March 2015
Guy Monson
Thinking tactically:
Source: Macrobond
0
100
200
300
400
500
600
Jan-08
Jan-10
Jan-12
Jan-14
Jan-16
US
Japan
Euro
UK
Central bank assets as share of GDP, Jan 2008 = 100
A SHARP INCREASE IN CENTRAL BANK BALANCE SHEETS
Since 2008, Central bank asset purchases have successfully
protected markets from an array of global risks...
Since 2009, Central
banks have
purchased $10.7
trillion of financial
assets. Currently:
ECB monthly purchase = 60bn BOJ monthly purchases = 6.6trillion yen ($58bn)Source: Sarasin & Partners/MacroBond 26.02.2015 GLOBAL EQUITY AND BOND MARKETS
Source: Sarasin & Partners/MacroBond 26.02.2015 GLOBAL 10 YEAR BOND YIELDS
The winners have been bond and equity investors in a
global ‘Hunt for Yield’….
Economy Negative 2 Year Bond Yields
Switzerland -1.13%
Germany -0.24%
Sweden -0.23%
Source Bank of England Stability Report Nov 2014 CYBER AND GEOPOLITICAL RISKS
Source: Macrobond
EQUITY AND OIL VOLATILITY
Equity volatility has fallen despite rising geopolitical and
cyber risks and sharp increases in oil volatility, …
US NOMINAL GDP, BOND YIELDS AND FED FUNDS RATE
But can the gap between bond yields, interest rates and
nominal growth remain this wide for much longer?
Source Bank of England/Economist Feb 2015/Elections etc, Trinity College Oxford. Returns 20 02/3 source Bloomberg UK GROWTH PROSPECTS AND ELECTORAL OUTLOOK
In the UK the economy continues to improve despite the
election, although UK assets have underperformed…
1 year Equity Returns: Nikkei + 27%, Euro Stox + 14%,
Source: Macrobond
EUROPEAN INFLATION TO BE NEGATIVE FOR THE FORESEEABLE FUTURE
1.The European Crisis is starting to abate:
The ECB has crossed the Rubicon with QE…
Falling energy prices pull inflation into negative territoryOn 22 January 2015 the
President of the
European Central Bank,
announced an
'expanded asset
purchase programme':
where €60 billion per
month of euro-area
bonds bought. The
stimulus was planned to
last until September
2016 at the earliest with
a total QE of at least
€1.1 trillion.
Source: EU Commission, EuroStat
GREEK DEBT COMPARED TO EUROZONE AVERAGE GREECE’S DEBT BREAKDOWN
Greece: Private sector debt is now so limited that contagion
risk from a ‘managed’ default would be limited…
The average maturity of Europe's loans to Greece is 32 years (the last payment due in 2053). Greece pays about 1.5 percent on those loans - by comparison the UK Government’s average debt duration is 10.9 Years &
Source: Macrobond
European sentiment, led by Germany, is starting to climb –
Could this be like the UK in 2013 & animal sprits return?
• The German government closed
fiscal year 2014 without posting
any net borrowing for the first
time since 1969 (ie with a
balanced budget).
• The 2014 pay round brought
employees an average
year-on-year rise of 3.0%in their
negotiated rates of pay
…. the
highest for almost 20 years.
• It is remarkable how quickly and,
in particular, how strongly
economic growth in Germany
picked up towards the end of last
year…
Bundesbank Monthly Report
February 2015/Bloomberg
Source: Macrobond
US DOLLAR VS KEY CURRENCIES
2. The ‘strong’ economies of the US & China have
Source: Macrobond
LOWER PUMP PRICES BOOST CONSUMPTION
Source: Macrobond
WEAKER OIL AND METAL PRICES IMPROVE MARGINS…
3.The world has received a huge boost from lower oil
prices and commodity prices…
Roughly $1.5 trillion p.a.
transfer from oil producers
to consumers
Source: HIS Energy
BREAK EVEN FOR US SHALE PROJECT
Source: Macrobond
ASIAN AND EM OIL IMPORT BILL
In Asia, the $220bn oil import bill will drop sharply, even as
US shale oil/gas keeps flowing (even at these prices)…
1.
While most Governments are still facing debt & deflation risks improving economic momentum means
interest rate risk is re-emerging
2.
Bond yields will trend higher as they start to price in a oil led simultaneous global recovery in world
growth mid-year & rising European momentum…
3.
Lower oil prices are capping global inflation but the impact appears to be temporary. Political risk in
Libya, Nigeria, Iraq and potentially Russia could limit further downside.
4.
Equities still remain our asset of choice. Valuations risks appearing in the US - Global Equity income
attractive.
5.
Sterling risks are rising as BREXIT/Policy risks climbs in run up to UK election (07.05.2015).
INVESTMENT BACKDROP
Source IMF, New York Fed Survey (% chance you attach to the timing of the first increase in Fed Funds) PRIMARY DEALERS SURVEY ON US RATES
Preparing for when Federal reserve starts raising interest
rates…
“
If economic conditions continue to
improve…the committee will at some
point begin considering an increase
in the target range for the federal
funds rate on a meeting-by-meeting
basis. Before then, the committee
will change its forward guidance.”
