Outlook As good as it gets. Structural concerns remain . CFA - PowerPoint PPT Presentation

Capital Markets Outlook „As good as it gets. Structural concerns remain .“ CFA Forecast Dinner, San Diego CEO, Andreas Utermann

Table of Contents Macro Outlook 1 How should assets be allocated 2 Special Topics 3 Concluding Remarks 4 2

1 Macro Outlook Macroeconomic environment at a glance Framing the current economic landscape of financial markets 1 December 2017 Global Developed Emerging US Eurozone Japan UK China 1 Growth Macro data flow Inflation 2 Growth Economic surprises Inflation 3 GDP Consensus forecasts CPI Change (3 months) Improving Deteriorating Unchanged At the turn of the year, the global economy enjoyed its strongest cyclical conditions in many years. 1 Macro data flow as measured by our proprietary Macro Breadth Indices, which track the direction of important economic data (global economy: 226, developed countries: 135, EM: 88, US: 50, Eurozone: 61, Japan: 39, UK: 38, China: 40) on a monthly basis. Source: Allianz Global Investors Global Economics & Strategy, Bloomberg, Datastream, UBS, Consensus Economics 3

1 Macro Outlook 2018 economic outlook: “Late cycle extension with risks attached” Already matured global business cycle may enjoy some extra time US recovery already the 3 rd longest post-WWII Length of current vs. historical business cycles Ill-timed fiscal stimulus may extend recovery, but raises Maturity of economic expansion varies by country risk of boom/bost scenario Less matured More matured Economic expansion 120 3/91-3/00 120 102 2/61-12/69 106 95 100 86 since 7/09 102 80 11/82-7/90 92 64 Months 61 11/01-12/07 73 57 60 3/75-1/80 48 58 40 8/54-8/57 39 35 40 34 11/70-11/73 36 19 20 12 4/58-4/60 24 7/80-7/81 12 0 US UK Eurozone Japan Russia Brazil 0 50 100 150 months Current cycle Historical average After running for more than eight years, the global business cycle appears to be quite matured. While we deem the probability of a recession in 2018 as subdued, medium-term risks continue to build in the current “fragile goldilocks” environment of diminished potential growth and increasing resource utilization. Source: Allianz Global Investors Global Economics & Strategy, Bloomberg. 4

1 Macro Outlook Major central banks heading towards gradual normalization Unconventional policy normalization will lead... ...to a climax in central bank liquidity in 2018 25 projection Monetary base (% of nominal world GDP) 20 15 10 5 0 2006 2008 2010 2012 2014 2016 2018 2020 US Eurozone Japan UK China Peak liquidity will constitute a major turning point for global monetary policy in 2018. Source: Allianz Global Investors Global Economics & Strategy, Bloomberg, Datastream. 5

1 Macro Outlook Global cyclical economic snapshot: (Almost) as good as it gets Global business and consumer sentiment 1 at cycle high Global unemployment rate at multi-decade low 2 9 standard deviation 1 8 0 % 7 -1 6 -2 -3 5 1999 2002 2005 2008 2011 2014 2017 1999 2002 2005 2008 2011 2014 2017 Business sentiment Consumer sentiment Global unemployment rate Global business fixed investment 2 finally picking up Revival of world trade and global industrial production 18 12 10 12 8 5 6 4 yoy % yoy % 0 0 0 -5 -6 -4 -10 -12 -8 -15 -18 -12 1999 2002 2005 2008 2011 2014 2017 2001 2003 2005 2007 2009 2011 2013 2015 2017 World trade volume Global industrial production (rs) Global business fixed investment Model Resynchronisation of global growth has lately been driven by pickup in global business fixed investment. 1 Based on 86 global, regional and country macroeconomic sentiment indicators (GDP weighted) 2 Global business fixed investment ex China/India. Model = f(global business sentiment, corporate profits, corporate credit costs) Source: Allianz Global Investors Global Economics & Strategy, IMF, CPB, Bloomberg, Datastream 6

1 Macro Outlook Global output gap points at gradually rising core inflation Global output gaps as % of GDP Global output gaps have closed, notably in advanced economies. Core inflation is therefore likely to gradually edge higher. Source: Allianz Global Investors Global Economics & Strategy, OECD, Datastream, latest estimate for 2018. 7

