1

For professional investors only, not suitable for retail investors.

MACRO BACKDROP TO TRUMP POLITICS

Issue #9

Jan/Feb 2017

Multi asset views from RLAM

Royal London Asset Management manages £101 billion in life insurance, pensions and third party funds*. Global Multi Asset Portfolios (GMAPs) blend active and passive exposures in risk-rated funds with a tactical asset allocation overlay and are available on a wide range of platforms.

*As at 30/09/2016

This month’s contributors

Trevor Greetham

Head of Multi Asset

Hiroki Hashimoto

Senior Quantitative Analyst

The Investment Clock approach splits the

business cycle into four phases depending

on the strength of growth and the

direction of inflation.

In the Overheat phase commodities are

usually the best asset class but with

monetary policy likely to remain loose

around the world, we think stocks have

further to run.

Political risk will be a feature of 2017 as it was in 2016. The

unpredictable nature of a Trump administration creates uncertainty,

especially if protectionist rhetoric starts to outweigh promises of

stimulus. However, global growth is picking up and monetary policy is

likely to remain loose in most developed countries despite an upturn in

inflation. With the Investment Clock model supportive of stocks and

commodities, we would probably view dips as a buying opportunity.

Nominal growth surge – positive for stocks and commodities

The Investment Clock has been in the Overheat phase of the business cycle since

last summer. Things have really heated up recently in what looks to be the

strongest surge in nominal growth since the financial crisis. Hopes of loose US

fiscal policy and deregulation under Trump could add fuel to the fire. Historically

commodities have done best at these times (see table). However, with monetary

policy likely to remain behind the curve, stocks should continue to do well.

Lone hiker – positive for US dollar, Japan

Very few central banks are likely to respond to higher inflation with higher interest

rates. The European Central Bank (ECB) and Bank of Japan (BoJ) are printing

money and the Bank of England (BoE) will want to keep policy loose while Brexit

negotiations are in progress. With only the US Federal Reserve (Fed) likely to raise

rates, dollar strength is likely. Bouts of dollar weakness can be used to add to

positions in Japanese equities, which tend to do well when the yen is weak and

global growth is strong.

Climbing the wall of worry

Political risk is likely to create bouts of negativity in 2017. We have a new and

unpredictable leader in the White House, Brexit negotiations and a series of

important elections in Europe and it would not be surprising to see red on the

screens from time to time. We will be watching our investor sentiment indicator

closely. With global growth picking up and the earnings outlook improving, we

would most likely view dips as a buying opportunity.

Policy Paper: The Curse of Long Term Cash

In the short run, cash is the safest asset class. In the long run, it can be seen as

the riskiest, vulnerable to bouts of unexpected inflation, like the 1970s, or long

periods with interest rates well below the rate of inflation like today. Royal

London’s latest policy paper The Curse of Long Term Cash argues that savers

have missed out on £100 billion in returns by using Cash ISAs as a long-term

strategy.

Focus Table: Real returns in different Investment Clock phases

Source: RLAM. Analysis from April 1973 to April 2015. Real returns in US dollar terms. Indices used are ML Treasury & Agency

Master, S&P Composite, GSCI Commodity index and US 3-month T Bills.

Please visit www.investmentclock.co.uk for our blog and information about our

multi asset range. For product details, contact: multiassetsupport@rlam.co.uk

2 For professional investors only, not suitable for retail investors.

INVESTMENT CLOCK IN OVERHEAT

Chart 1: The Investment Clock is in Overheat

We tell the time on the Investment Clock model that

guides our asset allocation using global growth and

inflation indicators. We have been in the Overheat

phase since July last year and things have really heated

up recently in what looks to be the strongest surge in

nominal growth since the financial crisis.

Global growth remains above its long-run trend as

evidenced by the ongoing fall in unemployment rates

across the world and business confidence is picking up

in all regions of the world.

Meanwhile, with China seeing the strongest growth in

years, inflation is picking up from a very low base and

we expect this trend to continue.

Historically commodities have done best during an Overheat, however, with monetary policy likely to remain loose almost everywhere, we see this as “Early Overheat” and stocks should continue to do well.

Chart 2: Global growth trend positive Chart3: Inflation scorecard also positive

Source: RLAM, DataStream. Source: RLAM, DataStream. Our indicators show that a recovery in growth was already under way before the US election. However, Trump’s victory is likely to keep us there with promises of corporate tax cuts and fiscal stimulus.

