Global Economic and Financial Market Overview
Q3 2019
This marketing document is for use by Professional Clients
only and is not for consumer use. Please do not redistribute.
Neal Bailey
Market Insights Team
Global Economic and Financial Market Overview
2
1. Performance in 2019 YTD
2. Economic outlook
3. Current financial market backdrop
1. Performance in 2019 YTD
2019 YTD market highlights Summary
▪ Positive performance across all asset classes
▪ Strong performance across equity markets. Developed markets outperform, led by the
US and Europe ex UK
▪ DM government bond yields fall sharply, but underperform rest of FI
▪ Credit markets positive on lower yields and spreads. HY outperforms IG
▪ Low or negative rates weighed on cash returns
▪ Oil gives up some of gains. Gold rallies
Source: Invesco as at August 2019. Where Invesco has expressed views and opinions these may change.
4
-5
0
5
10
15
20
25
GlobalEquities
DM Equities EM Equities Global Govt.Bonds
Global IG Global HY Global Cash Oil Gold
Global Asset Classes – Total Return performance in 2019 YTD (local currency %)*
Source: Datastream as at 1 August 2019. *Indices used are: Global Equities – MSCI ACWI, DM Equities – MSCI World, EM Equities – MSCI EM, Global Govt. Bonds – ICE BofA ML
Global Government, Global IG – ICE BofA ML Global Corporate, Global HY – ICE BofA ML Global High Yield, Global Cash – JPM Global Cash 1m, Oil – Crude Oil BFO M1 Europe FOB
$/bbl, Gold – Gold Bullion LBM U$/Troy Ounce.
5
2019 YTD market highlights Performance Overview
86
88
90
92
94
96
98
100
102
-160
-140
-120
-100
-80
-60
-40
-20
0
20
Sep 18 Nov 18 Jan 19 Mar 19
Global equity flows and MSCI ACWI performance
98
99
100
101
102
103
104
105
106
-80
-70
-60
-50
-40
-30
-20
-10
0
10
Sep 18 Nov 18 Jan 19 Mar 19
Flows
(Cumulative $bn)
Global IG flows and ICE BofAML Global Corporate TR
performance
Asset class flowsThe rally has not been reflected in equity fund flows…but FI has seen substantial inflows
Source: BofAML as at 2 August 2019. *Rebased 100 = 19 September 2018. $ = US.
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Perf.
(RHS)*
Flows
(Cumulative $bn)
Correct colour for labels on RHC – Update Friday
Perf.
(RHS)*
3.0%
-0.4% -0.2%
-4.1%
-2.5%
3.4%
-3.0%
0.8%
-9.1%
-12.0%-14.00%
-12.00%
-10.00%
-8.00%
-6.00%
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
Fixed Income Equity Asset Allocation Alternatives Commodities
8.76bn7.49bn
5.28bn4.01bn 3.78bn
-2.71bn -3.11bn -3.32bn -3.96bn
-8.32bn-10bn
-8bn
-6bn
-4bn
-2bn
0bn
2bn
4bn
6bn
8bn
10bn
GlobalFlexible
Bond-USDHedged
EURCorporate
Bond
Global Bond USDFlexibleBond
GlobalLarge-Cap
BlendEquity
Asia exJapanEquity
US Large-Cap Value
Equity
GlobalEmergingMarketsEquity
Alt - MarketNeutral -Equity
EurozoneLarge-Cap
Equity
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Market highlightsFlow summary
Source: Morningstar Direct, Estimated Net Flows from 01/01/2019 to 30/06/2019, Net Flows/Total Net Assets in EURO as stated in Morningstar Direct Asset Flow application.
