Crown Agents Macroeconomic & Market OutlookPrivate & Confidential
May 2019
Global Macroeconomic & Market OutlookOn the Wings of a Dove
Neil Michael
Chief Investment Strategist
& Head of Multi-Asset Investments
Crown Agents Macroeconomic & Market OutlookPrivate & Confidential
• In a significant about turn, central banks have pivoted from hawkishness to dovishness with respect to monetary policy.
• Trade uncertainty has been a substantial drag on global growth but there is an increasing likelihood of a trade agreement between the US and China. However, the US could then turn its attention from China to the EU.
• Despite a fall in global manufacturing activity, service activity continues to hold up well thanks to solid labour and housing markets.
• After a slowdown, global growth is therefore likely to stabilise and then pick-up again, with rising but contained inflation.
• Supply side improvements in the largest economies should allow the global expansion to continue for a while longer, with limitedinflation.
• Rates expected to peak in the US, remain on the floor in the Eurozone and Japan, rise post Brexit in the UK, and nudge down in China.
• Government bond yields have probably over-reacted to recession fears and are not reflecting improved equity market sentiment.
• IG credit spreads have narrowed and US leverage has risen, making them less attractive than they were.
• Company earnings growth is likely to be flat to down in Q1 but pick-up thereafter.
• Equity valuations are mixed – US large cap expensive and Eurozone slightly rich; UK and EM reasonable.
• US small cap cheap relative to large cap and UK mid caps likely to outperform in a softer Brexit scenario.
• Emerging market equities should benefit from growth convergence and any Dollar weakness.
• Equity market sentiment is neither excessively bullish nor bearish.
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Executive Summary
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Table of Contents
Macro Outlook
Bond Market Outlook
Equity Market Outlook
Crown Agents Macroeconomic & Market OutlookPrivate & Confidential
Macro Outlook
Crown Agents Macroeconomic & Market OutlookPrivate & Confidential
Federal Reserve Dot Plot
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Central Banks Have Pivoted From Hawkishness To Dovishness
Source: Bloomberg. March 2019.
Probability of an Interest Rate Hike
Source: Bloomberg. As at 16 April 2019.
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Central Bank Balance Sheets Expected To Start Expanding Again
Global Central Bank Balance Sheets
Source: JP Morgan Asset Management. March 2019.
Crown Agents Macroeconomic & Market OutlookPrivate & Confidential
FOMC Estimates of Neutral Fed Funds Rate
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Fed Becoming More Cognisant of The Neutral Rate
Source: National Bank of Canada. Jan 2019.
Fed Funds Rate versus Estimate of Neutral Fed
Funds Rate
Source: Bloomberg. CAIM. Dec 2018. Based on growth in the factors of production plus inflation.
Crown Agents Macroeconomic & Market OutlookPrivate & Confidential
Top Countries With Which US Has Goods Trade
Deficit in 2018
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Trade Uncertainty Has Been A Significant Drag on Global Growth
& US Attention Could Turn From China To The EU
Source: National Bank of Canada. March 2019. Share of deficit in brackets.
World Trade & Global Manufacturing Activity
Source: Bloomberg. Data to Feb/Mar 2019.
Crown Agents Macroeconomic & Market OutlookPrivate & Confidential
Global Services Activity
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Despite Fall In Manufacturing Activity, Service Activity Continues
To Hold Up Well
Global Manufacturing Activity
Source: Bloomberg. Data to Mar 2019.
Crown Agents Macroeconomic & Market OutlookPrivate & Confidential
Global House Prices
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Consumer Confidence Supported By Solid Labour & Housing
Markets
Global Unemployment & Real Wages
Source: Bloomberg. Data from Sept 2002 to Jan/Feb 2019. Source: Bloomberg. Data from Dec 2007 to Mar 2019.
Crown Agents Macroeconomic & Market OutlookPrivate & Confidential
Fiscal Support For Consumers Around The World
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Global Growth Also Supported By Fiscal Stimulus
Changes In Global Structural
Primary Fiscal Balances
Source: IMF. April 2019. Source: HSBC. Mar 2019.
Crown Agents Macroeconomic & Market OutlookPrivate & Confidential
Global Inflation Forecasts
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After A Slowdown, Global Growth Is Likely To Stabilise And Then
Pick-Up Again, With Rising But Contained Inflation
Global GDP Forecasts
Source: Bloomberg Consensus. April 2019. Source: Bloomberg Consensus. Mar 2019.
Crown Agents Macroeconomic & Market OutlookPrivate & Confidential
Global Productivity Rates (%YoY)
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Supply Side Improvements In The Largest Economies Should Allow The
Expansion To Continue For A While Longer, With Limited Inflation
Global Investment Rates (%YoY)
Source: Bloomberg Consensus. Dec 2018 / March 2019. Source: Bloomberg Consensus. Dec 2018.
Crown Agents Macroeconomic & Market OutlookPrivate & Confidential
Bond Market Outlook
Crown Agents Macroeconomic & Market OutlookPrivate & Confidential
UST 2 Year vs 1Y1Y Forward vs Fed Funds Rate
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Rates Expected To Peak In The US, Remain On The Floor In The Eurozone
& Japan, Rise Post Brexit In The UK, & Nudge Down In China
Source: Bloomberg. Dec 1989 to Mar 2019.
Expected Central Bank Rates
Source: Bloomberg Consensus. As at 17 Apr 2019.
