House View Commitee - SEB Groupsebgroup.com/.../house_view/house_view_march_2019.pdf · House View factors Macro and Markets Market and Fair Value Indicators In Focus Asset Class

SEB House View 20 March 2019

Summary House View factors Macro and Markets Market and Fair Value Indicators In Focus Asset Class and Sector Views Risk Environment

Slide 3

Summary

- We reduce risk utilization to neutral as we see limited upside for equities until macroeconomic momentum turns positive - Our base case scenario is that a trade deal between the US and

China will be struck and that global tactical growth momentum following this will reaccelerate - However given current valuations, following the rally and the

downward revision to EPS estimates, we are lifting the bar for our argumentation and require broad based evidence that our scenario is materializing

- We expect to see a lag between a trade deal and the positive economic effects(rising trades and business optimism) hereof - However we expect that this void will be filled by a

rebounding German auto sector and a stabilization in Chinese tactical growth; to materialize over the next 1-3 months

- The dovish turn by central banks is discounted and they will as an isolated factor not be able to drive equities higher by themselves over the coming 3-6 months

- The neutral stance towards risk utilization is tactical and as of writing we expect our next move to be a reentry into an overweight - We view positioning as a positive factor as investor surveys are

indicating that real money investors remains on the sidelines - We expect this to amplify the upward move in equities so forth

macro starts to turn positive - In aggregate we are still positive towards equities, we do not expect

a correction/recession or anything of the like, but until we get confirmation of our base case scenario we chose to stand on the sidelines

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).

Old (65%)

New (50%)

Slide 4

Multi Asset Model Portfolio

- The equity overweight is reduced by 6%-points - The allocation to government bonds is correspondingly increased - The overweight to equities, while neutral on aggregated risk

utilization, is possible given the underweight to High Yield bonds - The High Yield underweight is also financing our overweight

to Emerging Market Debt LC - The reduction in risk utilization is expected to be short lived

- We therefore choose to implement it only through the most liquid asset classes and stay away from changing credits

- The attractiveness of High Yield and Emerging Market Debt is rising so forth our base case scenario starts to materialize - Although High Yield spreads have tightened over 2019 we still

see them as too wide in case of a non-recession environment - With central banks being on hold we see a likelihood that a

soft goldilocks scenario could reemerge in which we expect all carry trades, including High Yield, to generate relatively strong returns

- Emerging Market Debt is in our view the only asset class which has yet to price in the dovish turn by the FED - We have been puzzled by the weak performance of the asset

class and expect a strong rebound as growth for EM stabilizes and as investor confidence in the cycle comes back

- We expect to re-evaluate our stance towards those High Yield and Emerging Market Debt over the coming months - But do not change positioning now with our move to neutral in risk

utilization

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.

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Emerging Market Debt

High Yield Bonds

Investment Grade

Equities

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Slide 5

Regional equity model portfolio

- We maintain the regional equity model portfolio of February - Overweight Emerging Market equities and correspondingly

underweight Europe - We see this as a consensus view but are still of the view that

EM equities have yet to fully discount the dovish FED and improving growth outlook

- The downward revision of 2019 EPS estimates is in our view very overdone for Emerging Market equities - Consensus is looking for negative USD EPS growth for 2019 - We expect that the Chinese monetary stimulus and the

stabilization in commodity prices will lead to upward revisions of EPS estimates over the coming quarters

- The primary arguments behind our European equity underweight are: - Macro momentum in Europe is significantly lacking that of the US - In contrast to the US we are seeing no significant policy response

to the weakening growth outlook - The introduction of TLRTOs was the smallest possible action

that could reasonably had been expected - Political uncertainty for Europe remains high and we can no

longer disregard the political noise around BREXIT which we think should be increasingly discounted for European equities

- In case of a trade deal between the US and China we expect both European and Emerging Market equities to outperform US equities (tactically) - But we also expect Emerging Markets to outperform European

equities; we are as such not expecting to underperform in a trade war deal scenario

Regional equity positioning

Benchmark is MSCI All Country

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Europe

Japan

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Slide 6

DM Equities 7.90%

Fixed Income -0.80%

2012 2013 2014 2015 2016 2017 2018 2019 2020-5

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Commodities ( 3.0%/13.0%)

EMD LC ( 5.6%/ 8.0%)

High Yield ( 3.5%/ 3.9%)

Investment Grade ( 0.8%/ 2.4%)

DM Equities ( 7.9%/13.8%)EM Equities ( 8.2%/12.3%)

Fixed Income (-0.8%/ 1.1%)Money Market (-0.5%/ 0.0%)

Swedish equities ( 9.0%/12.5%)

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Equity Risk and Return Estimates

Source: SEB

Figure 1: 12 month forward looking return expectations Figure 2: 12 month forward looking return expectations for equities and bonds

Figure 3: 12M expected risk and returns

Source: SEB

Source: SEB

Figure 4: Implied returns*

Source: SEB

* Implied returns are what would make the overlay portfolio mean variance optimal. For a further description see the whitepaper Implied Returns, SEB IM 2018

* High Yield is 50% US and 50% EU

Slide 7

Historical House View Allocation

Figure 2: High Yield Figure 1: Equities

Figure 3: Emerging Market Debt Figure 4: Fixed Income*

* The 2014-2015 combined overweight to equities and fixed income was financed by an underweight to Investment Grade, Commodities, and EMD.