2019 Q2:
▪ Investors have switched to
the “save mode”. Less risky
asset classes (government
bonds, corporate bonds) are
preferred
▪ Market inflows continue to
be positive during 2nd
quarter (EUR 32bn)
▪ Fixed income investments
attracted the most flows
(EUR 64bn) whereas
outflows in equities
accelerated (EUR -25bn)
▪ After being a “top sector” by
net flows in Q1, Emerging
Markets (equities & bonds)
lost in Q2
YTD – Top/Bottom 5 sectors by Net Flows
YTD net flows (quarterly flow growth rate %)
2. Economic outlook
50
100
150
200
250
300
350
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
GFC
EZ crisis
Chinagrowth
Brexitvote
Trumpelection
Tradetensions
Global Economic Policy Uncertainty index*
The global macro backdropHeightened levels of uncertainty…
Source: Bloomberg as at 6 August 2019. *Based on current price GDP weights. GFC = Global Financial Crisis.
9
-20
-15
-10
-5
0
5
10
15
20
01 03 05 07 09 11 13 15 17 19
49
50
51
52
53
54
55
56
14 15 16 17 18
JPM Global Purchasing Managers Index (PMI) World trade volume (3mma yoy%)
The global macro backdrop …has led to further weakness in PMIs and a sharp fall in global trade…
Source: Bloomberg and Datastream as at 6 August 2019.
10
Composite
Services
Manufacturing
-100
-80
-60
-40
-20
0
20
40
60
80
100
120
Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17 Jan 18 Apr 18 Jul 18 Oct 18 Jan 19 Apr 19 Jul 19
G10
Citi Economic Surprise Indices
The global macro backdrop…and a record period of negative G10 economic newsflow
Source: Datastream as at 1 August 2018.
11
EZJapan
UKChina
US
0
1
2
3
4
5
6
7
US
EZ
Germ
any
Fra
nce
Ita
ly UK
Japa
n
Ch
ina
2019 2020 Trend
0
5
10
15
20
25
30
35
40
45
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6
201
7
201
8e
201
9f
202
0f
Contraction Slowing growth Accelerating growth
Country GDP growth performance (number) Consensus GDP forecasts for 2019 and 2020 (%)*
The global macro backdropA synchronised slowdown in 2019…but with the global outlook currently forecast to improve in 2020
Source: LHS: OECD Economic Outlook 2018 as at 20 May 2019. e = estimate f = Forecast. *Brackets show OECD November 2018 Economic Outlook forecasts. RHS: Consensus
Economics and OECD as at 12 July 2019. * Trend growth is the 10yr CAGR for the period 2020 – 2030 calculated from the OECD’S Long-term baseline real GDP projections from
Economic Outlook – July 2018. **IMF WEO, July 2019. Brackets show April 2019 Economic Outlook forecasts.
12
IMF World Real
GDP forecasts**
2018 3.6%
2019f 3.2% (3.3%)
2020f 3.5% (3.6%)
0
20
40
60
80
100
120
140
45 49 54 58 61 70 75 80 82 91 01 09to
date
Mo
nth
s
Year started
0
1
2
3
4
5
6
58 61 70 75 80 82 91 01 09
Year started
Duration of US economic expansions since WW2
(months)
US recoveries – Real GDP (% annualised)
US recession risk A record US recovery…but at much slower growth rates than in previous cycles
Source: LHC: NBER (National Bureau of Economic Research) as at 1 August 2019. RHC: NBER and Datastream as at 1 August 2019.
Avg. =
58 months
13
14
-3
-2
-1
0
1
2
3
4
77 81 85 89 93 97 01 05 09 13 17
Recessions
Yield curve inversion – 10yr-2yr UST spread (%)
20
30
40
50
60
70
80
90
100
110
120
59 64 69 74 79 84 89 94 99 04 09 14
Recessions
Conference Board Lead Indicator (CLI)*
US recession riskNear-term recession risks appear low currently (1/2)
Source: Datastream as at 1 August 2019. *The CLI is the composite average of the following: Average weekly hours, manufacturing; Average weekly initial claims for unemployment
insurance; Manufacturers' new orders, consumer goods and materials; Vendor performance, slower deliveries diffusion index; Manufacturers' new orders, nondefense capital goods;
Building permits, new private housing units; Stock prices, 500 common stocks; Money supply, M2; Interest rate spread, 10-year Treasury bonds less federal funds; Index of consumer
expectations.