Crown Agents Macroeconomic & Market OutlookPrivate & Confidential
Government Bond Yields 2Yr % Government Bond Yields 10Yr %
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Government Bond Yields Have Probably Over-Reacted To
Recession Fears
Source: Bloomberg, Data from 12 Jan 2001 to 12 April 2019
Crown Agents Macroeconomic & Market OutlookPrivate & Confidential
UST 5Yr Yield & S&P 500
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Bond Yields Not Reflecting Equity Market Sentiment
Source: Bloomberg, Data from Dec 2013 to 12 April 2019.
Crown Agents Macroeconomic & Market OutlookPrivate & Confidential
Nominal & Real Yields % (2Yr)
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US & China Are The Only Major Bond Markets Compensating For
Inflation
Source: Bloomberg, Data from 12 Jan 2001 to 12 April 2019
Crown Agents Macroeconomic & Market OutlookPrivate & Confidential
Investment Grade Spreads US IG Leverage Measures
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IG Spreads Have Narrowed & US Leverage Has Risen
Source: Bloomberg, Bank of America Merrill Lynch. Data from 17 April 2009 to 12 April 2019Source: JP Morgan.
Crown Agents Macroeconomic & Market OutlookPrivate & Confidential
High Yield Spreads US HY Default Rates
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HY Spreads Narrower But Not Back To 2018 Lows & Default
Rates Are Low
Source: Bloomberg, Bank of America Merrill Lynch. Data from 17 April 2009 to 12 April 2019Source: JP Morgan.
Crown Agents Macroeconomic & Market OutlookPrivate & Confidential
EMB IG Spread (Versus 10Yr UST Yield)
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Emerging Market Bonds – Spreads Have Narrowed But Current Accounts Have
Improved, Although Countries With The Biggest CA Deficits Are Most Vulnerable
Source: Bloomberg. Data from April 2009 to 12 April 2019.
Current Accounts Balances & Changes In EMBI Spreads
Source: IMF. JP Morgan. April 2019.
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Summary of Bond Outlook
Source: CAIM
Crown Agents Macroeconomic & Market OutlookPrivate & Confidential
Equity Market Outlook
Crown Agents Macroeconomic & Market OutlookPrivate & Confidential
Global Company Earnings Growth (%YoY)
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Equities – Earnings Growth Likely To Be Flat in Q1 But Pick-Up
Thereafter
Source: Bloomberg analysts estimates (EEG). Data from Mar 2015 to Oct 2020.
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Equities – US, UK & EM Have Some Of The Highest ROC
In The World
Global Return On Capital
Source: Bloomberg. Data from Jan 2006 to March 2019.
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Equities –Apart From The US, Equities Look Cheap Relative To
Bonds – UK Very Cheap
Equity Dividend versus Bond Yields
Source: Bloomberg. Data as at March 2019.
Crown Agents Macroeconomic & Market OutlookPrivate & Confidential
Global Composite Fundamental Valuation Ratios (P/EBITDA, P/B, & P/S – Number of Standard
Deviations from Long Run Average)
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Equity Valuations Are Mixed – US Large Cap Expensive And
Eurozone Slightly Rich; UK & EM Reasonable
Source: Bloomberg. Data from Jan 2001 to Mar 2019.
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Macro Fundamentals, Although Softer, Are Still Supporting US
Equities; Small Cap Cheap Relative To Large Cap
Source: JP Morgan. March 2019.
S&P 500 Index & Conference Board Leading
Economic IndicatorRolling One Moving Average of US Small/Large Cap Equities
Source: Bloomberg. 30 April 2019.
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UK Mid Caps Likely To Outperform In A Softer Brexit Scenario
Source: Bloomberg. March 2019.
FTSE250/FTSE100 & Sterling
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Emerging Market Equities Should Benefit From Growth
Convergence & Any Dollar Weakness
Source: JP Morgan. March 2019.
EM/DM Equity Ratio & Dollar
Source: Bloomberg. Data from Jan 2016 to Dec 2018.
EM/DM Growth versus EM/DM Equity Performance
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Equities – Sentiment Is Neither Excessively Bullish Or Bearish
Source: Bloomberg. Data from 3 Feb 2006 to 22 April 2019.
US Sentiment Indicators VIX S&P 500 Volatility Index
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Summary of Equity Outlook – US & UK
Source: CAIM
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Summary of Equity Outlook – Eurozone, Japan & Emerging Markets
Source: CAIM
Crown Agents Macroeconomic & Market OutlookPrivate & Confidential
This communication is intended for professional clients and eligible counterparties only. Past performance is not a reliable indicator of future results. Performance results are calculated before management fees and after trading expenses. Information contained in this publication is compiled from industry sources which we consider to be accurate and reliable.
There is no representation or warranty of any kind, whether express or implied, regarding the accuracy or completeness of the information given. The information provided does not constitute advice and it should not be relied on as such.
Any views or opinions expressed are those of Crown Agents Investment Management Ltd and are subject to change due to market and other conditions and should not be taken as statements of policy or intent.
Crown Agents Investment Management Ltd accept no liability for the impact of any decisions made based on the information provided in this publication.
Crown Agents Investment Management Limited. Registered in England & Wales. No: 2169973. Vat Reg No: GB 340 679841.
Authorised and regulated by the Financial Conduct Authority.
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Disclaimer
Neil Michael
Chief Investment Strategist
& Head of Multi-Asset Investments
Robin Woodall
Senior Equities Fund Manager
Charles Thomson
Senior Fixed Income Fund Manager
Contact
http://www.caiml.co.uk/
+44 (0)20 3903 2500
+44 (0)20 8643 9113
Crown Agents Investment Management
Quadrant House,
The Quadrant,
Sutton, London,
SM2 5AS,
United Kingdom.
Ritesh Anand
Executive Vice President
Simon Price
Senior Equity Fund Manager
Slawomir Soroczynski
Senior Fixed Income Fund Manager