House View Commitee - SEB Group...Positioning Sentiment Politics Valuations Central Banks-10-8-6-4-2 0 2 4 6 8 10 0 2 4 6 8 10 ive Importance House View Committee -The latest rout

SEB House View

07 February 2018

• Summary Decision variables Macro and Markets Market Indicators Asset Class and Sector Views Risk Environment

Slide 3

Summary

- We remain at 75% in risk utilization

- The primary, but not sole, factor behind the rout in equities is in our view stretched positioning

- Especially within the short equity volatility space

- The downward pressure from unwinding of these positions are done now and we expect volatility to normalize over the coming weeks

- The rout is not a reflection of changing macro and/or micro fundamentals

- The growth picture has in our view only gained strength over 2018

- The rout is not driven by rising rates

- The rise in US rates is still primarily driven by stronger macro

- We believe that the higher wage inflation of January’s job report will have to be confirmed in order to force the FED in a more hawkish direction

- We remain of the view that equities will deliver strong positive returns in 2018 driven by significant earnings growth

- Bottom-up estimates for 2018 EPS growth has converged upwards to our top-down estimate and is now pointing towards ~12% local currency growth

- The tactical overweight to risk is motivated by a view that the divergence between macro and financial markets will diminish

- This is in contrast to the January House View were we expected upward revisions of earnings estimates to be the primary driver behind equity market gains

The speedometer controls to what extent the portfolios should utilize their risk budgets. It is connected to the model portfolio (page 4) which at all times utilizes its risk budget in-line with the speedometer. In a very general sense it can be interpreted as equities on/off (with 50% being neutral).

75%

Slide 4

Multi Asset Model Portfolio

- We remain overweight equities

- 2018 EPS estimates are pointing towards an earnings growth of 12% (local currency)

- This is in line with our top-down estimate and we expect this to be the primary driver of equities

- We remain significantly underweight High Yield Bonds

- With stretched valuations we expect the asset class to come under pressure as the FED continues to hike rates

- Note that traditional factors remain positive for the asset class (low recession risk and benign credit standards in the SLO)

- We see the risk for the FED as skewed to the upside

- Seeing it as more likely that the FED will deviate from the current projection by hiking rates 4 times rather than reducing the pace and only hiking twice

- Note that we only see this scenario as happening in case growth remains strong in which case we expect equities to continue to outperform

- We are overweight Emerging Market Debt in local currency

- We expect EM macro momentum to accelerate upwards towards that of DM which we expect will support further EM FX strength

- With low EM inflation rates and improving external balances we see little risk for negative spillover effects from a tighter US monetary policy

Model Portfolio

Long only portfolio. Yearly VaR(95%) ex. mean between 7% and 21%.No restrictions on the individual asset classes. The weights are set manually by the House View committee; i.e. they are not based upon an optimization model.

1%

-3%

10%

-6%

0%

11%

-13%

-30% 20% 70% 120%

Cash

Commodities

Emerging Market

Debt

High Yield Bonds

Investment Grade

Equities

Government Bonds

Allocation

Strategic

allocation

Diff

Slide 5

Multi Asset Model Portfolio – Risk characteristics

Tracking Error

Source: SEB Source: SEB

Value at Risk (95%)

Blo

om

be

rg C

om Oil

US

HY

Sp

rea

d

EU

IG S

pre

ad

EM

D S

pre

ad

EM

Asi

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M O

the

r

EM

vs

GL

US

vs

EU

JP

vs

GL

SW

vs

GL

Siz

e

Eq

uit

ies M

om

en

tum

(U

S)

Qu

alit

y (

US

)

Va

lue

(U

S)

Gro

wth

(E

U)

VIX

EM

FX

US

DS

EK

EU

RU

SD

US

DJ

PY

US

DG

BP

US

2Y

Yie

ld

US

10

Y Y

ield

SW

5Y

Yie

ld

DE

5Y

Yie

ld

Mo

me

ntu

m

Idio

syn

cra

ctic

-25

-20

-15

-10

-5

0

Ris

k co

ntr

ibu

tio

n

Blo

om

be

rg C

om

Oil U

S H

Y S

pre

ad

EU

IG S

pre

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EM

D S

pre

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EM

Asi

a v

s E

M O

the

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EM

vs

GL

US

vs

EU

JP

vs

GL

SW

vs

GL

Siz

e

Eq

uit

ies

Mo

me

ntu

m (

US

)

