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BROKERS IRELAND
IRISH LIFE
INVESTMENTS
December 2019
1
2
3
4
History of Equity Markets
5
6
7
8
Diversification
Active vs Passive
Behavioural Finance
Irish Life Fund Solutions
Investment Quiz
Market Outlook
Summary
HISTORY OF EQUITY MARKETS
4
LONG TERM EQUITY RETURNS – US EQUITIES 1927-2018
1
10
100
1000
10000
30
/12
/192
7
30
/12
/192
9
30
/12
/193
1
30
/12
/193
3
30
/12
/193
5
30
/12
/193
7
30
/12
/193
9
30
/12
/194
1
30
/12
/194
3
30
/12
/194
5
30
/12
/194
7
30
/12
/194
9
30
/12
/195
1
30
/12
/195
3
30
/12
/195
5
30
/12
/195
7
30
/12
/195
9
30
/12
/196
1
30
/12
/196
3
30
/12
/196
5
30
/12
/196
7
30
/12
/196
9
30
/12
/197
1
30
/12
/197
3
30
/12
/197
5
30
/12
/197
7
30
/12
/197
9
30
/12
/198
1
30
/12
/198
3
30
/12
/198
5
30
/12
/198
7
30
/12
/198
9
30
/12
/199
1
30
/12
/199
3
30
/12
/199
5
30
/12
/199
7
30
/12
/199
9
30
/12
/200
1
30
/12
/200
3
30
/12
/200
5
30
/12
/200
7
30
/12
/200
9
30
/12
/201
1
30
/12
/201
3
30
/12
/201
5
30
/12
/201
7
S&P 500
WW2 1939-45
Korean War 1950-53
Post War Boom
New Deal 1933-40
Oil shocks 1973 & 79
Vietnam war 1969-72
Black Monday Oct 1987
Stagflation 1973-75
Savings & loans crisis 1986-95
Iraq invasion of Kuwait
Tech bubble
Tech bubble burst
Allied invasion of Iraq
Global financial crisis
US QE1
Q4 2018 crash
Great Depression
Reagan era
5
LONG TERM EQUITY RETURNS – US EQUITIES 1900-2018
▪ LT Annualised Return is 9.4% Nominal and 6.4% Real return
▪ Inflation 2.9% p.a.
5.3
6.4
3.7
1.9
0.7 0.8
0
1
2
3
4
5
6
7
1969-2018 1900-2018
Equities Bonds Bills
Note: The three asset classes are equities, long-term government bonds, and Treasury bills. All returns include reinvested income, are adjusted for inflation, and are
expressed as geometric mean returns.
6
RELATIVE SIZES OF WORLD STOCK MARKET
Top 3 1899
UK 25%
USA 15%
Germany 13%
Top 3 2018
USA 53%
Japan 8.4%
UK 6%
The evolution of equity markets over time from end-1899 to end-2017
7
HOLDING PERIOD MATTERS
The longer your holding period, the better chance of positive returns
Maximum and minimum real returns over different periods
Note: light blue represents current year. Source CRSP. Barclays Research
8
DISTRIBUTION OF EQUITY RETURNS
▪ Distribution of Equity Returns S&P 500
▪ 3 years below 30% drop
9
POWER OF COMPOUNDING – £100 INVESTED IN 1899
Equities
Without reinvesting Income reinvested
Gilts
Cash
15,185
63
2,706,467
41,873
20,733
$
10
LESSONS FROM HISTORY
DIVERSIFICATION, WHAT DRIVES MARKETS & AVOID THE HEADLINES
12
WHAT CAN YOU INVEST IN? – MAJOR ASSET CLASSES
Cash Bonds Stocks
Commodities Property Alternatives
13
WHY DIVERSIFY?
