The PineBridge Global Multi-Asset Series required selectivity. selectivity. required with albeit assets, to safety relative to shine continue will assets risk suggests Line Market Capital our Overall, markets. US liquid safe, of out flows and elsewhere recovery greater imply would détente Atrade valuations. in recognized adequately than war. more is However, this trade the from damage to less due also but abating, drags post-crisis from only not strength, relative display fundamentals US basis, a regional On consumption. toward up back converge to manufacturing global for and investments their shrinking to stop businesses some for path the to ease enough be could They consequential. very be could uncertainty ever-escalating the end merely that talks trade renewed why is which shock, exogenous recession-inducing today’s be could developments trade negative Unexpectedly cycle. late or mid, early, we were of whether irrespective arecession produce would shock the example, for again, to happen were embargo oil a1973-style if course, Of trade. around uncertainty the for not if bet, ahigh-confidence as slowdown of amidcycle out coming arebound to view we continue predecessors, its did as of recession, prospect the raised –has expansion long this in third –the mini-slowdown cyclical recent the While rates. capitalization and flows, cash demand, improve it would term medium the if over even term, long the in of hyperinflation risk the poses Theory, Monetary Modern in espoused as masses,” the for to “QE markets” capital for “QE from Ashift spending. to government closely more tied creation monetary limitless into morph likely will programs easing quantitative restored today’s case, the being up ends that If of diminishing. instead further to rise populism cause will frustration, economic created has which period, post-crisis slow and long the growth, incremental Without Europe. in do they than China in potentially, and, US the in to occur likely more seem changes These drags. of post-crisis lifting the and change, structural support, of fiscal signs for lookout the on be should investors re-abnormalization, from rates risk-free to benefit the than more by rising from premium risk class’ asset an To preempt clear. increasingly are policy monetary of unconventional version of today’s limits The toward consumption. manufacturing from growth of China’s composition changing the by unveiled exports, on over-reliance its and demand domestic Europe’s in weaknesses structural by part in driven globally, yields to depress continue also will situation Europe’s demand. economic their for prognosis reasonable any exceeds that to alevel of funds supply the of rebooting aresult as down going is globally rate neutral the put, Simply factors. to cyclical response in curve rates the in collapse quarter’s of last independent rates, capitalization medium-term for implications favorable –has “re-abnormalization” termed be can that –moves (ECB) bank Central European the and Reserve Federal the by accommodation unusual of return the rates, capitalization their as well as years, five over flows cash class of asset level and risk, growth, the change events how on focuses CML our Since (CML). Line Market Capital our in expressed as outlook five-year our affecting developments significant most two the were talks trade US-China of renewal the and policies monetary accommodating of extremely return quarter’s Last aTradeSpigots and Time-Out The Implications of Reopened Credit Classes Asset Across Return and Risk of Relative Five-Year Forecast Quarterly Capital Market Line MULTI-ASSET STRATEGY INVESTMENT STRATEGYINVESTMENT INSIGHTS
INVESTMENT STRATEGY INSIGHTS summarize our view of the global global of the view our summarize we report, this In classes. asset the across specialists our with dialogue we make after judgments fundamental several key quantifies of our multi-asset products. It proprietary tool for the management (CML) is our Line Market Capital The About This Report today. today. CML the driving fundamentals the examine and CML, the from gathered insights provide markets, Research Analyst Johaadien Mikhail Manager Portfolio CFA Ng, Sunny Manager Portfolio FRM CFA, Hu, Peter Manager Portfolio Agam Sharma Manager Portfolio CFA Lin, Steven Manager Portfolio CFA PhD, Azema-Barac, Magali Manager Portfolio CAIA Redha, Hani of Multi-Asset Head Global CFA J. Kelly, Michael Contributors: CAPITAL MARKET LINE September 2019 Capital Market Line as of 30 September 2019 (Local Currency)
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Please see Capital Market Line Endnotes. Note that the CML’s shape and positioning were determined based on the larger categories and do not reflect the subset categories of select asset classes, which are shown relative to other asset classes only.
