absolute strategy research - microsoft · 2018-10-01 · asset allocation 9. global equity returns...

ABSOLUTE STRATEGY RESEARCH

21st September 2018

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Equity Optimism Trimmed as Yields Set to Rise Top convictions remain around rising yields and stocks beating bonds Investors remain convinced that US Treasury yields will rise, both at the short end and the long end, with implied probabilities of 72% and 66% for 2-year and 10-year yields respectively, as the Fed normalises its monetary policy and moves to quantitative tightening. However, conviction levels have declined significantly in the past 3 months, from 76% and 70%, respectively (Table 1). Investors are also convinced that 10-year German Bund yields will move higher (71%) and that stocks will continue outperforming bonds globally in the next 12 months (66% probability).

Equity optimism is trimmed, as earnings growth expectations are reined in

ASR Investor Optimism Indicator dropped to its lowest level since the survey was launched almost four years ago. The quarterly drop in our Optimism Indicator reflects 1) a loss of confidence in Global equities making further headway and more specifically reduced expectations around corporate earnings growth (our panel had already been expecting valuation multiples to contract since March of this year) ; 2) a new preference for Defensive equities vs the more Cyclical ones (even though this remains a low conviction call) ; 3) a modest rise in recession risk. Investors have also reiterated their belief that the global business cycle may have peaked.

Investor uncertainty remains close to record highs, especially on market calls, with some of the regional equity allocation views being neutralised

While investors remain bullish on stocks vs bonds, uncertainty has been rising on many different fronts: equities, corporate earnings, sectoral and regional allocation within the equity market, and commodities.

With regards to regional equity preferences, in the past 3 months, investors have become sceptical that US equities would continue outperforming the rest of the world in the coming year, and that EM equities would continue underperforming DM. This follows the 10% outperformance of US vs non-US stocks between the 2Q and the 3Q polling periods, and the -7% underperformance of EM vs DM equities. This might be an indication that investors are starting to question whether the US / EM divergence of the past few months has gone too far.

Table 1: ASR Multi-Asset Survey 3Q18 Results; Fieldwork 30th Aug. to 12th Sept.

Source: ASR Ltd. / Extel Institutional Investor

3Q18 Survey - Fieldwork conducted

between 30 Aug & 12 Sep 2018

3Q18

Implied

Prob.

2Q18

Implied

Prob.

QoQ

Change

US 2-year Treasury yields higher 72 76 -3

German 10-year Bund yields higher 71 72 -1

US core inflation at 2% or higher 71 69 1

VIX higher 70 69 1

US 10-year Treasury yields higher 66 70 -4

Global equities outperform bond returns 66 69 -2

Global corporate earnings higher ($) 62 68 -5

US real yields higher 57 63 -5

Global equities higher ($) 54 59 -5

Global cyclical stocks outperform defensives 48 53 -5

Global business confidence higher 40 40 0

Global recession 34 31 3

Japanese core inflation at 2% or higher 32 28 4

Survey based on 196 Participants

ASR

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20

18

Q3

Dorothee Deck +44 (0) 20 7073 0756 [email protected]

Charles Cara +44 (0) 20 7073 0738 [email protected]

David Bowers +44 (0) 20 7073 0733 [email protected]

Biggest Q/Q Changes in Expectations

Most Likely

Least Likely

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ASR Multi-Asset Survey | 21st September 2018

A b s o l u t e S t r a t e g y R e s e a r c h 2

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(*) The ASR Multi-Asset Survey Optimism Indicator shown in Chart 1 is the average of 9 implied probabilities in the survey: Macro 1. Global business confidence being higher 2. Absence of a global recession 3. US unemployment rate being flat or lower Fixed Income & Credit 4. US 10-year Treasury yields being higher 5. US investment grade corporate bond returns outperforming US Treasuries 6. US TIPS returns beating US Treasuries Equities 7. Global equities being higher 8. Global cyclical stocks outperforming defensives Asset Allocation 9. Global equity returns outperforming global bond returns

Survey Highlights: 5 Key Messages

1) Investor optimism at its lowest since Survey was launched

This quarterly survey reveals the least optimistic views and some of the lowest conviction levels on record since December 2014.

ASR Optimism Indicator declined to 56 in September, vs 58 in June and a maximum of 67 in December 2016. The quarterly decline was driven primarily by 1) a loss of conviction in global equity prospects (investors less bullish), 2) sector preferences within the equity market (panel now slightly negative on Cyclicals / Defensives, vs slightly positive in June), 3) 10-year US Treasuries (investors less bearish), and to a lower extent, 4) a modest rise in perceived recession risk.

Similarly, low levels of conviction are apparent in 13 of the 30 questions this quarter (implied probabilities ranging from 45% to 55%). The ASR Uncertainty Score (defined by the percentage of investors reporting ‘no strong opinion’ on 9 key questions) remains one of the highest on record, at 18 vs a maximum of 19 in 1Q18.