3 For professional investors only, not suitable for retail investors.

NOMINAL GROWTH SURGE

Chart 4: US Small Business Survey and GDP growth

Small business sentiment has a strong

relationship with GDP growth, and has shown

a significant uptick since the US election. We

think that Trump’s policies could supercharge

an upturn that was already under way.

That said, Trump comes into office in 2017

with unemployment low, the U.S. stock market

at a record high and interest rates starting to

rise. Obama started out in 2009 just after the

Lehman failure with unemployment double its

current level and stock markets on their knees.

History will judge who leaves America in a

greater state than that in which they found it.

Chart 5: China is becoming an inflationary force

The Chinese economy is also seeing a

strong upturn if the so-called Li Keqiang

index is to be believed.

This index measures basic variables like

railway cargo volume, electricity

consumption and the volume of loans

disbursed by banks – allegedly the three

most reliable measures looked at by the

Chinese Premier when he was a Party

Committee Secretary.

Chart 6: Stocks vs Bonds and nominal growth scorecard

With global growth picking up and

inflation rising, we are seeing the strongest

surge in nominal growth since the financial

crisis. Combining the growth and inflation

scorecards that feed into the Investment

Clock model, we generate a strong signal in

favour of stocks versus bonds.

4 For professional investors only, not suitable for retail investors.

LONE HIKER

Chart 7: US dollar and interest rate differential

Very few central banks are likely to respond to

higher inflation with higher interest rates. The

ECB and BoJ are printing money and the BoE

will want to keep policy loose while Brexit

negotiations are in progress. With only the Fed

likely to raise rates, interest rate differentials

will continue to rise and this supports

continued dollar strength.

Chart 8: Commodities and trade weighted US dollar

Strong growth, particularly in China, and

rising inflation suggests good returns are to be

had from commodities and we have moved

overweight. However, dollar strength can be a

headwind and we continue to prefer stocks.

Chart 9: Japan vs. EM equities and the US dollar index

Strong global growth is typically good for both

Japanese and emerging market equities but we

have taken emerging markets back to neutral

on concerns over the potential for ‘border

taxes’. We remain overweight Japan with the

yen hedged where possible.

Interestingly, Japan tends to outperform the

emerging markets pretty consistently in a

strong dollar environment as we are seeing at

present. Bouts of dollar weakness, perhaps

linked to political events, could provide good buying opportunities for Japan.

5 For professional investors only, not suitable for retail investors.

WHERE WE STAND

We are overweight stocks, especially Japan, and commodities, underweight bonds, and US and

European stocks.

-- - = + ++

Multi Asset

Stocks

Property

Commodities

Bonds

Cash

-- - = + ++

Regional Equity

UK

US

Europe

Japan

Pacific ex. Japan

Emerging Market

Multi Asset: Overweight Equities and commodities; underweight bonds

We have been overweight equities since 2012 on the back of continued global recovery and loose policy. With business

confidence picking up in major economies and policy staying loose despite the upturn in inflation we remain overweight

equities. Political risks will be a factor in 2017 but with a positive fundamental backdrop we would most likely buy dips.

We are underweight bonds. Quantitative easing and pension fund buying have pushed yields to levels that make no sense in the

long run and rising inflation will ultimately lead to higher yields.

We are neutral to slightly overweight UK commercial property. While we expect some downside to capital values in the next few

months as uncertainty around Brexit negotiations hurts economic growth. A positive supply/demand backdrop and a large

rental yield cushion should make UK property resilient.

We have moved modestly overweight commodities. The improvement in Chinese growth and a strong world economy supports

higher commodity prices although further US dollar strength may be a headwind.

Equity Regions: Overweight Japan; underweight Europe and US

Japan is our favourite equity market on the basis of reflationary fiscal and monetary policy and a tendency to do well when the

dollar is strong. We are overweight in our funds, with the yen hedged where possible.

We have been overweight emerging market equities but we used the recent recovery as an opportunity to trim the exposure and

are now neutral. The new US administration and stronger dollar are a significant source of uncertainty.

We have been underweight Europe since the Brexit vote on the basis that political risk would rise heading into elections in the

Netherlands, France and Germany. We reduced the size of our underweight ahead of the Italian referendum as Europe’s

underperformance suggested bad news was already in the price.

We are broadly neutral UK equities. Monetary policy will remain loose but ongoing Brexit risks will probably increase with the

triggering of Article 50.

6 For professional investors only, not suitable for retail investors.

THE CURSE OF LONG TERM CASH

Table: Sterling-based annual returns from major asset classes 2007-2016

Source: RLAM, DataStream as of January 2017. Multi Asset returns are based on the benchmark returns of Royal London Global Multi Asset Portfolio (GMAP) Balanced Fund.

