PAM Secular Outlook 2020 - LUCA PAOLINI, CHIEF STRATEGIST September 2020 London/Geneva - fundresearch.de
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PAM Secular Outlook 2020
LUCA PAOLINI, CHIEF STRATEGIST
September 2020
London/Geneva
For professional investors onlyTHE LAST 5 YEARS: OUTPERFORMANCE OF US ASSETS
Selected asset classes: total return p.a. over the past 5 years (in USD and local currency)
15%
10.8% 10.7%
10% 8.8%
7.5%7.0%
6.5% 6.8%
5.7%5.6%5.5%5.3%5.2% 3.2% 0.7% 5.0% 0.2%
4.8%4.6% 1.9%
5% 3.9%3.8%3.8%3.7%3.5%3.4%
3.0%2.8%2.5%
2.3% 0.2% 2.3%
0.7% 0.7%
0%
-5%
-2.1% -2.4%
-10%
-2.9%
-12.5%
-15%
5Y TOTAL RETURNS IN LOCAL CURRENCY P.A. CURRENCY IMPACT
Source: Refinitiv Datastream, Pictet Asset Management. As at 30th June 2020. Benchmarks: MSCI indices for equities, Bofa indices for DM corporate bonds, JP Morgan indices for EM bonds and Euro-zone govt bonds, SBI for
Swiss bonds, Bloomberg indices for commodities, Burgiss index for private equity, HFRI for hedge funds, NCREIF/IPD/SXI for US, UK, Swiss & Europe closed ended funds for real estate markets, ICE Bullion for gold.
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Pictet Asset Management
For professional investors onlyT H E P O S T- C O V I D W O R L D ? M O R E D E B T, M O R E G O V E R N M E N T, M O R E A S I A
PRE-COVID POST-COVID
Economy Low growth, low inflation Low growth, low but rising inflation
Savings ratios In line with fundamentals High precautionary savings
Labour Under-paid, low security, daily commute Minimum wage, working from home, automation
Welfare state Means-tested, less generous, reduced scope Extensive income support, UBI, universal healthcare
Business Low-tax, winner takes all Zombification, National Champions, government backstop
Inventory management "Just in time" "Just in case"
Government Regulation, privacy, private interest Dirigistic, priority of public interest
Politics Populism, polarization "smart" populism (technocratic)
Economic system Shareholder capitalism Stakeholder capitalism
Industrial policy Government support/stakes in few strategic industries Nationalizations, all major industries deemed "strategic"
Fiscal Policy Fiscal responsibility, budget rules MMT, deficit spending; “print and spend”
Taxes On income, focussed on households Focus on wealth/capital
Monetary Policy "Lower for longer", "data dependent“ "Lower forever"; "opportunistic reflation"
Economic power US global leadership Regional blocks, power shifts to the East
Trade "Slowbalization" De-globalization, duplication of supply chains
International relations Fading cooperation Confrontational, focus on national autonomy/interest
Tech Global tech titans, linear tech adoption China-US decoupling, exponential tech adoption
Finance Short-term, passive, financial engineering ESG, sustainable investments, active investing
Civic liberties Extensive, protection of privacy Restricted in case of emergency
Europe Fragmentation and reform fatigue Fiscal integration, Risk mutualisation
3 / 13 PAM Secular Outlook 2020
Pictet Asset Management
For professional investors onlyT H E L E G A C Y O F C O V I D - 1 9 : S U R G I N G P U B L I C D E B T … C A N W E PAY I T B A C K ?
Public debt as % of GDP, advanced economies*
180
160
ADVANCED ECONOMIES, SIMPLE AVERAGE
WEIGHTED AVERAGE, IMF FISCAL MONITOR
140
120
Goverrnment Debt % GDP
100
80
60
40
20
0
1800 1810 1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020
Source: Refinitiv Datastream, IMF Historical Public Debt Database, IMF Fiscal Monitor April 2020, Pictet Asset Management . Simple average, weighted average after 2000. As of April 2020 (IMF forecasts for 2020-21)
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PAM Secular Outlook 2020
Pictet Asset Management
For professional investors onlyW H E R E N E X T F O R C E N T R A L B A N K S ? N O F R E E L U N C H - U N C O M F O RTA B L E O P T I O N S
Policy actions/strategies FED ECB BOE SNB BOJ PBoC Constraints
Forward Guidance √ √ √ √ √ √ Communication mishaps/credibiity. Reduced flexibility.