▪ Historically an inversion of the yield curve has been the most
consistent lead indicator of a recession with an average
21 month lead (10 – 34m range) over the past 40 years
▪ Not yet inverted this cycle, but at 12bp back close to flattest it
has been (11bp)
▪ The CLI has historically peaked on average 15 month ahead
of a recession (9 - 22m range)
▪ Currently the CLI has declined marginally from its recent peak
2
4
6
8
10
12
50 55 60 65 70 75 80 85 90 95 00 05 10 15
Recessions
20
40
60
80
100
120
140
160
67 72 77 82 87 92 97 02 07 12 17
Recessions
15
Unemployment (%) Conference Board Consumer Confidence Index (CCI)
US recession riskNear-term recession risks appear low currently (2/2)
Source: Datastream as at 1 August 2019.
▪ Unemployment has historically troughed on average 10 months
ahead of a recession (2 - 17m range)
▪ The latest unemployment figure shows a rise from cyclical low
of 3.6% to 3.7%.
▪ The CCI has historically peaked on average 15 month ahead of
a recession (6 - 22m range)
▪ Currently the index is rising and close to cycle highs
40
45
50
55
60
65
48
49
50
51
52
53
Dec 17 Apr 18 Aug 18 Dec 18 Apr 19
CKGSB*
Bus Conditions
(RHS)
Caixin Manuf.
-10
-5
0
5
10
Dec 14 Dec 15 Dec 16 Dec 17 Dec 18
Positive developments?Chinese green shoots?
Source: Datastream and Bloomberg as at 1 August 2019. *CKGSB = Cheung Kong Graduate School of Business.
16
-5
0
5
10
15
20
25
Dec 14 Dec 15 Dec 16 Dec 17 Dec 18
Infrastructure
Real Estate
Infrastructure and Real Estate investment (yoy 3mma %)
-20
-10
0
10
20
30
40
Dec 14 Dec 15 Dec 16 Dec 17 Dec 18
US
ASEAN
Japan
Exports (yoy 3mma %)
Credit impulse (yoy%) Business surveys
Official Manuf.
EU
-40
-35
-30
-25
-20
-15
-10
-5
0
5
7
8
9
10
11
12
13
1998 2001 2004 2007 2010 2013 2016 2019
Positive developments?Eurozone growth outlook - The backdrop remains challenging…particularly for the industrial sector
17
-5
0
5
10
15
2012 2013 2014 2015 2016 2017 2018 2019
Exports and Manufacturing production (yoy%) Unemployment and Consumer Confidence
Source: Datastream as at 27 July 2019.
Non-EZ exports
Manufacturing Unemployment (%)
Cons Conf
(RHS)
-4
-3
-2
-1
0
1
2
3
4
530
35
40
45
50
55
60
65
70
91 94 97 00 03 06 09 12 15 18
98
99
99
100
100
101
101
14 15 16 17 18 19
GS Financial Conditions Index and ISM Manufacturing
PMI
Positive developments?Financial conditions have eased further
Source: LHC: Bloomberg and Datastream as at 1 August 2019. RHC: Datastream as at 1 August 2019.
18
Goldman Sachs (GS) US Financial Conditions Index
PMI
(Lag 6m)
Fin Cons
(RHS – Inverted yoy chge)Easing
Tightening
-1.5
-1.0
-0.5
0.0
0.5
1.0
2015 2016 2017 2018 2019f 2020f 2021f
Advanced G20 Emerging G20Easier
policy
Tighter
policy
-2
-1
0
1
2
3
US Japan China EZ2015 2016 2017 2018 2019f 2020f 2021f
Easier
policy
Tighter
policy
Positive developments?Fiscal policy is a tailwind in 2019…particularly in China and the EZ…and further easing may be in the pipeline
19
Source: Top chart: IMF and Datastream as at 10 April 2019. Bottom chart: IMF and Datastream as at 10 April 2019.
Change in cyclically-adjusted primary balance as % potential GDP (%)
Regional change in cyclically-adjusted primary balance as % potential GDP (%)
Positive developments? Potential for amelioration of tensions on the trade front?
