MARKET OUTLOOK 2020
MEDIA BRIEFING
GSFM OVERVIEW
GSFM FUM – $16.7 billion at 30 June 2020
TODAY’S PRESENTERS:
• Damien McIntyre, CEO, GSFM
• Stephen Miller, Investment Strategist, GSFM
• Nick Griffin, Chief Investment Officer, Munro Partners
• Eric Souders, CFA, Director, Payden & Rygel
• Max Cappetta, CEO, Senior Portfolio Manager, Redpoint Investment Partners
• Facilitated by Leeanne Bland, Pritchitt Partners
Stephen Miller, Investment Strategist GSFM
Investing in a Rumsfeldian world: “known unknowns” and “unknown unknowns”!
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C O V I D I S T H E O V E R A R C H I N G C H A L L E N G E F O R P O L I C Y M A K E R S A N D M A R K E T S
… b u t e x t r a o r d i n a r y f a i t h i n t h e a b i l i t y o f p o l i c y m a k e r s t o n a v i g a t e a w a y t h r o u g h t h e c r i s i s
a n d
“ m o n o p o l i s t i c p r i v i l e g e ” ? . . .
The economy i s f rag i l e…
…mean (over l y?) ebu l l i en t markets
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O T H E R R I S K S A L S O S E E M A S Y M M E T R I C A L LY W E I G H T E D T O T H E D O W N S I D E
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S o m e N e a r - T e r m G l o b a l C h a l l e n g e s :
§ Trade and geopolitical tensions between the US and China (and the EU and India and Japan…)
§ Deglobalisation and re-regulation.
§ Dysfunctional global politics and the related rise of left / right populism.
i. In the US, political ‘gridlock’ and a polarising Presidential campaign.
ii. In Europe, Merkel in government but not in power; EU / ECB policy paralysis (‘North’ v ‘South’); polarisation elsewhere… France, Italy and Spain
iii. In China. The Hong Kong question.
§ A depleted macro policy armoury on the part of global authorities.
S o m e D o m e s t i c C h a l l e n g e s :
§ High household debt
§ China dependence.
§ Depleted monetary policy armoury.
S o m e S t r u c t u r a l C h a l l e n g e s :
§ Climate change / the environment.
§ Cyber ‘Cold War’.
§ Inequality.
§ “Oligopolisation”.
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W h a t c o m e s n e x t ?
• M o r e Q E ?
• C o n v e n t i o n a l f i s c a l p o l i c y ?
• M o n e t a r y f i n a n c e d f i s c a l e x p a n s i o n ?
G L O B A L D M S O V E R E I G N B O N D M A R K E T Y I E L D S A R E C L O S E T O H I S T O R I C L O W S .
I S C O N V E N T I O N A L M O N E TA RY P O L I C Y J U S T P U S H I N G O N A S T R I N G ?
§ Do low bond yields potentially reduce the efficacy of DM sovereign bonds as a portfolio diversifier to risk assets?
Source: : Bloomberg
A verage Long -E nd S overe ign B ond Y ie ld
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Source: Minack Advisors, DataStream, US Federal Reserve, BoE, GFD, NBER
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10-Year Government Bond Yield
U.S. Japan Germany Australia
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H o w l o w c a n b o n d y i e l d s g o ?
As at 30th June 2020:US: +0.66%Germany: -0.46%Japan: 0.02%Australia +0.87%
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1880 1900 1920 1940 1960 1980 2000 2020%
AVERAGE LONG-END SOVEREIGN BOND YIELD
AVERAGE OF US, JAPAN, GERMANY & UK.US RECESSIONS SHADEDGAPS DUE TO MISSING DATA
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Source: Minack Advisors
A D V A N C E D E C O N O M Y E Q U I T Y M A R K E T S A R E N O T ‘ C H E A P ’ . M A R K E T S A P P E A R P R I C E D F O R A N O P T I M I S T I C ( B U T M A Y B E N O T I M P L A U S I B L E ) S C E N A R I O :
R E F L E C T S E X T R A O R D I N A R Y F A I T H I N A B I L I T Y O F P O L I C Y M A K E R S A N D C E N T R A L B A N K S T O N A V I G A T E A P A T H T H R O U G H T H E C R I S I S .
I M P L I E S T H E F A A N G S P L U S M I C R O S O F T ( A N D M A Y B E T E S L A ) A R E A B L E T O M A I N T A I N A ‘ M O N O P O L I S T I C P R I V I L E G E ’ ( D O W N P L A Y S R E G U L A T O R Y R I S K ? ) .