Qu

alit

y (

US

)

Va

lue

(U

S)

Gro

wth

(E

U)

VIX

EM

FX US

DS

EK

EU

RU

SD

US

DJ

PY

US

DG

BP

US

2Y

Yie

ld

US

10

Y Y

ield

SW

5Y

Yie

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DE

5Y

Yie

ld

Mo

me

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m

Idio

syn

cra

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-0.5

0

0.5

1

1.5

2

Tra

ckin

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rro

r

Slide 6

Multi Asset Class Risk and Return Estimates, 12M

Source: SEB

Global Equities

EM Equities

Government Bonds

High Yield

Investment Grade

EMD LC

CommoditiesHedge Funds

Swedish equities

-2%

0%

2%

4%

6%

8%

10%

0% 5% 10% 15%

Re

turn

Risk

Slide 7

Regional equity model portfolio

- We are overweight Emerging Market and Japanese equities

- Financed by an underweight to US equities

- We expect to see JPY weakness against both the USD and the EUR in 2018

- This will ensure faster Japanese earnings growth

- We expect that EM equities will continue to outperform in H1 2018

- Macro surprises of EM have lagged those of DM over 2017

- With global trade and commodity prices rising we expect this to change over the next couple of quarters; i.e. we expect EM macro momentum to increase faster than that of DM

- EM is still trading, even on a sector adjusted basis, cheap compared to DM

- Positive macro surprises should be able to drive not only earnings growth but also multiple expansion for the region

- While DM central banks are in a clear tightening mode the potential for monetary stimulus in EM has increased

- Real EM policy rates are in our view slightly on the high side and with the stabilization in growth we see a heightened potential for stimulus across the universe

- As European profit margins remain low the region is leveraged towards our strong 2018 growth outlook

- EUR strength, and the potential for discussions around ECB tightening during 2018, however motivates our neutral stance

Regional equity positioning

-11%

0%

3%

0%

0%

4%

4%

-30% 20% 70%

North America

Europe

Japan

Sweden

East Asia ex. Japan

EM Asia

EM Ex. Asia

Allocation

MSCI AC

Diff

Slide 8

Equity Risk and Return Estimates

Source: SEB

DM

US

Europe

Japan

SwedenEM

ChinaLatAm

0%

2%

4%

6%

8%

10%

12%

5% 10% 15% 20% 25% 30%

Re

turn

Risk


Slide 10

Macro

Earnings

Positioning

Sentiment

Politics

Valuations

Central Banks

-10

-8

-6

-4

-2

0

2

4

6

8

10

0 2 4 6 8 10

Po

siti

ve

/Ne

ga

tiv

e

Importance

House View Committee

- The latest rout in equities has changed the House View members view on the driving factors for financial markets

- Positioning has become much less of a drag and has increased in importance

- The unwinding of short volatility positions has been significant and has eased the stretched positioning

- As 2018 EPS estimates have been revised higher, and as equity prices have fallen, valuations are less negative now than at the last House View meeting

- US equities have gone from trading at close to 19 in forward PE to 17

- This is still high in a historical context, but much lower than what we have seen over the last year

- Sentiment has gone from a large negative to a neutral

- Technical indicators have switched from overbought to oversold territory

- The earnings season has largely come out as expected by the committee

- Surprising on the upside and with a surge of upward revisions to 2018 estimates

- But as the earnings season is now finishing up for the US we expect focus on earnings to fall slightly; on a tactical horizon

- Central banks have increased in focus

- But we still need to see more broad based inflation pressures for the US before they become a significant negative factor

Macro and earnings are still the primary factors for the overweight to risk. The negative drag from positioning and valuations have eased.

With the latest route in equities positioning is less of a negative drag. As the earnings season is coming to an end the importance hereof has fallen.