Chart 1: ASR Multi-Asset Survey Optimism Indicator (*) at its lowest level since the survey was launched in December 2014


2) Loss of confidence in the cycle becomes more entrenched

On the macro front, investors continue to believe that the business cycle is unlikely to improve from current elevated levels. They see a 40% probability of an improvement in global business confidence, unchanged in the past 3 months, but down significantly from the 52% level reported a year ago.

However, the expected slowdown in global growth is not expected to pose a major threat to the economy. A global recession remains unlikely, but the probability has increased to 34% in September from 31% in June and 27% in December 2017.

Investors have become more uncertain about the strength of the US labour market. The probability that US unemployment will be higher a year from now has increased to 47% in September, from 46% in June and 40% in December 2017. With US unemployment close to multi-decade lows, this development should not come at a surprise.

13

19

18 18

12

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55

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67

4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18

Corresponding Uncertainty Score (Avg. % of 'No Strong Opinions') - RHS

ASR Optimism Indicator (%) - LHS

Optimism Indicator Historical Average

ASR Optimism Indicator (%) Corresponding Uncertainty Score (%)






Investors remain confident that the best of global growth is now behind us. A global recession remains unlikely in the coming year, but concerns have been mounting in the past 9 months. Investors remain convinced that US 2-year and 10-year yields will continue to rise. This is expected to lead to a further flattening of the yield curve (59% implied probability), consistent with what the forwards markets currently suggest. At the time of writing, the futures markets are discounting a 14 b.p. flattening of the 2s-10s curve 12 months forward.

Chart 2: Confidence in the cycle is waning


3) Top convictions remain around US rate normalisation

The top convictions this quarter remain that US Treasury yields will rise, both at the short end and the long end, with implied probabilities of 72% and 66% for 2Y and 10Y yields respectively, as the Fed normalises its monetary policy. However, it should be noted that conviction levels have declined over the past 3 months, from 76% and 70% respectively.

Investors are also convinced that 10-year German Bund yields will move higher in the coming year, with a 71% implied probability.

Chart 3: Top convictions remain around US Treasury Yields moving higher, leading to a flattening of the yield curve


4) Global equity markets expected to make further gains, but conviction levels down significantly in recent months

A small majority of investors continue to see Global equity markets making further headway in the coming year, driven by corporate earnings, but partially offset by valuation compression. However, confidence has been significantly eroded in the past 3 months, primarily driven by a loss of conviction in earnings expectations. These represent two of the biggest changes in expectations this quarter.

6263

54 5355

5149

5855

5052

47

4340 40

2730

28

3936

3836

38

33

29 2830

27

31 3134

39 40

4345

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4644

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4647

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60

70

8020

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4Q14 2Q15 4Q15 2Q16 4Q16 2Q17 4Q17 2Q18

Business Confidence (LHS) Global Recession (RHS-Inv)

US unemployment higher (RHS-Inv) 50

64

7173

77 7976 73

76 75 7672

70 70

74

68 68

6365

70

74 75

7172

6970 70

66

61 6159

63 64

56

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58 58

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4Q14 2Q15 4Q15 2Q16 4Q16 2Q17 4Q17 2Q18

2Y UST yields higher 10Y UST yields higher US yield curve flatter 50






Investors now see a 54% probability of equity markets rising in the coming year, down from 59% in June and 61% in December 2017. They remain confident that corporate profits will rise in the next 12 months, with a 62% probability. However, this probability is down significantly from 68% in June and 74% in December 2017. Valuation multiples are still expected to contract (46% probability in September vs 48% in June). Nine months ago, investors were still bullish, expecting valuation multiples to expand. Investors now see a 51% probability of US equities outperforming the rest of the world, down from 55% in June, … … and they see a 50% probability of EM outperforming DM, up from 47% in June. The preference for Asian vs European stocks is maintained, with a 56% probability of outperformance.

The loss of conviction in equity markets is particularly pronounced since December 2017, when investors saw a 61% probability of positive equity returns in the coming year, and a 74% probability of positive growth in corporate profits.

Chart 4: Global equity prospects are revised down


5) Investors neutralise some of their regional equity preferences

In the past 3 months, investors have become less convinced that US equities can continue outperforming the rest of the world in the coming year, and that EM equities will continue underperforming DM. This is a reversal of the views they held in June, which may seem inconsistent with their expectation of a slowdown in global growth.

However, this follows the 10% outperformance of US / non-US stocks between the 2Q and the 3Q polling periods, and the -7% underperformance of EM / DM equities. So, while the regional preferences expressed in June were ‘low conviction calls’, investors may be starting to question whether the US / EM decoupling of the past few months has gone too far. They still prefer Asia vs Europe.

