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.


-12

-10

-8

-6

-4

-2

0

2

4

6

8

1/1

/2007

6/1

/2007

11/1

/2007

4/1

/2008

9/1

/2008

2/1

/2009

7/1

/2009

12/1

/2009

5/1

/2010

10/1

/2010

3/1

/2011

8/1

/2011

1/1

/2012

6/1

/2012

11/1

/2012

4/1

/2013

9/1

/2013

2/1

/2014

7/1

/2014

12/1

/2014

5/1

/2015

10/1

/2015

3/1

/2016

8/1

/2016

1/1

/2017

6/1

/2017

11/1

/2017

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


2.3–2.5% 2.2% 1.8% 2.1%


-0.5

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

3

Source: Invesco, data as of 30 November 2017.

Financial conditions still loose despite the Fed’s rate hikes

-600%

-500%

-400%

-300%

-200%

-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


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


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


-14

-12

-10

-8

-6

-4

-2

0

2

4

6

Jan-0

7

Jun-0

7

Nov-0

7

Apr-

08

Sep-0

8

Feb-0

9

Jul-

09

Dec-0

9

May-1

0

Oct-

10

Mar-

11

Aug-1

1

Jan-1

2

Jun-1

2

Nov-1

2

Apr-

13

Sep-1

3

Feb-1

4

Jul-

14

Dec-1

4

May-1

5

Oct-

15

Mar-

16

Aug-1

6

Jan-1

7

Jun-1

7

Nov-1

7

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)



2.0–2.4% 2.0% 1.3% 1.4%


-0.4

0.0

0.4

0.8

1.2

1.6

Jan-9

9

Sep-9

9

May-0

0

Jan-0

1

Sep-0

1

May-0

2

Jan-0

3

Sep-0

3

May-0

4

Jan-0

5

Sep-0

5

May-0

6

Jan-0

7

Sep-0

7

May-0

8

Jan-0

9

Sep-0

9

May-1

0

Jan-1

1

Sep-1

1

May-1

2

Jan-1

3

Sep-1

3

May-1

4

Jan-1

5

Sep-1

5

May-1

6

Jan-1

7

Sep-1

7

Sta

ndard

devia

tion

-600%

-400%

-200%

0%

200%

400%

600%

Dec-9

9

Sep-0

0

Jun-0

1

Mar-

02

Dec-0

2

Sep-0

3

Jun-0

4

Mar-

05

Dec-0

5

Sep-0

6

Jun-0

7

Mar-

08

Dec-0

8

Sep-0

9

Jun-1

0

Mar-

11

Dec-1

1

Sep-1

2

Jun-1

3

Mar-

14

Dec-1

4

Sep-1

5

Jun-1

6

Mar-

17

Pote

ntial %

Financial conditions

ECB to maintain loose monetary policyPositive for European corporate bonds

7

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


The Fed likely to loosen bank regulationAs much as USD 2.3 trillion lending capacity to be freed up

8

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


34.8%

17.3%

0%

10%

20%

30%

40%

50%

60%

Feb-1

1

Apr-

11

Jun-1

1

Aug-1

1

Oct-

11

Dec-1

1

Feb-1

2

Apr-

12

Jun-1

2

Aug-1

2

Oct-

12

Dec-1

2

Feb-1

3

Apr-

13

Jun-1

3

Aug-1

3

Oct-

13

Dec-1

3

Feb-1

4

Apr-

14

Jun-1

4

Aug-1

4

Oct-

14

Dec-1

4

Feb-1

5

Apr-

15

Jun-1

5

Aug-1

5

Oct-

15

Dec-1

5

Feb-1

6

Apr-

16

Jun-1

6

Aug-1

6

Oct-

16

Dec-1

6

Feb-1

7

Apr-

17

Jun-1

7

Aug-1

7

Share of Euro Agg Index With Negative Yield Share of Global Agg Index With Negative Yield

9

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


Global corporate bond market viewsA scale of A to E (A: most positive, E: most negative)

10

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


U.S. investment grade corporate bondsSolid fundamentals and technicals to tighten credit spreads

11

Tight credit spreads would continue to tighten


U.S. high yield bondsSupported by improving fundamentals

12

Source: Bloomberg, Invesco, 30 September 2017.

Improving revenues, cashflows and leverage


-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

1.9x

2.1x

2.3x

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

13

Source: Deloitte, End September 2017 (RHS); Macrobond, End December 2016 (LHS).

European corporates have been conservative with their discretionary cash


EU high yield bondsSupported by improving fundamentals

14

Source: Bloomberg, Invesco, 30 September 2017.

Strongly improving revenues, cashflows and leverage


6.16%

5.78%

2.14%

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

15

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


0

2

4

6

8

10

12

14

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

16

Source: JPMorgan, Invesco, as at 31 May 2017.


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

17

Asian USD bond market has been growing fast

Source: HSBC, Bloomberg, Invesco, data from 1 January 2010 to 31 December 2017.


China’s new policies mean a new game plan for Emerging Market bonds

18

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


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

19

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


Our high conviction bond strategies for 2018

20

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


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

construed as an offer to buy or sell any financial instruments. Nor does this constitute a recommendation of the suitability of any investment strategy

for a particular investor. Circulation, disclosure, or dissemination of all or any part of this document to any unauthorized persons is prohibited.

This document may contain statements that are not purely historical in nature but are “forward-looking statements.” These include, among other

things, projections, forecasts, estimates of income, yield or return or future performance targets. These forward-looking statements are based upon

certain assumptions, some of which are described herein. Actual events are difficult to predict and may substantially differ from those assumed. All

forward-looking statements included herein are based on information available on the date hereof and Invesco assumes no duty to update any

forward-looking statement. Accordingly, there can be no assurance that estimated returns or projections can be realised, that forward-looking

statements will materialise or that actual returns or results will not be materially lower than those presented.

All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. As with all investments there

are associated inherent risks. Please obtain and review all financial material carefully before investing. The opinions expressed are based on current

market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

It is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any investment strategy to any

person in any jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it would be unlawful to market such an offer

or solicitation. This document should not be distributed to retail clients who are resident in jurisdiction where its distribution is not authorized or is

unlawful. It should not be relied upon as the sole factor in an investment making decision. Circulation, disclosure, or dissemination of all or any part of

this document to any unauthorized person is prohibited.

This document is issued in Hong Kong by Invesco Hong Kong Limited景順投資管理有限公司, 41/F, Champion Tower, 3 Garden Road, Central,

Hong Kong.

21

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