Jun 29, 2016 - Beyond that, however, global price swings have remained reasonable, ... On the balancing side, the Europe
LGT Beacon Weekly Market Update 29 June 2016
Brexit-Vote: keep calm and reassess with reason Mikio Kumada, CIIA, LGT Capital Partners Last Thursday, the United Kingdom’s voted in favor of leaving the European Union. In doing so, they shook a key political arrangement of the Western world and upset markets. Their vote also led us to revise our view on the British pound. Beyond that, however, global price swings have remained reasonable, and do not warrant a revision of our broader global macro assessment.
The global response to the outcome of the UK referendum was negative: equities, industrial commodities and interest rates fell. Demand for safe haven assets, such as the Japanese yen, the US dollar, and gold, surged. The British pound was sold off hardest, driven in part by a – questionable, but for now reasonable – perception that the UK has not only prospectively cut itself off from its main source of capital and closest trade partners, but also initiated its own political disintegration (due to the possible secession of a evidently staunchly pro-EU Scotland and perhaps Northern Ireland). The potential historic consequences of this event naturally loom large in people’s minds, but the slump in the GBP also reflects more benign factors - namely the more predictable prospect for further monetary easing by the Bank of England, as part of the necessary countermeasures. Furthermore, the global price swings have generally remained within acceptable bounds, suggesting that there is no systemic crisis on the horizon (for examples, see page 2). The global outlook is also balanced by increased chances for further monetary easing in the rest of Europe and Japan, as well as a significant postponement of US monetary tightening plans. Naturally, the vote triggers uncertainty over the future of the UK. London now has to sort out the domestic political fallout, initiate EU exit procedures, and lengthy renegotiations on new trade agreements, as well as continued access to the EU market. Possible outcomes can only be highly speculative at this point, and include the possibility of new elections. The vote is also a blow to the idea of European integration and the euro, which will be questioned again and could renew pressures on the peripheral economies. On the balancing side, the European Central Bank is today more willing to boost money supply as needed, as are other major central banks around the world. Indeed, responses in the various credit markets, including the EU periphery, have been far more benign these days than during previous phases of turmoil. North America, Asia and the emerging markets, meanwhile, should be able to hold up quite well economically, although that too will largely depend on policy responses in the near future. Overall, despite the short-term turmoil, we believe our risk scenario of a fall-back into a deflationary global recession remains unlikely. Revised tactical assessment on currencies Thus, we have revised our view on the GBP, on which we were bullish based primarily on the attractive valuation and strong fundamentals. However, we decided not to actively reduce Sterling further, as we believe