Global Economic and Financial Market Overview Q3 2019 Neal Bailey This marketing document is for use by Professional Clients Market Insights Team only and is not for consumer use. Please do not redistribute.
Global Economic and Financial Market Overview 1. Performance in 2019 YTD 2. Economic outlook 3. Current financial market backdrop 2
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
2019 YTD market highlights Performance Overview Global Asset Classes – Total Return performance in 2019 YTD (local currency %)* 25 20 15 10 5 0 -5 Global DM Equities EM Equities Global Govt. Global IG Global HY Global Cash Oil Gold Equities Bonds 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
Correct colour for labels on RHC – Update Friday Asset class flows The rally has not been reflected in equity fund flows…but FI has seen substantial inflows Global equity flows and MSCI ACWI performance Global IG flows and ICE BofAML Global Corporate TR performance 20 102 10 106 0 0 100 105 Flows Flows (Cumulative $bn) (Cumulative $bn) -20 -10 98 Perf. 104 (RHS)* -40 -20 Perf. 96 103 (RHS)* -60 -30 94 102 -80 -40 92 101 -100 -50 90 100 -120 -60 88 99 -140 -70 -160 86 -80 98 Sep 18 Nov 18 Jan 19 Mar 19 Sep 18 Nov 18 Jan 19 Mar 19 Source: BofAML as at 2 August 2019. *Rebased 100 = 19 September 2018. $ = US. 6
Market highlights Flow summary YTD net flows (quarterly flow growth rate %) 2019 Q2: 6.00% 3.4% ▪ Investors have switched to 3.0% 4.00% the “save mode”. Less risky 0.8% 2.00% asset classes (government 0.00% bonds, corporate bonds) are -0.2% -0.4% -2.00% preferred -2.5% -4.00% -3.0% ▪ Market inflows continue to -4.1% -6.00% be positive during 2 nd -8.00% quarter (EUR 32bn) -10.00% -9.1% ▪ Fixed income investments -12.00% -12.0% attracted the most flows -14.00% Fixed Income Equity Asset Allocation Alternatives Commodities (EUR 64bn) whereas YTD – Top/Bottom 5 sectors by Net Flows outflows in equities accelerated (EUR -25bn) 8.76bn 10bn 7.49bn ▪ After being a “top sector” by 8bn 5.28bn 6bn net flows in Q1, Emerging 4.01bn 3.78bn 4bn Markets (equities & bonds) 2bn lost in Q2 0bn -2bn -4bn -2.71bn -3.11bn -3.32bn -3.96bn -6bn -8bn -10bn -8.32bn Global EUR Global Bond USD Global Asia ex US Large- Global Alt - Market Eurozone Flexible Corporate Flexible Large-Cap Japan Cap Value Emerging Neutral - Large-Cap Bond-USD Bond Bond Blend Equity Equity Markets Equity Equity Hedged Equity Equity 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. 7
2. Economic outlook
The global macro backdrop Heightened levels of uncertainty… Global Economic Policy Uncertainty index* Trade tensions 350 Trump 300 election Brexit vote EZ crisis 250 China GFC growth 200 150 100 50 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: Bloomberg as at 6 August 2019. *Based on current price GDP weights. GFC = Global Financial Crisis. 9
The global macro backdrop …has led to further weakness in PMIs and a sharp fall in global trade… JPM Global Purchasing Managers Index (PMI) World trade volume (3mma yoy%) 56 20 Services 15 55 10 54 5 53 0 Composite 52 -5 Manufacturing 51 -10 50 -15 49 -20 14 15 16 17 18 01 03 05 07 09 11 13 15 17 19 Source: Bloomberg and Datastream as at 6 August 2019. 10
The global macro backdrop …and a record period of negative G10 economic newsflow Citi Economic Surprise Indices 120 100 Japan EZ 80 60 40 20 0 -20 -40 China UK -60 US -80 -100 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 Source: Datastream as at 1 August 2018. 11
