Global Macroeconomic & Market Outlook · Global Macroeconomic & Market Outlook On the Wings of a Dove Neil Michael Chief Investment Strategist & Head of Multi-Asset Investments. Private

Crown Agents Macroeconomic & Market OutlookPrivate & Confidential

May 2019

Global Macroeconomic & Market OutlookOn the Wings of a Dove

Neil Michael

Chief Investment Strategist

& Head of Multi-Asset Investments


• In a significant about turn, central banks have pivoted from hawkishness to dovishness with respect to monetary policy.

• Trade uncertainty has been a substantial drag on global growth but there is an increasing likelihood of a trade agreement between the US and China. However, the US could then turn its attention from China to the EU.

• Despite a fall in global manufacturing activity, service activity continues to hold up well thanks to solid labour and housing markets.

• After a slowdown, global growth is therefore likely to stabilise and then pick-up again, with rising but contained inflation.

• Supply side improvements in the largest economies should allow the global expansion to continue for a while longer, with limitedinflation.

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

• Government bond yields have probably over-reacted to recession fears and are not reflecting improved equity market sentiment.

• IG credit spreads have narrowed and US leverage has risen, making them less attractive than they were.

• Company earnings growth is likely to be flat to down in Q1 but pick-up thereafter.

• Equity valuations are mixed – US large cap expensive and Eurozone slightly rich; UK and EM reasonable.

• US small cap cheap relative to large cap and UK mid caps likely to outperform in a softer Brexit scenario.

• Emerging market equities should benefit from growth convergence and any Dollar weakness.

• Equity market sentiment is neither excessively bullish nor bearish.

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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


Federal Reserve Dot Plot

4

Central Banks Have Pivoted From Hawkishness To Dovishness

Source: Bloomberg. March 2019.

Probability of an Interest Rate Hike

Source: Bloomberg. As at 16 April 2019.


Central Bank Balance Sheets Expected To Start Expanding Again

Global Central Bank Balance Sheets

Source: JP Morgan Asset Management. March 2019.


FOMC Estimates of Neutral Fed Funds Rate

6

Fed Becoming More Cognisant of The Neutral Rate

Source: National Bank of Canada. Jan 2019.

Fed Funds Rate versus Estimate of Neutral Fed

Funds Rate

Source: Bloomberg. CAIM. Dec 2018. Based on growth in the factors of production plus inflation.


Top Countries With Which US Has Goods Trade

Deficit in 2018

7

Trade Uncertainty Has Been A Significant Drag on Global Growth

& US Attention Could Turn From China To The EU

Source: National Bank of Canada. March 2019. Share of deficit in brackets.

World Trade & Global Manufacturing Activity

Source: Bloomberg. Data to Feb/Mar 2019.


Global Services Activity

8

Despite Fall In Manufacturing Activity, Service Activity Continues

To Hold Up Well

Global Manufacturing Activity

Source: Bloomberg. Data to Mar 2019.


Global House Prices

9

Consumer Confidence Supported By Solid Labour & Housing

Markets

Global Unemployment & Real Wages

Source: Bloomberg. Data from Sept 2002 to Jan/Feb 2019. Source: Bloomberg. Data from Dec 2007 to Mar 2019.


Fiscal Support For Consumers Around The World

10

Global Growth Also Supported By Fiscal Stimulus

Changes In Global Structural

Primary Fiscal Balances

Source: IMF. April 2019. Source: HSBC. Mar 2019.


Global Inflation Forecasts

11

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. April 2019. Source: Bloomberg Consensus. Mar 2019.


Global Productivity Rates (%YoY)

12

Supply Side Improvements In The Largest Economies Should Allow The

Expansion To Continue For A While Longer, With Limited Inflation

Global Investment Rates (%YoY)

Source: Bloomberg Consensus. Dec 2018 / March 2019. Source: Bloomberg Consensus. Dec 2018.


Bond Market Outlook


UST 2 Year vs 1Y1Y Forward vs Fed Funds Rate

14

Rates Expected To Peak In The US, Remain On The Floor In The Eurozone

& Japan, Rise Post Brexit In The UK, & Nudge Down In China

Source: Bloomberg. Dec 1989 to Mar 2019.