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Slide 8

Expected returns

Figure 1: Absolute expected returns

Figure 2: Risk utilization since inception Figure 3: Relative expected return*

* Shows the 12M forward expected outperformance of the model portfolio compared to the strategic allocation.

- With the lower allocation to equities the expected return of the model portfolio has dropped to 4.3% - This puts the expected return of the model portfolio in line with

that of the benchmark - This is one illustration that the reduction in risk utilization is a

move designed to preserve capital in an environment where we on a tactical horizon see the downside risks as being slightly higher than the upside risks

- It is worth noting that the 50% in risk utilization is the lowest level since August 2018

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Slide 10

House View decision variables

- SEB House View sees all factors outside of Central Banks as less supportive for risk taking than compared to early February - As equities have rallied and as EPS estimates have been revised

lower valuations are now starting to look like a hindrance to further gains in equities - In order for equities to move higher from here we require a

credible turn in tactical macroeconomic momentum and upward revisions to EPS estimates

- Current macro is on aggregate looking weak and in isolation we do not think that it validates an overweight to equities - Note that we have argued to remain overweight equities

previous months in expectation to a trough in macro over Q2 2019 - But given the stretched valuations we are now requiring

that this view actually starts to materialize - In terms of levels (not changes from last month) we see positioning

and central banks as the primary positive factors for risk taking - Investors surveys are indicating that real money investors

remain on the sidelines - So forth macro turns positive we expect this investor group

to buy equities at current or higher valuations - The dovish turn by the FED since December 2018 has clearly

supported equities - However the importance of central banks have been

significantly lowered as everything outside of an announcement on the end of QT in our view is priced

Figure 1: Central Banks and Positioning are now the only positive factors. It is a much more neutral picture which we are seeing now compared to early February.

Figure 2: All factors outside of Central Banks have become less positive since early February.

Source: SEB

Source: SEB

MacroEarnings

PositioningSentiment

Politics

Valuations

Central Banks

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Slide 12

Developments in the Markets

- The rally of early 2019 continued in late February and early March - US equities have now started to push above the highs of the mid-

October and November range - This has in combination with the downward revision to EPS

estimates ensured that valuations are touching upon the levels set during the summer of 2018

- Despite the significant loss in macroeconomic momentum for Europe we have seen European equity markets that have recovered most of the losses endured during Q4

- Analysts have continued to revise EPS estimates lower - The 2019 EPS estimate for the SP500 is now standing at 167

USD compared to 179 USD in mid-October - We see the downward revisions as being excessive and

expect to see a bottoming in EPS estimates as Q1 earnings starts to come out in mid-April

- Despite the strong equity markets global yields have continued to fall on the back of the dovish pivot by the FED and the ECB - German 10 year yields are now back in the vicinity of 0% for the

first time since late 2016 - The US 10 year is now at the lowest levels since the early part of

2018 - Market pricing of the FED rate hike cycle has remained stable over

February and March - The market is still looking for a cut between now and the end of

2020 - Note that the FED as of writing is still expecting 2 hikes for

2019

Figure 1: Earnings estimates continues to be revised lower for SP500. The market is now looking for less than 4% earnings growth for 2019.

Figure 2: Global yields continued to fall over February and March. The German 10 year is now trading close to negative rates once more; for the first time since 2016.

Slide 13

Economy – Developed Markets

- Macro surprises fell further into negative territory for both Europe and the US over March - Following a strong non-farm for January we saw a relapse in

February with employment growth coming in at 20k against an expectation of 180k - This in combination with a weaker than expected ISM

Manufacturing drove Bloomberg's surprise index to the lowest level since 2016

- For Europe the story mimicked that of the US with macro surprises being negative - Although we did see a small uptick from the lows of early

March following positive consumer confidence readings from France and Germany

- A large divergence between manufacturing and non-manufacturing PMIs for both Europe and the US remains - While ISM Manufacturing fell to the lowest levels in 2 years Non-

Manufacturing rose back to the levels of September and October 2018

- Anecdotal evidence from the Manufacturing sector continues to point towards the trade war as being the main culprit behind the weak growth momentum - As manufacturing is more trade sensitive than services

- Despite weak employment growth wages rose more than expected in the February job report - If sustained this can in our view become one of the primary

factors challenging the goldilocks scenario which is now increasingly being discounted by the markets

Figure 1: Following a weak job-report and a disappointing ISM Manufacturing we saw Bloomberg’s surprise index falling to the lowest level since 2016.

Figure 2: Both for Europe and the US we are seeing a large divergence in the momentum of the Manufacturing and Service sector with the former being more influenced by the trade war.

