scott haslem chief investment officer crestone wealth … · global growth outlook –covid-19 hits...

2020 outlook – cautious optimism meets coronavirus

Scott HaslemChief Investment OfficerCrestone Wealth [email protected]

March 2020

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Tactical asset allocation - neutral, & leaning in

We entered 2020 with a neutral position, leaning into risk as our optimism rose that geo-politics would evolve positively

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Tactical asset allocation - neutral, & leaning in

(1) Inflation resurgence…key in 2018, less likely 2020• Growth re-accelerates and inflation resumes its climb, central banks tighten• Curves ‘bear’ steepen, valuations compress, risk-off rises• Negative for almost all asset classes, favours alternatives and cash

(2) Trade war & other geopolitical risks…key in 2019, calmed for 2020 so far• US starts trade disputes on various fronts, Brexit, Iran, Taiwan?• Global growth slows more sharply, earnings growth approaches zero• Negative for equities, favours defensive bonds, alternatives and cash

(3) Earnings continue to slow, don’t stabilise or recover…key risk in 2020 • Despite stabilising growth, earnings don’t recover, high valuations unsustainable• Negative for equities, favours defensive bonds, alternatives and cash

Risks facing markets fall broadly into three buckets:

4

Global growth outlook

Sources: Markit, Factset, RBA, UBS

After soft H1 2020, growth to pick-up…leaders lift

Global growth slowed sharply in H2 2019…forecasts still firm?

Global unemployment 40yr low

47

48

49

50

51

52

53

54

55

56

-2

-1

0

1

2

3

4

5

6

7

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020World GDP, UBSe JP Morgan Global PMI, advanced 6mths

World GDP growth (% year-on-year)

2% growth is typically where the world enters recession

5

Global growth outlook – Covid-19 hits Q1 growth

Coronavirus more contagious, less deadly

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Copper price points to a sub-50 China PMI

Sources: Credit Suisse

Australia has a high exposure to China growth shock

Global growth outlook – Covid-19 hits Q1 growth

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Rebounds around ‘shutdowns’ and ‘supply chain’ issues are typically

powerful

Sources: Credit Suisse

Recent trends – rebound from Q2 best ‘guess’

Bonds have rallied…but solid US data questions for how long?

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United States - resilient

Sources: Markit, Haver, Factset, UBS

US growth holding near 2% – consumer remains robust, inflation low

US growth slows to 2%, early Q1 leaders look better US inflation remains benign

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-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19

ECB target

Headline

Core

Sources: UBS, Markit, Factset

Europe leaders show some recent stabilisation

Europe - stabilisingTepid end to 2019…early signs of stability ahead of covid-19

EU core CPI only up slightly...…ECB eases comprehensively

10

Sources: UBS, CEIC

China – Q1 shock ahead, plenty of stimulusChina data weakened noticeably into mid year/Q3…signs of stabilisation appeared late in 2019, with 6% Q4 growth and December data rebound

Exports jump to 8% growth in December

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-1

0

1

2

3

4

5

6

7

-1

0

1

2

3

4

5

6

7

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Domestic demand

GDP

Year-ended growth

Australia – growth slows to under 2% from > 3%

Sources: ABS, Crestone, UBS

Australia – the ‘gentle turn’?Australia – growth and inflation drops in 2019

Inflation edging up toward the RBA’s target

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Jobs growth providing support

Sources: ABS, RBA, CoreLogic, UBS

Housing auction rates now consistent with rising prices

Australia – jobs & income supportiveJobs market positive, housing & income improving…RBA may still trim once more

Tax cuts boost income

13

Building approvals recover, but construction -20% ahead Sales of homes pick-up

Sources: ABS, RBA, Core Logic, UBS

Australia – housing turns positiveHousing growth to drop in 2020, but credit & prices support retail

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Sources: ABS, CoreLogic, UBS

Australia – mixed business conditionsBiz confidence soft, business capex growth remains elusive

Business investment remains subduedBusiness conditions soft

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AUD: USD0.67…likely to rise above USD0.71 through 2020

Sources: UBS, CBA, RBA, Factset

Exchange rates - Australian dollarRate spreads argue for AUD ‘5-handle’

Commodities argue for AUD ‘8-handle’

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Source: BCA, UBS

Risks - Trade wars…dispute calmsA conflict for geopolitical supremacy in the 21st century…a ‘phase one’ deal has been done (and ‘phase two is post election)

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Risks – US election provides new uncertaintyTrump popularity on the rise…Sanders rising in the polls

Below which 2nd

term presidents have lost

Sources: BCA

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Earnings outlook improves into 2020…but already in the price?