Chart 5: Investors neutralise their regional allocation views


70

65 6461

5761

55 55

62

58 5859 61

5859

545451

56 59

69 70 70 70

74

7068

62

5857

54

50

5552

49

55

50 50

55 54

48 4846

20

30

40

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60

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80

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30

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4Q14 2Q15 4Q15 2Q16 4Q16 2Q17 4Q17 2Q18

Global equities higher ($) Global earnings higher ($)

Global equity valuations higher 50

37 36

42

38

4345 46

56

43

35

3942

46

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6360 60

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5956

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4Q14 2Q15 4Q15 2Q16 4Q16 2Q17 4Q17 2Q18

US equities > non-US equities ($) EM equities > DM equities ($)

Asian Equities > Europe equities ($) 50






Survey Responses: Macro Environment & Tail Risks

Investors continue to believe that global business confidence is unlikely to improve from its current elevated level. They believe that the best of global growth is now behind us. The probability of an improvement in global business confidence is estimated at 40%, unchanged in the past 3 months but down from 52% a year ago (see Chart 6). However, the expected slowdown in the cycle is not perceived as posing a major threat to the economy. A global recession remains unlikely over the next 12 months, with a 34% probability, up slightly from 31% three months ago (see Chart 7). On balance, investors believe that the US unemployment rate is unlikely to rise in the next 12 months, placing a probability of 47% on this event. However, with the unemployment rate approaching multi-decade lows, we are not surprised to see this probability up from 40% in December 2017 (see Chart 8).

Chart 6: Probability of global business confidence being higher

Source: ASR Ltd. / Extel Institutional Investor Chart 7: Probability of a global recession in the next 12 months

Source: ASR Ltd. / Extel Institutional Investor Chart 8: Probability of a rise in the US unemployment rate


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Very LikelySomewhat LikelyNo Strong OpinionSomewhat UnlikelyVery Unlikely

Probability of Global Business confidence being Higher in the Next 12 Months

3Q17 2Q18 3Q18

62 63

54 53 5551

49

5855

50

52

4743 40 40

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Panel's Implied Probability (%) Baseline Probability in the 10 Years to June 2018 (%)

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Probability of a Global Recession in the Next 12 Months

3Q17 2Q18 3Q18

27 30 28

39 36 38 36 3833

29 28 30 27 31 31 34

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Probability of a Higher US Unemployment Rate in the Next 12 Months

3Q17 2Q18 3Q18

39 40 43 45 43 40 4146 44 40 43 46 47

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80

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Survey Responses: Core Inflation

Investors have become increasingly convinced that US core inflation will be 2% or higher in 12 months’ time, placing a 71% probability on that event, up significantly 53% a year ago. This is not surprising given the sharp increase in US core inflation seen in recent months, from 1.4% in August 2017 to 2.0% in July 2018. In contrast, inflation expectations have been much more stable in Japan and the Eurozone in recent months. Investors remain convinced that core inflation will not hit 2% in Japan in the next 12 months (32% probability, Chart 10). They also believe this scenario is unlikely in the Eurozone (42% probability, Chart 11).

Chart 9: Probability that US core inflation will be 2% or higher

Source: ASR Ltd. / Extel Institutional Investor Chart 10: Probability that Japanese core inflation will be 2% or higher

Source: ASR Ltd. / Extel Institutional Investor Chart 11: Probability that Eurozone core inflation will be 2% or higher


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Probability that US Core Inflation will be 2% or Higher in the Next 12 Months

3Q17 2Q18 3Q18

56

69 70

5653

5967 69 71

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Probability that Japanese Core Inflation will be 2% or Higher in Next 12 Mths

3Q17 2Q18 3Q18

4626 27

31 31 28 32

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Probability that Eurozone Core Inflation will be 2% or Higher in Next 12 Mths

3Q17 2Q18 3Q18

7037 38 42 40 40 42

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80

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Survey Responses: US Interest Rates & Yield Curve

Historically, the area of interest rates is where investors have registered some of the strongest convictions in the survey. This is true again this quarter, even though confidence levels have moderated in the past three months.

Investors remain convinced that 2-year and 10-year US Treasury yields will move higher in the next 12 months, placing probabilities of 72% and 66% on those events respectively. However, these probabilities are down significantly since June, from 76% and 70%, respectively (see Charts 12 and 13).

Investors continue to expect a flattening of the yield curve, but conviction levels are more modest.

They place a 59% probability on a further flattening of the curve in the coming 12 months, broadly stable since December 2017 (Chart 14). This is consistent with what the market is currently pricing in. At the time of writing, the futures markets are discounting a 14bp flattening in 12 months’ time (US 10-year minus 2-year yields).

Chart 12: Probability that 2-Year UST yields will be higher

Source: ASR Ltd. / Extel Institutional Investor Chart 13: Probability that 10-Year UST yields will be higher

Source: ASR Ltd. / Extel Institutional Investor Chart 14: Probability that the US yield curve will be less positive


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Probability of Higher US 2-Year Treasury Yields in the Next 12 Months

3Q17 2Q18 3Q18

6471 73 77 79 76 73 76 75 76 72

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Probability of Higher US 10-Year Treasury Yields in the Next 12 Months

3Q17 2Q18 3Q18

70 7074

68 6863 65

7074 75

71 7269 70 70

66

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Probability that the US Yield Curve will be Flatter in the Next 12 Months

3Q17 2Q18 3Q18

61 61 5963 64

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5258 58

5460 58 60 59

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Survey Responses: USD, US Real Yields & TIPS

A small majority of investors expect the USD to rise in the next 12 months, consistent with their expectation of a rise in US real yields. This translates into an implied probability of 53%, essentially stable in the past 12 months. As of September, investors see a 57% probability of a rise in US real yields in the coming year, down significantly from 63% in June. This is the second biggest change in expectations this quarter. Investors continue to expect US TIPS to outperform US Treasuries in the coming year, with a probability of 58% in June, essentially unchanged in the past 12 months. However, the level of uncertainty remains very high, with a third of the panel reporting ‘no strong opinion’ (Chart 17).