Source: SEB

Source: SEB

Macro

Earnings

Positioning SentimentValuations

PoliticsCentral Banks

-2

-1

0

1

2

3

4

5

6

7

-6 -4 -2 0 2 4 6

Ch

an

ge

in p

osi

tiv

e/n

eg

ati

ve

Change in importance


Slide 12

Developments in the Markets

- Global equity markets corrected significantly over the last couple of weeks

- With both US, European, and Japanese equities falling by more than 10%

- The correction was ascribed to both rising rates and stretched short volatility positioning

- The unwinding of the latter drove the VIX to the highest levels since 2011

- On Monday 05 February we saw the largest daily increase in VIX on record

- Notably the increase came about without any of the macro or political surprises which historically have driven the VIX higher

- Rates have continued to rise following the last House View meeting

- US 10Y yields rose to the highest levels since 2013

- The longer end of the curve had failed to move upward in line with the short end over the last couple of quarters

- Leading to a significant flattening of the US yield curve

- Market pricing of the FED funds curve did not change materially during the equity market selloff

- This is in contrast to the BREXIT and Trump election where the market instantly started to price in a dovish FED in light of the market weakness

VIX rose significantly during February. In contrast to previous spikes there was no political or macroeconomic event driving the development.

Longer dated US yields started to follow the short dated yields higher. We are now looking at the highest US 10Y yield since 2013.

Source: SEB

Slide 13

Economy – Asia and Emerging Markets

- Rising exports remains the big theme for the EM space

- The trend of rising global trade continued over January

- PMIs from China and Korea signals that this will continue as new export orders sub-components have started to rise

- However PMIs in EM remains at lower levels than those of DM

- The growth momentum is therefore still lower which has also been visible in a narrowing of the growth gap between EM and DM over the last couple of quarters

- As commodity prices continues to rise and as global trade continues to gather pace we expect this convergence to stop

- I.e. that the gap between EM and DM growth will move north driven by strong EM growth

- Consumer confidence in the EM space also continued to gather pace

- Signaling that the changing growth composition remains well underway

- Especially so for China

- EM inflation remained at low levels

- Real inflation rates continues to hover around relatively elevated levels

- Increasing the scope that we could see monetary stimulus over 2018

- The strength in EM FX over 2018 exacerbates this trend

Global trade continues to support EM growth. South Korea (a bellwether for EM) improved in January.

As DM growth has accelerated over the past couple of quarters the gap between EM and DM growth has narrowed. EM should accelerate from here.


Slide 15

Q3-15 Q4-15 Q1-16 Q2-16 Q3-16 Q4-16 Q1-17 Q2-17 Q3-17 Q4-17 Q1-1895

100

105

110

115

Lev

el

Macro data level

-0.1

0.1

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar-1

-0.5

0

0.5

1

1.5

2

Mo

me

ntu

m

3M MA

1M MA

0.2

0.3

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar-0.5

0

0.5

1

1.5

Su

rpri

se

3M MA

1M MA

House View US surprise indicator

The level of US macro has accelerated over the past month. The likelihood for further gains is limited.

US macro remains positive but less so than during November.

US macro momentum has fallen close to neutral.

Source: SEB House View

Source: SEB House View Source: SEB House View

- Despite falling macro momentum we are still seeing positive surprises

- Expectation has been for a larger decline in the PMIs than what we have seen

- Non-farm and ISM Non-Manufacturing is driving surprises higher

- Macro momentum has moderated

- Driven primarily by the PMIs

- Hard data is continuing to gather strength and is thereby supporting momentum

- The level of US macro remains very high and the upside potential is limited

- We do not expect to see further acceleration in soft data

Slide 16

Q3-15 Q4-15 Q1-16 Q2-16 Q3-16 Q4-16 Q1-17 Q2-17 Q3-17 Q4-17 Q1-1898

100

102

104

106

108

110

Lev

el

Macro data level

0.4

0.3

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar-0.5

0

0.5

1

1.5

Mo

me

ntu

m

3M MA

1M MA

0.7

0.6

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar-1

-0.5

0

0.5

1

1.5

2

Su

rpri

se

3M MA

1M MA

House View EU surprise indicator

The level of EU macro remains at extremely elevated levels. We do not expect further gains in soft data.

European macro economic surprises remains positive.

3M macro momentum for Europe remains in positive territory.