Co-ordinated swap lines for USD liquidity √ √ √ √ √ X Fed's capital losses
Macro-prudential measures X X √ √ √ √ Operative complexity, shadow markets
QE - government bonds √ √ √ √ √ X Misallocation capital /distorted market signals
QE – corporate debt/ ETFs √ √ √ √ √ X Asset bubbles and moral hazard; political backlash (PE bailout)
QE- equities/ETFs X X X X √ X Legal constraints, asset bubble, poltical backlash
Negative interest rates X √ X √ √ X Commercial banks' profitability, more savings
Subsidized lending to banks √ √ √ √ √ √ Central bank's capital losses
Repo market backstop √ X √ √ X X Weaker market signals
Regulatory forbearance √ √ √ √ √ √ Moral hazard, excessive risk taking
FX targeting / QE foreign securities X X X √ √ √ Central bank's capital losses, loss of policy independence, currency wars
Overhaul Inflation targeting √ 0 X X X X Un-anchoring of Inflation expectations
Yield curve control (bond yield cap) X X X X √ X Size of central bank's balance sheet, functionality of markets, moral hazard
Monetary financing of government 0 X √ X 0 X Central bank's independence, inflation, currency depreciation, digital currencies
Monetization of debt X X X X X X Central bank's independence, inflation, currency depreciation, digital currencies
√ : announced/implemented; 0 : under review/indirect implementation; X: not yet operational
Source: Pictet Asset Management. September 2020.
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PAM Secular Outlook 2020
Pictet Asset Management
For professional investors onlyE Q U I T I E S S T I L L M O R E AT T R A C T I V E T H A N G O V E R N M E N T B O N D S
Global earnings vs Global bond yield – spread and ratio* (US before 1987)
10 12
8
10
6
8
4
2 6
0
4
-2
2
-4
Last data point 14/08/2020
-6 0
1960 1970 1980 1990 2000 2010 2020
Global Earnings minus Government Bond yield (US before 1987), in % - latest: 3.7
Global Earnings/Government Bond yield ratio (US before 1987, rhs) - latest 7.3X
Source: Refinitiv Datastream
Source: Refinitiv Datastream, BofA, Pictet Asset Management.
*trailing 12m earning yield for DJ Index until 1987, DS World index thereafter. For bonds: US 10Y before 1987, ICE BofA Global government index thereafter.
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PAM Secular Outlook 2020
Pictet Asset Management
For professional investors onlyFINANCIAL REPRESSION (1): BOND YIELD < TREND GDP GROWTH
Ratio of US 10Y bond yields to US nominal GDP growth, by decade*
2.0
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
1880-90 1890-00 1900-10 1910-20 1920-30 1930-40 1940-50 1950-60 1960-70 1970-80 1980-90 1990-00 2000-10 2010-20 JUN-20 2020-2025
(F'CAST)
Source: Refinitiv Datastream, BEA, Federal Reserve. 1881-1930 :IMF. Pictet Asset Management. *median value by decade of nominal bond yield/nominal GDP, **for Jun-20, bond yield at 30th June / median nominal GDP of 2010-2020
PAM Secular Outlook 2020
Pictet Asset Management
For professional investors onlyL E A D E R S H I P R O TAT E S I N T H E N E X T C Y C L E – U S E Q U I T I E S T O U N D E R P E R F O R M
Regional leaders in bull markets (annualised relative US$ Sector leaders in bull markets (annualised relative US$ performance
performance versus performance in the following bull market*) versus performance in the following bull market*)
30% 40%
LATAM
25%
35% *
30%
20%
25%
G E R M AN Y
15%
JAPAN 20%
PACIFIC EX-JP
US IT
10% 15%
ENERGY M A T E R IA LS
5%
US