Chart 15: Probability of a rise in the USD trade-weighted index

Source: ASR Ltd. / Extel Institutional Investor Chart 16: Probability that US real yields will be higher

Source: ASR Ltd. / Extel Institutional Investor Chart 17: Probability that US TIPS will outperform US Treasuries


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Probability of a Rise in the USD Trade-Weighted Index in the Next 12 Months

3Q17 2Q18 3Q18

7366 64 65 63

5659 61

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Probability that US Real Yields will be Higher in the Next 12 Months

3Q17 2Q18 3Q18

6265 63 60 63 63 61 63

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Probability that US TIPS Returns will Beat US Treasuries in the Next 12 Mths

3Q17 2Q18 3Q18

47 48

61

49

56 5560

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56 5760 60 58 58

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Survey Responses: US Corporate Credit & EM Debt

Consistent with their view that global business confidence is unlikely to improve from current elevated levels and that rates will move higher, investors have become significantly less confident on US credit in recent months.

The probability of US investment grade bond returns outperforming USTs in the next 12 months has declined sharply from 66% in Dec. 2016 to 50% in Sept. 2018 (Chart 18).

Similarly, investors now expect US high yield credit to underperform US investment grade (from neutral 9 months ago, Chart 19) …

… and they have turned essentially neutral on EM sovereign bonds vs US High Yield corporate bonds (Chart 20). They now see a 52% probability that EM sovereigns will beat US HY, down from 62% in September 2017, but up slightly from 49% in June. Interestingly, the level of uncertainty has dropped significantly in the past 3 months, with ‘only’ 22% of the panel reporting ‘no strong opinion in September, vs 37% in June!

Chart 18: Probability that US IG bond returns will beat US Treasuries

Source: ASR Ltd. / Extel Institutional Investor Chart 19: Probability that US HY bond returns will beat US IG

Source: ASR Ltd. / Extel Institutional Investor Chart 20: Probability that EM sovereign bond returns will beat US HY


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Probability of US IG Bond Returns Beating US Treasuries in the Next 12 Mths

3Q17 2Q18 3Q18

62 62 6460 60

65 65 6266

62 61 59 5651

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Probability of US HY Bond Returns Beating US IG in the Next 12 Months

3Q17 2Q18 3Q18

52

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Probability of EM Sov. Bond Returns ($) Beating US HY in the Next 12 Months

3Q17 2Q18 3Q18

62 60 59

49

52

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Survey Responses: Global Equity Drivers

A majority of investors continue to expect equity markets to rise globally, driven by earnings growth, as opposed to valuation expansion. But this has now become a low conviction call. The probability of a further rise in global equity prices in USD terms in the next 12 months has declined significantly in the past 3 months, from 59% in June to 54% in September. This represents the biggest change in expectations this quarter (Chart 21). This reassessment has been driven primarily by a loss of conviction on the earnings front. While they remain confident that corporate earnings will grow in the next 12 months, with a probability of 62%, this probability is down significantly from 74% in December 2017 (Chart 22). Valuation multiples are expected to contract vs widen 9 months ago (Chart 23).

Chart 21: Probability that global equity markets will be higher

Source: ASR Ltd. / Extel Institutional Investor Chart 22: Probability of positive global corporate earnings growth

Source: ASR Ltd. / Extel Institutional Investor Chart 23: Probability that global equity valuations will be higher


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Probability that Global Equity Markets will be Higher ($) in the Next 12 Mths

3Q17 2Q18 3Q18

7065 64 61

57 6155 55

6258 58 59 61 58 59

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Probability of Positive Global Corporate Earnings Growth ($)

3Q17 2Q18 3Q18

5451

5659

69 70 70 7074

70 6862

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Probability that Global Equity Market Valuations will be Higher

3Q17 2Q18 3Q18

58 57 54

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48 48 46

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Survey Responses: Equity Risk Appetite

Investors still believe that a bear market in the US is unlikely within the next 12 months.

The risk of a 20% drawdown in US equities at some stage within the next 12 months is estimated at 41% in September, vs 40% in June (Chart 24).

However, the probability of this risk looks elevated compared with the experience of the past 10 years, when 20% drawdowns in US stocks have been seen only 10% of the time.

Investors remain convinced that the VIX will move higher in the coming year, placing a 70% probability on this event (Chart 25). This is not surprising, given that the VIX averaged 14 during the 3Q18 polling period (vs a 20Y median of 18), shortly after hitting a six-year high of 37 in February this year.