Slide 14

Economy – Asia and Emerging Markets

- The broad Emerging Market PMI gained in March - Driven primarily by gains in LatAm which have been supported by

strong commodity prices - Brazil have regained growth momentum after the election of

Bolsonaro as most tactical growth momentum indicators have started to move out of contraction territory

- The gains in Emerging Market tactical growth momentum follows a weak Q4 - Turkey posted a weak GDP print for Q4 which put the country into

the worst recession since the financial crisis - It is however worth noting that the tightening of monetary

policy (which is hampering growth) is also bringing about positives as we have seen a significant fall in the current account deficit and the inflation rate

- The falling Chinese credit growth have started to bottom out - As the monetary stimulus has started to filter into the real

economy we have seen the credit impulse as calculated by Bloomberg bottoming out - We expect this trend to continue over the coming months

and help stabilizing Chinese growth - There has been no letup in the downward pressure on global trade

- South Korean exports (a bell weather for global trade) fell further over March and is now down 11.4% on a year on year basis

Figure 1: PMIs for LatAm appears to have turned a corner. Following the election of Bolsonaro in Brazil we have seen improving tactical growth momentum.

Figure 2: The credit impulse for China has started to turn upwards as we have seen the effects of the monetary stimulus feeding in. We expect this to support growth.


Slide 16

SEB House View - US surprise indicator

Figure 2: The correlation between macro surprises and equity markets have fallen over February and March.

Figure 1: The SEB House View macro surprise indicator has turned negative once more.

Figure 3: Contribution to the SEB House View surprise indicator.

Source: SEB House View

Source: SEB House View *Surprises vs. rolling 3 month return of SP500 Source: SEB House View

- Macro surprises for the US fell over March - SEBs House View macro surprise indicator has fallen less than the

corresponding indicators of Bloomberg and Citi but the trend is the same

- It is clear that equities and macro has diverged over 2019 - Equities have in our view been driven by the dovish turn of the

FED and discounting of a trade deal - For equities to go higher from here we require a turn in

macroeconomic momentum and a series of positive macro surprises - Note that the level of US macro has fallen close to the

average of the last 5 years - If nothing else this increases the potential for

growth to rebound

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Slide 17

SEB House View - EU surprise indicator

Figure 2: The correlation between European macro surprises and equities remains low.

Figure 1: European macro surprises remains negative.

Figure 3: It is primarily the German and French PMIs which have surprised on the downside.



- European macro surprises remains negative but have come off from the early March lows - Driven by positive surprises in German consumer confidence and

service PMIs - We are still seeing a large negative drag from the

manufacturing PMIs across Europe - In terms of levels of macro then we are at the lowest level in more

than 3 years - European macro is more than 1 standard deviation below its

rolling 5 year level - However it is important to note that momentum is turning

less negative and thereby indicating that a trough could be imminent

*Surprises vs. rolling 3 month return of Stoxx 600 Source: SEB House View

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Slide 18

SEB House View - US macro monitor

Figure 3: US macro indicators deviation from level of 5 last years

Figure 2: US macro momentum

Figure 4: Contribution to US macro momentum



Figure 1: Level of US macro



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Slide 19

SEB House View – EU macro monitor

Figure 3: EU macro indicators deviation from level of last 5 years

Figure 2: EU macro momentum

Figure 4: Contribution to EU macro momentum



Figure 1: Level of EU macro



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Slide 20 R

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Now -3.7%

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Apr16 -11.5%

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020-15

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SEB House View – EM FX Fair Value Indicator

Figure 2: Short and medium term divergence from fair value

Figure 1: Short term deviation from fair value

Figure 3: Deviation from fair value over time



- We see the GBI-EM Diversified FX universe as undervalued by 3.7% - The bulk of the undervaluation is driven by Turkey and Brazil

- For Brazil it is primarily the improving macroeconomic momentum which gives support

- For Turkey it is worth noting that policy rates have remained high despite the fall in inflation and that the current account deficit has narrowed significantly - We expect strong performance of the Lira once growth

stabilizes; we see the latest weakness as a consequence of the political insecurity and the weak Q4 GDP number

- We expect to see the valuation gap closing once investor optimism regarding the growth outlook starts to improve



Slide 22

In Focus #1: Brexit extension in the dark

– The British Parliament voted to delay the UK’s official departure date from the EU – as of writing the UK is officially scheduled for the 29th of March – but uncertainty still remains as of the nature of a possible Brexit extension – Sterling rallied slightly after MPs voted to rule out a no-deal

scenario, which would have seen the UK crashing out of EU – Although MPs in principal voted to leave with a deal, any

extension still needs to be approved by the EU – And given that any Member State can technically

oppose an extension, the likelihood of a hard Brexit remains on the cards, albeit it’s our least likely scenario

– Moreover, a consensus has yet to emerge from the EU bloc and UK regarding the nature of the extension – According to the EU Commission’s president, the UK must

leave the EU by the 22nd of May if it wishes not to participate in European Parliament elections

– Our base case scenario remains a soft Brexit, where the UK remains in close relationship with the EU, and in some form a part of the single market as well as the customs union – Rejecting a no-deal does not technically rule out a no-deal

scenario, but markets seem to have welcomed the delay for now, and entered a wait-and see territory – Even if it is unlikely that the EU will provide any further

concessions to the deal that has been struck, and volatility in the markets can only be expected, the worst case scenario seems to have been averted for now

What can we expect going forward?

