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For dealer use only. Not for public distribution.
316314 3/19
Active Insights:Putnam’s 2019 Outlook
Chris GalipeauSenior Investment Director, Global Asset Allocation
2For dealer use only. Not for public distribution.
316314 3/19
Executive summary
• Macro: From great to good
• Equities: Large sell-off, large rally? Now what?
• Fixed income: What is next for rates and credit?
• Commodities: Back to a more neutral outlook
• Risks, realities, and conclusions
Macro
From great to good
4For dealer use only. Not for public distribution.
316314 3/19
Global economies moving in the right direction, at a slower pace
Sources: World Bank, January 2019; Bloomberg, 12/31/18.
0%
1%
2%
3%
4%
5%
6%
7%
World United States China
2018e 2019f 2020f
Real GDP YoY Global and domestic PMIs still positive
50
51
52
53
54
55
56
57
Dec-1
5
Ma
r-16
Ju
n-1
6
Sep
-16
Dec-1
6
Ma
r-17
Ju
n-1
7
Sep
-17
Dec-1
7
Ma
r-18
Ju
n-1
8
Sep
-18
Dec-1
8
JPMorgan Global Composite PMI
Markit U.S. Composite PMI
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316314 3/19
Fed has achieved its dual mandate
Source: Bloomberg, 12/31/18.
Core inflation YOY
0%
1%
2%
3%
4%
5%
6%
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
2015
2018
Hu
nd
red
s
U.S. Core PCE U.S. Core CPI
U.S. unemployment rate
0%
2%
4%
6%
8%
10%
12%
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
2015
2018
Hu
nd
red
s
U.S. unemployment rate
6For dealer use only. Not for public distribution.
316314 3/19
Yields around the world likely to grind higher, slowly
Source: Bloomberg, 12/31/18.
Global 10-year yields
-1%
0%
1%
2%
3%
4%
5%
6%
Ja
n-1
2
Apr-
12
Ju
l-1
2
Oct-
12
Ja
n-1
3
Apr-
13
Ju
l-1
3
Oct-
13
Ja
n-1
4
Apr-
14
Ju
l-1
4
Oct-
14
Ja
n-1
5
Apr-
15
Ju
l-1
5
Oct-
15
Ja
n-1
6
Apr-
16
Ju
l-1
6
Oct-
16
Ja
n-1
7
Apr-
17
Ju
l-1
7
Oct-
17
Ja
n-1
8
Apr-
18
Ju
l-1
8
Oct-
18
Ja
n-1
9
U.S. Germany Japan U.K.
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316314 3/19
Recession
-5
-4
-3
-2
-1
0
1
2
3
4
-25
-20
-15
-10
-5
0
5
10
15
20
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
LEI YOY Index — last price**(left axis)
Yield curve*(right axis)
The Index of Leading Economic Indicators and yield curve not signaling recession
* Yield curve represents yield difference between the 10-year and 2-year bond, as of 12/31/18.
** As of 11/30/18.
Sources: Conference Board, Bloomberg.
(%)
20
18
(%)
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316314 3/19
Thoughts from the Portfolio Manager’s desk
•Global growth has slowed, but economic fundamentals remain healthy
and supportive of risk assets
•There is no sign of an economic recession. While an inverted yield
curve has preceded recessions in the past, flat yield curves should not
be interpreted as having equal predictive powers
•Major economic concerns are abating
Equities
Large sell-off, large rallyNow what?
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316314 3/19
3,000
The stock market is not the economy: 20% drawdowns can happen absent an economic recession
Sources: Conference Board, Bloomberg, as of 1/3/19.
Historically, these events have been buying opportunities
S&P 500 (logarithmic scale)
100
1,000
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
11For dealer use only. Not for public distribution.
316314 3/19
Equity valuations have come down
Source: Bloomberg, as of 12/31/18. Represented by the S&P 500 Index. Valuations use trailing 12-month data.
Past performance is not indicative of future results.
Price/earnings ratio Price/book ratio
Price/cash flow Price/sales ratio
0
2
4
6
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
Average
0
10
20
30
40
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
Average
0
5
10
15
20
25
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
Average
0
1
2
3
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
Average
12For dealer use only. Not for public distribution.
316314 3/19
Earnings growth remains strong
Sources: Bloomberg, Putnam, as of 12/31/18.