Historically, periods of rising equity volatility have been associated with the under-performance of stocks vs bonds, credit vs Treasuries and cyclical stocks vs defensives.

Investors have now turned slightly bearish on Cyclicals vs Defensives (Chart 26).

Chart 24: Probability of a 20% drawdown in US equities

Source: ASR Ltd. / Extel Institutional Investor Chart 25: Probability that the VIX will be higher

Source: ASR Ltd. / Extel Institutional Investor Chart 26: Probability that Global Cyclicals will beat Defensives


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Probability of a 20% Drawdown in US Equities Within the Next 12 Months

3Q17 2Q18 3Q18

48

50

4438 38 38 39 44 40 41

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Probability that Implied Equity Volatility will be Higher in the Next 12 Mths

3Q17 2Q18 3Q18

68

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6557

6670 67

71 73 71 74

6569 70

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Probability that Global 'Cyclical Stocks' will Beat 'Defensives'

3Q17 2Q18 3Q18

59 59 5951 51 52 52

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56 57 57 54 53

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Survey Responses: Regional Equity Allocation

This quarter, we have seen some interesting reversals in regional equity preferences.

Investors have now become neutral on US equities vs the rest of the world, from being positive in June 2018 and negative for most of the period before (the only exception was 4Q16). The probability of a US outperformance has declined from 55% in June to 51% in September (Chart 27).

While this reversal may seem at odds with the view that global growth will slow down, it should be seen in the context of the recent performance. US equities have outperformed by 10% on average between the June and the September polling periods, and their PE premium has increased from 52% to 60%.

Similarly, investors have now turned neutral on EM Equities vs DM, from being slightly bearish in June This follows the 7% underperformance of EM / DM equities over the period (Chart 28).

Asian equities are still preferred to their European peers (see Chart 29).

Chart 27: Probability that US equities will beat non-US equities

Source: ASR Ltd. / Extel Institutional Investor Chart 28: Probability that EM equities will outperform DM equities

Source: ASR Ltd. / Extel Institutional Investor Chart 29: Probability that Asian equities will beat European stocks


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Probability that US Equities will Beat non-US Equities in the Next 12 Months

3Q17 2Q18 3Q18

37 3642

3843 45 46

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Probability that EM Equities will Beat DM Equities in the Next 12 Months

3Q17 2Q18 3Q18

63 60 60

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Probability that Asian Equities will beat European Stocks in the Next 12 Mths

3Q17: NA 2Q18 3Q18

58 59 59 56

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Survey Responses: Asset Allocation

Investors remain confident that equities will beat bonds globally in the next 12 months, with a 66% probability, down slightly from 69% in June (Chart 30).

This is consistent with expectations of a rise in equity markets (54% probability) and higher 10-year government bond yields in the US and Germany (66% and 71% probabilities, respectively).

A small majority of investors continue to believe in the strength of the US labour market. However, with the US unemployment rate approaching multi-decade lows, it is not surprising to see that conviction levels have moderated. The probability of a rise in unemployment has increased significantly, from 40% in December 2017 to 47% at present (Chart 31). This is important because historically, increases in US unemployment have been associated with rotation out of stocks into bonds.

Investors expect stocks to beat commodities in the coming year (60% probability), but uncertainty remains very high, with 31% of the panel expressing ‘no strong opinion’.

Chart 30: Probability that global stocks will beat global bond returns

Source: ASR Ltd. / Extel Institutional Investor Chart 31: Probability of a higher US unemployment rate

Source: ASR Ltd. / Extel Institutional Investor Chart 32: Probability that global equities will beat commodities


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Probability that Global Stocks will Beat Global Bond Returns

3Q17 2Q18 3Q18

75 74 7467 67 67 63

68 77 74 72 73 70 66 69 66

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Probability of a Higher US Unemployment Rate in the Next 12 Months

3Q17 2Q18 3Q18

39 40 43 45 43 40 4146 44 40 43 46 47

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Survey Responses: Commodities

Once again this quarter, the commodity space has attracted the highest level of uncertainty. On balance, investors expect the price of gold to rise in the coming year, with a probability of 54%. However, the degree of uncertainty about the asset class is very high, with 37% of the panel reporting ‘no strong opinion’ (see Chart 33). Unsurprisingly, this uncertainty extends to the performance of other commodities relative to gold. Investors expressed a small preference for oil and industrial metals relative to gold. But 37% of the panel reported ‘no strong opinion’ on both pairs. Oil / gold and industrial metals / precious metals have historically been good cross-checks for other risk-on pairs such as equities / bonds, cyclical stocks / defensive stocks, US high yield / investment grade credit (strong positive correlation).

