Global bond outlook: Navigating risk to find opportunitycae47786... · Global bond outlook:...
Transcript of Global bond outlook: Navigating risk to find opportunitycae47786... · Global bond outlook:...
For 2018 Invesco Roadshow only. Circulation, disclosure or dissemination of all or any part of this document to any unauthorized person is prohibited.
Global bond outlook: Navigating risk to find opportunity
Chris LauSenior Portfolio Manager, Fixed Income
12 January 2018Confidential: This document is intended for professional investors in Hong Kong for 2018 Invesco Roadshow only. It is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any securities or investment advisory services, and does not constitute a recommendation of the suitability of any investment strategy or investment advice. Not for further distribution.
For 2018 Invesco Roadshow only. Circulation, disclosure or dissemination of all or any part of this document to any unauthorized person is prohibited.
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QoQ
, %
Upper Bound Actual IFI Estimate Lower Bound
Invesco Fixed Income’s economic growth forecast model
U.S.Robust GDP growth, moderate inflation
2
Source: Bloomberg, Invesco, data as of 30 November 2017. Opinions and forecasts are subject to change without notice.
GDP growth Inflation (CPI)
Invesco FixedIncome’s forecast Market consensus
Invesco FixedIncome’s forecast Market consensus
2.3–2.5% 2.2% 1.8% 2.1%
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0.0
0.5
1.0
1.5
2.0
2.5
Apr-
98
May-9
9
Jun-0
0
Jul-
01
Aug-0
2
Sep-0
3
Oct-
04
Nov-0
5
Dec-0
6
Jan-0
8
Feb-0
9
Mar-
10
Apr-
11
May-1
2
Jun-1
3
Jul-
14
Aug-1
5
Sep-1
6
Oct-
17
Sta
ndard
devia
tion
Financial conditions
Positive financial conditions and real economy for U.S. corporate bonds
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Source: Invesco, data as of 30 November 2017.
Financial conditions still loose despite the Fed’s rate hikes
-600%
-500%
-400%
-300%
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-100%
0%
100%
200%
300%
Dec-9
9
Feb-0
1
Apr-
02
Jun-0
3
Aug-0
4
Oct-
05
Dec-0
6
Feb-0
8
Apr-
09
Jun-1
0
Aug-1
1
Oct-
12
Dec-1
3
Feb-1
5
Apr-
16
Pote
ntial %
Production output gap Production output gap is not tight yet
loose
tight
surplus
tight
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300
400
500
600
700
800
900
Jul-
16
Aug-1
6
Sep-1
6
Oct-
16
Nov-1
6
Dec-1
6
Jan-1
7
Feb-1
7
Mar-
17
Apr-
17
May-1
7
Jun-1
7
Jul-
17
Aug-1
7
Sep-1
7
Oct-
17
Nov-1
7
Dec-1
7
US shale gas horizontal drilling stops growing
Factors that will drive a rebound in oil pricesLeading to higher market expectations of inflation and hence rising long-term US Treasury yields
4
Source: OPEC, data of 31 December 2016 (LHS).Source: Baker Hughes, data as of 31 December 2017 (RHS).
Geopolitical risks
Iraq: Kurds’ independence movements
Venezuela: A disfunctioning government
Russia: Sanctions by the U.S.
Saudi Arabia: Political conflicts with Iran and Qatar
Saudi Arabia and Russia to lead the formation of “OPEC 2.0”
Saudi Arabian princes, government ministers, and business people were arrested in Saudi Arabia recently
Iran: Social unrest
Countries2016 oil exports as a percentage
of global (%)
Saudi Arabia 16.90
Russia 11.50
Iraq 8.61
Iran 4.35
Venezuela 4.15
Qatar 1.14
Total 46.65
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100-day annualized implied volatility of 10-year US Treasury yield
The market too complacent on volatility riskThe implied volatility of US Treasury at historical low levels
5
Source: Bloomberg, data as of 3 January 2018.
Volatility risk management is important in 2018
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Dec-0
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May-1
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Oct-
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Mar-
11
Aug-1
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Jan-1
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13
Sep-1
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Feb-1
4
Jul-
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Dec-1
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May-1
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15
Mar-
16
Aug-1
6
Jan-1
7
Jun-1
7
Nov-1
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QoQ
, %
Upper Bound Actual IFI Estimate Lower Bound
Invesco Fixed Income’s economic growth forecast model
EURobust GDP growth, low inflation
6
Source: Bloomberg, Invesco, data as of 30 November 2017. Opinions and forecasts are subject to change without notice.
GDP growth Inflation (CPI)
Invesco FixedIncome’s forecast Market consensus
Invesco FixedIncome’s forecast Market consensus
2.0–2.4% 2.0% 1.3% 1.4%
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Sta
ndard
devia
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Pote
ntial %
Financial conditions
ECB to maintain loose monetary policyPositive for European corporate bonds
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Source: Invesco, data as of 30 November 2017.
Tight financial conditions and production output surplus warrant the ECB to keep loose monetary policy
Production output gap
loose
tight
surplus
tight
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The Fed likely to loosen bank regulationAs much as USD 2.3 trillion lending capacity to be freed up
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Source: BoA Merrill Lynch, data as of 15 August 2017.
