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Personal Finance Society2017 – A year of living dangerously?

Market Insights Team

This presentation is for Professional Clients only and is not for consumer use.

2017 – A year of livingdangerously?

What we said at start of 2016

Growth and US interest policy key variables for 2016

Political and geo-political risks

Low yields weigh on fixed income markets

Better opportunities in equities than fixed income

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2017 – A year of living dangerously?

2016 review

Political uncertainty

Macro economics

Markets and strategies

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Learning objectives

Following this presentation, you will:

Understand what will influence the prospects for the global economy in 2017.

Outline the key fundamental drivers likely to drive asset class performance.

5

Logo demonstrates the quality of an event and that it meets CII member CPD scheme requirements. The Chartered Institute for Securities & Investment has a policy of formally recognising those organisations who meet the Chartered Institute for Securities & Investment’s stringent quality assurance requirements for the provision of CPD.


2016 review

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-5

0

5

10

15

20

25

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35

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Global Equities Global Govt.Bonds

Global IG Global HY Global Cash Commodities

Local £

Global – 2016 Performance overviewAn excellent year for £ denominated investors

Total returns (%)

Source: Datastream as at 3 January 2017. Indices used: Global Equities – MSCI AC World, Global Govt. - JPM GBI Global All Mats., Global IG – BofA ML Global Corporate, Global HY – BofA ML Global High Yield, Cash – JPM Global Cash 1m, Commodities – Thomson Reuters Equal Weight Continuous Commodity Index.

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0

5

10

15

20

25

30

35

40

Equities Gilts IL IG HY Cash Property

UK – 2016 Performance overviewA good year for most asset classes too

Total returns (%)

Source: Datastream as at 17 January 2017. Indices used: Equities – FTSE All Share, Gilts – BofA ML UK Gilt, IL - BofA ML Inflation – Linked Gilt, IG - BofA ML Sterling Corporate, HY – BofA ML Sterling High Yield, Cash – JPM UK Cash 1m, Property – IPD Total Return Index.

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2016 review


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2016 review


– Trump

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The Trump policy conundrum

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Reward Risk

Tax cuts

Fiscal stimulus Immigration

Trade

Source: Invesco Perpetual. For illustrative purposes only.

De-regulation

Geo-politics

http://www.google.co.uk/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwjRt5SdrqDQAhWGOxQKHRTbD5UQjRwIBw&url=http://worldartsme.com/scales/&psig=AFQjCNE0932bp3eUbpHAf0tnzqN1k_fFXQ&ust=1478941944920326

http://www.google.co.uk/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwjRt5SdrqDQAhWGOxQKHRTbD5UQjRwIBw&url=http://worldartsme.com/scales/&psig=AFQjCNE0932bp3eUbpHAf0tnzqN1k_fFXQ&ust=1478941944920326


2016 review


– Trump

– European politics

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Euro zone upcoming political events2017-2018

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Source: Invesco Perpetual as at end December 2016. For illustrative purposes only.

Mar2017

Apr2017

May2017

Jun2017

Jul2017

Aug2017

Sep 2017 2018

NetherlandsParliamentary election

FrancePresidential election

GermanyFederal elections

AustriaGeneral election by spring 2018

ItalyGeneral election by May 2018

FranceNational Assembly elections

How vulnerable is Europe to political upheaval in 2017?

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Stephanie ButcherFund Manager, European Equities

How vulnerable is Europe to political upheaval in 2017?

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Stephanie ButcherFund Manager, European Equities


2016 review


– Trump

– European politics

– Brexit

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The Brexit rollercoasterA lengthy and uncertain process

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Source: Invesco Perpetual and Global Counsel as at 5 January 2017.

2025?

May 2020

Mar 2019

Mar 2017

Jan2017

June2016

Article 50 activated

Two years to negotiate terms of withdrawal – hard or soft Brexit?