6.1%3.8%
-0.7%
-3.6% -3.3% -4.2% -4.3% -3.1%
-0.2%
4.9%
9.0%10.2%
11.9%
17.3%
10.8%
-10%
-5%
0%
5%
10%
15%
20%
S&P 500 trailing 12-month earnings per share growth
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316314 3/19
Where we see opportunity for growth and value
Source: Bloomberg, 12/31/18.
• Value: The market appears to be
overshooting on the downside.
Looking for good businesses with
high cash generation, quality
balance sheets, and cyclical
exposure
• Growth: Preference for companies
with structural advantages: barriers
to entry, moat, and ability to
withstand market downturns.
Themes include e-commerce,
prepayment processing, and
personalized medicine-10
-5
0
5
10
15
Ja
n-1
8
Fe
b-1
8
Ma
r-18
Apr-
18
Ma
y-1
8
Ju
n-1
8
Ju
l-1
8
Aug
-18
Sep
-18
Oct-
18
Nov-1
8
Dec-1
8
Russell 1000 Growth Russell 1000 Value
14For dealer use only. Not for public distribution.
316314 3/19
China’s economic trajectory reverberates strongly in the rest of EM
Source: J.P. Morgan.
China’s share in exportsCountries represented:
TW = TaiwanCL = ChileKR = South KoreaPE = PeruBR = BrazilSA = Saudi ArabiaMY = MalaysiaVN = VietnamID = IndonesiaPH = PhilippinesTH = ThailandZA = South AfricaRU = RussiaAR = ArgentinaCO = ColombiaIL = IsraelIN = IndiaTR = TurkeyHU = HungaryMX = MexicoCZ = Czech RepublicPL = Poland
15For dealer use only. Not for public distribution.
316314 3/19
Valuations outside the United States
Source: Bloomberg, 1/10/19.
Europe Japan Emerging markets
0
0.5
1
1.5
2
2.5
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
Price/Cash flow relative to the United States
0
0.5
1
1.5
2
2.5
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
0
0.5
1
1.5
2
2.5
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
16For dealer use only. Not for public distribution.
316314 3/19
Thoughts from the Portfolio Manager’s desk
• The macro backdrop seems to have settled relative to Q4 2018. We have
passed peak rate of change in real GDP and earnings per share but we
anticipate earnings to be up year on year.
• China’s economy is slowing. All EM countries feed off of China, so expect
a domino effect for EM depending on how the trade war talks conclude
• We favor companies with strong balance sheets, cash flows, and secular
tail winds
• We expect the recent 20% move off the December lows to be digested
Fixed income
What’s next for rates and for credit?
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316314 3/19
Where are rates headed next?
Source: Bloomberg, 12/31/18.
• With Fed tightening and continued
domestic growth, U.S. Treasury yields
may continue a modestly upward
trajectory
• However, low rates globally and U.S.
pension demand remain an important
constraint on how high yields can
actually rise
Global 10-year yields
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Ja
n-1
2
Ju
l-1
2
Ja
n-1
3
Ju
l-1
3
Ja
n-1
4
Ju
l-1
4
Ja
n-1
5
Ju
l-1
5
Ja
n-1
6
Ju
l-1
6
Ja
n-1
7
Ju
l-1
7
Ja
n-1
8
Ju
l-1
8
Ja
n-1
9
U.S. Germany Japan U.K.
19For dealer use only. Not for public distribution.
316314 3/19
Over the long term, a secular shift upward is likely underwayInterest-rate cycles span decades
Source: http://www.multpl.com/10-year-treasury-rate/table/by-month, as of 12/31/18.
U.S. 10-year yield: 1945–2018
0%
4%
8%
12%
16%
1945
1948
1951
1954
1957
1960
1963
1966
1969
1972
1975
1978
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
2015
2018
20For dealer use only. Not for public distribution.
316314 3/19
Investment-grade valuation
Sources: Bloomberg Barclays U.S. Corporate Investment Grade Bond Index, Bloomberg Barclays U.S. High Yield Corporate Update, Putnam, as of 12/31/18.
Past performance is not a guarantee of future results.