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD
1
Fidelity India
China
45.60%
Indexed
European Gilts
10.48%
Fidelity India
87.18%
Fidelity EMEA
41.64%
Indexed
Technology
5.14%
Fidelity Euro
Opps
27.07%
Indexed Ireland
37.26%
Fidelity India
56.84%
Indexed Ireland
33.27%
Indexed
Emerging Market
Equity
20.59%
Fidelity China
25.87%
Irish Property
6.16%
Indexed
Technology
22.93%
2
Indexed Pacific
Equity
18.77%
Indexed Fixed
Interest
9.54%
Fidelity EMEA
79.31%
Fidelity India
39.17%
Indexed North
American Equity
4.77%
Fidelity Spec
Sitns
25.86%
Indexed
Technology
30.34%
Fidelity India
China
42.35%
Indexed
Technology
22.19%
Indexed North
American Equity
19.45%
Fidelity India
24.44%
Property
Portfolio
5.84%
Fidelity Managed
Intl
22.71%
3
Fidelity Man
Inter
11.31%
Cash
4.03%
Fidelity India
China
78.98%
Fidelity Man
Inter
32.25%
Indexed
European Gilts
4.08%
Fidelity India
25.19%
Fidelity Spec
Sitns
28.62%
Fidel Glob Prop
Shares
36.49%
Indexed
Japanese Equity
21.55%
Indexed Pacific
Equity
18.82%
Fidelity India
China
24.41%
Fidelity Multi
Asset Str Def
5.44%
Fidelity Global
Prop Shares
19.90%
4
Fidelity Euro
Opps
9.40%
Inflation Link
Bond
2.97%
Indexed
Emerging Market
Equity
73.05%
Indexed
Technology
32.05%
Indexed Fixed
Interest
3.61%
Fidel Glob Prop
Shares
24.61%
Indexed
Japanese Equity
24.42%
Indexed
Technology
35.57%
Fidelity Euro
Opps
20.60%
IL/Setanta Global
Equity
16.02%
Indexed
Emerging Market
Equity
19.45%
UK Property
5.29%
Infrastructure
Equities
18.03%
5
Indexed
Technology
7.46%
Indexed
Japanese Equity
-25.03%
Indexed Pacific
Equity
67.43%
Indexed Pacific
Equity
29.10%
Indexed UK
Equity
2.55%
Fidelity EMEA
23.14%
Indexed North
American Equity
22.26%
Fidelity China
28.98%
Fidelity Spec
Sitns
18.58%
Fidelity EMEA
15.50%
Indexed
Technology
16.72%
Indexed
Technology
4.58%
Indexed North
American Equity
17.37%
6
Property
Portfolio
6.24%
Property
Portfolio
-27.62%
Fidelity China
64.48%
Fidel Glob Prop
Shares
28.64%
Indexed Euro
Short Dated Bond
2.42%
Indexed Ireland
23.08%
Property
Portfolio
21.62%
Infrastructure
Equities
28.55%
Property
Portfolio
17.18%
Infrastructure
Equities
15.00%
Multi Asset
Portfolio 6
14.71%
Indexed
European Gilts
1.63%
Indexed
European Gilts
15.40%
7
Indexed
European Equity
6.08%
UK Property
-31.70%
Indexed
Technology
50.89%
Indexed
Emerging Market
Equity
28.08%
UK Property
2.35%
Indexed Pacific
Equity
20.56%
Consensus Equity
20.38%
Indexed North
American Equity
28.51%
Fidelity Man
Inter
15.05%
IL/Setanta
Managed
12.33%
Indexed Pacific
Equity
13.28%
Indexed Fixed
Interest
1.06%
Indexed Ethical
Global Equity
14.73%
8Cash
4.02%
Indexed North
American Equity
-34.11%
Fidelity Euro
Opps
45.14%
Fidelity India
China
27.78%
Indexed Euro
Corporate Bond
2.24%
Indexed
European Equity
20.15%
Fidelity Man
Inter
19.52%
Property
Portfolio
21.68%
UK Property
14.29%
Indexed World
Equity Fd
11.69%
Fidelity EMEA
13.12%
Cash
1.01%
Fidelity Global
Spec Sitns
14.22%
9
Fidelity Spec
Sitns
1.17%
Consensus
-34.72%
Fidelity Spec
Sitns