U S C orpora te p ro f i ts over the bus iness cyc le
Source: Federal Reserve Bank of St Louis
W i t h e a r n i n g s p o t e n t i a l l y u n d e r a c u t e s t r e s s , v a l u a t i o n s a r e h a r d l y c h e a p . . . h i g h e s t s i n c e t h e t e c h b u b b l e …
… p a r t i c u l a r l y w h i l e s o m e c o r p o r a t e p r o f i t m e a s u r e s a p p e a r t o h a v e t u r n e d o v e r B E F O R E t h e c r i s i s
S & P 500 12M P rospec t ive P r ice -E arn ing R a t io
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85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21
RATI
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AVERAGE EX 1998-
AVERAG
RECESSIONS SHADED
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60 65 70 75 80 85 90 95 00 05 10 15 20%
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PRE-TAX PROFIT SHARE OF BUSINESS GDPPRE-TAX, CC/IVA ADJUSTED US-SOURCED PROFITS
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9©
GSF
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Source: Minack Advisors
S H O U L D W E B E WA RY O F R E G I M E S H I F T S I N A S S E T R E T U R N C O R R E L AT I O N ?
§ Negative correlation between bond and equity returns is assumed as a given. However, this was not the norm for most of the last (twentieth) century.§ There has been some variability in the day-to-day performance during the crisis.
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CO
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US EQUITY-BOND CORRELATION
ROLLING 36 MONTH CORRELATION BETWEEN THE 1 MONTH TOTAL RETURN ON S&P500 AND 1 MONTH RETURN ON 10 YEAR TREASURIES.
EQUITIES FALL WHEN BOND YIELDS RISE
EQUITIES RISE WHEN BOND YIELDS RISE
PRE-RECESSION PEAKS IN 12M EQUITY-BOND CORRELATION
OCT '18
A period of disinflation and monetary policy primacy. Does this persist with fiscal policy primacy and/or
‘money financed’ fiscal policy??
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C O N C L U S I O N S
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§ Global uncertainties are unusually elevated at the same time as structural currents are hitting global markets. The conventional policy armoury to deal with those uncertainties is depleted.
§ What takes the place of monetary policy? More QE? Conventional fiscal policy? Monetary financed fiscal policy? Whatever emerges may have profound implications for the relationship between asset returns.
§ Can DM sovereign bonds continue to cushion equity market sell-offs / be an efficient portfolio diversifier for risk assets?
§ Are markets complacent? Will volatility persist or increase?§§ The importance of uncorrelated sources of return in multi-asset portfolios is elevated.
§ Elevated uncertainties mean diversification is paramount.
T H I S M A Y M E A N L O O K I N G B E Y O N D ‘ T Y P I C A L ’ E Q U I T Y A N D B O N D B E T A E X P O S U R E .• G O L D ( D E F E N S I V E ) , • A R / U N C O N S T R A I N E D B O N D S ( D E F E N S I V E )• A C T I V E E Q U I T Y• L O N G / S H O R T E Q U I T Y • H E D G E F U N D E X P O S U R E
Nick Griffin, Chief Investment OfficerMunro Partners
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$2 billion FUM
15.2% p.a. since inception1
JUST THE FACTS
Global investment manager – growth equity focus
Established July 2016 in Melbourne
1. Munro Global Growth Fund as at 30 June 2020. Inception date 1 August 2016. Past performance is for the Munro Global Growth Fund given in this presentation is given for illustrative purposes only and should not be relied upon as (and is not) an indication of future performance.
LOW RATES SUPPORT EQUITY MARKETS
EQUITY RISK PREMIUM (ERP) = 1/PE S&P500 – US 10 YEAR
Source: Bloomberg Finance L.P 31 June 2020
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Source: Company Filings, Magna, Morgan Stanley, Munro estimates 30 June 2020
“tipping point of physical to digital (cash)”… “explosion of new users”…
“We have seen increased usage across all of our platforms”
“We have seen 2 years of digital transformation in 2 months”
“We experienced a major surge in demand”
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2000 2005 2010 2015 2020 2025
Mar
ket P
enet
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)
US Card US eCommerceWorkloads in Public Cloud Global Digital Ad Spend
S-CURVES ARE INFLECTING HIGHER IN A POST COVID-19 WORLD
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THE NEXT S-CURVE?