Expected Central Bank Rates

Source: Bloomberg Consensus. As at 17 Apr 2019.


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

15

Government Bond Yields Have Probably Over-Reacted To

Recession Fears

Source: Bloomberg, Data from 12 Jan 2001 to 12 April 2019


UST 5Yr Yield & S&P 500

16

Bond Yields Not Reflecting Equity Market Sentiment

Source: Bloomberg, Data from Dec 2013 to 12 April 2019.


Nominal & Real Yields % (2Yr)

17

US & China Are The Only Major Bond Markets Compensating For

Inflation

Source: Bloomberg, Data from 12 Jan 2001 to 12 April 2019


Investment Grade Spreads US IG Leverage Measures

18

IG Spreads Have Narrowed & US Leverage Has Risen

Source: Bloomberg, Bank of America Merrill Lynch. Data from 17 April 2009 to 12 April 2019Source: JP Morgan.


High Yield Spreads US HY Default Rates

19

HY Spreads Narrower But Not Back To 2018 Lows & Default

Rates Are Low

Source: Bloomberg, Bank of America Merrill Lynch. Data from 17 April 2009 to 12 April 2019Source: JP Morgan.


EMB IG Spread (Versus 10Yr UST Yield)

20

Emerging Market Bonds – Spreads Have Narrowed But Current Accounts Have

Improved, Although Countries With The Biggest CA Deficits Are Most Vulnerable

Source: Bloomberg. Data from April 2009 to 12 April 2019.

Current Accounts Balances & Changes In EMBI Spreads

Source: IMF. JP Morgan. April 2019.


Summary of Bond Outlook

Source: CAIM


Equity Market Outlook


Global Company Earnings Growth (%YoY)

23

Equities – Earnings Growth Likely To Be Flat in Q1 But Pick-Up

Thereafter

Source: Bloomberg analysts estimates (EEG). Data from Mar 2015 to Oct 2020.


Equities – US, UK & EM Have Some Of The Highest ROC

In The World

Global Return On Capital

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


Equities –Apart From The US, Equities Look Cheap Relative To

Bonds – UK Very Cheap

Equity Dividend versus Bond Yields

Source: Bloomberg. Data as at March 2019.


Global Composite Fundamental Valuation Ratios (P/EBITDA, P/B, & P/S – Number of Standard

Deviations from Long Run Average)

26

Equity Valuations Are Mixed – US Large Cap Expensive And

Eurozone Slightly Rich; UK & EM Reasonable

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


Macro Fundamentals, Although Softer, Are Still Supporting US

Equities; Small Cap Cheap Relative To Large Cap

Source: JP Morgan. March 2019.

S&P 500 Index & Conference Board Leading

Economic IndicatorRolling One Moving Average of US Small/Large Cap Equities

Source: Bloomberg. 30 April 2019.


UK Mid Caps Likely To Outperform In A Softer Brexit Scenario

Source: Bloomberg. March 2019.

FTSE250/FTSE100 & Sterling


Emerging Market Equities Should Benefit From Growth

Convergence & Any Dollar Weakness

Source: JP Morgan. March 2019.

EM/DM Equity Ratio & Dollar

Source: Bloomberg. Data from Jan 2016 to Dec 2018.

EM/DM Growth versus EM/DM Equity Performance


Equities – Sentiment Is Neither Excessively Bullish Or Bearish

Source: Bloomberg. Data from 3 Feb 2006 to 22 April 2019.

US Sentiment Indicators VIX S&P 500 Volatility Index


Summary of Equity Outlook – US & UK

Source: CAIM


Summary of Equity Outlook – Eurozone, Japan & Emerging Markets

Source: CAIM


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.

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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

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SM2 5AS,

United Kingdom.

Ritesh Anand

Executive Vice President

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Simon Price

Senior Equity Fund Manager

[email protected]

Slawomir Soroczynski

Senior Fixed Income Fund Manager

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Global Macroeconomic & Market Outlook · Global Macroeconomic & Market Outlook On the Wings of a Dove Neil Michael Chief Investment Strategist & Head of Multi-Asset Investments. Private