43.14%
Indexed
Commodities
25.54%
Indexed Ireland
2.17%
Fidelity India
Chin
19.97%
Indexed World
Equity Fd
19.06%
IL/Setanta
Managed
20.44%
Fidelity China
11.86%
IL/Setanta Equity
Dividend
11.66%
Fidelity Spec
Sitns
12.53%
Fidelity India
0.54%
Fidelity Euro
Opps
13.85%
10
Indexed Fixed
Interest
0.41%
Active Managed
-37.46%
Fidelity Man
Inter
40.68%
Fidelity Spec
Sitns
24.40%
Infrastructure
Equities
1.25%
Fidelity Man
Inter
18.16%
Fidelity Euro
Opps
18.57%
Indexed
European Gilts
20.43%
IL/Setanta Equity
Dividend
11.73%
Multi Asset
Portfolio 6
11.23%
Fidelity Man
Inter
11.99%
Indexed EU Short
Dated Bond
0.08%
Consensus Equity
4.46%
14
EARNINGS DRIVE MARKETS
MARKET CONTROVERSIES ARE A CONSTANT
--- S&P500 (LHS)
--- Earnings Per Share -RHS
15
BEWARE HEADLINES – THE DEATH OF EQUITIES
February 2000
The Boom – How Prosperity is reshaping the American Economy
August 13, 1979
The Death of Equities
16
SOCIAL MEDIA CAN MOVE MARKETS
17
KEY LEARNINGS I
Diversification is important –
assets have
different characteristics
Earnings are the driver of
shares prices in the long run
Tune out the Noise!
ARE MARKETS EFFICIENT?ACTIVE V PASSIVE
19
ARE MARKETS EFFICIENT?
▪ Efficient Markets Hypothesis (EMH)
▪ Yes and No
▪ Efficient Markets mean all information about a stock is in the price already and assets are fairly priced
▪ Is there any point to doing Fundamental Analysis?
▪ Probably are efficient in the long term but not so in the short term – this is where dislocations and bubbles occur
20
ACTIVE OR PASSIVE? PASSIVE
▪ Passive Approach is buy all of the stocks in an index
and not conduct fundamental analysis
▪ Tracking error is a key skill here
▪ Replicate the benchmark and get the benchmark return
▪ Majority of active managers underperform the major
indices
21
ACTIVE OR PASSIVE? ACTIVE
▪ But some managers do outperform markets
▪ Any manager can outperform over 1 year but can
they do it consistently?
▪ Today there is no information advantage but you
can have a knowledge advantage – most
investors don’t think long term
BEHAVIOURAL FINANCE
23
BEHAVIOUR – WHAT INFLUENCES OUR DECISIONS?
INVESTOR BEHAVIOUR
Loss Aversion
Investors are more averse to losses
than to potential returns
Narrow Framing
Making decisions without considering
all implications
Mental Accounting
Taking undue risk in one area and
avoiding rational risk in another
Diversification
Seeking to reduce risk, but simply
using different sources
Herding
Copying the behaviour of others even
in the face of unfavourable outcomes
Regret
Treating errors of commission more
seriously than errors of omission
Media Response
Tendency to react to news without
reasonable examination
Confirmation Bias
Accepting information that confirms
already-held views
Anchoring
Relating to the familiar experiences, even
when inappropriate
24
VOLATILITY HAS A DIRTY NAME
Seeing through the noise:
▪ Markets suffered double-digit declines in 22 of the last 39 years, yet still ended those years with positive returns 75%
of the time.
