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Global Equities Outlook: Where are the opportunities?
Paul ChanHead of Multi-Asset and Hong Kong Pensions
12 January 2018 This document is intended only for 2018 Invesco Roadshow in Hong Kong. This is not an invitation to subscribe for shares in a fund nor is it to be construed as an offer to buy or sell any financial instruments. Nor does this constitute a recommendation of the suitability of any investment strategy for a particular investor. Circulation, disclosure, or dissemination of all or any part of this document to any unauthorized persons is prohibited.
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2017 saw
2
Source: Invesco Hong Kong Limited, as of 27 December 2017.Opinions and forecasts are based on current market conditions and subject to change without notice.
Co-ordinated recovery in economic growth despite the Fed hiked three times
Smooth uptrend with falling volatility
Positive returns for major asset classes, higher in USD terms
Recovery in exports growth in Asia
Recovery of commodity prices lifted Europe
Growth and momentum outperformed value and yield
High yield outperformed sovereign debts
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Questions for 2018
3
Source: Invesco Hong Kong Limited, as of 27 December 2017.Opinions and forecasts are based on current market conditions and subject to change without notice.
Would great moderation continue?
Would three rate hikes in the US slow or reverse the ongoing business cycle expansion and recovery?
What is the impact of liquidity withdrawal and attempts by central banks in trying to raise cost of capital?
What does deleveraging mean for China?
Another down year for the USD?
Would US 10-year government bond yield hit 3%?
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A history of the Fed Funds Rate since 1979
4
Source: http://www.minyanville.com/business-news/markets/articles/2524USD-2523rate-2523hike-2523dollar-2523gold-2523economy/2/24/2017/id/59492, courtesy of @HedgeEye, as of 24 February 2017.Source: [Jerome Powell] https://www.mt5.com/forex_humor/image/32549#18, as of 9 November 2017.
February 2018
to ??
JEROMEPOWELL—— 6’0”
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What happens to S&P500 if the Fed starts hiking?US equities: Room to expand?
5
Source: Pavilion Global Markets, Thomson Reuters Datastream, Bloomberg, as of 21 December 2017.
Fed Funds rate at the start of tightening
Fed Funds rate at the end of tightening
1983–84 8.50% 11.75%
1986–87 5.88% 7.25%
1988–89 6.50% 9.75%
1994–95 3.00% 6.00%
1999–00 4.75% 6.50%
2004–06 1.00% 5.25%
2015– 0.25% 1.50%
Average 4.27% 7.75%
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150
200
250
300
350
400
450
500
550
0
50
100
150
200
250
300
350
400
90 95 00 05 06 07 08 09 10 11 12 13 14 15
Shadow banking (USD tn)
Global financial assets (USD tn)
Global financial assets (incl. shadow banking), % of GDP (RHS)
0
3,000
6,000
9,000
12,000
15,000
18,000
21,000
1999 2002 2005 2008 2011 2014 2017
Fed ECB BoJ BoE PBoC
G5 central bank assets(USD billion)
Estimated value of global financial instruments(USD trillion)
Central bank assets keep rising
6
Source: Macquarie Research, Bloomberg, as of 20 December 2017.
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Great moderation or …
7
Source: Bloomberg, as of 8 December 2017.
-6
-3
0
3
6
500
1,100
1,700
2,300
2,900
12/07 12/08 12/09 11/10 11/11 11/12 11/13 11/14 11/15 11/16 11/17
daily move % (RHS) daily move >2% (RHS)
S&P 500 index (LHS)
0
30
60
90
12/07 12/08 12/09 11/10 11/11 11/12 11/13 11/14 11/15 11/16 11/17
VIX index
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JP Morgan Markets trading book Average daily revenue and volatility
8
Source: [top chart] JP Morgan Chase & Co. [2016 Business Updates], as of 28 February 2017.ǂ Markets: Offering research, proprietary pricing data and analytics, and trade execution across multiple asset classes, including credit, equities and FX.