Source: Invesco as at 1 August 2019.
20
USMCA
ratification
Section 232
auto tariff
decision
US – China
trade
negotiations
US bi-lateral
free trade
negotiations
with Japan and
Europe
TradeExposure to US / China trade tensions varies hugely…and not every country is a loser?
Source: LHC: Source: HSBC as at 27 July 2019. Note that Mexico, Canada and Hong Kong figures have been adjusted to appear in the scatter chart – actual numbers are shown in
parentheses). RHC: Source: Datastream as at 1 August 2019.
21
-5
0
5
10
15
20
Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19
Share of country exports to China and US (%) Asian exports to US (yoy%)
Taiwan
Korea
Thailand
Vietnam
China
BrexitIncreased risk of No Deal
22
Source: Top chart: Invesco for illustrative purposes only. Bottom LHC and MC: Dmitry Grozoubinski of ExplainTrade.com as at July 2019. *Based on average imports 2016 – 2018. UK
data based on UK’s temporary No Deal tariff regime. Bottom RHC: OBR as at 17 July 2019.
Re-negotiation
and
new deal
ReferendumCancel
BrexitGeneral election
No-deal
Brexit
82%
13%
5%
Tariff free
Subject to tariff =<10%
Subject to tariff >10% or non-ad valorum tariff
49%45%
6%
Tariff free
Subject to tariff =<10%
Subject to tariff >10% or non-ad valorum tariff
EU27 import tariffs from the UK post No
Deal (%)*
UK import tariffs from the EU27 post No
Deal (%)*
98
102
106
110
114
118
122
2013 2015 2017 2019 2021 2023
No Deal Brexit Real GDP stress test*
Stress Test
March 2019 Forecast
Brexit options
96
100
104
108
112
116
Dec 17 Apr 18 Aug 18 Dec 18 Apr 19
US$ Trade Weighted and JPMorgan EM Currency indices*
Positive developments?US$ relatively stable
Source: Datastream as at 1 August 2019. *Rebased 100 = 29 December 2017.
23
Broad Trade Weighted Index
JPM EM currency index
Positive developments?Markets expecting more dovish Central Banks, especially the Federal Reserve, but major additional QE not yet on agenda…
Source: LHC: Bloomberg as at 1 August 2019. *US – USD OIS Forward Swap 1y 1m minus US Fed Funds Effective Rate, Japan – JPY Forward Swap 1y 1m minus Bank of Japan
Estimate Unsecured Overnight Call Rate, EZ – Eur Eonia Forward Swap 1y 1m minus EMMI Euro Overnight Index. RHC: Source: Datastream as at 1 August 2019. **US, EZ and Japan in
US$.
24
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
2015 2016 2017 2018 2019
Expected interest rate change over next 12 months (%)*
-1.2
-0.8
-0.4
0.0
0.4
0.8
1.2
1.6
2.0
2.4
2.8
2013 2014 2015 2016 2017 2018US Japan EZ
Major DM Central Bank balance sheets (yoy $trn)**
US
EZ
Japan
UK
0
100
200
300
400
500
600
Jun 89 - Sep 92 Jan 01 - Jun 03 Sep 07 - Dec 08 Current to zerobound
-1
0
1
2
3
4
5
6
7
8
9
2008 2010 2012 2014 2016 2018
US EZ Japan
UK Australia Canada
NZ Sweden Switzerland
US rate cuts around recent recessions (%)
Monetary policy …and far less room on the conventional policy front too
Source: LHC: Bloomberg and Datastream as at 7 August 2019. RHC: Datastream as at 1 August 2019.
25
Major DM Central Bank policy rates (%)
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2014 2015 2016 2017 2018 2019 2020
95
100
105
110
115
120
125
130
Inflation relative to Central Bank inflation objectives
since the GFC*
Inflation outlookCentral Banks have struggled to hit their inflation targets since the GFC…and may continue to do so…
Source: LHC: Source: Datastream as at 1 August 2019. *Rebased 100 = 31 December 2008. RHC: Source: Datastream and Central Banks as at 1 August 2019. *Dashed lines are Central
Bank forecasts to end of 2020. Japan forecast is ex Fresh Food and includes impact of consumption tax hike in October 2019. US is based on PCE inflation.