Strategy - Equity earnings outlook

Sources: UBS, IBES, 17 February 2020

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Sources: UBS, Bloomberg, Crestone Wealth Management, 17 February 2020

Strategy - Equity market valuations

Equity markets valuations have now become expensive…

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13

14

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2003 2005 2007 2009 2011 2013 2015 2017 2019

US - P/E 1 year forwardP/E X

Average

Average since 2013

5

6

7

8

9

10

11

12

13

14

15

2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

EM - P/E 1 year forwardP/E X

Average

Average since 2013

8

9

10

11

12

13

14

15

16

17

18

19

2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Australia - P/E 1 year forwardP/E X

Average

Average since 2013

20

Sources: UBS, Crestone

Strategy – relative valuations

Yield relatives Equity relatives

2

3

4

5

6

7

8

9

2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Australia - ERPP/E X

-40

-35

-30

-25

-20

-15

-10

-5

0

5

2017 2018 2019 2020

P/E 1-year forward relative to US

Emerging markets

Australia

UK

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Sources: UBS, Datastream, Crestone, October 2019

Strategy – Aussie growth is scarce

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Central bank balance sheet expansion is ending?

Sources: UBS, RBA, IMF

Inflation has eased after having trended higher

Strategy - Fixed income…global rates expensiveTight job markets and rising wages suggest central banks will still gradually normalise rates, but stalled until 2020 or beyond…

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-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

01-Feb-15 01-Feb-16 01-Feb-17 01-Feb-18 01-Feb-19 01-Feb-20

10 year bond yields

US - LHS UK - LHS Australia - LHS Germany - RHS

%%

US deficit to surpass $1 trillion in 2020, and peak at 5.4% in 2022

Yields slump again…waiting for inflation to rise

Sources: RBA, Factset, Crestone

EU equity dividends exceed the corporate yield

Strategy - Fixed income…can bond yields rise?

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• Actively managed strategies with specialised investment mandates that invest both long and short across asset classes

• Use strategies and tools not always available to individual investors

• Historically lower volatility and reduced dependence on market returns

• Actively managed strategies that invest in equity and debt of non-traded companies and assets

• Strategic and operational involvement as well as purchase/exit price to drive returns

• Typically no access for investors through traditional liquid instruments

• Potentially lower correlations to traditional assets

Hedge funds Private markets

Strategy - Alternative assetsAlternative assets provide investors with access to a diverse range of strategies beyond traditional investments

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Strategy - Why invest in EM equities?

(1) Fastest growing region in the world

(2) Provides access to secular investment themes

(3) Provide a good source of diversification

-40

-30

-20

-10

0

2009 2011 2013 2015 2017 2019

EM - P/E 1 year forward, relative to World ex Aust

P/E rel discount

Late September, when TAA went overweight

Recent troughs

1 December new o/w

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Source: Morningstar, Bloomberg, Crestone. Calendar year returns relate to total returns in Australian dollars for the S&P/ASX 200 Accumulation Index, Bloomberg Aus Bond Composite 0+Y TR Index, Barclays Global Aggregate TR USD Hedged Index, and MSCI World ex-Australia NR Index AUD and the HFRI Fund Weighted Composite index AUD. Data as at January 2018.

Allocate efficiently between asset classes with unpredictable performance

Asset allocation is the key to successful investing

2008 (%) 2009 (%) 2010 (%) 2011 (%) 2012 (%) 2013 (%) 2014 (%) 2015 (%) 2016 (%) 2017 (%) 2018 (%)

Domestic fixed income

15.0

Domestic equities

37.0

International fixed income

9.3


11.4

Domestic equities

20.3

International equities

48.0


15.0


11.8

Domestic equities

11.8


13.4

International hedge funds

5.9


9.2


8.0


6.0


10.5


14.1


26.9


12.6


10.8


7.9

Domestic equities

11.8


4.5

Domestic cash

7.6

Domestic cash3.5

Domestic cash4.7

Domestic cash5.0


9.7

Domestic equities

20.2


10.4


3.4


6.5


3.7

Domestic cash1.9


0.8


1.7

Domestic equities

1.6


-5.3


7.7

Domestic cash2.9


9.8


2.6


5.0


3.7


1.7


-24.9


-0.3


-2.0


-5..5


5.1


2.3

Domestic equities

5.6

Domestic equities

2.6


2.9

Domestic cash1.8


1.5

Domestic equities

-38.4


-5.8


-3.3

Domestic equities

-10.5

Domestic cash4.0


2.0

Domestic cash2.7

Domestic cash2.3

Domestic cash

2.1


0.3

Domestic equities

-2.8

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About this document

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scott haslem chief investment officer crestone wealth … · global growth outlook –covid-19 hits...

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