S&P 500 intra-year declines vs. calendar year returns
Despite average intra-year drops of 13.9%, annual returns positive in 29 of 39 years
Source: Factset, Standard & Poor’s, J.P. Morgan Asset Management
25
TIMING THE MARKET CAN BE COSTLY
Annual Price Returns S&P 500 1996-2016
7.68
4
1.57
-0.51
-2.42
-4.00
-2.00
0.00
2.00
4.00
6.00
8.00
10.00
CAGR Excluding 10 best days Excuding 20 best days Excluding 30 best days Excluding 40 best days
Perc
en
tage
26
TIMING THE MARKET CAN BE COSTLY
Average Stock Fund Return vs. Average Stock Fund Investor Return
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
Average Stock Fund Return Average Stock Fund Investor Return
Avera
ge
Ann
ua
l R
etu
rn
1994-2013
Investor
Behaviour Penalty
• As Warren Buffett wrote in 1991, “the stock market serves as a relocation centre at which money is moved
from the active to the patient.”
27
LESSONS FROM INVESTMENT MASTERS
28
KEY LEARNINGS II
Equities are the best performing
asset class over timeVolatility is not a bad thing Timing the market is not
possible consistently
IRISH LIFE FUND SOLUTIONS
30
OUR FUND MANAGERS
Expertise in designing MAPS, Ireland’s largest retail multi-asset fund (over €5bn AUM, Jun 19)
Strong background in Quantitative Solutions
Over €79bn in assets under management
Track record of long-term successful partnerships
Award winning team: Irish Pensions 2018 Passive and Property Manager of the Year
Ireland’s leading active fund manager, focus on long-term value investing
Recognised by leading global consultants, Morningstar rated funds
Over €10bn in assets under management
Track record of consistent outperformance irrespective of market conditions
Award winning team: Irish Pensions 2018 Equities Manager of the Year
Global active investment fund manager with over $412bn assets under management
Multiple award winning team: 31 Morningstar awards, 109 Thomson Reuters Lipper fund awards in 12 countries
Over 230 investment researchers with a focus on bottom-up research (17,000 company meetings or one every 10 minutes on average)
Broad range of investment strategies (multi-asset, regional, thematic etc.)
31
IRISH LIFE MAPS
Irish Life MAPS – Four Pillars to Support Customers
Choice Smoother returns Risk management Peace of mindDiversification within:▪ Asset Classes▪ Managers▪ Strategies▪ Currencies▪ Geographies▪ Option Strategy
▪ Range of 5 Risk Rated Funds
▪ Annual Review▪ Rebalancing▪ DSC▪ Systematic
Currency Hedge▪ Low Volatility▪ Equity Option
Strategy
▪ Performance▪ Range of
Returns▪ ILIM▪ ESG
32
SMART BETA – QUANTS FACTOR-BASED INVESTING
▪ Hybrid of Active & Passive
▪ Capture market inefficiencies in a systematic way
▪ Not market weighted may be instead ranked by volatility, dividends or equal weighted
ILIM Quantitative Strategies Group set up in 1996
Multi
Factor
Risk Control strategies
– DSC, Equity Options
Global Low
Volatility
Currency
Hedging
33
SETANTA – DEDICATED VALUE INVESTORS
Core Principals Evidence
Selective
Risk Averse
Long Term
Deep Research
Consistent Application
Incentive Structure
High Active Share
Strong risk-adjusted returns
Low Portfolio Turnover
Established 1998Owned by Great West Lifeco
Part of Irish Life Group
Focused ExpertiseStock pickers, differentiated portfolios
“Value is more than a number”
Knowledge advantage
34
LONG TERM TIME HORIZON: WHY DOES IT
MATTER?
Current Setanta Global Equity Portfolio
➢ 87 holdings
➢ 51 held for > 5 years
➢ Accounts for 64% of portfolio
➢ Companies have grown in value
➢ Our competition?