26
EZ
US
Japan
UK
Headline inflation and Central Bank forecasts (yoy %)*
US
Japan
EZ
2%
targets
UK
2%
Inflation outlook…as monetary pressures remain muted…while wage growth is only accelerating slowly…
Source: LHC: Datastream as at 1 August 2019. RHC: Source: Datastream as at 1 August 2019. OECD = Organisation for Economic Co-operation and Development.
27
-2
0
2
4
6
8
10
12
14
1995 1998 2001 2004 2007 2010 2013 2016
-6
-4
-2
0
2
4
6
2001 2004 2007 2010 2013 2016 2019
Money
supply
CPI
Avg.
8.7% yoy
Avg.
6.3 yoyAvg.
3.4% yoy
Avg.
1.7% yoy
OECD – Broad money supply and CPI (yoy %) Wage growth (3mma yoy%)
UK
GermanyUS
Japan
High debt levelsHigh levels of debt remain a structural headwind to global growth… alongside weak productivity and demographics
Source: LHC: BIS as at 1 August 2019. RHC: IMF as at 10 April 2019. *Latest is April 2019.
100.0
110.0
120.0
130.0
140.0
150.0
160.0
170.0
180.0
190.0
200.0
200
210
220
230
240
250
260
270
280
290
300
2001 2003 2005 2007 2009 2011 2013 2015 2017
28
Advanced Economies and Emerging Markets non-financial sector
debt to GDP (%)
Advanced Economies (LHS)
Emerging Markets (RHS)
Global financial vulnerabilities*
Sovereigns Non financial firms Households
2007 Latest 2007 Latest 2007 Latest
US
Euro area
Other DM
China
Other EM
Quintiles
Highest Lowest
Economic outlookSummary
Source: Invesco as at August 2019. Where Invesco has expressed views and opinions these may change.
29
▪ Remains strongest growing DM by a significant margin.
▪ Slowing growth from a high level as fiscal stimulus eases
▪ Record length of expansion, but recession risk appears
low
▪ First rate cut since GFC. QT ended early
▪ Trump policy unpredictability creates uncertainty
▪ Growth outlook challenging with Germany and Italy the
laggards
▪ Export rather than domestic led weakness
▪ Political risks remain elevated
▪ Inflation struggling to hit target
▪ ECB pointing to renewed policy easing
▪ Growth expectations under pressure
▪ Idiosyncratic risks weigh on a number of economies
▪ US$ stabilisation and a more dovish Fed helpful
▪ China policy response focused on stabilisation not
reflation
▪ Economy struggling against Brexit uncertainty
▪ Consumer backdrop remains mixed
▪ BoE likely to normalise monetary policy slowly
▪ Brexit by 31 October whether deal or no-deal?
▪ Growth remains weak relative to other major economies
▪ Inflation struggling to hit 2% target
▪ Stimulative monetary policy remains in place
▪ Abenomics drives change
US Economy Eurozone Economy
UK Economy
EM Economies
Japan Economy
Investment risks
The value of investments and any income will
fluctuate (this may partly be the result of exchange
rate fluctuations) and investors may not get back
the full amount invested.
Important information
This document is for Professional Clients only and
is not for consumer use.
All data is as at August 2019 and sourced from
Invesco unless otherwise stated.
Where individuals or the business have expressed
opinions, they are based on current market
conditions, they may differ from those of other
investment professionals and are subject to change
without notice.
This document is marketing material and is not
intended as a recommendation to invest in any
particular asset class, security or strategy.
Regulatory requirements that require impartiality of
investment/investment strategy recommendations
are therefore not applicable nor are any prohibitions
to trade before publication. The information
provided is for illustrative purposes only, it should
not be relied upon as recommendations to buy or
sell securities.
Investment risks and important information
Issued in the UK by Invesco Asset Management Limited, Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH, UK.
Authorised and regulated by the Financial Conduct Authority.
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