1 Macro Outlook Inflation pickup should become more visible in 2018 Global consumer inflation still well behaved Underlying inflation pressure in the US on the rise Muted response to the erosion of economic slack so far CPI dip in 2017 mainly caused by transitory factors 6 6 5 5 4 3 4 yoy % yoy % 2 3 1 2 0 -1 1 -2 0 -3 1996 2000 2004 2008 2012 2016 1995 1998 2001 2004 2007 2010 2013 2016 World CPI World CPI core CPI (headline) Underlying inflation gauge (all data) We expect the persistent narrowing of output gaps to put incremental upward pressure on core inflation in 2018. Source: Allianz Global Investors Global Economics & Strategy, Bloomberg, Datastream. Underlying inflation gauge as calculated by the Federal Reserve Bank of New York. 8

Table of Contents Macro Outlook 1 How should assets be allocated 2 Special Topics 3 Concluding Remarks 4 9

2 Asset Allocation US Treasuries: On the expensive side Fundamental interest rate model: US Treasuries Term premium still at depressed (negative) levels 1.6 7 6 1.2 5 0.8 4 % 0.4 % 3 0.0 2 -0.4 1 0 -0.8 1997 2000 2003 2006 2009 2012 2015 1993 1997 2001 2005 2009 2013 2017 U.S. term premium (10y swap) Average US Treasury 10y yield Model* US Treasury 10-year bonds are still expensive from a fundamental valuation perspective. Moreover, unsustainably negative term premia pose a serious risk for a medium-term setback. *) Model [US Treasury 10y yield = f(T-Bill 3m, ISM manufacturing, FED international custody holdings, term premium 3m1y, consensus expectations CPI, GER/ITA10y spread)]. Source: Allianz Global Investors Global Economics & Strategy, Bloomberg. Past performance is not a reliable indicator of future results. 10

2 Asset Allocation Equity valuation overview: US expensive, most Emerging Markets attractive, Europe around fair Overview of Global equity markets cyclically adjusted P/E (S&P 500, otherwise MSCI indices in local currency) 32 30 28 26 24 22 20 130+-year US historical average 18 16 14 12 10 8 6 4 2 0 US valuations point to below-average long-term real returns in the coming decade, while European and EM offer the best long-term upside from a valuation perspective. Source: AllianzGI, Datastream, *numbers for regional indices without inflation adjustment. Latest available data used (December 1 st 2017)

2 Asset Allocation US earnings revisions very positive, while dispersion of earnings estimates is picking up. A warning signal ? IBES revisions momentum S&P 500 vs coefficient of variation of (#positive/ #negative revisions) 12-month forward IBES estimates The sharp increase in US earnings revisions reflects the recent US tax cuts. In 2000 and 2007, the combination of high earnings revisions momentum and low, but rising dispersion of earnings estimates was a warning signal for the S&P 500. Source: Allianz Global Investors Global Economics & Strategy, IBES 12

2 Asset Allocation US dollar: medium-term downtrend prevails Dollar is significantly overvalued from a long-term fundamental perspective 1 US macro data have underperformed rest of the world since mid-2016 2 long-term fundamental valuation vs. USD 30% 10 350 USD undervalued US macro data outperform 5 330 20% 0 310 10% -5 290 0% -10 270 -15 250 -10% -20 230 -20% USD overvalued US macro data underperform -25 210 2004 2006 2008 2010 2012 2014 2016 -30% 2000 2002 2004 2006 2008 2010 2012 2014 2016 Macro data flow: US vs. world (ex US) US dollar (nominal effective, rs) G-10 industrialized FX Emerging Markets FX Interest rate (monetary policy) differentials have not boosted the dollar 3 Speculators maintain their moderate underweight in the dollar 1.5 20 80 rising rate differential = stronger USD speculative long USD rolling 12-month correlation 15 60 1.0 10 40 0.5 5 20 % bn USD 0 0 0.0 -5 -20 -0.5 -10 -40 rising rate differential = weaker USD speculative short USD -15 -60 -1.0 2010 2011 2012 2013 2014 2015 2016 2017 2018 1999 2002 2005 2008 2011 2014 2017 US dollar (trade weighted, 6m change) Net speculative positions (CFTC, rs) US dollar vs. short-term interest rate differential (average G-10 FX) Medium-term headwinds from still ambitious long-term valuations and a synchronized global economic upswing continue to weigh on the US dollar. 1 Fundamental valuation model based on proprietary behavioral equilibrium exchange rate approach, 2 Macro data flow measured by proprietary Macro Breadth Indices 13 3 Interest rate differentials based on nominal 3m1y forward rates, Source: Allianz Global Investors Global Economics & Strategy, Bloomberg, Datastream