➢ Holding period typically <1 year
➢ Alignment of interest:
➢ 80% incentives - 3/5 year performance
5 year time period from 15th May 2012 to 15th May 2017
35
FIDELITY – GLOBAL ACTIVE
DIVERSIFIED
OUTCOME FOCUSED
FLEXIBLE
Sources of return, risk and yield
should be uncorrelatedPortfolios positioned to mitigate event
risk and manage volatility
RESEARCH-LED
RISK-CONSCIOUS
Clients’ specific needs at the centre of our approach
A range of strategies, evolving to meet client requirements
Investors must deal with
unpredictable and uncertain markets
Dynamic asset allocation to generate stable outcomes through the cycle
A broad range of research disciplines produces uncorrelated
ideas
Well-resourced research team, with a variety of specialisms and expertise
Investors must take a degree of risk
but limit the risk of permanent capital loss
Taking risk intelligently and consciously is key
Investment PhilosophyCore beliefs and their applications
36
KEY LEARNINGS III
Long term time horizon Active & Passive approaches are
not mutually exclusive
Smart Beta is a combination
of both
CAN AN IRISH MANAGER COMPETE?
38
MULTIPLE AWARD WINNING TEAMS WITH
STRONG TRACK RECORDS
Fidelity World’s Jeremy Podger –
track record of strong
outperformance
ILIM Indexation process
A-rated by leading
international consultants
Setanta Global Equity
outperforms the index in 16
of 18 years
A
HOW WE MANAGE MONEY
40
IRISH LIFE MAPS – INVESTMENT PROCESS
01
02
Idea Generation
▪ Quantitative Strategies Group
▪ Alternative Strategies Team
▪ Asset Allocation Committee
03
Portfolio Solutions Team
▪ Annual Portfolio Modelling Exercise
▪ Determine what makes sense from a portfolio perspective
▪ Size positions appropriately
04
Asset Allocation Committee▪ Proposed changes presented to the
Asset Allocation Committee
CIO Sign-Off
A robust and structured solution review process
41
IRISH LIFE MAPS – MANAGING RISK
42
IRISH LIFE MAPS – MANAGING RISK
Deliver a return commensurate with each funds targeted risk rating and within the expected range of returns
• Smoother Journey• Manage for extreme
events• Returns within an
expected range
Core objective: to deliver risk-controlled investment returns
43
IRISH LIFE MAPS – MANAGING RISK
PROPERTY
CASH
EQUITIES
BONDS
ALTERNATIVES
Fund Name MAP2 MAP3 MAP4 MAP5 MAP6
Emerging Market Shares 0% 0% 0% 10% 32%
Low Volatility Shares 5% 10% 15% 11% 6.5%
All Country World Index 11% 22% 33% 45% 45%
Equity Option Strategy 3% 6% 9% 12% 5%
Infrastructure Equities 1% 2% 3% 2% 1.5%
EQUITIES 20% 40% 60% 80% 90%
Euro Corporate Bonds 30% 19% 3.5% 0% 0%
Euro Government Bonds 8.5% 0% 0% 0% 0%
Emerging Market Debt 0% 3% 3.5% 0% 0%
Global High Yield Bonds 3.5% 3.5% 3.5% 0% 0%
BONDS 42% 25.5% 10.5% 0% 0%
EXTERNAL MANAGERS 22% 22% 22% 12.5% 5%
IRISH PROPERTY 6% 7.5% 7.5% 7.5% 5%
CASH 10% 5% 0% 0% 0%
RISK CONTROL
STRATEGIES
44
IRISH LIFE MAPS – MANAGING RISK
2017
Oct 2015▪ Underweight in emerging
market equities
Nov 2015▪ Max property allocation
Dec 2015▪ Underweight
government bonds ▪ Overweight corporate
bonds
2014
Jun 2014▪ Property introduced▪ Low Vol Equities replaces Min
Vol Equities
2016
Jan 2017▪ Overweight equities▪ Increased underweight
to bonds
Feb 2017▪ Reduced cash
overweight
Mar 2017▪ Introduced equity
option strategy▪ Extended low volatility
to emerging market equities
Jan 2016▪ Partial currency hedge ▪ DSC extended to include
emerging market equities
Mar 2016▪ DSC triggered
Jun 2016▪ Underweight global equities
Dec 2016▪ Neutral global equities▪ Reduced overweight to
property
2015 2017
2018▪ DSC triggered in
March and October▪ Introduce
infrastructure shares
▪ Residential property added
2018
45
SETANTA INCOME OPPORTUNITIES FUND
› A conservative, value strategy
› Appeals to investors seeking above average yield without putting more capital at risk
› Lower volatility than a traditional balanced fund
Description
Objectives are:
› To generate a targeted income for the investor (measured by the net yield on the Fund)
› To maintain the real value of the portfolio (European Harmonised Index of Consumer Prices
(HICP) over 5 year period)
46
SETANTA INCOME OPPORTUNITIES FUND
Second Objective:
Capital Growth
Assets meet value criteria
Long term oriented
Risk: Probability of permanent
impairment of capital
First Objective:
Income Generation
Dividend Stocks
Option Income
Property Income
Bond Income
HEADLINE 02
Multi Asset Portfolio Objectives
Investment Process
47
SETANTA INCOME OPPORTUNITIES FUND
› Irish Property Crisis (Part 1)
› Fund invested in office and retail assets in 2012 after property collapse.