The global macro backdrop A synchronised slowdown in 2019…but with the global outlook currently forecast to improve in 2020 Country GDP growth performance (number) Consensus GDP forecasts for 2019 and 2020 (%)* 45 7 IMF World Real 40 GDP forecasts** 6 35 2018 3.6% 5 2019f 3.2% (3.3%) 30 2020f 3.5% (3.6%) 4 25 20 3 15 2 10 1 5 0 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018e 2019f 2020f US EZ Germany UK Japan China France Italy Contraction Slowing growth Accelerating growth 2019 2020 Trend 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 Lon g-term baseline real GDP projections from Economic Outlook – July 2018. **IMF WEO, July 2019. Brackets show April 2019 Economic Outlook forecasts. 12
US recession risk A record US recovery…but at much slower growth rates than in previous cycles US recoveries – Real GDP (% annualised) Duration of US economic expansions since WW2 (months) 6 140 5 120 100 4 80 Months Avg. = 3 58 months 60 2 40 1 20 0 0 45 49 54 58 61 70 75 80 82 91 01 09 58 61 70 75 80 82 91 01 09 to Year started date Year started Source: LHC: NBER (National Bureau of Economic Research) as at 1 August 2019. RHC: NBER and Datastream as at 1 August 2019. 13
US recession risk Near-term recession risks appear low currently (1/2) Yield curve inversion – 10yr-2yr UST spread (%) Conference Board Lead Indicator (CLI)* 4 120 110 3 100 2 90 80 1 70 0 60 50 -1 40 -2 30 -3 20 77 81 85 89 93 97 01 05 09 13 17 59 64 69 74 79 84 89 94 99 04 09 14 Recessions Recessions ▪ Historically an inversion of the yield curve has been the most ▪ The CLI has historically peaked on average 15 month ahead consistent lead indicator of a recession with an average of a recession (9 - 22m range) 21 month lead (10 – 34m range) over the past 40 years ▪ Currently the CLI has declined marginally from its recent peak ▪ Not yet inverted this cycle, but at 12bp back close to flattest it has been (11bp) 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. 14
US recession risk Near-term recession risks appear low currently (2/2) Unemployment (%) Conference Board Consumer Confidence Index (CCI) 12 160 140 10 120 8 100 80 6 60 4 40 2 20 50 55 60 65 70 75 80 85 90 95 00 05 10 15 67 72 77 82 87 92 97 02 07 12 17 Recessions Recessions ▪ Unemployment has historically troughed on average 10 months ▪ The CCI has historically peaked on average 15 month ahead of ahead of a recession (2 - 17m range) a recession (6 - 22m range) ▪ The latest unemployment figure shows a rise from cyclical low ▪ Currently the index is rising and close to cycle highs of 3.6% to 3.7%. Source: Datastream as at 1 August 2019. 15
Positive developments? Chinese green shoots? Credit impulse (yoy%) Business surveys 10 53 65 Official Manuf. CKGSB* 52 60 5 Bus Conditions (RHS) 51 55 0 50 50 -5 49 45 Caixin Manuf. -10 48 40 Dec 14 Dec 15 Dec 16 Dec 17 Dec 18 Dec 17 Apr 18 Aug 18 Dec 18 Apr 19 Infrastructure and Real Estate investment (yoy 3mma %) Exports (yoy 3mma %) 40 25 30 Infrastructure 20 ASEAN 20 EU 15 Real Estate 10 10 0 Japan 5 -10 US 0 -20 Dec 14 Dec 15 Dec 16 Dec 17 Dec 18 -5 Dec 14 Dec 15 Dec 16 Dec 17 Dec 18 Source: Datastream and Bloomberg as at 1 August 2019. *CKGSB = Cheung Kong Graduate School of Business. 16
Positive developments? Eurozone growth outlook - The backdrop remains challenging… particularly for the industrial sector Unemployment and Consumer Confidence Exports and Manufacturing production (yoy%) 5 15 13 Cons Conf 0 (RHS) 12 Non-EZ exports -5 10 -10 11 -15 10 5 -20 -25 9 0 -30 8 -35 Unemployment (%) Manufacturing -40 7 -5 2012 2013 2014 2015 2016 2017 2018 2019 1998 2001 2004 2007 2010 2013 2016 2019 Source: Datastream as at 27 July 2019. 17
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