OA
S (
bp
s)
0
1
2
3
4
5
6
7
8
9
10
0
100
200
300
400
500
600
700
800
900
1,000
OAS Yield to worst
Bloomberg Barclays U.S. Corporate Investment Grade Bond Index
Yie
ld (%
)
Spread Yield
Average 168 bps 4.23%
High 618 bps 9.09%
Low 82 bps 2.58%
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316314 3/19
Credit cycle:
1990–1999
Credit cycle:
2000–2009
Credit cycle:
2010–present
High yield credit cycles and default rates still behaving wellWithin the context of past credit cycles, current global spreads are near fair value and defaults remain low
* Current and average default rates include distressed exchanges.
** As measured by the BBG Barclays High Yield Index, as of 12/31/18.
Sources: JPMorgan High Yield Market Monitor, Barclays U.S. High Yield Update, Putnam. As of 12/31/18, unless otherwise noted. Past performance is not a
guarantee of future results.
0
200
400
600
800
1000
1200
1400
1600
1800
2000
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Sp
rea
d (b
ps)
De
fault r
ate
(L
TM
tra
ilin
g)
Default rate* Average default rate Spread to worst Average spread to worst
Current
spread
(bps)
571
Current
default
rate
1.87%
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316314 3/19
34 56 89 130
573
425
123 129 15056 35 68
121
438
271
430
1364
550
50 75 1000
200
400
600
800
1000
1200
1400
1600
Agencies Agency MBS CMBS Investment-grade
corporates
High yield Emerging-market debt
Non-agencyRMBS
CMBS-Mezzanine
Agency IO
Average excess yield over Treasuries (OAS, 12/31/97–12/31/07)
Current excess yield over Treasuries(OAS as of 2/28/19)
We believe attractive opportunities exist outside of the indexCurrent spreads relative to historical period
Sources: Barclays, Bloomberg, Putnam, as of 2/28/19.
The chart above compares 10-year pre-crisis average OAS to current period OAS to illustrate the degree of liquidity premium we believe is embedded in the current OAS. Ten years of
pre-crisis data is used as certain sectors, such as CMBS, do not have a materially longer history.
Data is provided for informational use only. Past performance is no guarantee of future results. All spreads are in basis points and measure option-adjusted yield spread relative to
comparable maturity U.S. Treasuries with the exception of non-agency RMBS and mezzanine CMBS, which are loss-adjusted spreads to swaps calculated using Putnam’s projected
assumptions on defaults and severities, and agency IO, which is calculated using assumptions derived from Putnam’s prepayment model. Agencies are represented by BBG Barclays U.S.
Agency Index. Agency MBS are represented by BBG Barclays U.S. Mortgage Backed Securities Index. Investment-grade corporates are represented by BBG Barclays U.S. Corporate
Index. High yield is represented by JPMorgan Developed High Yield Index. CMBS is represented by both agency and non-agency CMBS that are eligible for inclusion in the BBG Barclays
U.S. Aggregate Bond Index; mezzanine CMBS is represented by the same index using the AA, A, and BBB components. Average OAS for Mezzanine CMBS is for the 2000–2007 time
period. Emerging-market debt is represented by the BBG Barclays EM Hard Currency Aggregate Index. Non-agency RMBS is estimated using average market level of a sample of below-
investment-grade securities backed by various types of non-agency mortgage collateral (excluding prime securities) and Agency credit risk transfer securities. Mezzanine CMBS is
estimated from an average spread among baskets of Putnam-monitored new issue and seasoned mezzanine securities, as well as a synthetic (CMBX) index. Agency IO is estimated from
a basket of Putnam-monitored interest-only (IO) and inverse IO securities. Option-adjusted spread (OAS) measures the yield over duration equivalent Treasuries for securities with different
embedded options.
In the index
We believe opportunities in the heavily traded
benchmark sectors are scarce
Outside the index
Non-benchmark strategies may be compelling,
but they require specialized research
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316314 3/19
The opportunity set vs. the U.S. and Global Aggregate Bond indexes
Approximately 70%–80% of the indexes are composed of government securities
(Treasuries, agencies, and MBS)
Sources: Bloomberg, Putnam, as of 12/31/18, most recent available.
Bloomberg Barclays U.S.