- European macro continues to surprise on the upside

- Led by pan-European consumer confidence and German production data

- Macro economic momentum remains positive

- Driven in large part by German data

- The level of European macro data is at very high levels

- As for the US it is limited how much more we can expect in terms of positive changes to macro

Slide 17

Co

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tio

n t

o s

urp

rise

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb-10

0

10

20

30

40

Consumer

Industrial

PMI

Co

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o s

urp

rise


0

5

10

15

20

25

Consumer

Housing

Industrial

Labour

PMI

Co

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ibu

tio

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o s

urp

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-5

0

5

10

15

Consumer

Housing

Industrial

Labour

Co

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o s

urp

rise

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb0

10

20

30

40

50

Consumer

Housing

PMI

House View macro surprise contributions

EU – Contribution to 3 month surprise

Global soft data – Contribution to 3 month surprise

US – Contribution to 3 month surprise



Global hard data – Contribution to 3 month surprise


Slide 18

Co

ntr

ibu

tio

n t

o m

om

en

tum

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb-0.4

-0.2

0

0.2

0.4

0.6

Consumer

Industrial

PMI

Co

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tio

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o m

om

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-0.2

0

0.2

0.4

0.6

0.8

1

Consumer

Housing

Industrial

Labour

PMI

Co

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tio

n t

o m

om

en

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-0.4

-0.2

0

0.2

0.4

0.6

0.8

Consumer

Housing

Industrial

Labour

Co

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ibu

tio

n t

o m

om

en

tum


0

0.2

0.4

0.6

0.8

1

1.2

Consumer

Housing

PMI

House View macro momentum contributions

EU – Contribution to 3 month momentum

Global soft data – Contribution to 3 month momentum

US – Contribution to 3 month momentum



Global hard data – Contribution to 3 month momentum



Slide 20

Developed Market Equities – 12M Outlook

- Developed Market equities will be the best performing major asset class over the coming 12 months

- The return will come solely from earnings growth

- We expect to see a slight multiple contraction

- Higher yields and increasing volatility will limit how far multiples can go

- We expect to see upward revisions of 2018 EPS estimates for both Europe and the US

- With low margins Europe is poised to be leveraged to improving global growth

- However the uncertainty around the EUR will introduce a risk premium which will hamper the upside

- The strong global growth which we are currently seeing will be the driver behind the strong earnings growth

- For most of 2017 the gains in equities was driven by multiple expansion as a consequence of the string of positive macro surprises

- We expect that the strength of soft data will now translate itself into hard data

- This is in our view not fully reflected in the bottom-up consensus estimates for 2018 EPS

The market is foreseeing 10% earnings growth in the SP500.

The 2018 theme will be how strong GDP growth ensures further gains in earnings.

Slide 21

Emerging Market Equities – 12M Outlook

- We expect that Emerging Market equities will deliver a return in excess of Developed Market equities

- In contrast to Developed Market equities we are expecting both strong earnings growth and multiple expansion

- Several factors are supportive for Emerging Market equities

- Emerging Market is trading at a historically large discount to Developed Market equities

- The premium by which EM is trading is in our view driven by the political uncertainty of later years and because investors shunned the asset class during 2014-2015

- We expect to see upward convergence of the sector adjusted PE for EM equities over the next couple of years

- In itself generating a return potential of some 20%

- Global trade is rising strongly at the moment

- We believe this will boost EM earnings as it has done in the past

- The strong Chinese growth momentum will lift growth for the rest of the EM space

- As China has historically been leading aggregated EM growth

Bottom-up EPS growth for EM has started to be lifted significantly. It is on the basis of strong EM EPS growth that we are overweight.

EM growth is set to accelerate further in 2018.

Slide 22

High Yield Bonds – 12M Outlook

- We expect that global High Yield bonds will outperform Investment Grade and Government bonds over the coming 12 months

- But the absolute return will be low and the asset class will underperform equities

- Structural factors which historically have been supportive for the asset class are still in place

- The growth outlook remains stable and the likelihood for a recession in 2018 is very low

- The latter is our primary argument as to why we expect High Yield bonds to outperform

- Expectations to gradually rising core government bond yields will continue to drive investors into less rate sensitive asset classes; such as High Yield

- Credit conditions are being loosened in both Europe and the US

- Note that this is a reversal of the trend which we saw for 2016 as a whole

- Free cash flows are improving rapidly at the moment

- The primary risk for the High Yield space is rising financing costs

- This as leverage within the High Yield space has risen over the last couple of years

- However we do not expect this to be a major risk factor for the coming 6-12 months

Spread to worst for US High Yield is now at decade lows. The sub 200 bps premium does not in our view compensate for the credit and liquidity risk.