* Volatility measured as standard deviation. Average daily revenue and volatility exclude business simplification# For 2014–2016, loss days represent the number of days Markets posted losses. For 2012–2013, loss days represent the number of days for which the Corporate
and Investment Bank (CIB) posted losses under the market risk-related revenue measures.Source: [bottom chart] Bloomberg, as of 12 December 2017.
6972
6770
80
7 0 0 2 0
2012 2013 2014 2015 2016
Marketsǂ average daily revenue (USDmn) Markets volatility*
Loss days#
5
15
25
35
45
12/11 6/12 12/12 6/13 12/13 6/14 12/14 6/15 12/15 6/16 12/16
VIX index
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0
4,000
8,000
12,000
16,000
20,000
10/08 10/09 10/10 10/11 10/12 10/13 10/14 10/15 10/16 10/17
FBI shuts down Silk RoadCoinbase & other digit currencies
PBoC bans bitcoins at banks
Newsweek finds Satoshi Nakamoto
US auction 29,656 bitcoins
Microsoft accepts bitcoins
Gemini launched, bitcoin trading platform
Bitcoin Foundation formed
US seizes Mt. Gox accounts
CBOE Futures
PBoC investigation
Japan legalization
New Altcoins
China ICO bans
Bitcoin Savings & Trust halts payments
1st Mt. Gox hack
Mt. Gox begins trading bitcoin
Silk Road opens
Pizza Day
GFC, White paper, QE, TARP
Bitcoin storms Wall Street
XBT-USD cross rate, USD
Bubble – Bitcoin
9
GFC=Global financial crisis, QE=Quantitative easing, TARP=The Troubled Asset Relief Program.Source: Bloomberg, as of 13 December 2017; [Bitcoin image] https://www.123rf.com/profile_yourg.
2008Satoshi
Nakamoto
1998
Wei Dai B Money
1989
David Chaum Digicash
1997
Dr Adam Back Hashcash
2004
Hal Finney RPOW
2005
Nick Szabo Bit Gold
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2.5
3.0
3.5
4.0
4.5
5.0
2010 2011 2012 2013 2014 2015 2016 2017
Date of forecast
2011
2012
2013 20142015
2016
2017 2018
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
2010 2011 2012 2013 2014 2015 2016 2017 2018
Date of forecast
2011
2014
2013
2012
2015
2010
10-Year US Note yield
2016
2017
2018
Consensus forecast, 10-Year US Note yield, Year-end % IMF World Economic Outlook global growth projections
Global rates and inflation
10
Source: (left chart) Bloomberg, The National Bureau of Economic Research (NBER), OECD, Minack Advisors, as of 21 December 2017.Source: (right chart) State Street Global Markets, IMF, Bloomberg; data as of 15 May 2017.
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7.5
0.5
1.5
2.5
3.5
4.5
2
6
10
14
18
Mar-00 Sep-02 Mar-05 Sep-07 Mar-10 Sep-12 Mar-15 Sep-17
Unemployment rate, %
Unemployment+Underemployment, %
Avg. Hourly Earnings (RHS)
13.4
0.0
1.5
3.0
4.5
6.0
2
6
10
14
18
Mar-00 Sep-02 Mar-05 Sep-07 Mar-10 Sep-12 Mar-15 Sep-17
Unemployment rate, %
Unemployment+Underemployment, %
Wages and Salaries (RHS)
USA: Disguised Unemployment 7.5% Euro Area: Disguised Unemployment 13.4%
Disguised unemployment= un + under-employed
11
Source: UBS, as of 15 November 2017.
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Impact on S&P500 earnings forecasts of limiting effective tax rate to 20%
12
Source: ASR Ltd., Thomson Reuters Datastream, as of 9 November 2017.
0
10
20
30
40
50
60
Real esta
te
Technolo
gy
Insura
nce
Health c
are
Chem
icals
Auto
s
Pers
onal goods
Food &
bevera
ge
Industr
ial goods
Tra
vel and leis
ure
Fin
anic
al serv
ices
Utilities
Constr
uction
Reta
il
Banks
Media
Tele
com
s
Basic
resourc
es
Oil &
gas
Tota
l
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Performance of high and low tax rate companiesRebased (2015 = 100)
13
Source: ASR Ltd., Thomson Reuters Datastream, as of 9 November 2017.