2 | PineBridge Investments Capital Market Line as of 30 September 2019 (USD View, Unhedged)
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S Go t Bond -3 0 5 10 15 20 25 30 35 e ted is
Please see Capital Market Line Endnotes. Note that the CML’s shape and positioning were determined based on the larger categories and do not reflect the subset categories of select asset classes, which are shown relative to other asset classes only.
Capital Market Line Endnotes The Capital Market Line (CML) is based on PineBridge Investments’ estimates of forward-looking five-year returns and standard deviation. It is not intended to represent the return prospects of any PineBridge products, only the attractiveness of asset class indexes, compared across the capital markets. The CML quantifies several key fundamental judgments made by the Global Multi-Asset Team for each asset class, which, when combined with current pricing, results in our annualized return forecasts for each class over the next five years. The expected return for each asset class, together with our view of the risk for each asset class as defined by volatility, forms our CML. Certain statements contained herein may constitute “projections,” “forecasts,” and other “forward-looking statements” which do not reflect actual results and are based primarily upon applying a set of assumptions to certain financial information. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid only as of the date of this document and are subject to change. There can be no assurance that the expected returns will be achieved over any particular time horizon. Any views represent the opinion of the investment manager and are subject to change. For illustrative purposes only. We are not soliciting or recommending any action based on this material.
Capital Market Line | 3 Insights From Today’s CML The slope of our CML steepens due to lower bond yields. The downward adjustment of core bond yields has resulted in a steeper CML, notwithstanding adjustments to growth estimates. Our fundamental forecasts underpinning the CML incorporate the fading of post-crisis drags from developed-market (DM) private-sector deleveraging and the global regulatory spike, as well as supportive macro policy. We also recognize the crucial role played by productivity and the changing nature of China’s growth contributors – and its impact on commodities – in defusing cost pressures. In contrast, investors remain highly sensitive to a perceived imminent end to the expansion. As a result, the slope of our CML supports risk-taking.
“Lower for longer” bond yields set up growth assets as clear outperformers in the years ahead. Proactive central banks are underwriting the expansion by suppressing bond yields. We expect yields to remain anchored by weak growth dynamics in Europe and Japan, as well as the massive global savings glut and central bank balance sheets. This sets up
4 | PineBridge Investments financial conditions to be very accommodative, providing support for growth and equity valuations. The “re-abnormalization” of yields provides a floor on fixed income assets, yet it also reduces the drag on risk assets’ valuations.
Strong consumption patterns will be coupled with selective corporate investment activity. As services increase their contribution to the global economy at the expense of good production, the cycle ahead will increasingly be anchored by strong global consumer demand and “mini-cycles” of limited amplitude relative to previous cycles. Excess capacity will limit firms’ capital spending for physical plants, yet investments in intellectual property and digitization will only accelerate. As evidence, despite all the uncertainty caused by the trade war, firms continued to spend on technological solutions to enhance their capabilities and reduce their costs. We expect this to continue, potentially benefitting several areas, including software and automation solution providers. Beyond improving existing business operations, the innovations create new digital products and features, introduce new ways to deliver them, and enable new business models.
Trends are diverging across credit markets. Credit markets have become bifurcated. Some, such as US investment-grade credit and leveraged loans, are following the typical pattern of ever-worsening credit fundamentals that is characteristic of previous credit cycles. However, other credit markets have been healing over the last few quarters, reducing their leverage ratios and curbing their capital expenditures. These include emerging market (EM) corporates (both investment grade and high yield) as well as US high yield corporates. Yet the growth environment we anticipate remains sufficiently supportive to avoid a large default spike or sharp credit spread widening. Overall, we expect credit markets to deliver modest returns given low defaults, tight credit spreads, and low risk-free yields.
