Multi-Asset with Robin McDonald, Schroders
- 12 mins 48 secs
What has changed in the multi-asset market over the last few months? How will the upcoming US election impact 2020 & will equities continue to rally? Robin McDonald joins us to talk all this and more..
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what to expect from different asset classes in 2020. And for all the latest analysis, I'm joined today by Robin McDonald, head of multi manager team at Shorter's. Thank you very much for joining us. Well, we've talked to you about three months ago. What has changed? What were the main things that appeared that will change your outlook going forward? Well, I think, Cam, you know, we're We're close to the end of 2019 now, you know, 2019. Unlike 2018 which was a tough year for most financial assets, 2019 has been a bit of a bonanza year, particularly for American shares and things like that. So, you know, we're coming to the end of a of a big ear successful year on. I think you know, in that context, what's changed over the course of the last three months. That I think, has Bean a bit surprising is the fact that in spite of the fact that let's say, U S stocks are at all time, Hi is pretty much US. Unemployment is at 50 year lows, US kind of core inflation median inflation's a 10 year highs is that you know the Federal Reserve over the course of the last three months have announced that they're going to be re expanding their balance sheet again, which, you know the market has taken pretty positively, said the Fed of announced that they're gonna be buying about $60 billion per month of T bills. And I think what's interesting is why they're doing it on in that regard. You know, what we can see is a theme globally, really is the fact that, you know governments are pretty much trying to stay, you know, relevant in the game and dealing with populist A tendencies within various countries and economies by boosting their spending on that, really, they're spending money that they don't have on to that extent. If you think about the U. S budget deficit, which under Trump has grown by about 68% over the course of the last few years, you know they're spending money that they don't have. The budget deficit is rising and it's really forcing on, and I think that's the point. It's forcing the Fed toe have to intervene by buying T bills in this instance. But Treasury bonds adding liquidity to the system in a time where ordinarily they wouldn't. I guess the point there is. There's an awful lot of supply coming out off the Treasury. In terms of bonds being issued on, there isn't commensurate amount of demand. You know, foreign central banks, who have historically been big buyers of Treasuries, have been cutting their Treasury exposure. And it's left us money markets in a short term bit of a pickle. And that's really what the Fed is responding to. But the kind of one of the consequences off that clearly in the short term has to being toe boost already very elevated U. S stocks. So I think as we go into 2020 this is a thing that's likely to build because we know it's an election year. We know that both candidates are likely to campaign on further blowing out the budget deficit and, quite frankly, when you've already got things like Social Security, Medicare, Medicaid, US entitlements, defense spending on interest expense already together more than 100% of U. S. Federal tax receipts, it's very difficult for the U. S government of the U. S economy to expand fiscal spending on other programs, tax cuts or whatever it may be without printing money. And that is the world that seamlessly. We seem to be moving towards government spending money that they don't have an expecting central banks to kind of print it. So for us, you know, we do think we're kind of 10 11 years in now to in some economies, quite a late cycle environment. The US being one. So for us, this feels kind of inflationary. Um, the market has bean pretty paranoid about dis inflation, deflation for a long period of time. But, you know, as we protect forward into 2020 and beyond, we kind of think the fundamentals are looking a heck of a lot more inflationary than they have done in recent years. But we're definitely not going to see the recession coming again. We seem to be in a pretty interesting point there because from ah, survey perspective, if you think things like guys names or or kind of PM eyes. And this morning we've had, you know, the latest forecast. PM eyes out of out of the eurozone and you know they're stabilizing, but they're stabilizing at a pretty subdued level, and the market in the very recent past has been trying to discount kind of a rebound in economic activity on what I would say is that for now, it feels to us as though some of the pessimism has Bean pulled out of the market. A lot of investors aren't yet super duper optimistic, but I do think that, you know, if the economy does stabilize, we do get gradual improvement into next year, even if it's quite fleeting. Um, then there's in a fair degree of rotation that can happen within asset markets within bond markets, with equity markets that I think we can capture for our clients and make some decent, some decent returns. You have to think that, you know, about 12 months ago when everybody was forecasting the U. S. Interest rates were on a rising trajectory, we're gonna continue rising into this year, even, you know, 10 year Treasury bonds in the U. S. Wielding about three and 1/4 percent, that was in October last year, in September of this year, that more than hard, you know, that fallen from three and 1/4 down to one and 1/2 which was not only fantastically rewarding if you along bonds, but it's being fantastically rewarding. If you've been long stocks, you know Treasury bond yields, you know they form a significant component of one's discount rate. If you're discounting future cash flows into the present to get a Net present, Danny, you use it a scam rate and the 10 year bond yield is a big part of that. So the fact that it's more than half is being very significant for US equity valuations. But this year was that we've also seen the negative yielding bonds worth out trend gonna go next year. Well, I think you know, I think the very, you know, we picked out at about $17 trillion worth of negative yielding bonds, and today I think we're about 13 or