the already undervalued currency is currently overshooting on the downside, leaving room for a relief rally. We also moderated our bullish JPY view and used the post-referendum rally to halve our significant overweight and lock in hefty gains (which outweighed the losses from our GBP position). While the Bank of Japan is likely to ease in the near future, bouts of global risk aversion are likely to reoccur, which means the yen remains useful as a protective hedging element in our asset allocation. Beyond these changes, we decided to stay the course in terms of overall tactical positioning (for updated overview of our overall tactical allocation, see page 4). Our portfolios were positioned around neutral in terms of overall equity risk. Of course, within that risk-controlled framework, our in-house fund managers have and will continue to selectively rebalance positions in their respective areas, when and as they deem fit. For example, such short-term opportunities included purchases included UK real estate investments trusts. LGT Capital Partners AG, Schützenstrasse 6, CH-8808 Pfäffikon, Telefon +41 55 415 9211, Fax +41 55 415 9480,
[email protected], www.lgtcp.com
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Charts and background information: European equity volatility: no new high
UK equity volatility: marginal new high
40
35
35
30
30
25
25
20
20
15
15
10
10
2012
2013
2014
2015
2016
5
2017
2012
2013
€Stoxx50 volatility index
2014
2015
2016
2017
2016
2017
FTSE volatility index
US equity volatility: clearly no new high
Japan equity volatility: clearly no new high
30
50
28
45
26 40 24
35
22 20
30
18
25
16 20
14 15
12 10
2012
2013
2014
2015
2016
10
2017
2012
2013
S&P 500 volatility Index
2014
2015
Nikkei volatility index
In response to the referendum, the implied future stock market volatility index for the EuroStoxx 50 reversed just below its 52-week high, while its UK equivalent hit only a marginal new high. The volatility indices for the US and Japan reversed well below the levels last seen during the mostly China-related selloffs since last summer. Thus, the UK vote, while important for the GBP, ranks among the normal disruptions that we have been expecting to occasionally reoccur in the current global macro environment. Credit markets: much calmer than in January
1000
1000
900
Spread over US treasuries (basis points)
Two year spread vs German bund (basis points)
EU periphery bonds: modest upheaval
800 700 600 500 400 300 200
100 0 2012
2013 Spain
2014 Italy
2015 Portugal
2016 Ireland
2017
550
900
500
800
450
700 400
600 350 500 300
400
250
300 200 2012
2013 US HY
2014 2015 Euro HY Index (non USD)
200 2016 2017 EM debt (RHS)
The last two graphs show that the post-referendum rise in peripheral EU government bonds yields (relative to equivalent German bund yields) has also remained modest. The same is true with regard to the high yield credit and emerging market debt segment. LGT Beacon. Sources: Bloomberg, or as stated. See Disclaimer on last page. LGT Beacon. Sources: Bloomberg, or as stated. See Disclaimer on last page.
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Market Performance
Equities World
Global share
Mkt Cap. in $
Last price
5 days
1 month
3 months
6 months
1 year
Year to date
Trend
BBG World All Country