The UK formally exits the EU at earliest

Referendum

Supreme Court decision on Article 50

UK General Election at latest.

Negotiations with EU and Rest of World to replace treaties that no longer apply.


2016 review


Macro economics

– Overview

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What is the economic growth outlook for developed markets in 2017?

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John GreenwoodChief Economist, Invesco Ltd.

What is the economic growth outlook for developed markets in 2017?

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-60

-40

-20

0

20

40

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2011 2012 2013 2014 2015 2016

Economic growth news flowBetter than expected currently

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G10 Citi Economic Surprise Index

Source: Datastream as at 1 February 2017.

Data worse than expected

Data betterthan expected

0

20

40

60

80

100

120

140

1945 1949 1954 1958 1961 1970 1975 1980 1982 1991 2001 2009

to date

Mo

nth

s

Year started

US recessions concernsCurrent expansion looks long in the tooth…

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Duration of US economic expansions (months)

Source: NBER (National Bureau of Economic Research) and Invesco Perpetual as at 1 February 2017.

Avg. = 58 months

Can Trump double the rate of growth?

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Can Trump double the rate of growth?

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-4

-2

0

2

4

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59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15

US long-term GDPDoubling growth may be ambitious

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US annual real GDP (%)


Trump target growth rate

How is the UK economy coping post the referendum?

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How is the UK economy coping post the referendum?

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The UK economy post referendumLittle change

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Indicator Q4 2015 Current

GDP

Unemployment rate

Real wage growth

House prices

Consumer confidence

Retail sales

CPI

£ Trade Weighted Index

Broad money growth

Public and private debt/GDP

Trade balance

Composite PMI

Source: Invesco Perpetual for illustrative purposes. Red = negative; Amber = neutral; Green = positive.

Is fiscal stimulus the right policy to reinvigorate the global economy?

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Is fiscal stimulus the right policy to reinvigorate the global economy?

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Fiscal stimulusMore, but still limited

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Source: OECD as at 23 November 2016.

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016e 2017f 2018f

Change in OECD underlying fiscal balance as % of potential GDP

Looser fiscal policy

Tighter fiscal policy

-50

-40

-30

-20

-10

0

10

20

30

40

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1999 2001 2003 2005 2007 2009 2011 2013 2015

Inflation expectationsDeflationary impulse waning

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G10 Citi Inflation Surprise Index


Inflation lower than expected

Inflation higherthan expected

0.0

0.5

1.0

1.5

2.0

2.5

3.0

US UK Eurozone Japan

Current

2017f

Rising inflation expectations for 2017

Major developed economies – Consumer Price Inflation outlook (%)

Source: Datastream and Consensus Economics as at 1 February 2017. All annual inflation numbers are based on the average of the monthly year on year inflation numbers.

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2016 review


Macro economics

– Overview

– Monetary policy

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0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Dec 15 Dec 16 Dec 17 Dec 18 Dec 19 Dec 20

US rate hike expectationsMarket expectations more in sync with the Fed’s

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US rate hikes – Fed and market expectations (%)

Source: Datastream as at 1 February 2017. Fed based on median Fed dots forecast.

FuturesStart 17

Fed Start 17

FedStart 16

FuturesStart 16

FedStart 16

FuturesStart 16

-30

-20

-10

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US Equities 10Yr UST IG Credit HY Credit US$

What happens when the Fed hikes rates? Historic performance – full rate hike cycle

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Source: Datastream as at 3 January 2017. Looks at 4 periods since 1986 with exception of HY credit, which looks at 3 periods from 1994. US Equities – US DS Market (1986 cycle) and S&P500 (remainder), IG – BofA ML US Corp. Mstr., HY – BofA ML US High Yield.

Asset Class – Total Returns (%)

Average Max/Min

Is the current monetary policy stance in the UK appropriate?

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Is the current monetary policy stance in the UK appropriate?

