Models for sustainable economic growth 23 rd March 2017 John Bilton, CFA | Head of Global Multi-Asset Strategy FOR INSTITUTIONAL/WHOLESALE/PROFESSIONAL CLIENTS AND QUALIFIED INVESTORS ONLY – 0 | NOT FOR RETAIL USE OR DISTRIBUTION
Regulatory reform: what might this mean for jobs, economic growth, and stability? The response to the global financial crisis was a surge in market regulation However well meaning regulation may be, the combined effect of new rules can’t be known ex-ante Regulation may be at a high water mark, but de regulation is unlikely to be either rapid or extensive Number of pages of U.S. legislation introduced under key financial market statutes Federal Reserve Act (1913) The Glass-Steagall Act (1933) Interstate Banking Efficiency Act (1994) Graham-Leach-Bliley Act (1999) Sarbanes-Oxley Act (2002) Dodd Frank Bill (2010) 0 500 1000 1500 2000 2500 Source: Source: American Bankers Association, J.P. Morgan Asset Management. Data are as of August 21, 2015. FOR INSTITUTIONAL/WHOLESALE/PROFESSIONAL CLIENTS AND QUALIFIED INVESTORS ONLY – 1 | NOT FOR RETAIL USE OR DISTRIBUTION
Are there new opportunities in areas such as infrastructure and green finance? Investors are seeking diversification into new areas – and infrastructure is one hotspot Infrastructure assets (debt and equity) have an attractive yield relative to other assets Institutional allocation globally to infrastructure is around 4% today, but demand growth is strong Dividends in infrastructure generally offer an attractive income source LISTED INFRASTRUCTURE DIVIDEND YIELD VS. BOND YIELDS (%) 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Jul '11 Jan '12 Jul '12 Jan '13 Jul '13 Jan '14 Jul '14 Jan '15 Jul '15 Jan '16 U.S. corporate yield (BAA) Maturity-matched U.S.Treasury yield DJ Brookfield global infrastructure S&P global infrastructure Source: Barclays, DJ Brookfield, FTSE & Standard & Poors. Bond yields shown for Barclays US Aggregate Corporate (BAA) Index. Infrastructure indices represent publically listed infrastructure companies. DJ Brookfield: Dow Jones Brookfield Global Infrastructure Index, FTSE Global: FTSE Core Infrastructure Index, S&P Global: S&P Global Infrastructure Index. FOR INSTITUTIONAL/WHOLESALE/PROFESSIONAL CLIENTS AND QUALIFIED INVESTORS ONLY – 2 | NOT FOR RETAIL USE OR DISTRIBUTION
Investment philosophy: meeting the needs of investors over the long term The shift towards “outcome oriented” investing gathering pace Transparency in process, cost, and performance is, increasingly, a differentiator New investment styles, like ESG, are influencing the investment process beyond dedicated funds Target date retirement assets (a popular outcome oriented investment style) are set to double over five years $2,500 90% 80% Target data assets ($ trillions) 71.2% 68.9% $2,000 65.9% 70% 62.0% $2,052 57.0% 60% $1,835 50.4% $1,626 $1,500 50% $1,429 42.0% $1,245 40% $1,000 $1,080 $937 36.1% 30% 33.4% 30.8% 28.1% 20% 25.5% $500 23.0% 20.8% 10% $0 0% 2014 2015E 2016E 2017E 2018E 2019E 2020E Target-date assets Target-date contributions as % of 401(k) contributions Target-date assets as % of 401(k) assets Source: The Cerulli Report: Retirement Markets 2015 – Growth Opportunities in Maturing Markets FOR INSTITUTIONAL/WHOLESALE/PROFESSIONAL CLIENTS AND QUALIFIED INVESTORS ONLY – 3 | NOT FOR RETAIL USE OR DISTRIBUTION
Structural economic changes: Technology, Globalisation and Demographics Three structural forces – technology, globalisation, and demographics – influence long run growth A populist tide is seen as rejecting globalisation, yet the threat of automation may be much greater Policy differs markedly depending on whether automation is a substitute for or enabler of labour Global trade growth is positive, but slowing; G4 population growth is now negative; and technology costs have plummeted 1000000 9% 8% 100000 7% 10000 6% 1000 5% 100 4% 3% 10 2% 1 1% 0.1 0% 0.01 -1% 1980 1985 1990 1995 2000 2005 2010 2015 2020 3 2 1 Data costs (log scale) Population growth (RHS) Global trade growth (RHS) Source and notes: 1: Data costs from statisticbrain.com; USD cost per gigabyte of hard drive data storage 2: Population growth from United Nations for G4 economies, working age population; 5 year moving average of YoY change 3: Global trade growth from Haver, global export growth/global GDP growth, reindexed at 100 in 2010, seasonally adjusted; 5yr moving average of Y/Y change FOR INSTITUTIONAL/WHOLESALE/PROFESSIONAL CLIENTS AND QUALIFIED INVESTORS ONLY – 4 | NOT FOR RETAIL USE OR DISTRIBUTION
Tying economic outlook to asset market returns starts with equilibrium interest rates Falling population drives inexorable downgrades to long term growth and interest rate expectations Basing forecasts so heavily on population may be flawed as digitisation and automation accelerate… …and the balance between people, process and property as economic drivers will continue to evolve Economy wide borrowing costs track nominal GDP: challenges to long term growth, reduce equilibrium interest rates 12% 10% 8% 6% 4% 2% 0% -2% Mar-90 Jun-92 Sep-94 Dec-96 Mar-99 Jun-01 Sep-03 Dec-05 Mar-08 Jun-10 Sep-12 Dec-14 Spread (Economic rate - US GDP 10y ave) US GDP nominal 10y ave Weighted "economic" rate (0.2*Tyld + 0.4*mtg + 0.4*corp) Source: Bloomberg, Haver Analytics, *Estimated borrowing cost is approximated from 0.2 *Treasury yield + 0.4 * mortgage rate + 0.4 * corporate yield. GDP = Gross Domestic Product FOR INSTITUTIONAL/WHOLESALE/PROFESSIONAL CLIENTS AND QUALIFIED INVESTORS ONLY – 5 | NOT FOR RETAIL USE OR DISTRIBUTION
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