In case of an extension after March 29th A short extension:

This option would make clear that negotiations on a withdrawal agreement would only be conditional, and otherwise

a no-deal scenario is possible

A longer extension: An extension of at least 9 months could

enable a second referendum, a change of government, time for renegotiations , or a

change of course

The EU response EU says NO to an extension:

Although the EU could technically reject a delay, it is quite improbable that Member

States would inflict on themselves the costs of a disorderly Brexit

EU says YES to an extension: A short extension before the European

elections may be granted. Otherwise an extension of several months would

provide time for a second referendum or a change in prime minister

May seeks an extension from the EU

The reasons for the extension: May needs to present a strategy for the

extension, as the EU has made it clear that any Brexit delay cannot allow for

further negotiations

The length of the extension: May has warned that a lengthy extension

would require the UK to take part in the European elections, and instead is

pursuing MPs to support a short delay

Slide 23

In Focus #2: China

– Economic slowdown in China is given, however the fear of a detrimental deceleration is overstated, as the Chinese government is pushing for economic stimulus – In Chinas’ annual policy summit of the NPC, Premier Li Keqiang

highlighted the economic battle ahead, and announced tax cuts worth USD 298 billion that would take effect on April 1 – The economic growth target was lowered, and latest data

from China shows that industrial production fell short of expectation, jobless rate has increased, credit data has been weakened, and trade data was distorted by the Lunar year – However, monetary easing is expected, and strong

measures will be taken as emphasis was put on using price tools such as RRR, interest rates, increasing support for smaller and medium firms, as well as opening up market access for foreign companies

– Although markets are concerned that Chinese banks have a flood of bad loans, officials have stated that China will not resort to QE or massive deficit spending in order to support the economy – Keqiang reiterated that a debt-fuel investment boom is not in the

agenda, and one of the main tasks for the government in 2019 was rather to boost domestic consumption – As policy is expected to stay supportive, and extra liquidity

can support small and private enterprises, the slowdown will not be a cliff-drop but rather an orderly steadily slowing Chinese economy

Figure 1: Chinese sentiment towards monetary policy have started to improve with stimulus from PBOC.

Figure 2: The credit impulse in China appears to be turning. We expect this to improve further over the coming months.


Slide 25

Developed Market Equities – 12M Outlook

- Developed Market equities will deliver returns in excess of all fixed income alternatives over the coming 12 months - We do not expect to see multiple expansion on a 12 month

horizon - But given the defensive positioning in the market we expect

investors to reallocate into equities at the first sign of a turn in macro - We expect that this will lead to short term multiple

expansion as we think this move will lead EPS revisions - But EPS revisions will turn positive and during H2

2019 catch up to the equity markets - On a strategic horizon we expect that Developed Market equities

to grind higher in line with earnings - The market is currently pricing in just north of 3% earnings

growth for MSCI World - We see this estimate as being too low and expect EPS

estimates to be revised higher already by the Q1 earning season

- We do acknowledge that we will see margin pressure from rising wage costs but do not expect this factor to fully erode our expected topline growth

- The major risk to Developed Market equities is a failure to secure a trade deal between China and the US - It now seems likely that a deal will be signed in June which in the

short term lifts the uncertainty; in our view

Figure 1: Bottom-up EPS growth for MSCI World has been revised significantly lower over the start of 2019. We think that the negative EPS revisions are overdone.

Figure 2: We expect nominal GDP to slow to around 4% for 2019. This would still be supportive of significant earnings growth

Slide 26

Emerging Market Equities – 12M Outlook

- We expect positive absolute returns of Emerging Market equities over the coming year - We see the downward revisions to EPS estimates over 2019 as

overdone - The weakness in EM FX over 2018 will mitigate the negative

impact of the trade war - Investor surveys are indicating a defensive allocation among TAA

managers towards EM equities - EM equities is the market which to the largest decree have

priced in the trade war - Any kind of soft resolution to the trade war will in our

view create a positive repricing of the region - I.e. limited downside but significant upside to EM

equities in relation to the trade war - Our positive return expectation is built primarily on a constructive

view towards earnings growth - Correcting for sector composition then MSCI EM Asia is trading at

roughly the same level as MSCI World - The EM risk premium is only to be found in LatAm

- The Chinese stimulus will in our view support EM equities as a whole - We see scope for further cuts in the Reserve Requirement Ratio

during 2019 - In addition to the cuts of January 2019

Table 1: In order for a credible turn in EM equities we require a rebound in global trade. South Korean exports are presently falling by 11% on a YonY basis.