Expect EM equities to display wide dispersion and mixed performance relative to DM. On a cyclical basis, Brazil and India can erode their negative output gaps and deliver above-trend growth, in our view. Yet many EM economies are facing slowing demographic gains and challenges to the global trading status quo. Over the cycle ahead, many EM nations will likely benefit less from IP transfers and foreign direct investment, as automation costs fall and EM cost advantages erode. Painful structural reforms are therefore required to achieve further competitiveness, yet these are difficult to accomplish and initially result in disruption. EM investments, therefore, should be approached with selectivity, requiring nimbleness to capture cyclical moves supported by stimulus measures rather than structural tailwinds. Potential winners from the trade war are Taiwan and Vietnam, while a winner geopolitically could be Singapore.
Private assets remain unattractive. The insatiable demand for private assets has abated somewhat in 2019. Overall, we find this cycle playing out very similarly to previous cycles, albeit over a longer timeframe. In private credit, we have ongoing concerns about the quality of underwriting. In private equity, we see increasingly unfavorable investment terms in the form of fees and expenses, as well as fewer investor rights. Private assets are also potentially vulnerable to disruptive technologies in a wide range of sectors, warranting a cautious approach, particularly in large-cap private credit markets. We recommend “future-proofing” private investments or otherwise maintaining dry powder through a focus on liquid assets until a better entry point is discernable.
Capital Market Line | 5 The Fundamentals Driving Our CML
The “re-abnormalization” of core bond yields has begun. Supply chains will adjust gradually on the margin. Central banks will likely need to keep monetary policy The recent turmoil around trade has been damaging to extraordinarily loose to offset headwinds from trade tensions, corporate confidence, but recent developments indicate a peak weak demographics, and a slowing Chinese economy that is in uncertainty. As the dust settles, firms will be evaluating their less supportive of manufacturing exporters. In Europe, monetary supply chains and re-orienting them by factoring in the new policy will likely take interest rates deeper into negative territory, tariff landscape, as well as risk management considerations. and resumption of QE will tug on global bond yields, including Yet evidence thus far indicates that perhaps only 20%-30% those in the US. Japan will also contribute to this trend over the of production will migrate away from China over the next few next few years. We have reduced our forecasts for real yields, years. Technology will remain the core of the conflict. To sell into more so in Europe and Japan than in the US. Concurrently, China, most companies will retain a substantial manufacturing populist forces will continue to pressure governments into presence there, yet perhaps be choosier about the technology looser fiscal stances, as “QE for the capitalists” morphs into “QE content. So the separation of supply chains will be evolutionary for the masses” in the form of stepped-up public infrastructure rather than revolutionary. spending. There is a good chance that some fiscal stimulus will eventually occur in Europe, and the new ECB head may be China will continue to slow, yet avoid a “hard landing.” instrumental in convincing policymakers of this need. Policymakers in China have shown remarkable discipline in managing a slowing economy while also reeling from the trade US demographics and consumption growth are war, avoiding a repeat of the boom-bust patterns of 2012-2016. improving. After more than 20 years of declining working-age Yet considerable fiscal resources will be required to engineer population growth, the next few years in the US will likely see the re-balancing toward a consumption- and services-based a gradual re-acceleration as a result of the Generation Y and economy. China will need to accelerate its reforms and open Z cohorts entering the workforce. The size of this combined its economy in order to offset a poor demographic profile. cohort is larger than the Baby Boomer generation; even with Reforming industrial policies, state-owned enterprises, and their more prudent consumption profile, their contribution market regulations based on competitive neutrality principles to consumption growth will rise meaningfully over our is crucial to creating a level playing field for all firms. This, in intermediate-term horizon. A key beneficiary of this trend will turn, holds the key to unclogging the major bottlenecks in the be the housing market, in our view, especially rental properties. expansion of the private corporate sector, and thereby boosting Coupled with rising productivity growth (see below) we see an consumption, investment, and productivity growth. Overall, we improving potential growth path ahead for the US. Sadly, the US expect China to continue on a gradual glide path to lower, yet stands alone in this respect, with other economies seeing either more sustainable, growth. slowing population growth or outright contraction. This sets up the US to continue