› Eurozone Sovereign Crisis
› Fund buys peripheral Eurozone debt when mispriced (2010-2011).
› Irish Property Crisis (Part 2)
› Fund invests in residential assets to backdrop of scarce capital for required investment (2014)
› Oil Price Crash
› Fund invests in bonds of oil exposed companies (2016).
› Emerging Market Fears
› Fund takes advantage to buy positions in bonds backed by strong companies (Turkey, Mexico 2017-2018)
Opportunistic Approach to Asset Selection
48
SETANTA INCOME OPPORTUNITIES FUND
High Yield Equities
• Strategy filters broader Setanta philosophy
• Seek stocks with both capacity and commitment to pay dividends
• Expect stocks to have sustainable dividend prospects
• Some sectors and regions offer better income prospects, but fund managers believe in sensible
diversification
• Many ideas in common with the Setanta Global Equity Fund
49
SETANTA INCOME OPPORTUNITIES FUND
Defensive in Times of Strife
Source: Setanta estimates; based on CLI Income Opportunities Fund. Periods shown are those of cumulative declines of greater than 5% in which all individual months record
declines.
50
FIDELITY WORLD FUND
01
02
03
04
05
06M
ay
14
Aug
14
Nov
14
Feb
15
May
15
Aug
15
Nov
15
Feb
16
May
16
Aug
16
Nov
16
Feb
17
May
17
Aug
17
Nov
17
Feb
18
May
18
Aug
18
Nov
18
Feb
19
May
19
33.4%
30.2%
16.1%
Global equity fund with a developed market focus
Concentrated & active portfolio
Stock selection backed by depth of FI research team
Portfolio managed to deliver across the cycle
Long-term career track record
4* Morningstar rating
51
Outperformance of global indices and peers over a long industry tenure
0
100
200
300
400
500
700
600
800
900
Mar-
96
Sep
-96
Mar-
97
Sep
-97
Mar-
98
Sep
-98
Mar-
99
Sep
-99
Mar-
00
Sep
-00
Mar-
01
Sep
-01
Mar-
02
Sep
-02
Mar-
03
Sep
-03
Mar-
04
Sep
-04
Mar-
05
Sep
-05
Mar-
06
Sep
-06
Mar-
07
Sep
-07
Mar-
08
Sep
-08
Mar-
09
Sep
-09
Mar-
10
Sep
-10
Mar-
11
Sep
-11
Mar-
12
Sep
-12
Mar-
13
Sep
-13
Mar-
14
Sep
-14
Mar-
15
Sep
-15
Mar-
16
Sep
-16
Mar-
17
Sep
-17
Mar-
18
Sep
-18
Mar-
19
Indexed
Retu
rn
Jeremy Podger MSCI World MSCI ACWI IA Sector Average
Past performance is not a reliable indicator of future results. Returns may increase or decrease as a result of currency fluctuations. For fundsthat invest in overseas markets, changes in currency exchange rates may affect the value ofan investment.