Slide 27

High Yield Bonds – 12M Outlook

- High Yield bonds still looks set to deliver higher returns than Investment Grade and government bonds - But its relative attractiveness to equities is increasingly

diminishing the further we move into the later part of the business cycle - While earnings growth continues to look strong (favoring

equities) we are seeing increased leverage (in isolation negative for credits) - On the basis of loan officer surveys, soft data, and the

earnings reports we expect to see the trend of increasing leverage continuing in 2019

- Historically High Yield has trailed equity returns the further ahead the cycle has gone - We expect the same pattern to materialize this time around

- Despite our cautious stand towards High Yield we stress that we do still not foresee a significant repricing of default risk - We do however note that credit conditions have started to tighten

in the US - This is in our view one of the strongest strategic indicators

for High Yield and warrants our defensive stance

Figure 1: Although spreads have come down we see further scope for normalization given the lower recession risk.

Figure 2: The relative return of High Yield to equities is usually the strongest following a slowdown. In the later stages of the last 3 cycles we saw underperformance of HY to EQ.

Slide 28

Emerging Market Debt – 12M Outlook

- We expect Emerging Market Debt LC to outperform all fixed income alternatives over the coming 12 months - The FX component is in our view undervalued for the universe

- We especially see value stemming from Turkey and Brazil - We are seeing significant improvements in tactical

macroeconomic momentum of LatAm and especially Brazil - Despite this we have seen the Real being weak to

flat over 2019 - We are taking note of the significant drop in Turkey

inflation and the narrowing current account deficit - Despite this we have seen Lira weakness

- While we highlight Turkey and Brazil we have seen broad based improvements for the Emerging Market universe as a whole - The broad EM PMI have moved out of contraction territory - Current account deficits are on aggregate narrowing

- We expect to see a significant outperformance once investor sentiment turns on risk in general - We see EM FX as the only asset class which have yet to fully

discount the dovish turn by the FED

Figure 1: Current Account Deficits have started to tighten for Brazil and Turkey. We expect this to support EM FX.

Figure 2: EM PMIs have started to move north once more. This will in our view reduce the recession fears and support strong returns over the coming months.

Slide 29

Region Overview

Figure 1: SEB House View region score


Regional equity positioning

Benchmark is MSCI All Country

EM E

x. A

sia

EM A

sia

Japa

...

Nor

th A

mer

ica

Swed

en

East

Asi

a Ex

. Jap

an

Euro

pe

-6

-4

-2

0

2

4

6

8

Cont

ribtio

n to

scor

e

Forward EPS %EPS revSentimentValuationMomentum

0%

-6%

0%

0%

0%

6%

0%

55%

20%

8%

1%

3%

8%

5%

55%

14%

8%

1%

3%

14%

5%

North America

Europe

Japan

Sweden

East Asia ex. Japan

EM Asia

EM Ex. Asia

PF

BM

Diff

Slide 30

EM Asia - Overweight

Figure 2: Contribution to House View Region Score

Figure 1: Standardized relative valuation – Current constituents

Figure 3: Absolute valuations – Current constituents


Source: SEB House View Source: SEB House View

- We maintain our overweight position to EM Asia - Like last month the region scores high in our regional scoring

- The forward EPS growth is still very strong and the sentiment has turned and is becoming increasingly positive

- When adjusting for the sector difference to the market the region looks cheap although the difference has narrowed since the early part of 2019

- We expect the region to benefit from our expected trough in Chinese growth over Q2 2019 - As monetary stimulus starts to filter into the economy

EM Asia: 10.9

Market: 14.3

EM Asia (sector neutral): 12.7

2012 2013 2014 2015 2016 2017 2018 2019 20206

8

10

12

14

16

18

12M

For

war

d PE

Latest -1.6Mean -1.3

-2 std -2.6

+2 std -0.1

2015 2016 2017 2018 2019-5

-4

-3

-2

-1

0

1

12M

For

war

d PE

pre

miu

m to

mar

ket

Forward EPS % EPS rev Sentiment Valuation Momentum0

2

4

6

8

10

Ran

k 1-

7 (7

bes

t) 6

3

6

5

2

6 6

3

5

2

2019-03-202019-02-19

Slide 31

EM Ex. Asia - Neutral






- We are neutral EM Ex. Asia - Our regional scoring is strong for the region and this could

motivate an overweight - However the economies in the region are generally

dependent on commodity prices, both as exporters and importers - In out multi asset portfolio we have an underweight to

commodities hence we do not have an overweight to the region as the regional score might suggest - Instead we keep a neutral position in EM Ex. Asia

- We note that the region is trading relatively expensive on a sector adjusted basis following the rally of 2019

EM Ex. Asia: 11.9

Market: 14.3

EM Ex. Asia (sector neutral): 13.2

2012 2013 2014 2015 2016 2017 2018 2019 20206

8

10

12

14

16

18

12M

For

war

d PE

Latest -1.1

Mean -2.1

-2 std -4.3

+2 std 0.1

2015 2016 2017 2018 2019-6

-5

-4

-3

-2

-1

0

1

2

12M

For

war

d PE

pre

miu

m to

mar

ket


2

4

6

8

10

Ran

k 1-

7 (7

bes

t)

