where and how do we find growth in global...

Where and how do we find growth in global equities?

Andrea CicioneHead of Strategy

www.lombardstreetresearch.com

Where and how do we find growth?

In short, it’s tough

2

• The global cycle is maturing1

• Corporate earnings are falling2

• But alpha can still be captured3




3





A slowing global cycle

4

…explaining recent poor equity returns

Source: OECD, MSCI, LSRSource: OECD, LSR

Global growth below trend and slowing…

-6

-4

-2

0

2

4

6

97 98 99 100 101 102 103

LI > 100, y/y > 0

LI < 100, y/y < 0 LI > 100, y/y < 0

LI < 100, y/y > 0

OEC

D G

lob

al LI (%

y/y

)

OECD Global LI

Recovery Expansion

DownturnSlowdown

2008-09 Global

Financial Crisis

Mar-2006

2011-12

Euro crisisLatest

95

96

97

98

99

100

101

102

103

104

105

1971 1976 1981 1986 1991 1996 2001 2006 2011 2016

-80

-60

-40

-20

0

20

40

60

80

OECD Global LI MSCI World y/y (rhs)


Credit cycle maturing

5

…leading to credit market re-pricing

Source: Bloomberg, LSRSource: MSCI, Bloomberg, LSR

Leverage is increasing in the US…

0.8

1.3

1.8

2.3

2.8

3.3

3.8

2000 2002 2004 2006 2008 2010 2012 2014 2016

Ex-Financials, Tech Ex-Financials, Tech, Energy

Net debt-to-EBITDA

MSCI USA

25

50

75

100

125

150

175

200

225

250

400 800 1200 1600 2000 2400

Jan-09 to Mar-11 Oct-11 to Jun-15 Jul-15 to Jun-16 Latest

S&P

500

CDX NA

IG (bp)

Increasing

leverage




6





Corporate profits stagnating

7

…and things are worse elsewhere

Source: BloombergSource: BEA, Bloomberg

US profits stagnating despite low rates…

500

700

900

1100

1300

1500

1700

1900

2100

2300

2000 2002 2004 2006 2008 2010 2012 2014 2016

0

1

2

3

4

5

6

7

8

US corporate prof its (IVA, CCAdj) UST 2y yield (rhs)

%

-50%

-40%

-30%

-20%

-10%

0%

10%

US Euro area Japan UK

Surprise Change y/y

Q1 2016 Earnings


Not just a commodity story

8

…but weakness spreading to key sectors

Source: BloombergSource: MSCI, Bloomberg, LSR

Ex-Energy, ex-Materials EPS still ok…

0

5

10

15

20

25

30

2000 2002 2004 2006 2008 2010 2012 2014 2016

3

4

5

6

7

8

9

10

Energy+Materials Ex-Energy, Ex-Materials

EPS (12m t railing)

MSCI USA

-120%

-110%

-100%

-90%

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

S&

P 5

00

En

erg

y

Mate

rials

Ind

ust

rials

C.

Dis

cr.

C.

Sta

ple

s

Healt

hca

re

Fin

an

cials

Tech

Tele

com

Uti

liti

es

Sales Growth Earnings Growth

S&P 500 - Q1 2016 results - y/y changes


Poor productivity to squeeze margins

9

…but slowing productivity remains a drag

Source: BloombergSource: MSCI, Bloomberg, LSR

Margins are holding up for now…

-6

-4

-2

0

2

4

6

8

1990 1993 1996 1999 2002 2005 2008 2011 2014

7

8

9

10

11

12

13

14

15

Unit labour costs (y/y) Product ivity (y/y)

S&P 500 operat ing margins (rhs)