For professional clients only. Past performance is no guide to the future. The value of investments and the income from them is not guaranteed and may go

down as well as up and investors may not get back the amount originally invested. Issued by Royal London Asset Management February 2017. Information correct at that date unless otherwise stated. The views expressed are the author’s own and do not constitute investment advice. Royal London Asset

Management Limited, registered in England and Wales number 2244297; Royal London Unit Trust Managers Limited, registered in England and Wales

number 2372439. RLUM Limited, registered in England and Wales number 2369965. All of these companies are authorised and regulated by the Financial Conduct Authority. All of these companies are subsidiaries of The Royal London Mutual Insurance Society Limited, registered in England and Wales number

99064. Registered Office: 55 Gracechurch Street, London, EC3V 0RL. The marketing brand also includes Royal London Asset Management Bond Funds Plc,

an umbrella company with segregated liability between sub-funds, authorised and regulated by the Central Bank of Ireland, registered in Ireland number 364259. Registered office: 70 Sir John Rogerson’s Quay, Dublin 2, Ireland. Our ref: N RLAM W 0004.

Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

EM Stocks Gilts EM Stocks EM Stocks Gilts EM Stocks Global Stocks Property Property EM Stocks

+37.4% +12.8% +62.5% +23.6% +15.6% +12.8% +21.2% +19.5% +13.9% +35.4%

Commodities Cash UK Stocks Commodities Property UK Stocks UK Stocks Gilts Global Stocks Commodities

+14.3% +5.7% +30.1% +20.5% +8.1% +12.3% +20.8% +13.9% +4.4% +33.3%

Global Stocks Inflation (RPI) Global Stocks Global Stocks Inflation (RPI) Global Stocks Property Global Stocks Multi Asset Global Stocks

+11.2% +4.0% +20.6% +17.2% +5.2% +12.1% +11.0% +12.2% +1.8% +30.3%

Cash Multi Asset Multi Asset Property Multi Asset Multi Asset Multi Asset EM Stocks UK Stocks UK Stocks

+6.0% -10.4% +12.6% +14.7% +1.6% +7.1% +7.3% +7.9% +1.0% +16.8%

Multi Asset Commodities Commodities UK Stocks Cash Inflation (RPI) Inflation (RPI) Multi Asset Inflation (RPI) Multi Asset

+5.5% -10.9% +5.9% +14.5% +0.6% +3.2% +3.0% +6.5% +1.0% +12.1%

UK Stocks Global Stocks Property Multi Asset UK Stocks Gilts Cash Inflation (RPI) Gilts Gilts

+5.3% -18.5% +1.9% +11.7% -3.5% +2.7% +0.5% +2.4% +0.6% +10.1%

Gilts Property Cash Gilts Global Stocks Property Gilts UK Stocks Cash Property

+5.3% -22.6% +1.0% +7.2% -6.9% +2.3% -3.9% +1.2% +0.5% +2.6%

Inflation (RPI) UK Stocks Inflation (RPI) Inflation (RPI) Commodities Cash EM Stocks Cash EM Stocks Inflation (RPI)

+4.3% -29.9% -0.5% +4.6% -12.7% +0.6% -5.3% +0.5% -10.3% +1.8%Property EM Stocks Gilts Cash EM Stocks Commodities Commodities Commodities Commodities Cash

-5.4% -34.8% -1.2% +0.6% -18.4% -5.4% -11.2% -11.8% -20.3% +0.4%9

8

7

1

2

3

4

5

6

In the short run, cash is the safest asset class. In the long run, it can be seen as the riskiest. Cash offers short-term security and

capital preservation. However, large holdings of cash are vulnerable to bouts of unexpected inflation, like the 1970s, or long

periods with interest rates well below the rate of inflation like today.

In Royal London’s latest policy paper The Curse of Long Term Cash we show that if the money invested in Cash ISAs in the last

decade had been invested in a multi asset fund it could now be worth around £360 billion, compared with the £250 billion currently held in Cash ISAs. Savers have missed out on over £100 billion in returns by using cash as a long-term investment

strategy.

Since the financial crisis, cash has returned 1% or less a year, consistently below the prevailing level of inflation. Meanwhile, a

multi asset approach has offered strong returns well above the increase in the cost of living. We expect this situation to continue

with the Brexit negotiations keeping UK interest rates low as the weak pound pushes inflation higher, eroding the real value of

cash savings at an accelerating rate.

For more information visit: http://www.royallondon.com/policy-papers/