7

2

4

3

77 7 7

3

6

2019-03-202019-02-19

Slide 32

Europe - Underweight






- We maintain the underweight position in Europe - The region has the lowest aggregate score amongst all regions

- The only positive factor being the relative valuation - In addition the macro is deteriorating in Europe

- Italy is into a technical recession and in Q4 2018 the economy shrank by 0.2%

- Lastly we would like to highlight the political uncertainty as in BREXIT and the upcoming election to the European Parliament

Europe: 13.4

Market: 14.3Europe (sector neutral): 13.6

2012 2013 2014 2015 2016 2017 2018 2019 20208

10

12

14

16

18

12M

For

war

d PE

Latest -0.7Mean -0.5

-2 std -1.0

+2 std -0.0

2015 2016 2017 2018 2019-1.5

-1

-0.5

0

0.5

1

12M

For

war

d PE

pre

miu

m to

mar

ket


2

4

6

8

10

Ran

k 1-

7 (7

bes

t)

4 4

2

6

1

5

4 4

6

1

2019-03-202019-02-19

Slide 33

Japan - Neutral






- We maintain our neutral position in Japanese equities - The regional score for Japan is mixed

- Valuation and momentum is strong for Japan, but forward EPS growth and EPS revisions are lowest among all regions

- The highly cyclical companies of Japan would benefit from faster global growth - But domestic demand may decrease based on the

government’s ill-advised plan to raise sales tax in October this year - However it remains to be seen if this tax increase will be

implemented or not. The initial plan was to implement the tax change in October 2015 but this has been delayed several times due to the economic conditions in Japan

Latest -1.7

Mean -1.1

-2 std -1.9

+2 std -0.4

2015 2016 2017 2018 2019-3

-2

-1

0

1

2

3

4

12M

For

war

d PE

pre

miu

m to

mar

ket

Japan: 14.6Market: 14.3

Japan (sector neutral): 12.6

2012 2013 2014 2015 2016 2017 2018 2019 20208

10

12

14

16

18

20

12M

For

war

d PE


2

4

6

8

10

Ran

k 1-

7 (7

bes

t)

1 1

7 7

6

1

2

6

7 7

2019-03-202019-02-19

Slide 34

North America - Neutral






- We stay neutral North America - The region was recently upgraded to a neutral from the previous

underweight - The valuation premium to the market is in line with the

historical premium - Based on the regional scoring there is no obvious reason

why the region should either underperform or outperform the broad market

- In addition the regions shows stronger macro momentum than the rest of the developed markets

Latest 1.5Mean 1.6

-2 std 1.2

+2 std 2.0

2015 2016 2017 2018 20190.5

1

1.5

2

2.5

12M

For

war

d PE

pre

miu

m to

mar

ket

North America: 16.2

Market: 14.3North America (sector neutral): 15.8

2012 2013 2014 2015 2016 2017 2018 2019 20208

10

12

14

16

18

20

12M

For

war

d PE


2

4

6

8

10

Ran

k 1-

7 (7

bes

t)

5 5

1

4

5

3 3

2

4 4

2019-03-202019-02-19

Slide 35

Sweden - Neutral






- We stay neutral Sweden - The regional shows a neutral score

- Both on a absolute valuation and a sector adjusted valuation the region looks expensive - The valuation premium to the market has increased over

the last year and is now close to all time highs - The weak Swedish krona will support the competitiveness of the

export heavy Swedish companies - However in a late stage of the business cycle we maintain a

neutral position to Sweden due to the cyclicality of the country’s companies

Latest 1.7Mean 1.5-2 std 1.2

+2 std 1.9

2015 2016 2017 2018 2019-3

-2

-1

0

1

2

3

12M

For

war

d PE

pre

miu

m to

mar

ket

Sweden: 14.9Market: 14.3

Sweden (sector neutral): 16.0

2012 2013 2014 2015 2016 2017 2018 2019 20208

10

12

14

16

18

12M

For

war

d PE


2

4

6

8

10

Ran

k 1-

7 (7

bes

t)

3

6

5

2

3

4

1 1 1

3

2019-03-202019-02-19

Slide 36

Sector Overview

Figure 1: SEB House View sector score

Figure 2: SEB House View sector overview


Sector UW N OW

Communication Services N

Consumer Discretionary (N) OW

Consumer Staples UW

Financials N

Health Care OW

Industrials OW

Information Technology N (OW)

Materials UW

Utilities UW

* We do not take views on Energy or Real Estate. The former is too much of an oil call and the latter is too small a sector. (X) Indicates last months positioning.

Cons

umer

Dis

cret

iona

...

Heal

th C

are

Indu

stria

ls

Fina

ncia

ls

Com

mun

icat

ion

Serv

ic...