Slide 23

Emerging Market Debt – 12M Outlook

- We expect Emerging Market debt to deliver a return in excess of DM government bonds, Investment Grade and High Yield for the coming 12 months

- A return supported by both stronger EM FX against the USD and higher carry

- We expect EM FX and EM rates to remain resilient to FED rate hikes following the current projection

- Led by China we have seen a broad based revival in EM growth

- We believe this revival is more stable than those of later years given the regional breadth and the uptick in global trade

- As EM growth has gained momentum of its own we do not expect to see a negative impact on EM FX from rising US policy rates

- Assuming a rate hike path such as predicted by the FED

- Low EM inflation reduces the likelihood that EM countries will be forced to hike in tandem with the FED

- Spreads in EM have fallen significantly and the return potential from further spread compression is low

- We believe the bulk of EMD LC performance will come from FX appreciation

- The main risk to Emerging Market debt is political risks

- There remain a lack of structural reforms but we do not expect it to generate a correction while growth is strong

Low EM inflation generates a scenario in which US rates can edge higher (due to strong growth) without denting EM FX.

We see most value in EMD Local currency. We expect the majority of future return will come from FX appreciation rather than spread compression.

Slide 24

En

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Fin

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Ma

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Ind

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ls

TC Co

nsu

me

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IT

He

alt

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Co

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r S

Uti

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-3

-2

-1

0

1

2

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4

5

Co

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Sentiment

EPS

Valuation

Macro

Momentum

Sector overview

House View Sector Quant Score

House View Sector Quant Factor



Sector UW N OW

Financials OW

Consumer Stables UW

Consumer Discretionary N

Energy N

Industrials OW

Telecommunication N

Materials OW

Health Care UW

Info Tech N

Utilities UW

Sector Sentiment EPS Valuation Macro Momentum

Financials NEG POS POS NEG POS

Materials POS NEG POS NEG POS

Industrials NEG POS NEG POS POS

Consumer D NEG POS NEG POS POS

Consumer S POS NEG POS NEG NEG

Health Care POS NEG NEG POS NEG

Energy NEG POS POS POS POS

IT NEG NEG NEG POS POS

TC POS POS POS NEG NEG

Utilities POS NEG POS NEG NEG

Slide 25

Financials - Overweight

Contribution to House View Sector Score

Standardized relative valuation

Absolute valuations



- We expect the sector to benefit from monetary policy normalization

- As the FED continues to hike rates we expect to see earnings estimates for financials turning increasingly positive

- This as net interest margins will continue to rise

- We expect that financial deregulation in the US, however small, will also start translating itself into higher EPS estimates

- We expect to see an acceleration of this effect going into 2018

- Consensus looks for 9% EPS growth in 2018 for the sector

- We believe this is too small even taking into account the likelihood of no deregulation

Co

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to

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2015 2016 2017 2018-3

-2

-1

0

1

2

3

4

5

Sentiment

EPS

Valuation

Macro

Momentum

-3.9

-4.8

-3.0

-4.4

-3.4

-3.9

2015 2016 2017 2018-6

-5

-4

-3

-2

-1

Sta

nd

ard

ize

d P

E

13.8

17.7

2015 2016 2017 201811

12

13

14

15

16

17

18

19

12

M F

orw

ard

PE

Financials

Market

Slide 26

Co

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on

to

sco

re

2015 2016 2017 2018-3

-2

-1

0

1

2

3

Sentiment

EPS

Valuation

Macro

Momentum

-0.8

-0.8

0.3

-0.5

-0.0

-0.3

2015 2016 2017 2018-3

-2

-1

0

1

2

Sta

nd

ard

ize

d P

E

16.9

17.7

2015 2016 2017 201813

14

15

16

17

18

19

12

M F

orw

ard

PE

Materials

Market

Materials - Overweight



Absolute valuations



- We are overweight on materials as relative valuations have fallen over the last month

- As earnings estimates have been lifted while performance has lagged that of the broader market

- For 2018 we expect that materials will be supported by the continued improvement that we are seeing in Chinese macro

- We see potential for this trend to accelerate as we expect upward convergence of EM macro to DM macro

- On a tactical horizon we are seeing support from positive earnings revisions and momentum