Aggregate Bond Index
Bloomberg Barclays Global
Aggregate Bond Index
Out-of-index
opportunities
• $20.8 trillion market value
• Average yield: 3.28%
• Average OAS: 54 bps
• Average duration: 5.87 years
• $50.4 trillion market value
• Average yield: 2.03%
• Average OAS: 55 bps
• Average duration: 6.96 years
• $6.3 trillion market value
• Average yield: 6.11%
• Average OAS: 415 bps
Treasuries Gov't related
MBS Corporate
ABS CMBS
Covered
Treasuries Gov't related
MBS IG corporate
CMBS/ABS
Non-agency RMBS CMOs (IO/PO)
CMBS (ex-Agg) Global high yield
Bank loans EMD
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316314 3/19
Thoughts from the Portfolio Manager’s desk
•Central bank divergence remains a major theme, with the Fed confident
in the U.S. growth outlook, while the ECB and BoJ remain a bit more
cautious. The Fed has hit pause, shifts to data dependent
•We remain constructive on investment-grade corporates given overall
strong fundamentals and fair valuation. We find spread levels to be
generally appropriate for the underlying fundamental risk
•We remain constructive on high-yield corporates given overall strong
fundamentals and fair valuation. We find spread levels to be generally
appropriate for the underlying fundamental risk
•We are constructive on RMBS and CMBS as spreads look attractive
with fundamentals constructive
Commodities
Back to range bound
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316314 3/19
Bullish setup for crude
Note: Dotted line denotes 2007–2017 average (2.3 MMb/d). 2H18 and 2019 are projections.
Source: U.S. Energy Information Administration, 12/31/18.
Global spare capacity stretched thin
0
1
2
3
4
5
6
7
8
2008 2010 2012 2014 2016 2018
MMb/d
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316314 3/19
North American production growth may underwhelm
Source: U.S. Energy Information Administration, 12/31/18.
U.S. oil inventories are finally trending lower Has the U.S. crude oil production peaked for now?
U.S. total crude oil production (’000 bbl/d) 2017–2018U.S. crude oil days of supply
20
23
26
29
32
35
Jan Mar May Jun Aug Oct Dec
2017
2018
Harvey
8,000
8,500
9,000
9,500
10,000
10,500
11,000
11,500
12,000
Jan Apr Jul Oct Jan Apr Jul Oct2017 2018
c
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316314 3/19
Thoughts from the Portfolio Manager’s desk
•Slowing economic growth won’t cause a significant reduction in the
demand for oil
•We believe we have reached peak shale production in the United
States — now the biggest producer in the world
•Large percentage move off the December lows in oil argues for a
consolidation
Risks, realities, and conclusions
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316314 3/19
Risks
•China’s economy decelerates significantly, causing a domino effect
ripple through the rest of EM and into Europe and the United States
•The Fed makes a policy mistake and inverts the yield curve
•The U.S. economy decelerates significantly, and earnings collapse
Realities
•Global economic growth is slowing, but still positive with major threats
abating
•The outlook for earnings growth in 2019 is positive
Conclusion
•We are constructive on risk assets in 2019 although we anticipate
digestion of the move off the December lows
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316314 3/19
The views and opinions expressed are those of the speaker, Chris Galipeau, Senior Investment Director, January 2019, are subject to change with market
conditions, and are not meant as investment advice.
FOR DEALER USE ONLY. NOT FOR PUBLIC DISTRIBUTION.
Your clients should carefully consider the investment objective, risks, charges, and expenses of a fund before investing. For a prospectus, or a summary
prospectus, if available, containing this and other information for any Putnam fund or product, call the Putnam Client Engagement Center at 1-800-354-4000.
Your clients should carefully read the prospectus, or summary prospectus, if available, before investing.
Putnam Retail Management
Appendix
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316314 3/19
Terms and definitions
Components of The Conference Board Leading Economic Index:
• Average weekly hours, manufacturing
• Average weekly initial claims for unemployment insurance
• Manufacturers’ new orders, consumer goods, and materials
• ISM® Index of New Orders
• Manufacturers’ new orders, nondefense capital goods excluding aircraft orders
• Building permits, new private-housing units
• Stock prices, 500 common stocks
• Leading Credit Index™
• Interest-rate spread, 10-year Treasury bonds less federal funds
• Average consumer expectations for business conditions
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316314 3/19
Terms and definitions (cont’d)
Purchasing Manager’s Index: Measures manufacturing activity based on new orders,
inventory levels, production, supplier deliveries, and employment data; compiled by the
Institute for Supply Management.