Cons

umer

Sta

ples

Utili

ties

Info

rmat

ion

Tech

nolo

gy

Mat

eria

ls

-15

-10

-5

0

5

10

15

Cont

ribtio

n to

scor

e

Forward EPS %EPS revSentimentValuationMomentum

Sector 12M Forward EPS growth

4W EPS revision Relative sentiment

Std PE premium to market

Relative momentum

Communication Services 3.6 -0.5 Negative 1.2 Negative

Consumer Discretionary 12.7 -0.3 Positive -1.2 Negative

Consumer Staples 3.5 -2.0 Negative 0.7 Positive

Financials 8.8 -0.9 Positive -1.5 Negative

Health Care 6.2 -0.7 Positive -0.7 Positive

Industrials 10.3 -0.5 Positive -0.8 Positive

Information Technology 3.1 -2.0 Negative 0.9 Neutral

Materials -1.8 -2.8 Neutral 1.4 Negative

Utilities 4.6 -0.9 Negative 1.5 Positive

Slide 37

Communication Services - Neutral

Figure 2: Contribution to House View Sector Score





- We maintain our neutral position in Communication Services despite strong positive EPS revision during the last month - The relative valuation of the sector has increased and the sector

is now trading at price-earnings ratio of 16.6 - Forward EPS growth looks somewhat stronger than last month

but still lower than the aggregated market - This is the main reason for us to maintain the neutral stance

in the sector Latest 1.7Mean 1.3-2 std 0.7

+2 std 1.9

2017 2018 20190

1

2

3

4

5

6

12M

For

war

d PE

pre

miu

m to

mar

ket

Communication Services 16.6

Market 14.9

2017 2018 2019 202012

14

16

18

20

22

12M

For

war

d PE


2

4

6

8

10

12

Ran

k 1-

9 (9

bes

t)

4

8

3 3

4

3 3

9

5

2

2019-03-202019-02-06

Slide 38

Consumer Discretionary - Overweight






- We are increasing Consumer Discretionary from a neutral position to an overweight - The sector has the highest score amongst all in our sector scoring

- With strong forward EPS growth and strong EPS revision made last month we think the sector looks attractive

- The valuation premium to the broad market has come down since last month and we think the valuation is attractive now

- The sentiment score has increased significantly since last month - All of these arguments makes us increasing our allocation to the

sector

Latest 4.4

Mean 5.1

-2 std 4.0

+2 std 6.3

2017 2018 20193

4

5

6

7

8

9

12M

For

war

d PE

pre

miu

m to

mar

ket

Consumer Discretionary 19.3

Market 14.9

2017 2018 2019 202012

14

16

18

20

22

24

12M

For

war

d PE


2

4

6

8

10

12

Ran

k 1-

9 (9

bes

t)

9 9

7

8

2

9

6

4

7

6

2019-03-202019-02-06

Slide 39

Consumer Staples - Underweight






- We maintain our underweight position in Consumer Staples - The sector is continuing to trade with a large premium to the

market - Since the upturn in the market since the December correction

the sector has underperformed S&P 500 - Consumer Staples shows a neutral score amongst all the sectors

- But the EPS revisions and the forward EPS growth has decreased since last month - Both of these factors are among the weakest of all

sectors - The fundamentals together with the scoring makes us maintaining

our underweight

Latest 3.3

Mean 2.7

-2 std 1.1

+2 std 4.4

2017 2018 20191

2

3

4

5

6

7

12M

For

war

d PE

pre

miu

m to

mar

ket

Consumer Staples 18.2

Market 14.9

2017 2018 2019 202012

14

16

18

20

22

12M

For

war

d PE


2

4

6

8

10

12

Ran

k 1-

9 (9

bes

t)

3

2

4

5

8

5

7

8

4

7

2019-03-202019-02-06

Slide 40

Financials - Neutral






- We continue to have a neutral position within Financials - On the basis of a very dovish FED in January and a dovish FED in

early March we stay neutral in finance - With lower probability of higher rates during 2019 we think

that financials will have a hard time outperforming the broad market

- In terms of score the sector looks increasingly cheap on a relative valuation basis - However the momentum and EPS revision has decreased since

last month which gives an overall neutral score

Latest -3.4

Mean -2.8

-2 std -3.7

+2 std -1.9

2017 2018 2019-5

-4

-3

-2

-1

0

12M

For

war

d PE

pre

miu

m to

mar

ket

Financials 11.4

Market 14.9

2017 2018 20198

10

12

14

16

18

12M

For

war

d PE


2

4

6

8

10

12

Ran

k 1-

9 (9

bes

t)

7

4

8

9

1

7

5

2

8

3

2019-03-202019-02-06

Slide 41

Health Care - Overweight






- We maintain overweight to Health Care - The fact that a Texas federal judge states that the Affordable

Card Act (ACA, more known as Obamacare) is unconstitutional has worried the markets recently - However ACA has already withstood scrutiny in the Supreme

Court so if anything we would see the recent underperformance as a buying opportunity

- The valuation has come down during 2019 - But the sector is still trading at a premium to the market - Positive EPS revisions the last month as well as a the best

sentiment among all sector makes us maintaining the overweight to healthcare

Health Care 15.4Market 14.9

2017 2018 201912

13

14

15

16

17

18

12M

For

war

d PE


2

4

6

8

10

12

Ran

k 1-

9 (9

bes

t)