Slide 27

Co

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ibti

on

to

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2015 2016 2017 2018-3

-2

-1

0

1

2

3

Sentiment

EPS

Valuation

Macro

Momentum

1.3

-0.4

1.7

0.1

1.2

0.7

2015 2016 2017 2018-1.5

-1

-0.5

0

0.5

1

1.5

2

Sta

nd

ard

ize

d P

E

19.0

17.7

2015 2016 2017 201814

15

16

17

18

19

20

21

12

M F

orw

ard

PE

Industrials

Market

Industrials – Overweight



Absolute valuations



- We are overweight industrials due to the strong global macroeconomic recovery

- Relative valuation is challenging for the sector

- This negative drag has increased over the past month

- We are now trading 2 standard deviations above the historical premium

- Relative price momentum is a net neutral contributor

- We expect that the strong PMIs will push macro to become an even more positive factor over the coming months

- This will also make earning revisions more positive

Slide 28

Co

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on

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2015 2016 2017 2018-3

-2

-1

0

1

2

3

4

5

Sentiment

EPS

Valuation

Macro

Momentum

3.2

-0.0

2.7

0.7

2.0

1.3

2015 2016 2017 2018-0.5

0

0.5

1

1.5

2

2.5

3

3.5

Sta

nd

ard

ize

d P

E

20.9

17.7

2015 2016 2017 201814

15

16

17

18

19

20

21

22

12

M F

orw

ard

PE

Consumer D

Market

Consumer Discretionary - Neutral



Absolute valuations



- We reduce Consumer Discretionary to a neutral

- The significant rally which we have seen over the past couple of months has lifted relative valuations to overbought territory

- Same is signaled by our sentiment component which now puts the sector as the most overbought on a tactical horizon

- The global macro environment continues to support the sector

- Global consumer confidence is rising

- Which we expect will translate into higher consumption rates over the coming year

Slide 29

Co

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ibti

on

to

sco

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2015 2016 2017 2018-3

-2

-1

0

1

2

3

Sentiment

EPS

Valuation

Macro

Momentum

1.1

0.5

4.4

1.4

3.4

2.4

2015 2016 2017 20180

1

2

3

4

5

Sta

nd

ard

ize

d P

E

18.8

17.7

2015 2016 2017 201814

15

16

17

18

19

20

21

22

12

M F

orw

ard

PE

Consumer S

Market

Consumer Staples - Underweight



Absolute valuations



- As we believe all bond proxies should underperform on a relative basis as yields rise we underweight Consumer Staples

- Although valuations are cheap we expect the sector to underperform as the macroeconomic environment continues to gather pace

- The sector is trading more than 2 standard deviations cheap compared to its recent history

- But has come up slightly over December

- The underweight is primarily motivated by the defensive nature of the asset class

Slide 30

Health Care - Underweight



Absolute valuations



- We are underweight Health Care as we believe the latest rally has gone too far and that the sector is now overbought

- The strong performance over the last couple of months has eradicated the valuation argument which came into place following the election of Trump and the republican majority in the senate

- As it was speculated that the Affordable Care Act and increased price scrutiny would challenge the rise in earnings of later years

- The sector has historically underperformed in a rising yield and inflation environment

- Making it in our view hard to build a strategic case for the sector

Co

ntr

ibti

on

to

sco

re

2015 2016 2017 2018-2

-1

0

1

2

3

4

Sentiment

EPS

Valuation

Macro

Momentum

-1.0

-2.5

-0.7

-2.1

-1.2

-1.6

2015 2016 2017 2018-4

-3

-2

-1

0

1

2

3

Sta

nd

ard

ize

d P

E

16.7

17.7

2015 2016 2017 201814

15

16

17

18

19

12

M F

orw

ard

PE

Health Care

Market

Slide 31

Co

ntr

ibti

on

to

sco

re

2015 2016 2017 2018-2

-1

0

1

2

3

4

Sentiment

EPS

Valuation

Macro

Momentum

0.7

-1.2

0.7

-0.7

0.2

-0.2

2015 2016 2017 2018-2

-1.5

-1

-0.5

0

0.5

1

Sta

nd

ard

ize

d P

E

18.4

17.7

2015 2016 2017 201814

15

16

17

18

19

20

12

M F

orw

ard

PE

IT

Market

Tech - Neutral



Absolute valuations



- We are neutral tech

- Positive momentum and EPS revisions are dominating expensive relative valuations