* 10% F I N A N C IA LS
I N D U S TR IA LS
IT
5%
0%
0%
-5%
-5%
-10% -10%
INFLATION REAGANOMICS BLACK MONDAY 90S BOOM (OCT COMMODITY QE REFLATION INFLATION REAGANOMICS BLACK MONDAY 90S BOOM (OCT COMMODITY QE REFLATION
BOOM (OCT 74 - (AUG 82 - AUG RECOVERY (DEC 90 - SEP 00) SUPERCYCLE (MAR 09 - FEB BOOM (OCT 74 - (AUG 82 - AUG RECOVERY (DEC 90 - SEP 00) SUPERCYCLE (MAR 09 - FEB
NOV 80) 87) 87 - JUL90) (OCT 02 - OCT 20) NOV 80) 87) 87 - JUL90) (OCT 02 - OCT 20)
07) 07)
ANNUALISED RELATIVE US$ RETURNS THROUGH BULL MARKET NEXT BULL MARKET ANNUALISED RELATIVE US$ RETURNS THROUGH BULL MARKET NEXT BULL MARKET
Source: Refinitiv Datastream, MSCI. Pictet Asset Management. *Current bull market (23rd March to 31st August) Source: Refinitiv Datastream, MSCI, Pictet Asset Management. *Current bull market (23rd March to 31st August)
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PAM Secular Outlook 2020
Pictet Asset Management
For professional investors only… P O S I T I V E R E A L R E T U R N S I N M O S T D M B O N D S V E RY U N L I K E LY G O I N G F O RWA R D
Level of bond yields in 5 years’ time required to generate a positive after-inflation return*
1.0
0.7
0.5
0.5 0.4
0.3
0.1
0.0
-0.3
-0.5
-0.7
-0.8
-0.8
-1.0 -1.0
-1.5 -1.5
-1.6
AUS US JP Swiss Germany UK
if future inflation = CPI Swap if future inflation = PAM Forecast
Current yield
Source: Refinitiv Datastream
Last Date: 18/08/20
Source: Refinitiv Datastream, Pictet Asset Management.
* Total return adjusts for current roll yield. We use the 5Y inflation swap rate as an estimate market expectation of future inflation (0.5% inflation assumed for Switzerland). PAM 5Y average inflation forecast: 1.7% for
US, Germany, and UK, 0.1% for Japan, 0.4% for Switzerland and 1.9% for Australia
9 / 13 PAM Secular Outlook 2020
Pictet Asset Management
For professional investors onlyC H I N A’ S G O V E R N M E N T B O N D S : S U P E R I O R I N C O M E A N D D I V E R S I F I C AT I O N
China’s 10Y bond spread vs US Treasuries and inflation differential
4 4
3 3
2 2
1 1
0 0
-1 -1
-2 -2
2010 2012 2014 2016 2018 2020
China 10Y government bond yield - US 10Y (2.3)
China CPI YoY% - US CPI YoY% (1.7) Last Date: 19/08/20
Source: Refinitiv Datastream
Source: Refinitiv Datastream, Pictet Asset Management.
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PAM Secular Outlook 2020
Pictet Asset Management
For professional investors onlyUS DOLLAR SECULAR DOWNTREND TO RESUME
USD trade-weighted deviation from trend and future performance US dollar performance and US twin deficit, actual and projected*
40 -10 8
10
30 6
5
20 -5 4
10 2
0
0 0 0
-10 -5 -2
-20 5 -4
-10
-30 -6
-40 10 -15 -8
1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
US Trade-weighted Dollar; Deviation from Trend (14.3%) US twin balance % GDP, 5Y change, 2-yr lead (incl. IMF forecast)
Forecast Appreciation; Next 5yr p.a. (Inverted, rhs) US trade-weighted dollar, % appreciation p.a. over 5 years (rhs)
Source: Refinitiv Datastream
Source: Refinitiv Datastream
Source: Refinitiv Datastream, Pictet Asset Management, As of August 2020. Source: Refinitiv Datastream, Pictet Asset Management. As of August 2020.
* sum of current account and government balance as % of GDP.
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PAM Secular Outlook 2020
Pictet Asset Management
For professional investors onlyLONG-TERM ASSET CLASSES RETURN FORECASTS – JUNE 2020
Asset classes 5Y return forecasts in USD, p.a.