Chart 33: Probability that the gold price will be higher

Source: ASR Ltd. / Extel Institutional Investor Chart 34: Probability that oil will outperform gold

Source: ASR Ltd. / Extel Institutional Investor Chart 35: Probability that industrial metals will outperform gold


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Probability that the Gold Price will be Higher in the Next 12 Months

3Q17 2Q18 3Q18

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Probability that the Oil Price will Beat the Gold Price in the Next 12 Months

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47 47

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Indicators of Anchoring, Responsiveness & Capitulation

Charts 36 to 41 illustrate the degree of ‘anchoring’ in investors’ views.

They highlight the degree to which investors’ expectations have changed (or not) in the past three years, following changes in the macro-environment or financial market performance.

The implied probabilities in the survey are represented by the angle of the arrows. An arrow pointing upwards is consistent with the panel expecting the financial measure to rise, or the event to materialise, in the following 12 months and vice versa. Blue (red) arrows highlight a significant increase (decline) in implied probability versus the previous quarterly survey, i.e. greater than 4%. Click here for more details.

Chart 37 and 38 are good examples of ‘anchoring’ in investors’ views.

Expectations of a rise in 2-year UST yields and global equity markets have been very stable in recent quarters. This may be partially due to the trending nature of

Chart 36: How to Read the Following Charts – More details here

Source: ASR Ltd. / Extel Institutional Investor / Thomson Reuters Datastream Chart 37: Probabilities of US 2-year Treasury yields moving higher

Source: ASR Ltd. / Extel Institutional Investor / Thomson Reuters Datastream Chart 38: Probabilities of a rise in global equity prices in USD terms

Source: ASR Ltd. / Extel Institutional Investor / Thomson Reuters Datastream

1

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an 2 1 an 2 1 an 2 1 an 2 1 an 2 1

orld

ery i ely

i ely

o pinion

nli ely

ery nli ely

lo al e ities higher



https://www.absolute-strategy.com/x/research?id=63694#page=16

https://www.absolute-strategy.com/x/research?id=63694#page=16




those series. However, we feel that in the case of global equities, there might be some element of behavioural bias. When global equities lost 9% of their value between 2Q15 and 3Q15, investors barely re-assessed their expectations. The probability of a rise in equities went from 64% in 2Q15 to 61% in 3Q15 (Chart 39). Similarly, in the past 9 months, the outlook for equities has been revised downward, but to a much smaller extent than the views on corporate earnings.

In contrast, Charts 39 to 41 offer good examples of more dynamic behaviours on the part of investors.

In recent quarters, investors have been more active in revising their expectations about Global Cyclicals / Defensives, US / non-US equities, as well as EM vs DM equities (Charts 39 to 41).

This could be explained by the ‘less-trending’ nature of those series, by more frequent or more sudden changes in their fundamental drivers, or simply by different behavioural biases.

Chart 39: Probabilities of Global Cyclicals outperforming Defensives

Source: ASR Ltd. / Extel Institutional Investor / Thomson Reuters Datastream Chart 40: Probabilities of US equities outperforming non-US

Source: ASR Ltd. / Extel Institutional Investor / Thomson Reuters Datastream Chart 41: Probabilities of EM equities outperforming DM

Source: ASR Ltd. / Extel Institutional Investor / Thomson Reuters Datastream

1

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an 2 1 an 2 1 an 2 1 an 2 1 an 2 1

lo al yclicals vs efensives

lo al cyclicals o tperform defensives

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vs orld e

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Multi-Asset Survey – A Glance at the History

Table 2: ASR Multi-Asset Survey – Implied probabilities since the survey was launched

Source: ASR Ltd. / Extel Institutional Investor.

Market Levels During the Fieldwork Periods

Table 3: Average levels of market & macro series during field work periods

Source: ASR Ltd. / Thomson Reuters Datastream

Question 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18

Global business confidence higher NA 62 63 54 53 55 51 49 58 55 50 52 47 43 40 40

Global recession 27 30 28 39 36 38 36 38 33 29 28 30 27 31 31 34

US unemployment rate higher NA NA NA 39 40 43 45 43 40 41 46 44 40 43 46 47

US core inflation at 2% or higher NA NA NA NA NA NA NA 56 69 70 56 53 59 67 69 71

Eurozone core inflation at 2% or higher NA NA NA NA NA NA NA NA NA 46 37 38 42 40 40 42

Japanese core inflation at 2% or higher NA NA NA NA NA NA NA NA NA 31 26 27 31 31 28 32

US 2-year Treasury yields higher NA NA NA NA NA 64 71 73 77 79 76 73 76 75 76 72

US 10-year Treasury yields higher 70 70 74 68 68 63 65 70 74 75 71 72 69 70 70 66

US yield curve flatter 61 61 59 63 64 56 59 57 52 58 58 54 60 58 60 59

US real yields higher NA NA NA NA NA NA NA 62 65 63 60 63 63 61 63 57

US TIPS returns beat US Treasuries 47 48 61 49 56 55 60 64 69 64 56 57 60 60 58 58

German 10-year Bund yields higher NA NA NA NA NA NA NA NA NA NA NA NA NA NA 72 71

US IG corp. bonds beat US Treasuries 62 62 64 60 60 65 65 62 66 62 61 59 56 51 47 50