Janet Yellen Senate Bank Committee
Feb 2015
Source: Macrobond
US & GERMAN 2 YEAR BOND YIELDS
And investors are gradually tuning in to a slow cycle of
rising rates…
Source IMF Direct Jan 2015
5 EPISODES WHEN 10 YEAR US TREASURY RATES ROSE RAPIDLY
The problem is that once policies tighten in the US, history
tells us that there is usually a global response…
Source Haver Analytics Index: 100 =2000
DEBT BY SECTOR IN ADVANCED ECONOMIES (% OF GDP)
Source Haver Analytics
$ trillion, constant 2013 exchange rates
GLOBAL STOCK OF DEBT OUTSTANDING BY TYPE
And this holds risks for a world economy that still bears the
debt scars of the Credit Crisis…
Source: Macrobond
CREDIT – STERLING CREDIT SPREADS 2013-14
Source: Bank of England
CUMULATIVE FLOWS INTO HIGH YIELD BOND FUNDS
1. Watch for risks in ‘High Yield Bonds’
0 50 100 150 200 250 300 350 BBB A AA AAA
AA and A have widened 14bp from low
BBB widened 18bp
Source: Bank of England/Federal Reserve Bank of New York./Dealer inventories represent US primary net dealer positions in US corporate bonds. US PRIMARY DEALERS’ CORPORATE BOND INVENTORIES
The appetite to ‘warehouse’ corporate bonds in the event of
a crisis is very modest globally…
UK - NEW INSTRUCTIONS TO SELL AND BUYER ENQUIRIES(A)
THE PROPORTION OF UK POSTCODES WITH POSITIVE HOUSE PRICE INFLATION(A)
2. Caution in the global rush to buy what is now low yielding
– London residential property…
(a) Rising and falling inflation are determined by comparing current monthly inflation to the average rate of inflation in each postcode district during the past twelve months.
(a) Data are for England and Wales, and show the percentage balance reporting an increase in new instructions to sell/new buyer enquiries over the past month less the percentage reporting reduced
instructions/enquiries.
Source: The Property Archive and Bank calculations
The proportion of commercial real estate transactions in London with yields below 5% (a) YIELDS ON UK COMMERCIAL REAL ESTATE
How attractive is UK commercial real estate today…if
yields rise?
Source: Macrobond
DOES CHINA OFFER A VALUE ALTERNATIVE?
Source: Macrobond
US VALUATION RISKS ARE RISING
3.
US equity valuations rising & when to buy China
Source: Organisation for Economic Corporation and Development EXTRAORDINARY VARIATIONS IN TAX RATES
Source: US Federal Bank of St Louis
RECORD LEVELS OF PROFITABILITY
4. The global corporate tax - a ‘fair’ tax rate will need to be
assessed in company earnings…
AND DIVIDEND GROWTH COULD BE IMPRESSIVE BANKS HAVE BECOME MUCH HEALTHIER
And for the long term investor, could bank dividends be a
safe haven from higher rates….
26
Bonds Underweight: S
horter
duration in UK and US, and caution global high yield
Equities Overweight: Global equity earnings yields compelling vs other asset classes, but US valuations
high if bonds yields rise. Don’t chase US benchmark and consider portfolio insurance.
EM Equity Oil consumers & Reformers attractive (China, India and Indonesia)
Look for beneficiaries of slowly rising rates including Bank Equity, Insurance.
Alternatives: Infrastructure & Global Property
Risks:
High yield credit
London Real Estate
US Valuations
Global corporate tax agenda & earnings
PORTFOLIO POLICY
Important information
This information has been issued by Sarasin & Partners LLP, a limited liability partnership registered in England and Wales with registered number OC329859, which is authorised and regulated by the UK Financial Conduct Authority and passported under MiFID to provide investment services in the Republic of Ireland. It has been prepared solely for information purposes and is not a solicitation, or an offer to buy or sell any security. The information on which the document is based has been
obtained from sources that we believe to be reliable, and in good faith, but we have not independently verified such information and no representation or warranty, express or implied, is made as to their accuracy. All expressions of opinion are subject to change without notice.
Please note that the prices of shares and the income from them can fall as well as rise and you may not get back the amount originally invested. This can be as a result of market movements and also of variations in the exchange rates
between currencies. Past performance is not a guide to future returns and may not be repeated.
Neither Sarasin & Partners LLP nor any other member of Bank J. Safra Sarasin Ltd. accepts liability or responsibility
whatsoever for any consequential loss of any kind arising out of the use of this document or any part of its contents. The use of this document should not be regarded as a substitute for the exercise by the recipient of his or her own judgment. Sarasin & Partners LLP and/or any person connected with it may act upon or make use of the material referred to herein and/or any of the information upon which it is based, prior to publication of this document. If you are a private investor you should not rely on this document but should contact your professional adviser.
© 2015 Sarasin & Partners LLP – all rights reserved. This document can only be distributed or reproduced with permission from Sarasin & Partners LLP. Please contact [email protected].
Sarasin & Partners LLP Juxon House
100 St. Paul’s Churchyard London EC4M 8BU
T: +44 (0)20 7038 7000 F: +44 (0)20 7038 6850 E: [email protected] www.sarasinandpartners.com