14.0%
12.6%
12…
12.0%11.9%11.9% ----------Alternatives--------
12.0% 11.5%
10.3%
10.0% 9.7%9.7%
9.4%
8.7% 8.6%
8.0% 7.5% 7.5%
7.2%6.8% 7.0%
6.7%
5.9% 5.7%
6.0% 5.2%
4.6%4.5%
4.3%4.3%
3.7%
4.0% 3.0% 3.1%
2.5%2.5%2.2% 2.0%
2.2% 1.9%1.2% 0.4%
2.0%
0.7%
0.0%
-2.0%
EURO ZONE GVT. BONDS
JAPAN 10Y GVT.BONDS
US 10Y TREASURIES
COMMODITIES
SWISS BONDS
GLOBAL BONDS
GLOBAL EQUITIES
EM EQUITIES
EM ASIA
EURO ZONE EQUITIES
CHINA 10Y GVT. BONDS
UK 10Y GVT. BOND
GOLD
FRONTIER MARKETS EQUITIES
UK EQUITIES
EM DEBT USD
EM CORP BONDS
GERMAN 10Y BUNDS
US EQUITIES
UK REAL ESTATE
SWI REAL ESTATE
EURO ZONE HY
LATAM EQUITIES
US HY
US REAL ESTATE
HEDGE FUNDS
EM DEBT LOCAL CCY.
US INFLATION-LINKED
EMEA EQUITIES
EURO ZONE CORP IG
CHINA EQUITIES
SWISS EQUITIES
JAPAN EQUITIES
PRIVATE EQUITY
DM EQUITIES
EURO REAL ESTATE
US CORP IG
5Y TOTAL RETURNS IN LOCAL CURRENCY, P.A. CURRENCY IMPACT
Source: Refinitiv Datastream, Bloomberg, Pictet Asset Management. As of 30th June 2020. Benchmarks: MSCI indices for equities, Bofa indices for DM corporate bonds, JP Morgan indices for EM bonds and Euro-zone govt bonds, SBI for Swiss bonds, Bloomberg indices for
commodities, Burgiss index for private equity, HFRI for hedge funds, NCREIF/SXI/Europe & UK closed ended funds for real estate markets, ICE Bullion for gold. MSCI Frontier markets include Kuwait, Vietnam, Morocco, Nigeria, Kenya, Sri Lanka and others.
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PAM Secular Outlook 2020
Pictet Asset Management
For professional investors onlyFor more information
Pictet Asset Management should read the prospectus or
PICTET ASSET MANAGEMENT SA (“PAM”) definition: In this offering memorandum before
document, Pictet Asset investing in any Pictet
Route des Acacias 60, 1211 Geneva Management includes all the managed funds. This document
operating subsidiaries and has been issued in Switzerland
divisions of the Pictet group by Pictet Asset Management
that carry out institutional SA and/or Pictet & Cie and in
PICTET ASSET MANAGEMENT LIMITED asset management: Pictet the rest of the world by Pictet
Authorised and regulated by the Financial Asset Management SA, a Swiss Asset Management Limited and
corporation registered with the may not be reproduced or
Services Authority Swiss Financial Market distributed, either in part or in
Moor House, Level 11, 120 London Wall, Supervisory Authority FINMA, full, without their prior
Pictet Asset Management authorisation.
London EC2Y 5ET Limited, a UK company
www.pictet.com authorised and regulated by
the Financial Services
Authority, and Pictet Asset
Management (Japan) Limited,
a Japanese company regulated
by the Financial Services
Agency of Japan.
This document is for
distribution to professional
investors only. However it is
not intended for distribution to
any person or entity who is a
citizen or resident of any
locality, state, country or other
jurisdiction where such
distribution, publication, or
use would be contrary to law or
regulation. Information used in
the preparation of this
document is based upon
sources believed to be reliable,
but no representation or
warranty is given as to the
accuracy or completeness of
those sources. Any opinion,
estimate or forecast may be
changed at any time without
prior warning. Investors
13 / 13 PAM Secular Outlook 2020
Pictet Asset Management
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