100%
61,108
181.6
-3.4%
-3.2%
-2.8%
-6.1%
-12.0%
-5.0%
Falling
S&P 500
37.2%
22,741
2,036.1
-2.5%
-3.0%
-0.9%
-2.0%
-1.0%
-0.4%
Falling
Nasdaq Composite *
12.1%
7,390
4,691.9
-3.1%
-4.9%
-3.2%
-8.1%
-5.4%
-6.3%
Falling
S&P 600 Small Cap *
1.1%
645
679.8
-4.0%
-3.3%
-0.7%
-1.1%
-5.2%
1.2%
Falling
TSX
3.0%
1,815
13,842.7
-1.2%
-1.9%
3.1%
4.5%
-4.5%
6.4%
Rising
Bovespa
1.0%
606
50,006.6
-1.6%
1.9%
-2.2%
14.6%
-5.7%
15.4%
Rising
Mexbol
0.6%
338
44,714.5
-2.2%
-3.1%
-2.6%
3.0%
0.0%
4.0%
Rising
Euro Stoxx *
7.7%
4,727
295.7
-6.8%
-9.9%
-7.8%
-15.3%
-17.7%
-14.3%
Falling
FTSE 100
4.9%
2,971
6,140.4
-1.4%
-2.1%
0.6%
-2.8%
-7.3%
-1.6%
Falling
DAX Price Ix
2.7%
1,653
4,600.5
-5.7%
-8.3%
-6.9%
-15.6%
-17.3%
-14.7%
Falling
Swiss Perf Extra Pr Ix
2.3%
1,425
214.7
-3.4%
-6.1%
-2.2%
-4.1%
4.9%
-3.9%
Falling
WSE
0.2%
129
1,751.8
-2.8%
-4.8%
-10.3%
-7.5%
-23.5%
-5.8%
Falling
Micex
0.8%
467
1,857.2
-2.1%
-3.6%
0.7%
5.3%
13.6%
5.4%
Rising
Nikkei 225
7.7%
4,730
15,566.8
-3.1%
-7.5%
-9.0%
-18.0%
-22.6%
-18.2%
Falling
Hang Seng Ix
6.0%
3,677
20,334.1
-2.2%
-1.2%
-0.2%
-7.6%
-21.7%
-7.2%
Falling
China Enterprises Ix
9.9%
6,030
8,513.6
-2.8%
-1.0%
-2.4%
-13.0%
-32.9%
-11.9%
Falling
CSI 300
5.4%
3,274
3,144.9
0.3%
2.7%
0.3%
-16.4%
-25.0%
-15.7%
Rising
ASX 200
1.7%
1,039
5,142.4
-2.4%
-4.9%
2.8%
-2.4%
-5.2%
-2.9%
Falling
Sensex
2.4%
1,485
26,630.1
-0.5%
-0.1%
6.9%
2.1%
-3.7%
2.0%
Rising
Kospi
2.0%
1,194
1,956.4
-1.8%
-0.7%
-1.9%
-0.5%
-5.1%
-0.3%
Falling
Taiex
1.5%
886
8,586.6
-1.5%
1.5%
-0.4%
3.5%
-7.0%
3.0%
Rising
Americas
USA
Canada Brazil Mexico Europe
Euroland UK Germany Switzerl. Poland Russia Asia
Japan Hong Kong China H China A Australia India Korea Taiwan
All indices: price indices (excl. dividends), in local currency. Market cap in billion USD at current exchange rates refers to country or index where marked with asterisk (*)
Bonds
US Dollar, correlation-weighted index US Treasuries ** EMU Bonds (Germany) ** UK Gilts ** EM Bonds USD *** EM Bonds Local *** Investment Grade USD + High Yield USD +
USD
118.3
2.7%
0.3%
1.2%
-1.4%
3.6%
-1.9%
Rising
USD
394.0
1.5%
2.6%
3.0%
5.6%
7.7%
5.8%
Rising
EUR
235.9
1.2%
1.8%
2.2%
4.9%
8.6%
5.2%
Rising
GBP
645.1
3.9%
5.2%
6.1%
10.8%
14.7%
11.1%
Rising
USD
771.6
0.7%
2.3%
4.6%
9.3%
8.5%
9.2%
Rising
USD
259.9
-0.1%
3.4%
3.2%
10.7%
-0.3%
11.6%
Rising
USD
145.8
1.2%
2.3%
4.1%
7.3%
8.2%
7.5%
Rising
USD
157.1
-1.2%
0.3%
5.0%
8.9%
1.0%
8.6%
Rising
**Total return, indices of bonds with maturities of more than 1 year ***JP Morgan Indices + Bloomberg Indices
Commodities
WTI Crude oil (generic future) Industrial Metals Index (S&P GSCI) Gold, spot price
USD
48.2
-1.8%
-2.2%
26.0%
27.4%
-17.3%
30.2%
Rising
USD
124.4
1.5%
4.4%
4.1%
6.6%
-10.9%
6.3%
Rising
USD
1,320.6
4.3%
9.6%
6.3%
23.5%
11.9%
24.5%
Source: Bloomberg. All data based on last traded price at cut off time (Hong Kong or Central European Time)
Rising 29 Jun 2016 16:10
Total Return of Stock Markets
200 190 180 170
Jan. 1, 2011 = 100
160 150 140 130 120
110 100 90 80 70 60 2011
2012 MSCI USA USD
MSCI Japan JPY
2013 MSCI Europe EUR
2014
2015
MSCI All Asia Pacific x Jpn USD
2016
2017
MSCI Emerging Markets USD
LGT Beacon. Sources: Bloomberg, or as stated. See Disclaimer on last page. LGT Beacon. Sources: Bloomberg, or as stated. See Disclaimer on last page.