to be a secular engine of growth for the The EM-DM growth differential will widen from cyclical global economy. The key risk to this view is a potential victory of lows, but only in select economies. EM growth has been a progressive Democratic candidate in the 2020 US election. decelerating for over a decade as a result of several factors, including the structural slowdown of China and the unwinding of The productivity wave continues to build. The uptrend in the commodity super cycle. More recently, disruption to global productivity, which we had anticipated, continues to develop. We trade has also had a disproportionate effect on small, open see clear confirmation from both top-down and bottom-up data export-based economies. Going forward, we see challenges points that a global investment cycle is firmly underway, albeit to the tailwinds of IP transfer and foreign direct investment with some recent setbacks due to the trade war. Although these into EMs, as automation costs fall and localized production investment activities include traditional manufacturing-related processes are required to meet customized demand from end capital expenditures, they are predominantly taking the form of consumers. The result will be a stagnant growth differential technology-focused investment for the purpose of enhancing versus DM; we expect only a handful of markets to buck corporate capabilities to stave off disruption and become more this trend. agile and efficient at delivering services to end markets. This trend is predominantly US-led so far, with profoundly positive implications for growth and inflation, as rising productivity generates growth while simultaneously dampening inflationary pressure and improving margins. It is unclear whether similar trends will build up in other regions, but Japan shows some promise.
6 | PineBridge Investments About the Capital Market Line
The Capital Market Line (CML) is a tool developed and maintained by the Global Multi-Asset Team. It has served as the team’s key decision support tool in the management of our multi-asset products. In recent years, it has also been introduced to provide a common language for discussion across asset classes as part of our Investment Strategy Insights meeting. It is not intended to represent the return prospects of any PineBridge products, only the attractiveness of asset class indexes compared across the capital markets.
The CML quantifies several key fundamental judgments made by the Global Multi-Asset Team after dialogue with the specialists across the asset classes. We believe that top-down judgments regarding the fundamentals will be the largest determinants of returns over time driving the CML construction. While top-down judgments are the responsibility of the Multi-Asset Team, these judgments are influenced by the interactions and debates with our bottom-up asset class specialists, thus benefiting from PineBridge’s multi-asset class, multi-geographic platform. The models themselves are intentionally simple to focus attention and facilitate a transparent and inclusive debate on the key drivers for each asset class. These discussions result in 19 interviews focused on determining five year forecasts for over 100 fundamental metrics. When modelled and combined with current pricing, this results in our annualized expected return forecast for each asset class over the next five years. The expected return for each asset class, together with our view of forward-looking risk for each asset class as defined by volatility, forms our CML.
The slope of the CML indicates the risk/return profile of the capital markets based on how the five-year view is currently priced. In most instances, the CML slopes upward and to the right, indicating a positive expected relationship between return and risk. However, our CML has, at times, become inverted (as it did in 2007), sloping downward from the upper left to the lower right, indicating risk-seeking capital markets that were not adequately compensating investors for risk. We believe that the asset classes that lie near the line are close to fair value. Asset classes well above the line are deemed attractive (over an intermediate-term perspective) and those well below the line are deemed unattractive.
We have been utilizing this approach for over a decade and have learned that, if our judgments are reasonably accurate, asset classes will converge most of the way toward fair value in much sooner than five years. Usually, most of this convergence happens over one to three years. This matches up well with our preferred intermediate-term perspective in making multi-asset decisions.
Capital Market Line | 7 About PineBridge Investments is a private, global asset manager focused on active, high-conviction investing. PineBridge We draw on the collective power of our experts in each discipline, market, and region of the world through Investments an open culture of collaboration designed to identify the best ideas. Our mission is to exceed clients’ expectations on every level, every day. As of 30 June 2019, the firm managed US$97.2 billion across global asset classes for sophisticated investors around the world. pinebridge.com MULTI-ASSET | FIXED INCOME | EQUITIES | ALTERNATIVES
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