6 6

9

6

7

6

4

6

3

8

2019-03-202019-02-06

Latest 0.5

Mean 0.9

-2 std -0.2

+2 std 1.9

2017 2018 2019-1

-0.5

0

0.5

1

1.5

2

2.5

3

12M

For

war

d PE

pre

miu

m to

mar

ket

Slide 42

Industrials – Overweight






- We maintain our overweight to Industrials - In a scenario where growth bottoms out we expect a cyclical

sector such as industrials to outperform the market - The sector has one of the highest in our scoring

- With high forward EPS growth and strong sentiment being two of the factors contributing

- From a valuation perspective the sector still looks attractive even though the valuation has increased since February - The sector is still trading at a discount compared to usual

premium that the sector has during bull markets

Latest 0.5

Mean 0.9

-2 std 0.0

+2 std 1.8

2017 2018 2019-1

-0.5

0

0.5

1

1.5

2

2.5

3

12M

For

war

d PE

pre

miu

m to

mar

ket

Industrials 15.4Market 14.9

2017 2018 201912

13

14

15

16

17

18

19

20

12M

For

war

d PE


2

4

6

8

10

12

Ran

k 1-

9 (9

bes

t)

8

7

6

7

6

8 8

1

9

4

2019-03-202019-02-06

Slide 43

Information Technology - Neutral






- We decrease our overweight to a neutral position - The sector has had a very strong performance in the recent

month and as a consequence of this the valuation has rallied - The fundamentals does not looks attractive either

- Forward EPS growth are among the lowest in the market - EPS revision are also low compared to a market average

- The sentiment is also negative and we now see the sector as being overbought on the tactical horizon

- Hence we decrease to a neutral position

Latest 2.8

Mean 2.4

-2 std 1.5

+2 std 3.4

2017 2018 2019-0.5

0

0.5

1

1.5

2

2.5

3

3.5

12M

For

war

d PE

pre

miu

m to

mar

ket

Information Technology 17.7

Market 14.9

2017 2018 2019 202012

13

14

15

16

17

18

19

20

12M

For

war

d PE


2

4

6

8

10

12

Ran

k 1-

9 (9

bes

t)

2

3

2

4

5

2 2

5

6

5

2019-03-202019-02-06

Slide 44

Materials - Underweight






- We maintain our underweight to materials - All companies but one in the sector has seen unchanged or

negative EPS revisions the last month - In addition the forward EPS growth for the sector is still

lowest among all sectors - The sector is very much a play on commodity prices and since we

have a negative view on commodities we maintain our underweight position in the sector

Latest 0.7

Mean -0.0

-2 std -1.1

+2 std 1.0

2017 2018 2019-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

12M

For

war

d PE

pre

miu

m to

mar

ket

Materials 15.6

Market 14.9

2017 2018 201912

13

14

15

16

17

18

19

12M

For

war

d PE


2

4

6

8

10

12

Ran

k 1-

9 (9

bes

t)

1 1

5

2

3

1

9

3

2

1

2019-03-202019-02-06

Slide 45

Utilities - Underweight






- We maintain our underweight position in Utilities - During the recent market rally Utilities has underperformed the

market - But the absolute valuation has rallied as well as the valuation

compared to how the sector has been valued in recent years - We also expect the sector to underperform in a growth rebound

scenario, due to its defensive character

Latest 3.5

Mean 2.0

-2 std -0.1

+2 std 4.0

2017 2018 2019-2

-1

0

1

2

3

4

5

12M

For

war

d PE

pre

miu

m to

mar

ket

Utilities 18.4

Market 14.9

2017 2018 201912

13

14

15

16

17

18

19

20

12M

For

war

d PE


2

4

6

8

10

12

Ran

k 1-

9 (9

bes

t)

5 5

1 1

9

4

1

7

1

9

2019-03-202019-02-06


Slide 47

Risk Environment

- The rally over 2019 has been driven to a large part by expectation that a trade deal between China and the US would be struck - The latest rumors indicates that the deal will now only be

finalized in June - Given the magnitude of the rally over 2019 we see the risk

for a relapse in trade war fears as rising - This is partly lying behind our decision to lower risk

utilization - We also fear that a trade war between the EU and US could

erupt over auto tariffs - When we started the year the market was not pricing in a trade

deal - Now the market is fully discounting it and that is why we lift

it as our primary risk scenario - We see the risk for a recession as falling

- While macro is still looking weak it appears that the worst of the European and Emerging Market slowdown is behind us - We expect to see resurging Chinese credit growth and

German Auto production - We do not see the risk of a FED policy mistake as high

- We expect the FED to be on hold until at least H2 2019 and announce the end of QT at the March meeting - In any case we don’t expect the market to focus on the FED

Figure 1: The NY FEDs recession indicator have edged up over the last couple of months. We see this risk as overrated.

Slide 48

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.

Documents

House View Commitee - SEB Groupsebgroup.com/.../house_view/house_view_march_2019.pdf · House View factors Macro and Markets Market and Fair Value Indicators In Focus Asset Class