US HY corp. bonds beat US IG NA NA NA NA NA NA NA NA NA NA NA 52 50 46 45 46

EM sov. bonds beat US HY corp. bonds ($) NA NA NA NA NA NA NA NA NA NA NA 62 60 59 49 52

Global equities higher ($) 70 65 64 61 57 61 55 55 62 58 58 59 61 58 59 54

Global corporate earnings higher ($) NA NA NA NA 54 51 56 59 69 70 70 70 74 70 68 62

Global equity valuations higher NA 58 57 54 50 55 52 49 55 50 50 55 54 48 48 46

US equities outperform non-US equities ($) NA 37 36 42 38 43 45 46 56 43 35 39 42 46 55 51

EM equities outperform DM equities ($) NA NA NA NA NA NA NA NA NA NA NA 63 60 60 47 50

Asian equities beat European equities ($) NA NA NA NA NA NA NA NA NA NA NA NA 58 59 59 56

Global cyclical stocks outperform defensives 59 59 59 51 51 52 52 56 67 60 56 57 57 54 53 48

VIX higher NA NA 68 50 65 57 66 70 67 71 73 71 74 65 69 70

20% drawdown in US equities NA NA NA NA NA NA 48 50 44 38 38 38 39 44 40 41

Gold higher 47 53 52 53 56 56 55 57 50 55 53 NA NA NA 56 54

Industrial Metals outperform Gold NA NA NA NA NA 47 47 NA NA NA NA NA NA NA 56 53

Oil outperforms Gold NA NA NA NA NA NA NA NA NA NA NA 47 54 53 52 54

Global equities outperform bond returns 75 74 74 67 67 67 63 68 77 74 72 73 70 66 69 66

Global equities outperform commodities NA NA NA NA NA NA NA NA NA NA NA 55 54 48 58 60

USD trade weighted index higher 73 66 64 65 63 56 59 61 65 58 51 54 55 53 55 53

Number of Participants 100 120 165 210 183 210 221 201 202 243 192 207 229 204 214 196

Asset under Management ($ billion) 1,197 2,193 2,812 2,631 2,919 3,014 3,160 2,976 4,200 5,821 4,458 5,319 6,013 5,303 4,065 4,135

3Q17 vs. 4Q17 vs. 1Q18 vs. 2Q18 vs. 3Q18 vs.

3Q17 2Q17 4Q17 3Q17 1Q18 4Q17 2Q18 1Q18 3Q18 2Q18

Global Composite PMI 53.8 0.2 Pts 54.2 0.4 Pts 53.3 -0.9 Pts 54.1 0.8 Pts 53.4 -0.7 Pts

US unemployment rate 4.2 -0.1 % Pts 4.1 -0.1 % Pts 4.1 0.0 % Pts 3.9 -0.2 % Pts 3.9 0.0 % Pts

US core inflation 1.5 -0.1 % Pts 1.6 0.2 % Pts 2.0 0.3 % Pts 1.9 0.0 % Pts NA NA

Eurozone core inflation 1.1 0.0 % Pts 0.9 -0.2 % Pts 1.1 0.1 % Pts 1.0 -0.1 % Pts NA NA

Japanese core inflation 0.2 0.2 % Pts 0.3 0.1 % Pts 0.5 0.2 % Pts 0.3 -0.2 % Pts NA NA

US 2Y Treasury yields 1.36 3 b.p. 1.77 41 b.p. 2.25 48 b.p. 2.50 26 b.p. 2.68 18 b.p.

US 10Y Treasury yields 2.17 -1 b.p. 2.36 18 b.p. 2.86 51 b.p. 2.94 7 b.p. 2.91 -3 b.p.

US 10Y - 2Y yields 0.82 -4 b.p. 0.59 -23 b.p. 0.62 3 b.p. 0.43 -18 b.p. 0.23 -21 b.p.

US real yields 0.21 -4 b.p. 0.42 22 b.p. 0.56 13 b.p. 0.72 17 b.p. 0.82 9 b.p.

US TIPS / US Treasuries 50.67 0% 51.21 1% 52.64 3% 53.22 1% 53.25 0%

German 10Y Bund yields 0.40 13 b.p. 0.34 -6 b.p. 0.64 30 b.p. 0.44 -20 b.p. 0.37 -6 b.p.