so. Um, Now, what you have to acknowledge is that the majority of that is in Japan in Europe. But what I would say about Japan and Europe, although they have very, very subdued I negative short term interest rates, which in a way is kind of helping to keep the long end very low, if not negative. They are two quite cyclical economy. So I do think that that that that subset of the bond market that today is negative. You negatively yielding, is very vulnerable in an environment where you get a cyclical upswing. And when you think about the fact that everybody be it the Japanese, the Europeans, the Americans today they are all now printing money, and they have all cut interest rates over the course of the last 12 months. There is a fair degree of stimulus coming through the system. So again, one's gotta balance that with the fact that we are 10 years into U. S economic expansion and historically speaking, that's kind of the longest on record. So, you know, we are fairly late cycle, but we do, in the short term, have a fair degree of stimulus coming through the system. So it wouldn't surprise us if we do get a bit of a stabilization in the data. And under those circumstances, then, yeah, I do believe that $13 trillion worth of negative yielding bonds are pretty vulnerable. Actually, another thing I think that's a lot of investorsminds we've seen. This is you mentioned in this incredible rally in equities? Um, that much room to go higher. Well, again, I think that if you look at the equity market averages. If you look at the S and P is an index or the footsie is an index, it disguises a lot of what has actually been going on within the market and within the market. You've had a big, big performance dispersion between shares that ah, highly correlated with bonds and shares that are that much more cyclical and to be crude about it. Anything that's being highly correlated with bonds has done fantastically well as bond yields have fallen and anything that's correlated to the cycle has had a tough time. And again, the setup is essentially one whereby, you know, if you do get a stabilization in a bit of a recovery, then you could see this quite significant. Um, mean reversion within the market whereby stops that are a bit more cyclical, temporarily do quite well with the economy begins to accelerate again on those stocks that essentially trade his surrogates. The bonds are in a a bit of a tough spot for a period of time, so to us, it's interesting, you know, we're all we've all been kind of raised on the idea that past performance shouldn't be much of a guide to the future. And to me today, past performance probably best serves as a bit of a country indicator, actually, because I think next year has the potential to be quite different from this year in terms of what works within the market. You mentioned that presidential elections coming in the US How should that be changing? Maybe the outlook of the way you look at the potential asset classes, How could they be affected or just more? Yeah, well, again, you know, we think in the early part of next year, you know, when it comes to things like inflation, which have been very subdued, that actually given things, that base effects which have almost baked in that in the first quarter, you know, us inflation is gonna be writing a little bit. That's gonna be the backdrop. And against that backdrop, you've got a presidential campaign where the narrative is gonna be really one of who's gonna mount, spend the other on who's gonna have the central bank in effect, print the money to enable them to do it. And again, I do just think, you know, the market has got itself in quite a dis inflation deflation reed type funk. That's been the narrative for a decade. And that's how investors a kind of position that positioned within assets that benefit from dis inflation, deflation. They're not in assets that benefit from inflation. So again, I think that could play into this rotation argument that were positioned to take advantage of and whether it's being long inflation beneficiaries within the market within the equity market or whether it's been long other asset classes like gold, which to us strike us today is a far more effective hedge than, let's say, Bonds, um, for a balanced portfolio. You know, we just kind of think, you know, it's been it's been a tough asset class this year. Gold has been fine, but for a number of years it's been tough. Um, it's not being particularly rewarding, but we think he's got a bit of a brighter future. That, particularly if the market starts to discount a Seymour kind of fiscal recklessness, being more money printing and see with a backdrop of higher, not lower inflation. I'm just finally just interested, you know, the U. S China trade Ward's going on. Do you think it's more of a political game rather than economic game on. Do you think that Trump will feel compelled, Andi sort of, strategically to come up with some sort of solution before the elections? Well, I think that's kind of how he's pivoted in the sense that you can. You can kind of sense that he's, you know, he's more urgent today to do a deal. Then he was 3 to 6 months ago, and I think that's the case, because we are closer to the election and B because the economy is late. The question is, what is he actually going to get out of China? Isn't that significant? And I suppose from our perspective, the notion of a phase one deal is probably not that significant in the context of what we expect to be a multiyear, fractious relationship which, classically speaking, is one whereby you have an emerging power trying to unseat incumbent on dhe. Clearly, you know, the U. S. Of being a center off kind of global economic order now for for many, many decades, and the Chinese, by the nature of the scale of their economy, are trying to assert greater influence on that Ah nde So we expect that relationship to be pretty fractious. Whether China give Trump a win ahead of the election. I'm not so sure, actually, um, we would question why they would do that. As opposed to waiting him out. Seeing how the election pans out, see how the impeachment proceedings pan out. Are they gonna give too much out of that? No. They might give you a token gesture about buying a few more soybeans, but are they gonna move significantly? We don't see the signs of that. Robin McDonald. Thank you. Thank you.