94
96
98
100
102
104
106
108
110
1/15 5/15 9/15 1/16 5/16 9/16 1/17 5/17 9/17
ASR High Tax Rate vs. S&P 500 ASR Low Tax Rate vs. S&P 500
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0
50
100
150
200
250
300
350
400
1/11 9/11 5/12 1/13 9/13 5/14 1/15 9/15 5/16 1/17 9/17
Top 10 stocks
S&P 500
Equal weight price index of top-10 performing stocks (since May 2016) vs. S&P 500, rebased index
A very narrow marketThe few vs. the many
14
Source: Pavilion Global Markets, Bloomberg, as of 11 October 2017.
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28.2
23.2
0
5
10
15
20
25
30
35
40
2/95 5/97 8/99 11/01 2/04 5/06 8/08 11/10 2/13 5/15 8/17
MSCI EM IT index weight %, market cap based
MSCI EM IT index weight %, earnings based
4.8
2
4
6
8
10
12
14
2/95 5/97 8/99 11/01 2/04 5/06 8/08 11/10 2/13 5/15 8/17
MSCI Europe index weight %, market cap based
23.3
22.8
5
10
15
20
25
30
35
2/95 5/97 8/99 11/01 2/04 5/06 8/08 11/10 2/13 5/15 8/17
MSCI USA IT index weight %, market cap based
MSCI USA IT index weight %, earnings based
12.6
5
10
15
20
25
2/95 5/97 8/99 11/01 2/04 5/06 8/08 11/10 2/13 5/15 8/17
MSCI Japan IT index weight %, market cap based
A bet on EMs is a bet on … tech? Europe does not share this tech risk
If tech falls …
15
Source: Pavilion Global Markets, Thomson Reuters Datastream, as of 11 October 2017.Note: US recessions shaded.
US equities with more and more idiosyncratic tech risk Japan is somewhere in the middle on the tech risk
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MSCI AC Asia ex JapanYearly total return (in USD)
16
Source: Bloomberg, as of 18 December 2017.
-40%
-8%
65%
-35%
-3%-8%
46%
18%23%
33%40%
-52%
72%
19%
-17%
22%
3% 5%
-9%
6%
38%
-60%
-40%
-20%
0%
20%
40%
60%
80%
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017 Y
TD
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Electronics exports % share of total exports
17
Source: CEIC, WTO, Morgan Stanley Research, Trade Map, International Trade Centre, as of 19 December 2017.Note: Electronics exports include electronic data processing and office equipment, telecommunication equipment, integrated circuits and electronic components. They are SITC divisions 75, 76 and 776. Data included China, HK, India, Korea, Singapore, Taiwan, Thailand which made up 91% of Asia ex Japan exports in 2016.
29%
20%
22%
24%
26%
28%
30%
32%
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
For 2018 Invesco Roadshow in Hong Kong only. Circulation, disclosure, or dissemination of all or any part of this document to any unauthorized persons is prohibited.
China total aggregate financing and money supply
18
Source: Bloomberg, as of 20 December 2017.
0
5
10
15
20
25
30
0
100
200
300
400
500
600
1/02 10/03 7/05 4/07 1/09 10/10 7/12 4/14 1/16 10/17
Money supply M2, USD tn (RHS)
Total aggregate financing, USD bn
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Price to earnings
19
Source: Bloomberg, as of 15 December 2017.Note: Represented by MSCI indices.