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Economic and Corporate Snapshots
Macro fundamentals
USA
China
Eurozone
Japan
Germany
Britain
Brazil
Russia
GDP, nominal, 2016 ¹
bn USD
18,558
11,383
11,853
4,413
3,468
2,761
1,535
1,133
652
GDP per capita, 2016 ¹
USD, PPP
57,220
15,095
37,071
38,731
47,536
42,041
15,049
25,186
59,150
Real GDP growth, expected 2016
Consensus
1.90%
6.50%
1.60%
0.55%
1.65%
1.80%
-3.50%
-0.90%
1.20%
Real GDP growth, expected 2017
Consensus
2.30%
6.20%
1.60%
0.80%
1.60%
2.10%
0.85%
1.20%
1.60%
q/q annualized
1.1%
4.5%
2.4%
1.9%
2.8%
1.6%
-1.1%
-2.3%
0.4%
4.7%
4.0%
10.2%
3.2%
6.1%
5.0%
8.2%
5.6%
3.5%
Real GDP growth last quarter * Unemployment rate ²
Switzerl.
Inflation rate (CPI)
y/y
1.0%
2.0%
-0.1%
-0.3%
0.0%
0.3%
9.3%
7.3%
-0.4%
Industrial production
y/y
-1.4%
6.0%
2.0%
-3.3%
1.2%
0.8%
0.1%
0.7%
1.0%
Structural budget balance/GDP 2016
IMF
-3.4%
-2.9%
-1.1%
-4.5%
0.1%
-3.1%
-7.1%
-4.3%
0.0%
Gross government debt/GDP 2016
IMF
107%
47%
92%
249%
68%
89%
76%
18%
45%
Current account balance/GDP 2016
IMF
-2.9%
2.6%
3.5%
3.8%
8.4%
-4.3%
-2.0%
4.2%
9.3%
bn USD
42
3,192
253
1,194
38
109
185
330
661
International currency reserves
ESM/EFSF Govt bond yield 2yr **
p.a.
0.61%
2.49%
-0.46%
-0.30%
-0.66%
0.19%
12.42%
9.96%
-0.99%
Govt bond yield 10yr **
p.a.
1.46%
3.01%
0.19%
-0.23%
-0.12%
0.96%
6.94%
8.71%
-0.52%
Policy rate (or approximation)
p.a.
0.50%
4.35%
-0.40%
-0.06%
-0.40%
0.50%
14.25%
8.25%
-0.75%
¹IMF estimates. *annualized, most recent qtr. ²PRC ex. migrant workers. ** Currency swap rates for China & Brazil, closest ESM or EFSF bonds for Eurozone. ˚Max target rate for Fed, SNB
Corporate fundamentals Exchange capitalization*
USD
USA
China
Eurozone
Japan
Germany
Britain
Brazil
Russia
Switzerl.
22,741
9,707
5,735
4,730
1,653
2,971
606
467
1,425
Growth in earnings per share, estimated (MSCI) Next fiscal year / current fiscal year
Consensus
13.7%
14.7%
13.7%
9.1%
10.5%
16.9%
23.1%
13.9%
10.9%
FY year after next / next FY
Consensus
12.2%
12.9%
10.5%
7.7%
8.5%
14.1%
16.0%
18.9%
10.5%
Growth in revenue per share, estimated (MSCI) Next fiscal year / current fiscal year
Consensus
6.3%
11.6%
3.9%
2.7%
3.0%
5.5%
9.3%
13.4%
2.1%
FY year after next / next FY
Consensus
5.9%
10.6%
2.0%
2.1%
2.9%
2.6%
6.7%
11.2%
2.2%
Price-Earnings Ratio (est forward 12m)
Consensus
17.67
11.13
13.51
12.33
12.29
16.32
13.35
6.84
16.87
Price-Sales Ratio (est forward 12m)
Consensus
1.77
1.19
0.84
0.66
0.72
1.17
1.10
0.83
1.86
Dividend yield
Consensus
2.2%
2.6%
3.9%
2.6%
3.4%
4.4%
3.4%
4.8%
3.6%
Valuation metrics (MSCI)
* China includes Hong Kong. Notes: Corporate fundamentals are based on consensus estimates ."Reversal +" denotes a return to profits, "Reversal -" an expected loss next year. Source: Bloomberg. 6/29/2016
LGT Asset Allocation Strategy¹ Overweight in traditional public equities, but with a broadly neutral equity risk ("beta"). High cash position, modestly favoring USD, JPY and GBP
Alternatives
Real
Equities
Fixed income
Asset class Short-term investments Global sovereign bonds Inflation linked bonds Investment grade corporates High yield bonds Emerging markets bonds Equities global Equities North America Equities Europe Equities Japan Equities Asia/Pacific ex Japan Equities Emerging markets Commodities Real estate (REITs) Infrastructure Insurance linked strategies HF CTA HF Global macro HF Equity long/short HF Event driven HF Relative value Listed private equity
Currencies
2
Currency2 USD EUR CHF GBP JPY AUD Others (TAA vs. base currency)
Base currency
SAA
Tactical allocation versus SAA
underweight
overweight
-8%
-6%
-4%
-2%
+2%
+4%
+6%
+8%
-8%
-6%
-4%
-2%
+2%
+4%
+6%
+8%