Source: Morningstar Direct. Basis: bid-bid, net income reinvested at UK basic rate of tax in UK sterling to 31 May 2019. Jeremy Podger's combined track record of Investec Global Strategy I Acc GBP (01 April 1996 –31 August 2003), Threadneedle Global Select Z Acc GBP (1 September 2003 – 29 February 2012) and Fidelity Global Special Situations W Acc (1 March 2012 onwards). Note that the MSCI ACWI Gross Return (GR) index is used as the Net Return (NR) index does not have sufficient history.
4.4%
4.5%
5.9%
Ann. Net Excess Return vs. MSCI ACWI:
Ann. Net Excess Return vs. MSCI World:
Ann. Net Excess Return vs. Sector Average:
% of Peers Beaten: 91%
Ann. Net Excess Return vs. MSCI ACWI: 0.8%
Ann. Net Excess Return vs. MSCI World: 2.1%
Ann. Net Excess Return vs. Sector Average: 1.5%
% of Peers Beaten: 67%
1000Investec Global Free Enterprise Threadneedle Global Select
10.1% p.a.
7.8% p.a.
7.4% p.a.
6.4% p.a.
Fidelity
Ann. Net Excess Return vs. MSCI ACWI: 1.7%
Ann. Net Excess Return vs. MSCI World: 1.4%
Ann. Net Excess Return vs. Sector Average: 3.8%
% of Peers Beaten: 91%
1000Threadneedle Global Select
Ratings
JEREMY PODGER – TRACK RECORD
INVESTMENT QUIZ
53
THE NEXT INVESTMENT MASTER?
Brisbane
• Is the next Warren Buffett
in the room?
MARKET OUTLOOK
55
MARKET RETURNS
Source: Bloomberg
▪ Equity rebound from 2018 correction
▪ Policy pivot by US Fed and other central banks supports both equities and bonds
▪ Trade and growth concerns have contributed to ongoing volatility and equity draw downs ytd
▪ Global bonds higher ytd on growth concerns, persistent low inflation and more dovish central banks
Market performance YTD to 31st October
20.1
23.0
16.915.2
11.4
22.8
11.5
13.4
1.4
6.6
22.9
26.2
18.219.8
13.4
22.9
16.0
13.4
1.4
6.6
13.7
0
5
10
15
20
25
30
World Equities North America Pacific ex Japan Japan Emerging Market Rest of Europe UK Eurozone Bond 5yr+
Eurozone Bond 1-5 yr
Investment GradeCorporate
EM Debt Euro
Local Euro
56
PERFORMANCE
▪ Volatility remains a feature in equity markets
▪ Dovish central banks supported moves to new all time highs this year
▪ Growth concerns and trade war have contributed to draw downs in 2019
MSCI AC World
Source: Bloomberg, October 2019
1000
1050
1100
1150
1200
1250
1300
1350
MSCI AC World
MSCI AC World
Trade fears
Dovish central banksGrowth fears
Trade hopes
57
GLOBAL TRADE / BREXIT
TRADE BREXIT
▪ US and China have agreed a ‘mini’ trade deal
▪ Deal prevents further escalation of trade tensions
▪ Previously planned tariff increases being suspended
▪ China has agreed to increase imports of US agricultural goods
▪ Comprehensive deal however does not seem likely in the short term
▪ Existing tariffs to remain in place
▪ No firm agreements on intellectual property/technology
transfer/Chinese industrial subsidies/enforcement mechanisms
▪ Without a full resolution of trade dispute, uncertainties are expected
to remain a drag on growth
▪ New Withdrawal deal agreed between the UK and EU
▪ Deal not yet ratified by UK parliament
▪ As a result, Article 50 extended to January 31st
▪ UK general election to be held on 12th December
▪ Polls suggest Conservatives will win a clear majority
▪ A Conservative victory would result in new Withdrawal deal being
passed
▪ UK expected to officially leave the EU on 31st January
58
EQUITY MARKET VALUATIONS
Source: JP Morgan, Bloomberg October 2019
▪ Equity valuations are at or above long term average levels
▪ Equity P/e valuation now at the long term average