Source: BloombergNEF, Goldman Sachs, Munro Partners 30 June 2020
EUROPEAN “NET ZERO” TARGETS BY 2050 TO AMOUNT TO EUR 7 TRILLION OF CUMULATIVE INVESTMENT
BIOLOGICS SALES TO GROW TO $415BN BY 2025 SURPASSING SMALL MOLECULES
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Gen
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(201
9 G
Wh)
Time
Source: Frost & Sullivan, 31 March 2020
18.1%18.3%19.1%19.8%
21.2%21.9%22.7%24.1%
25.8%27.9%29.5%
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SD)
Global Biologics Market Biologics % of Market
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INVESTMENTS BY THEME
NET POSITIONING OF THE MGGF BY ‘AoI’ – 30 JUNE 2020
AREAS OF INTEREST (AoI) No. of Holdings
Indicative Position
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CLIMATE
HIGH PERFORMANCE COMPUTING
DIGITAL PAYMENTS
INTERNET DISRUPTION
E-COMMERCE
INNOVATIVE HEALTH
DIGITAL ENTERPRISE
0% 4% 8% 12% 16%
Past performance information given in this presentation is given for illustrative purposes only and should not be relied upon as (and is not) an indication of future performance. Inception date 1 August 2016.
MGGF PERFORMANCE – JUNE 2020
KEY PERFORMANCE STATISTICS MGGF MSCI
BETA (v LOCAL MSCI) 0.5 1.0
BETA (v MSCI AUD) 0.5 1.0
UPSIDE CAPTURE 76% 100%
DOWNSIDE CAPTURE 34% 100%
ANNUALISED STANDARD DEVIATION 9.1% 10.5%
SHARPE RATIO 1.6 1.0
SORTINO RATIO 2.7 1.3
MONTHLY PERFORMANCE BY FINANCIAL YEAR
JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN TOTAL
2017 FY 1.2% 1.1% -3.3% 2.2% 0.9% 1.9% 0.0% 2.1% 3.5% 4.2% -1.3% 12.9%
2018 FY 1.9% 3.3% 1.7% 6.7% 1.1% -2.5% 6.0% 0.1% -2.5% 0.0% 2.8% 1.1% 21.0%
2019 FY -0.4% 5.1% 0.9% -5.4% -3.1% -1.4% 2.1% 3.1% 1.2% 3.3% -4.1% 2.4% 3.1%
2020 FY 0.9% -0.6% -1.4% -0.3% 4.6% 0.7% 5.6% 0.6% 1.3% 4.2% 3.9% 2.1% 23.6%
SINCE INCEPTION (P.A) 15.2%
SINCE INCEPTION (CUM) 74.1%
PERFORMANCE SUMMARY 1 MTH 3 MTHS 6 MTHS 1 YR 3 YRS SINCE INCEP. (P.A.) SINCE INCEP. (CUM.)
MUNRO GLOBAL GROWTH FUND (AUD) 2.1% 10.5% 18.9% 23.6% 15.5% 15.2% 74.1%
GROWTH OF $100,000 INVESTED
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$95,000$105,000$115,000$125,000$135,000$145,000$155,000$165,000$175,000
JUL 1
6
OCT 16
JAN 17
APR 17
JUL 1
7
OCT 17
JAN 18
APR 18
JUL 1
8
OCT 18
JAN 19
APR 19
JUL 1
9
OCT 19
JAN 20
APR 20
Eric Souders, CFA, Director Payden & Rygel
Liquidity Within Fixed Income
A Roadmap for Fixed Income Liquidity
Market Structure
Unlike equities, fixed income does not trade on an exchange, but rather over-the-counter (OTC), through a broker dealer community that facilitates all transactions. Heightened regulation in recent years has permanently impacted broker dealer capacity.
Result: Reliance on the broker dealer community for liquidity purposes is challenged in many environments
Pricing and Technology
The existence of Trade Reporting and Compliance Engine (TRACE) has created greater pricing transparency. The scope of the bond market forces third-party pricing companies to use matrix pricing. The bond market is an evolving ecosystem driven by structural change and technological disruption (e.g. ETF growth, Electronic Trading, etc.)