% %

-10

-5

0

5

10

15

20

25

Mkt FN MT IN EN CS HC TC UT CD IT

Q1 2015 Q1 2016

MSCI US operat ing margins%


Valuations expensive in DMs

10

EM price-to-earnings ratio vs cycle

Source: MSCI, Bloomberg, LSRSource: MSCI, Bloomberg, LSR

DM price-to-earnings ratio vs cycle

(0.4) 1.6 1.9 1.4 0.6 0.9 0.7 0.91.7 1.7

0

5

10

15

20

25

30

35

40

US CA JP AU GB CH DE FR IT ES

7.5-year z-score

Key Last

Avg

7.5y

range+/- 1

stdev

0.0 (0.5) 0.7 0.6 0.4 1.0 (1.1) 0.30.2 0.6

0

5

10

15

20

25

30

35

40

CN IN KR TW BR MX RU ZA TR EM

Key Last

Avg

7.5y

range+/- 1

stdev

7.5-year z-score




11





Quant strategies

12

US sector selection, market neutral

Source: MSCI, Bloomberg, LSRSource: MSCI, Bloomberg, LSR

European sector selection, market neutral

80

90

100

110

120

130

140

150

160

170

Jun-11 Jun-12 Jun-13 Jun-14 Jun-15

Strategy MSCI World HFRI Equity Market Neutral

70

90

110

130

150

170

190

Jun-11 Jun-12 Jun-13 Jun-14 Jun-15

Strategy MSCI World HFRI Equity Market Neutral


Quant strategies

13

US sector selection, market neutral

Source: LSRSource: LSR

European sector selection, market neutral

Strategy Mkt Neutral HFRI Quant

Out-of-sample Return 40.8% 13.1% 12.6%

Volat ility (annualized) 10.5% 2.6% 6.7%

Sharpe Ratio 0.60 0.64 0.24

Downside Dev (annualized) 5.4% 1.7% 7.5%

Sort ino Rat io 1.30 1.44 0.32

Beta (vs S&P500) -0.09 0.15 -0.20

Correlat ion (vs S&P500) -0.11 0.71 -0.13

Alpha (ann. Vs S&P500) 7.96% 0.53% 7.39%

% Posit ive months 60.7% 68.3% 56.7%

Maximum monthly loss -6.1% -2.8% -5.4%

Maximum Drawdown -11.6% -5.5% -12.1%

Strategy Mkt Neutral HFRI Quant

Out-of-sample Return 80.0% 13.1% 13.1%

YTD Ret 9.9% -0.4% 0.9%

Ann.Ret 12.66% 2.53% 2.52%

Volat ility (annualized) 10.6% 2.6% 6.5%

Sharpe Ratio 1.11 0.66 0.26

Downside Dev (annualized) 6.1% 1.7% 4.2%

Sort ino Rat io 2.07 1.46 0.61

Beta -0.15 0.14 0.39

Correlat ion -0.20 0.63 0.79

Alpha (annualized) 13.05% 1.26% 0.41%

% Posit ive weeks 59.6%

% Posit ive months 63.3% 69.5% 55.9%

Maximum weekly loss -6.4%

Maximum Drawdown -11.2% -5.5% -12.1%


Brexit opportunities

14

…but the Undecided seem to favour Remain

Source: BloombergSource: Bloomberg

Remain and Leave neck and neck in polls…

0

10

20

30

40

50

60

70

Sep-15 Nov-15 Jan-16 Mar-16 May-16

Leave Remain Undecided

30

35

40

45

50

55

60

Sep-15 Nov-15 Jan-16 Mar-16 May-16

0

5

10

15

20

25

30

35

Remain Undecided (rhs, inv)


Brexit opportunities

15

Virtually no Leave-Undecided relationship

Source: Bloomberg, LSRSource: Bloomberg, LSR

Strong Remain-Undecided correlation

y = -0.8x + 57.8

R2 = 0.7

30

35

40

45

50

55

60

0 5 10 15 20 25 30 35

Remain

Undecided

y = -0.2x + 42.1

R2 = 0.1

30

35

40

45

50

55

60

0 5 10 15 20 25 30 35

Leave

Undecided


Brexit strategy

16

Europe also dragged down by Brexit risk

Source: Bloomberg, LSRSource: Bloomberg

EU-exposed UK stocks to rally if ‘Bremain’

1.15

1.20

1.25

1.30

1.35

1.40

1.45

1.50

Jan-14 Jul-14 Jan-15 Jul-15 Jan-16

11000

12000

13000

14000

15000

16000

17000

GBP/EUR Bloomberg BREXIT Equity Index* (rhs)

(* ) RR/, BARC, BKG, NXT, TCG, VOD, STHR, KGF, SVT, RGU

72

76

80

84

88

92

96

100

104

Jun-15 Sep-15 Dec-15 Mar-16 Jun-16

1.20

1.25

1.30

1.35

1.40

1.45

S&P 500 Stoxx 600 Europe GBP/EUR (rhs)

where and how do we find growth in global...

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