0.0% 3.5% 3.0% 3.0% 9.0% 9.0% 11.4% 4.7% 4.7% 2.0% 2.0% 12.5% 3.6% 5.0% 1.5% 5.0% 5.4% 3.6% 3.0% 1.5% 1.5% 5.0% SAA 76.0% 0.0% 0.0% 0.0% 2.0% 1.1% 20.9%
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
1 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0
Source: LGT Capital Partners. 1 Based on LGT GIM Growth (USD). Tactical positions (TAA), i.e. the position versus the stratetic allocation (SAA), can be transferred to similar portfolios as a general rule, but investment restrictions or liquidity considerations may lead to deviations in implementation. 2 Position in other currencies (Others) is against base currency – in this case USD.
Disclaimer: This document is intended solely for the recipient and may not be duplicated, distributed or published in either electronic or any other form without the prior written consent of LGT Group Foundation. This publication is for your information only and is not intended as an offer, solicitation of an offer, public advertisement or recommendation to buy or sell any investment or other specific product. Its content has been prepared by our staff and is based on sources of information we consider reliable. However, we cannot provide any undertaking or guarantee as to it being correct, complete and up to date. The circumstances and principles to which the information contained in this publication relates may change at any time. Once published, therefore, information shall not be understood as implying that no change has taken place since its publication or that it is still up to date. The information in this publication does not constitute an aid for decision-making in relation to financial, legal, tax or other consulting matters, nor should any investment or other decisions be made on the basis of this information alone. It is recommended that advice be obtained from a qualified expert. Investors should be aware that the value of investments can fall as well as rise. Positive performance in the past is therefore no guarantee of positive performance in the future. Forecasts are not a reliable indicator of future value developments. The risk of price and foreign currency losses and of fluctuations in return as a result of unfavorable exchange rate movements can-not be ruled out. There is a possibility that investors will not recover the full amount they initially invested. We disclaim without qualification all liability for any loss or damage of any kind, whether direct, indirect or consequential, which may be incurred through the use of this publication. This publication is not intended for persons subject to legislation that prohibits its distribution or makes its distribution contingent upon an approval. Any person coming into possession of this publication shall therefore be obliged to find out about any restrictions that may apply and to comply with them. It is up to potential investors to obtain comprehensive information and appropriate advice in their home country, country of residence or country of domicile about the applicable legal requirements and any tax consequences, foreign currency restrictions or foreign exchange controls and any other aspects that are of relevance prior to any decision to subscribe to, purchase, own, exchange or redeem such investments, or enter into any other transaction in relation to same. The securities and rights mentioned in this document may not be purchased or held by investors or for investors domiciled in the USA and/or with US citizenship, nor may such securities and rights be transferred to them. LGT Beacon. Sources: Bloomberg, or as stated. See Disclaimer on last page. LGT Beacon. Sources: Bloomberg, or as stated. See Disclaimer on last page.
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