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0

10

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Jan 15 Mar 15 May 15 Jul 15 Sep 15 Nov 15 Jan 16 Mar 16 May 16 Jul 16 Sep 16 Nov 16 Jan 17

UK base rates No hike for a while?

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Morgan Stanley Months to First Rate Hike Index


2016 review


Macro economics

Financial markets

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Is the 30 years + bull market in bonds finally over?

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Paul ReadCo-Head of Fixed Interest

Is the 30 years + bull market in bonds finally over?

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Paul ReadCo-Head of Fixed Interest

0%

2%

4%

6%

8%

10%

12%

14%

16%

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14

TR

CA

GR

(%

)

YTM (%)

UK bond marketsLow returns likely

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BofA Merrill Lynch Gilt Index Yield to Maturity (YTM) and 10 Year total return CAGR (%) since 1985

Source: Datastream as at 1 February 2017. TR = Total Return. CAGR = Compound Annual Growth Rate.

Current 1.28%

R squared89%

Do you still prefer equities?

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Nick MustoeCIO and Fund Manager, Global Equities

Do you still prefer equities?

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1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Equities outperform when growth outlook improves

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OECD Composite Leading Indicator and equity relative to bond performance (yoy%)


Equity relative to bond performance (%)

OECD CLI (6m mav, RHS)

What are the main issues facing equities in 2017?

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What are the main issues facing equities in 2017?

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30

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70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16

Global equity market valuations above long-term average

MSCI World index Trailing PE (x)


Long-term average

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A 24% premium to long-term average

-0.4

-0.2

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06 07 08 09 10 11 12 13 14 15 16 17 18

Potential for a large rotation

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Cumulative fund flows (global) since 2006 (US$tn)

Source: BofA Merrill Lynch using EPFR data as at 22 December 2016.

1.5

0.0

Bond funds

Equity funds

£ has been weak post the referendum. How do you see the currency’s prospects now?

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Stuart EdwardsFund Manager, Fixed Interest

£ has been weak post the referendum. How do you see the currency’s prospects now?

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Stuart EdwardsFund Manager, Fixed Interest

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100

Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17

Sterling’s decline has been material

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Sterling Trade Weighted Index


-22%

2017 – A year of living dangerously?Key takeaways

A potential shift in economic momentum - Reflation not low growth, lowflation?

Political and geo-political risks remain material

Reflation better for real assets

Bond bull market over, but no bear market?

Better opportunities in equities than fixed income

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Learning objectives

Following this presentation, you will:

Understand what will influence the prospects for the global economy in 2017.

Outline the key fundamental drivers likely to drive asset class performance.

55

Logo demonstrates the quality of an event and that it meets CII member CPD scheme requirements. The Chartered Institute for Securities & Investment has a policy of formally recognising those organisations who meet the Chartered Institute for Securities & Investment’s stringent quality assurance requirements for the provision of CPD.

Important information


All information as at 1 February 2017 sourced from Invesco Perpetual unless otherwise stated.

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

Past performance is not a guide to future returns.

Where the fund managers and John Greenwood have expressed views and opinions, they are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco Perpetual/Invesco investment professionals.

Where Neal Bailey or Neil Dobson have expressed opinions, they are based on current market conditions and are subject to change without notice. These opinions may differ from those of Invesco Perpetual investment professionals.

Where securities are mentioned in this document they do not necessarily represent a specific portfolio holding and do not constitute a recommendation to purchase, hold or sell.

For the most up to date information on our funds, please refer to the relevant fund and share class-specific Key Investor Information Documents, the Supplementary Information Document, the Annual or Interim Short Reports and the Prospectus, which are available using the contact details shown.

Information on our products is available at www.invescoperpetual.co.uk.

Invesco Perpetual is a business name of Invesco Asset Management Limited, Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH, UK. Authorised and regulated by the Financial Conduct Authority.

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Personal Finance Society2017 – A year of living dangerously?

Market Insights Team