Components of U.S. Real GDP (Federal Reserve Bank of St. Louis)
• Inventories
• Consumption
• Investment
• Government
• Exports
• Imports
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316314 3/19
Terms and definitions (cont’d)
Consumer Price Index: Released by the Bureau of Labor Statistics; used as the
reference rate for Treasury Inflation-Protected Securities (TIPS) and to adjust Social
Security payments
Personal Consumption Expenditures Price Index: Issued by the Bureau of Economic
Analysis; preferred inflation index for the Federal Reserve
Both indexes follow domestic inflation trends, though the CPI has historically reported
slightly higher inflation.
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316314 3/19
Real fed funds rate not signaling recession
Source: Bloomberg, 12/31/18.
-6
-4
-2
0
2
4
6
8
10
12
Se
p-5
4
Ap
r-5
7
No
v-5
9
Ju
n-6
2
Ja
n-6
5
Au
g-6
7
Mar-
70
Oct-
72
Ma
y-7
5
De
c-7
7
Ju
l-8
0
Fe
b-8
3
Se
p-8
5
Ap
r-8
8
No
v-9
0
Ju
n-9
3
Ja
n-9
6
Au
g-9
8
Ma
r-0
1
Oct-
03
Ma
y-0
6
De
c-0
8
Ju
l-1
1
Fe
b-1
4
Se
p-1
6
Effective federal funds rate — consumer price index for all urban consumers
De
c-1
8
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316314 3/19
S&P 500 has already priced in economic slowdown
* Advanced two quarters.
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
-4%
-2%
0%
2%
4%
6%
8%
10%
Dec-1
998
Jun
-199
9
Dec-1
999
Jun
-200
0
Dec-2
000
Jun
-200
1
Dec-2
001
Jun
-200
2
Dec-2
002
Jun
-200
3
Dec-2
003
Jun
-200
4
Dec-2
004
Jun
-200
5
Dec-2
005
Jun
-200
6
Dec-2
006
Jun
-200
7
Dec-2
007
Jun
-200
8
Dec-2
008
Jun
-200
9
Dec-2
009
Jun
-201
0
Dec-2
010
Jun
-201
1
Dec-2
011
Jun
-201
2
Dec-2
012
Jun
-201
3
Dec-2
013
Jun
-201
4
Dec-2
014
Jun
-201
5
Dec-2
015
Jun
-201
6
Dec-2
016
Jun
-201
7
Dec-2
017
Jun
-201
8
Dec-2
018
Jun
-201
9
Nominal U.S. GDP growth (YoY, left axis) S&P 500 return* (YoY, right axis)
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316314 3/19
How rate shifts can effect the price of bond portfolios
Sources: Bloomberg, Barclays, U.S. Treasuries, as of 12/31/18.
Percentage change in bond price
0.25% 0.48% 1.94% 2.82%4.66%
8.50%
19.35%
-0.25% -0.48% -1.94%-2.82% -4.66%
-8.50%
-19.35%
3-month 1-year 2-year 3-year 5-year 10-year 30-year
When rates fall 100 bps
When rates rise 100 bps
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316314 3/19
Interest-rate risk is unprecedented given the low level of rates
Sources: Barclays, Putnam, as of 12/31/18.
This chart uses yield to worst as the representation of yield, and modified adjusted duration as the representation of duration.
0
2
4
6
8
10
0
2
4
6
8
10
Du
ratio
n (y
ea
rs)
Yie
ld (
%)
Yield Duration
BBG Barclays U.S. Aggregate Index: historical yield vs. duration
40For dealer use only. Not for public distribution.
316314 3/19
Recession indicator lead times
The average max drawdown for the S&P 500 during the five recessions shown
above was -22.8%.
Yield curve
inverts LEI hits 0 Recession begins
Lead time
(yield curve) Lead time (LEI)
June 2006 August 2006 December 2007 18 months 15 months
February 2000 October 2000 March 2001 13 months 4 months
December 1989 October 1989 July 1990 19 months 8 months
September 1980 June 1981 September 1981 12 months 2 months
August 1978 April 1979 January 1980 17 months 8 months