0%
6.8%
Australian CPI (as at 31 March 2020 – latest available)* Mercer Median Balanced Growth Fund (as at 31 May 2020 – latest available) ASX 300 Accumulation Index
VOLATILITY
Real Return Fund
3.3%
ASX 300 Accumulation Index
13.4%
Source: Perpetual, FactSet Gross performance is before fees and assumes reinvestment of distributions. Net performance is after fees and assumes reinvestment of distributions. Past performance is not indicative of future performance. ^Inception date of Fund: 15 October 2010 *Inception date used for Australia CPI is 31 December 2010, and for Mercer Median is 30 November 2010 #Mercer MPA Investment Performance Survey of Wholesale - Balanced Growth as at 31 May 2020 23
Since Inception^
RISK MANAGEMENT NEED NOT BE AT THE EXPENSE OF RETURNS PERPETUAL’S DIVERSIFIED REAL RETURN FUND VS ASSET RETURNS 240
Performance from 31/10/2010 to 30/6/2020
220
Perpetual Diversified Real Return Fund
ASX300 200 CPI+5% AusBond Comp
180
CPI+4% Cash
160
CPI+3% DRRF Gross CPI+2%
140
120
100
Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18 Oct-18 Dec-18 Feb-19 Apr-19 Jun-19 Aug-19 Oct-19 Dec-19 Feb-20 Apr-20 Jun-20
80
Source: Bloomberg and Perpetual Investments Disclaimer: This presentation has been prepared by Perpetual Investment Management Limited (PIML) ABN 18 000 866 535, AFSL 234426 for financial advisers only. It is general information only and is not intended to provide you with financial advice. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. The relevant product disclosure statement (PDS), should be considered before deciding whether to acquire or hold units in the Fund(s). The PDS for the Perpetual Diversified Real Return Fund can be obtained by calling 1800 062 725 or visiting www.perpetual.com.au. No company in the Perpetual Group (Perpetual Limited ABN 86 000 431 827 and its subsidiaries) guarantees the performance of any fund or the return of an investor’s capital. Except where gross returns are specifically highlighted as gross returns, returns shown in this presentation have been calculated using exit prices after taking into account all of Perpetual’s ongoing fees and assuming reinvestment of distributions. No allowance has been made for taxation. Past performance is not indicative of future performance.
STRUCTURAL AND TACTICAL POSITIONS WORKED WELL
Structural Positions No exposure to US or European credit ➢ Removed in 2018
Reduced Pure Credit Alpha (a mix of senior and subordinate debt) by half in late 2019
Tactical Positions • USD call options (against AUD and EUR) ➢ Rolled the strike on the AUD put to lock in profits
• 9% face value put options on ASX and SPX ➢ Multiple strike rolls to lock in profits
No listed property ▪ 5% allocation to unlisted property – focus on industrial property
No listed or unlisted infrastructure No listed or unlisted private equity
25
• Rotated defence to 10% JPY call option (JPY appreciated from 110 to 102) ➢ Rolled the strike on the JPY call to lock in profits
FEBRUARY 28 PUT OPTION
Bought SPX put option
Rolled the strike price
26
Source: Perpetual Investments, Bloomberg
SPX put option expired
ADDED TO GOLD AS THE RUSH FOR LIQUIDITY SAW DECLINES
27
Source: Perpetual Investments, Bloomberg
OUR DASHBOARD INDICATED BETTER CREDIT VALUE IN THE US THAN AUSTRALIA AT MID-MARCH.
28
Source: Perpetual Investments, Bloomberg
PURCHASED US INVESTMENT GRADE
29
Source: Perpetual Investments, Bloomberg
BOUGHT US HIGH YIELD MID MARCH, HAVE SINCE EXITED
30
Source: Perpetual Investments, Bloomberg
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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 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.