▪ Market rebound has caused P/e multiple to rise from December lows
▪ Equities expensive on price/book and yield basis v’s long term averages
Global Equity 12 month Fwd P/e Global Dividend Yield
8
10
12
14
16
18
20
22
24
26
88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
MSCI AC World 12m Fwd P/E Average +1Stdev -1Stdev
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
MSCI World Dividend Yield Median +1Stdev -1Stdev
59
EQUITIES: SUMMARY OUTLOOK
Outlook
Outlook hinges on economic and
earnings backdrop
2019 global GDP growth
forecasts lowered to 2.6%
Increased fears of growth
slowdown could lead to fall in
equity markets
Equity valuations viewed as
being ‘full’ at current levels
Base case is limited equity market
upside on a 12 month view with
risks skewed to the downside
Volatility to remain a feature
given various risks
60
EUROZONE BOND YIELDS
▪ Yields still close to all-time lows
▪ Peripheral spreads have narrowed on easing of Italian political tensions and expectations of renewed asset purchases by the ECB
▪ Ireland seen as semi core but has been sensitive to Brexit outcome
Source: Bloomberg, October 2019
Eurozone Yields
-0.66-0.61
-0.43
-0.18
-0.44
-0.61
-0.42
-0.19
0.36
-0.38-0.38
-0.07
0.27
0.99
0.03
-0.80
-0.60
-0.40
-0.20
0.00
0.20
0.40
0.60
0.80
1.00
1.20
Germany France Spain Italy Ireland
Eurozone Yields2 yr 5 yr 10 yr
61
EUROZONE INFLATION
Source: Bloomberg, October 2019
▪ Eurozone inflation has been persistently weak
▪ Headline inflation at 0.7% y/y while core at 1.1% y/y
▪ Long term inflation expectations have declined and are close to all time lows
▪ Failure of inflation and inflation expectations to rise has contributed to the ECB providing additional policy accommodation
Eurozone Inflation Eurozone Inflation Expectations
1
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2
31/12/2015 31/12/2016 31/12/2017 31/12/2018
-1
-0.5
0
0.5
1
1.5
2
2.5
Headline CPI Core CPI Target
62
12 MONTH FORECASTS
12 Month forecasts Fed funds
rate
10 year US yield ECB 10 Year Germany
yield
Peripheral bond
spreads
Current 1.50% to 1.75% 1.69%-0.5% deposit rate; QE
reinvestments -0.38%
Italy +137
Spain +65
Ireland +41
12 Months 1.50% to 1.75% 1.00% to 1.80%
-0.5% deposit rate; QE
reinvestments; new
LTRO’s; restart QE
-1.00% to -0.20%
Italy +125/200
Spain +55/125
Ireland +35/75
Source: Bloomberg September 2019
▪ Bond trading ranges have
shifted to the downside
given growth/inflation
concerns and dovish
central banks
▪ Growth outcome and
central bank policies will be
key drivers of yield levels
▪ Core yield upside in
Europe capped by
additional policy
accommodation from the
ECB/low growth/low
inflation
▪ Base case is yields remain
low due to increased policy
accommodation and
growth concerns
▪ German 10 year yield:
-0.60% in 12 months
▪ US 10 year yield: 1.30%
in 12 months
63
FIDELITY: THE NEXT FIVE YEARS
64
SUMMARY
Stock
Research
& Selection
Strong risk/return
profile
Research
scale
Active &
Indexed
Long-term track record
Flagship funds
Diversification
Risk management
65
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Irish Life Investment Managers Limited is regulated by the Central Bank of Ireland
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Past performance, forecasts and simulated performance may not be a reliable guide to future performance
Investments may fall as well as rise
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