- As relative valuations are stretched we do not lift the sector to a overweight

- Although we respect the strong momentum the current valuations increase the fragility of the sector and as such we are looking for a better entry point

- We are thereby overriding our pure quant score

Slide 32

Co

ntr

ibti

on

to

sco

re

2015 2016 2017 2018-4

-3

-2

-1

0

1

2

3

4

Sentiment

EPS

Valuation

Macro

Momentum

-5.9

-6.0

-1.3

-4.8

-2.4

-3.6

2015 2016 2017 2018-10

-5

0

5

10

Sta

nd

ard

ize

d P

E

11.7

17.7

2015 2016 2017 201811

12

13

14

15

16

17

18

19

12

M F

orw

ard

PE

TC

Market

Telecommunication - Neutral



Absolute valuations



- We are neutral Telecommunication as we believe the recent relative selloff has made the sector relatively cheap

- As for Consumer Staples the sector is in oversold territory and is trading close to 2 standard deviation on the cheap side compared to its recent history

- Although we are neutral on the sector going into October we note that earnings revisions are a negative drag for the sector and we stress that its bond like proxy characteristics should cause it to underperform in the current strong macroeconomic environment

- We are therefore inclined to sell into strength that eradicates the recent valuation cap

Slide 33

Co

ntr

ibti

on

to

sco

re

2015 2016 2017 2018-3

-2

-1

0

1

2

3

4

Sentiment

EPS

Valuation

Macro

Momentum

-1.2

-1.1

1.4

-0.5

0.8

0.2

2015 2016 2017 2018-3

-2

-1

0

1

2

3

4

Sta

nd

ard

ize

d P

E

16.5

17.7

2015 2016 2017 201814

15

16

17

18

19

12

M F

orw

ard

PE

Utilities

Market

Utilities - Underweight



Absolute valuations



- We are underweight utilities as we expect the sector to underperform due to its bond like characteristics once yields starts to rise

- Note that valuations have fallen significantly

- The sector is looking extremely cheap and a contrarian bet could be initiated soon


Slide 35

Risk Environment

- On the verge of 2018 the list of potential negatives is shorter than what it has been for years

- Geopolitical risk seems tangible, macro is stable and rising across most sectors and regions, and inflation is muted

- The most pressing tactical risk is that there are so few risk factors which has allowed:

- Multiples to rise to levels last seen during the IT bubble

- Margin debt to market cap to rise to cycle highs

- Institutional investors to lift their equity allocation to the highest levels for years

- In the beginning of February we saw slight technical corrections, driving volatility higher

- We maintain an elevated risk of technical correction while expecting some stabilization in volatility for the near future

- For 2018 our primary risk scenario is one in which the FED is forced to tighten more aggressively than what the market and themselves are currently projecting

- As valuations are elevated and leverage is high a scenario in which yields starts to move north would put pressure on the themes which have been traded the last couple of years

- We see the likelihood for this scenario as low on a 3-6 month horizon

The allocation to equities in the AAII survey is now at the highest levels since 2001.

Margin debt to market cap in the US has risen to record highs. This leverage has only been possible due to the low volatility of the markets.

Slide 36

Disclaimer

This report has been compiled by SEB Group to provide background information only and is directed towards institutional investors. The material is not intended for distribution in the United States of America or to persons resident in the United States of America, so called US persons, and any such distribution may be unlawful. Although the content is based on sources judged to be reliable, SEB will not be liable for any omissions or inaccuracies, or for any loss whatsoever which arises from reliance on it. If investment research is referred to, you should if possible read the full report and the disclosures contained within it, or read the disclosures relating to specific companies. Information relating to taxes may become outdated and may not fit your individual circumstances. Investment products produce a return linked to risk. Their value may fall as well as rise, and historic returns are no guarantee for future returns; in some cases, losses can exceed the initial amount invested. You alone are responsible for your investment decisions and you should always obtain detailed information before taking them. If necessary, you should seek advice tailored to your individual circumstances from your SEB advisor.

This material is not directed towards persons whose participation would require additional prospectuses, registrations or other measures than what follows under Swedish law. It is the duty of each and every one to observe such restrictions. The material may not be distributed in or to a country where the above mentioned measures are required or would contradict the regulations in that country. Therefore, the material is not directed towards natural or legal persons domiciled in the United States of America or any other country where publication or provision of the material is unlawful or in conflict with local applicable laws.

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