Result: Greater trading transparency, pricing methodology, and structural change can cause prices to dislocate well beyond fair value, potentially for entire sectors
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Bond Market Growth and Broker Dealer Presence
As the Bond Market Has Grown…
Source: Bloomberg, Federal Reserve Bank of New York, SEC, Goldman Sachs Global Investment Research
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USD
Trilli
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EM Corp EM Sov USD Lev Loans USD HY USD IG
…Dealer Balance Sheets Have Shrunk
Source: Federal Reserve Bank of New York, SEC, Goldman Sachs Global Investment Research
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USD
Billio
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Goldman Sachs Data Federal Reserve Data
$33 billion
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Key Considerations:o The fixed income market has experienced tremendous growth since 2007, more than doubling in size
o Broker dealer balance sheets have declined precipitously since 2007, largely due to regulation such as Dodd Frank and the Basel Accord
o The combination of these factors has caused persistent degradation in liquidity
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COVID-19: Liquidity Can Overwhelm Fundamentals
Key Observations
Backdrop:o The combination of working from home, reduced Bank balance
sheets post-GFC, challenge in valuing a pandemic, and margin calls, led to a liquidity shock across fixed income
Evidence of Liquidity Shock:o US Treasury Bid Offer: 100 basis points in 30 year US Treasuries,
typically a handful of basis points
o Inverted CLO Credit Curve: AAA tranches sold at spreads greater than AA classes. No single-A CLO has ever taken principal loss, suggesting the AAA class was not being sold for credit reasons
o Leverage Unwind: Repo lines were pulled from levered vehicles like REITS and hedge funds
o Correlation Breakdown: Breakdown of traditional correlations; with days where equities were down 5%, yet safe haven assets like US Treasuries, US Agency RMBS, and Gold were lower in price
Separation of Liquidity and Credit:o Investors are periodically forced to sell (margin call, leverage
unwind, re-balancing), creating pricing pressure
o Third-party matrix pricing can impact an entire asset class, such as CLO, on low volume versus size of market
o Opportunities can arise for investors that separate price movement based on liquidity versus fundamentals
COVID-19
US Election
Euro Debt Crisis
• US CLO Market is $800bn in size• $20bn increase is 2% of the market• Prices overshoot fundamentals
Buying Opportunity!
Source: Bloomberg and BAML Research
Max Cappetta, CEO, Senior Portfolio ManagerRedpoint Investment Partners
About Redpoint
Founded in 2011
Quantitative Listed Equity Specialist
Experienced team serving institutional and retail clients
Over $9b FUM at 30 June 2020
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Global Enhanced$2,438 M
Global Enhanced SRI / Sustainable
$1,605 MAustralian Enhanced$3,515 M
Australian Enhanced SRI
$329 M
Australian Industrials SMA
$160 M
Global Infrastructure
$437 M
Global REITs$124 M
Currency$1,011 M
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About Redpoint
Global Enhanced (All Country)Global Enhanced (Developed)
Global Sustainable (All Country) Global Enhanced SRI
Australian EnhancedAustralian Industrials (SMA) Tax Effective Australian Share Fund
Australian Enhanced SRI
Currency hedging to AUD
FUM $9.62b as at 30 June 2020
Listed Infrastructure (Developed)Global REITs (Developed)
Investment approachA Quantitative approach = fundamental insights deployed systematically
activ
e re
turn
active risk
passive
enhanced
core
active concentrated
25
diverse insights, appropriately weighted in a risk controlled portfolio= core equity exposure for the long term
ESG & Sustainability
Quality
Growth
Valuation
Analyst Drivers
Price Action
Short Term Indicators
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Challenges facing investors
Income
Sustainability
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Challenges facing investors
Historical average PE = 14.5
ASX300 PEs:Post the market rebound
in Q2 of 2020, ASX300 trading at a premium of ~2 PE points relative to
start of 2020.
EPS downgrades bottomed in early June.
Reporting season will provide further insight as
to whether the current optimism is well founded
or not
Valuation
Source: Redpoint
DISCLAIMERThe information included in this presentation is provided for informational purposes only. Sources for the material contained in this presentation are deemed reliable but cannot be guaranteed. We do not represent that this information is accurate and complete, and it should not be relied upon as such. Any opinions expressed in this presentation reflect our judgment at this date, are subject to change and should not be relied upon. All reasonable care has been taken in producing the information set out in this presentation however subsequent changes in circumstances may occur at any time and may impact on the accuracy of the information. Neither Munro Partners, Redpoint Investment Management, Payden & Rygel, GSFM Pty Ltd, their related bodies nor associates gives any warranty nor makes any representation nor accepts responsibility for the accuracy or completeness of the information contained in this presentation.