average
15.6x
12/07 5/10 10/12 3/15 8/1740
60
80
100
120
140
10
12
14
16
18
20
EPS, index (RHS) 12M forward PE(X) (LHS)
average13.3x
12/07 5/10 10/12 3/15 8/176
8
10
12
14
16
8
10
12
14
16
18
EPS, index (RHS) 12M forward PE(X) (LHS)
average18.3x
12/07 5/10 10/12 3/15 8/170.00
0.17
0.34
0.51
0.68
9
15
21
27
33
EPS, index (RHS) 12M forward PE(X) (LHS)
average 13.0x
12/07 5/09 10/10 3/12 8/13 1/15 6/16 11/1715
21
27
33
39
45
51
8
10
12
14
16
18
20
EPS, index (RHS) 12M forward PE(X) (LHS)
average 11.7x
12/07 5/09 10/10 3/12 8/13 1/15 6/16 11/170.30
0.43
0.56
0.69
0.82
0.95
5
7
9
11
13
15
17
19
21
23
25
EPS, index (RHS) 12M forward PE(X) (LHS)
Asia ex Japan China
EuropeUS Japan
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Price to sales
20
Source: Bloomberg, as of 15 December 2017.Note: Represented by MSCI indices.
average 1.1x
12/07 5/09 10/10 3/12 8/13 1/15 6/16 11/17200
290
380
470
560
650
0.7
1.0
1.3
1.6
1.9
2.2
Sales, index (RHS) Price/Sales(X) (LHS)
average 1.4x
12/07 5/09 10/10 3/12 8/13 1/15 6/16 11/173.0
4.5
6.0
7.5
9.0
0.5
1.4
2.3
3.2
4.1
Sales, index (RHS) Price/Sales(X) (LHS)
average0.6x
12/07 5/10 10/12 3/15 8/177.0
9.0
11.0
13.0
15.0
0.30
0.45
0.60
0.75
0.90
Sales, index (RHS) Price/Sales(X) (LHS)
average1.0x
12/07 5/10 10/12 3/15 8/1780
110
140
170
0.5
0.8
1.1
1.4
Sales, index (RHS) Price/Sales(X) (LHS)
average1.5x
12/07 5/10 10/12 3/15 8/17760
870
980
1,090
1,200
0.6
1.0
1.4
1.8
2.2
Sales, index (RHS)
US Europe Japan
Asia ex Japan China
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Takeaways for 2018
21
Source: Invesco Hong Kong Limited, as of 27 December 2017.Opinions and forecasts are based on current market conditions and subject to change without notice.
Stay fully invested in 2018
Policies to avoid capital market cycles
Central banks may be less accommodative but they are still friends of capital markets
Digital revolution emerging over the last 10 years is re-writing business models
In low growth world, stocks deliver top and bottom lines growth command a premium, i.e. prefer US, Asia and Japan
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Important information
This document is intended only for 2018 Invesco Roadshow in Hong Kong. This is not an invitation to subscribe for shares in afund nor is it to be construed as an offer to buy or sell any financial instruments. Nor does this constitute a recommendation of the suitability of any investment strategy for a particular investor. Circulation, disclosure, or dissemination of all or any part of this document to any unauthorized persons is prohibited.
This document may contain statements that are not purely historical in nature but are “forward-looking statements.” These include, among other things, projections, forecasts, estimates of income, yield or return or future performance targets. These forward-looking statements are based upon certain assumptions, some of which are described herein. Actual events are difficult to predict and may substantially differ from those assumed. All forward-looking statements included herein are based on information available on the date hereof and Invesco assumes no duty to update any forward-looking statement. Accordingly, there can be no assurance that estimated returns or projections can be realised, that forward-looking statements will materialiseor that actual returns or results will not be materially lower than those presented.
All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. As with all investments there are associated inherent risks. Please obtain and review all financial material carefully before investing. The opinions expressed are based on current market conditions and are subject to change without notice. These opinions may differfrom those of other Invesco investment professionals.
It is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any investment strategy to any person in any jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it would be unlawful to market such an offer or solicitation. This document should not be distributed to retail clients whoare resident in jurisdiction where its distribution is not authorized or is unlawful. It should not be relied upon as the sole factor in an investment making decision. Circulation, disclosure, or dissemination of all or any part of this document to any unauthorizedperson is prohibited.
This document is issued in Hong Kong by Invesco Hong Kong Limited景順投資管理有限公司, 41/F, Champion Tower, 3 Garden
Road, Central, Hong Kong.
22