our customers, our future
AFM Conference and AGM 2017
KEITH WADE Schroders 2
The wider landscape for mutuals Outline
– The story so far – US: time to buy Trump? – UK & Eurozone: tale of two economies – From QE to QT – Conclusions
Source: Schroders Economics Group. 3
From populists to goldilocks The story so far
Source: Schroders Economics Group. 4
Global growth forecasts edge higher 2017 projections being upgraded, unlike past six years Consensus world GDP forecast, y/y % 3.8 3.6 3.4 3.2
3.0 2.8 2.6 2.4 2.2 2010
2011
2011
2012
2012
2013
2013
2014
2014
Source: Thomson Datastream, Schroders Economics Group, 9 October 2017. Forecast risk warning: please see the important information slide for full disclosure. 5
2015
2015
2016
2016
2017
2017
Surprise dip in US inflation US core inflation has fallen from 2.3% y/y in January to 1.7% y/y in August y/y % 4
3
2
1
0 2007
2008
Core CPI
2009
2010
2011
2012
Core CPI 6m annualised
Source: Thomson Datastream, Schroders Economics Group, 9 October 2017. 6
2013
2014
2015
2016
2017
Trimmed mean CPI (FRB Cleaveland)
The US Time to buy Trump?
US growth mix is changing US consumer fundamentals have deteriorated, but capex is rising
Source: Thomson Datastream, Schroders Economics Group, 9 October 2017.
Inflation continues to surprise on the downside Wages and the labour market – still some slack? y/y, %
%
6
3
y/y, %
%
6
65
4 5
64 5
5 4
6
63 4
62
7 3
61
3 8
2
9
60
2 59
10 1
1 85
90
95
00
05
10
15
Recession Worker compensation Unemployment rate, rhs, inv Source: Thomson Datastream, Schroders Economics Group, 9 October 2017. 9
58 85
90
95
00
05
10
15
Recession Worker compensation Employment/population ratio, rhs
Critical moment for inflation Core inflation tracks past growth and should now stabilise and recover y/ y %
y/ y %
3.5
8
3.0
6
2.5
4
2.0
2
1.5
0
1.0
-2
0.5
-4 96
98
00
02
recession
04
06
08
Core CPI
Source: Thomson Datastream, Schroders Economics Group, 9 October 2017. 10
10
12
14
16
18
US GDP, 6Q lag, rhs
Will this be a problem? Fed balance sheet reduction to start in Q4
Source: Thomson Datastream, US Federal Reserve, Schroders Economics Group, 9 October 2017. 11
Trump’s low approval rating spells trouble in the mid-terms Republicans need to deliver on promises % approval, final poll before m idterm 70
Clinton (1998) 65
Reagan (1986)
Eisenhower (1954)
Kennedy (1963)
60
Eisenhower (1958) 55
Nixon (1970)
G.W.Bush (2002)
G.H.W.Bush (1990)
Ford (1974)
50
Carter (1978)
Clinton (1994)
45
Johnson (1966)
Reagan (1982)
40
Trum an (1950) G.W.Bush (2006)
Trump current approval = 38%
35
Trum an (1946) 30 -60
-50
-40
-30
Source: Gallup, Schroders Economics Group, 7 October 2017. 12
-20
-10
0 10 seat gain/loss in US House
UK & Eurozone Tale of two economies
Eurozone goes from strength to strength Eurozone GDP vs. BNB survey & PMIs 6% 4% 2%
0% -2% -4% -6% 04
05
06
07
Eurozone GDP growth, Y/ Y
08
09
10
11
12
13
Belgian National Bank survey (standardised)
14
15
17
Markit PMI (standardised)
Source: Thomson Datastream, Markit, Belgian National Bank, Eurostat, Schroders Economics Group. Updated 9 October 2017. 14
16
Brexit: deal or no deal? Divorce, trade and transition
Source: Schroders Economics Group, The Times, The Independent ,18 August 2017. 15
UK economy deteriorating Consumption drivers under pressure, investment is weak Disposable income vs. savings rate
Investment slows as uncertainty rises 4q/4q 15%
12% 10%
10%
8%
5% 6%
0% 4%
-5% 2%
-10%
0%
-15%
-2%
-20%
-4% 06 07 08 09 10 11 12 13 14 Real household disposable income (% y/y)
15 16 17 Savings rate
Source: Thomson Datastream, ONS, Schroders Economics Group. 9 October 2017. 16
06
07 08 09 10 11 12 13 14 15 16 17 UK household consumption UK business investment
Are the BoE happy about this? Weaker GBP is a mixed blessing
Source: Thomson Datastream, Financial Times, Oxford Economics, Schroders Economics Group, 9 October 2017. 17
From QE to QT The outlook for global liquidity
Will global liquidity continue to expand? Global liquidity has been boosted by $1.5 tn this year, led by the BoJ and ECB Value of assets in central banks' balance sheets, USD tn 25
forecast
20 15 10 5 0 2005
2007 Eurozone
2009
2011 Japan
2013
Switzerland
2015 China
Forecast begins Q3 2017. Source: Thomson Datastream, Schroders Economics Group, 25 September 2017. Forecast risk warning: please see the important information slide for full risk warning. 19
US
2017 UK
ECB QE has had a significant impact on capital flows ECB’s action has had international impact Changes in portfolio holdings by issuer* , EURbn
1,000 500 0
Corporate
-500
Financial
-1,000 -1,500
Eurozone's purchases of foreign securities
Sovereign 2014 Q4 – 2017 Q1
*Private holdings by Eurozone investors. Source: Oxford Economics, Haver Analytics, Schroders Economics Group, 25 September 2017. 20
The ECB prepares to taper Eurozone yields at lows during ECB Quantitative Easing 10y sovereign yields, % 8 7 6 5 4 3 2 1 0 -1 2008
2009
Recession
2010
2011
2012
Germ any
2013
France
Source: Thomson Datastream, Schroders Economics Group, 09 October 2017. 21
2014
2015 Spain
2016
2017 Italy
The wider landscape Summary In 2017…
– Political risk has receded in US and EU… for now – Growth/ inflation mix creates positive environment for risk assets In 2018…
– US inflation to stabilise and pick-up – Do not rule out a Trump tax package – Be wary of Fed balance sheet reduction and ECB taper – BoE will find it hard to sustain tightening Source: Schroders 6 September 2017. 22
Important Information The views and opinions contained herein are those of Keith Wade, Chief Economist. They do not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds and are subject to change. This presentation is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy. The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Past Performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors. Issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA. Registration No. 1893220 England. Authorised and regulated by the Financial Conduct Authority. INS05427.
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