US IG corp. bonds / US Treasuries 487.99 1% 496.34 2% 505.38 2% 503.40 0% 505.34 0%

US HY corp. bonds / US IG 43.43 0% 43.46 0% 44.28 2% 44.87 1% 45.18 1%

EM sov. bonds ($) / US HY corp. bonds 110.97 1% 109.70 -1% 108.13 -1% 104.21 -4% 101.51 -3%

Global equities 956 4% 998 4% 1035 4% 1040 1% 1046 1%

Global trailing earnings 30.6 3% 30.6 0% 32.8 7% 33.6 2% 34.8 4%

Global equities PE 18.6 -2% 19.1 3% 18.8 -2% 18.1 -4% 17.4 -4%

US equities / non-US equities 1661.52 -3% 1707.13 3% 1748.51 2% 1782.34 2% 1961.89 10%

EM equities / DM equities 7.30 3% 7.05 -4% 7.33 4% 6.94 -5% 6.46 -7%

Asian / European equities ($) 2.44 1% 2.57 5% 2.63 2% 2.62 0% 2.50 -4%

Global cyclicals / defensives 55.60 2% 58.64 5% 60.65 3% 62.17 2% 59.56 -4%

VIX 11 2% 11 1% 18 66% 13 -28% 14 7%

US Equities maximum annual drawdown -0.2 0.0 % Pts -0.2 0.0 % Pts -4.6 -4.4 % Pts -4.1 0.5 % Pts -0.7 3.4 % Pts

Gold higher 705.73 4% 681.20 -3% 702.11 3% 687.44 -2% 633.31 -8%

Industrial Metals / Gold 190 11% 199 5% 198 0% 214 8% 196 -8%

Oil / Gold 59.68 8% 71.66 20% 73.36 2% 89.96 23% 100.13 11%

Global stock returns / global bond returns 178.33 2% 186.95 5% 191.30 2% 196.83 3% 199.28 1%

Global equities / commodities 41.81 -2% 40.58 -3% 40.56 0% 37.82 -7% 38.24 1%

USD trade weighted index (DXY) 92 -5% 93 1% 90 -3% 94 4% 95 1%




For full Research Library click here This research report is issued by Absolute Strategy Research Ltd, which is authorised and regulated by the Financial Conduct Authority “F ” . sol te Strategy Research Services Inc. is registered as an investment adviser with the US SEC, and is responsible for all communications and dealings with, and only with, US persons. The report is intended only for investors who are Eligible Counterparties or Professional Clients, as defined by MIFID and the FCA, and may not be distributed to Retail Clients. Absolute Strategy Research Ltd does not solicit any action based upon this report, which is not to be construed as an invitation to buy or sell any security. This report is not intended to provide personal investment advice and it does not take into account the investment objectives, financial situation and the particular needs of any particular person who may read this report. This research report provides general information only. The information contained was obtained from sources that we believe to be reliable but we do not guarantee that it is accurate or complete, and it should not be relied upon as such. Opinions expressed are our current opinions as of the original publication date appearing on this material only and the information, including the opinions contained herein, are subject to change without notice. This research report may not be redistributed, retransmitted or disclosed in whole or in part, without the express written permission of Absolute Strategy Research Ltd. © Absolute Strategy Research Ltd 2018. All rights reserved. Absolute Strategy Research Ltd. 1-2 Royal Exchange Buildings, London, EC3V 3LF. Phone: +44 (0) 20 7073 0730 Fax: +44 (0) 20 7073 0732. www.absolute-strategy.com. Absolute Strategy Research Ltd is registered in England and Wales. Company number 5727405. Registered Office: Salisbury House, Station Road, Cambridge CB1 2LA.

Survey Methodology: What we Mean by Implied Probabilities

ASR’s Multi-Asset Survey is a Survey of Probabilities.

Every quarter we contact around 200 asset allocators and multi-asset strategists from

around the world.

We ask them “how likely” they think certain financial and economic events are to occur in

the next 12 months. All thirty questions are framed with a binary outcome (will ‘X’ happen or

will it not happen?) within a fixed time horizon.

Each question offers five options: (1) very likely (2) somewhat likely, (3) no strong opinion,

(4) somewhat unlikely, (5) very unlikely.

We then ascribe notional probabilities to each of the five options. For example, if someone

responds “very likely”, we apply a 90% probability to their response. If they reply “very

unlikely”, we apply a 10% probability. If someone says “no strong opinion”, then we apply a

50% probability (the equivalent of tossing a coin).

By applying the different probabilities to all the responses, we can calculate an overall

probability. This is more sophisticated than other surveys, which just calculate a “net

balance” (e.g. % respondents that are ‘optimists’ minus % respondents that are

‘pessimists’). Our approach better captures differences in convictions.

Small changes in the implied probabilities matter: a 5% point change over a quarter often

indicates an important shift. A 10% point change can reflect a profound change in

expectations.

These “implied probabilities” are powerful as they can be used in multiple ways. First, we

can compare them with the probabilities that are implied in the market. Secondly, we can

compare them with our views and see where we are most different from the consensus. And

thirdly, we can compare them with the historic base (how often has this event occurred over

the past decade). An implied probability of 50% may sound like a neutral call but if the

event has only occurred 20% of the time over the past decade, then this 50% probability is

in fact a much more aggressive call that it appears.

This approach has one additional benefit, in that we can see how investors’ expectations are

affected by changes in the financial markets themselves. Is there evidence of momentum –

to what extent do respondents’ expectations for the next 12 months move with what has

happened over the past 12 months? Can we see evidence of anchoring – to what extent do

investors cling onto their views even when the market is going against them? Is there

evidence of crowding and contrarian tendencies – when investors think something is “very

likely”, does that indicate a crowded trade?


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