Positive for global corporate bonds in general
The financial conditions in the U.S. may remain loose
More than enough to offset effects of the Fed’s tapering
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Share of Euro Agg Index With Negative Yield Share of Global Agg Index With Negative Yield
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Source: Bloomberg Barclays Global Aggregate Index as of 29 September 2017.
Bonds with negative yields still prevailingGlobal bond investors hunting for yields
Global Bonds w/ Negative Yield as % of Global IG Broad Market
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Global corporate bond market viewsA scale of A to E (A: most positive, E: most negative)
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Source: Invesco, data as of 3 January 2018.
Asset Class Overall Fundamental Valuations Technical
US Investment Grade B B C B
EUR Investment Grade B B D B
UK Investment Grade C B D C
US High Yield C B E B
EUR High Yield C B E B
Emerging Markets – Sovereign B B D B
Emerging Market – Corporate B B D B
Asia Investment Grade B B C C
Asia High Yield B B C C
Bank Loans B B B A
Bank Loans – EUR B B C B
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U.S. investment grade corporate bondsSolid fundamentals and technicals to tighten credit spreads
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Tight credit spreads would continue to tighten
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U.S. high yield bondsSupported by improving fundamentals
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Source: Bloomberg, Invesco, 30 September 2017.
Improving revenues, cashflows and leverage
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-10% 15% 40%
Dividends or buybacks
More CapEx
Disposals
Acquisitions
Reducing leverage
New products & markets
Increasing cash flow
Reducing costs
Change Q2–Q3 Current
1.3x
1.5x
1.7x
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2.5x
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Euro IG A BBB
Leverage Deloitte CFO survey looking at their priorities in the next 12 months: Defensive Focus though Optimistic Trends
EU corporate bondsPositive fundamentals
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Source: Deloitte, End September 2017 (RHS); Macrobond, End December 2016 (LHS).
European corporates have been conservative with their discretionary cash
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EU high yield bondsSupported by improving fundamentals
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Source: Bloomberg, Invesco, 30 September 2017.
Strongly improving revenues, cashflows and leverage
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6.16%
5.78%
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3.40%
2.40%
0.05%0%
1%
2%
3%
4%
5%
6%
7%
Asian USD HY US HY EURO HY Asian USD IG US IG EURO IG
Yields of Asian, US and Euro bonds
Asian USD bonds offer more attractive yields
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Source: Bloomberg, Invesco; data as of 31 December 2017. Asian USD high yield is represented by Bank of America Merrill Lynch Asian Dollar High Yield Corporate Index, US high yield by Bank of America Merrill Lynch 0–3 Year Duration-to-Worst US High Yield Constrained Index, Euro high yield by Merrill Lynch 2–4 Year Euro High Yield Index, Asian USD investment grade by Bank of America Merrill Lynch Asian Dollar Investment Grade Corporate Index, US investment grade by Bank of America Merrill Lynch 1–3 Year US Corporate Index and Euro investment grade by Bank of America Merrill Lynch 1–3 Year Euro Corporate Senior Index.
High yield Investment grade
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2004 2005 2006 2007 2008 2009 2010 2011 2012 2014 2015 2016 2017
Global US Europe Emerging Markets Asia EMEA Latin America & Carribean
Annual default rates of high yield corporate bonds
Asian high yield bonds’ default rate is lower than global peers
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Source: JPMorgan, Invesco, as at 31 May 2017.
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0
200,000
400,000
600,000
800,000
1,000,000
2010 2011 2012 2013 2014 2015 2016 2017
(USD
million)
China Hong Kong Korea Indonesia India Philippines Singapore Malaysia Others
Market size of Asian USD bonds
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Asian USD bond market has been growing fast
Source: HSBC, Bloomberg, Invesco, data from 1 January 2010 to 31 December 2017.
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China’s new policies mean a new game plan for Emerging Market bonds
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1. Quality (not quantity) GDP growth
2. Consumption(not investment)led GDP
3. Anti-pollution
4. One-Belt-One-Road Initiative
Less imports of metals, iron ores,
coals
Less favorable to hard commodities export EM
Favorable to the One-Belt-One-Road EM countries which receive China’s direct investments
Favorable to the Asian EM countries at the expense of Latin American EM
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124.2
143.1151.4
179.0
216.6
245.5
0
50
100
150
200
250
300
2011 2012 2013 2014 2015 2016
(USD
bn)
China’s outward direct investment and building contracts (2011–2016)
China’s outward direct investment increasing
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Source: AEI, China Minsheng Securities, data as of 31 December 2016.
We expect China to invest USD 150 to 200 billion in One-Belt-One-Road countries per year
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Our high conviction bond strategies for 2018
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1. Minimum interest rate risk
2. Target volatility strategy
3. Overweight in corporate bonds versus government bonds
Asian USD bonds
“One-Belt-One-Road” USD bonds
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Important information
This document is intended only for 2018 Invesco Roadshow in Hong Kong. This is not an invitation to subscribe for shares in a fund nor is it to be
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Hong Kong.
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