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Capital Market Line MULTI-ASSET STRATEGY INVESTMENT STRATEGYINVESTMENT INSIGHTS Capital Market Line Quarterly Five-Year Forecast of Relative Risk and Return Across Asset Classes The Implications of Reopened Credit September 2019 Spigots and a Trade Time-Out Last quarter’s return of extremely accommodating monetary policies and the renewal of US-China trade talks were the two most significant developments affecting our five-year outlook as expressed in our Capital Market Line (CML). About This Report Since our CML focuses on how events change the growth, risk, and level of asset class The Capital Market Line (CML) is our cash flows over five years, as well as their capitalization rates, the return of unusual proprietary tool for the management accommodation by the Federal Reserve and the European Central bank (ECB) – moves of our multi-asset products. It that can be termed “re-abnormalization” – has favorable implications for medium-term quantifies several key fundamental capitalization rates, independent of last quarter’s collapse in the rates curve in response judgments we make after dialogue to cyclical factors. with our specialists across the Simply put, the neutral rate globally is going down as a result of rebooting the supply asset classes. In this report, we of funds to a level that exceeds any reasonable prognosis for their economic demand. summarize our view of the global Europe’s situation will also continue to depress yields globally, driven in part by markets, provide insights gathered structural weaknesses in Europe’s domestic demand and its over-reliance on exports, from the CML, and examine the unveiled by the changing composition of China’s growth from manufacturing fundamentals driving the CML toward consumption. today. The limits of today’s version of unconventional monetary policy are increasingly clear. To preempt an asset class’ risk premium from rising by more than the benefit to risk-free rates from re-abnormalization, investors should be on the lookout for signs of fiscal Contributors: support, structural change, and the lifting of post-crisis drags. These changes seem more likely to occur in the US and, potentially, in China than they do in Europe. Without Michael J. Kelly, CFA incremental growth, the long and slow post-crisis period, which has created economic Global Head of Multi-Asset frustration, will cause populism to rise further instead of diminishing. If that ends up Hani Redha, CAIA being the case, today’s restored quantitative easing programs will likely morph into Portfolio Manager limitless monetary creation tied more closely to government spending. A shift from “QE for capital markets” to “QE for the masses,” as espoused in Modern Monetary Theory, Magali Azema-Barac, PhD, CFA poses the risk of hyperinflation in the long term, even if over the medium term it would Portfolio Manager improve demand, cash flows, and capitalization rates. Steven Lin, CFA While the recent cyclical mini-slowdown – the third in this long expansion – has raised Portfolio Manager the prospect of recession, as did its predecessors, we continue to view a rebound coming out of a midcycle slowdown as a high-confidence bet, if not for the uncertainty Agam Sharma around trade. Of course, if a 1973-style oil embargo were to happen again, for example, Portfolio Manager the shock would produce a recession irrespective of whether we were early, mid, or late cycle. Unexpectedly negative trade developments could be today’s recession-inducing Peter Hu, CFA, FRM exogenous shock, which is why renewed trade talks that merely end the ever-escalating Portfolio Manager uncertainty could be very consequential. They could be enough to ease the path for Sunny Ng, CFA some businesses to stop shrinking their investments and for global manufacturing to Portfolio Manager converge back up toward consumption. Mikhail Johaadien On a regional basis, US fundamentals display relative strength, not only from post-crisis Research Analyst drags abating, but also due to less damage from the trade war. However, this is more than adequately recognized in valuations. A trade détente would imply greater recovery elsewhere and flows out of safe, liquid US markets. Overall, our Capital Market Line suggests risk assets will continue to shine relative to safety assets, albeit with required selectivity. The PineBridge Global Multi-Asset Series MULTI-ASSET STRATEGY INVESTMENT STRATEGY INSIGHTS CAPITAL MARKET LINE INVESTMENT STRATEGY INSIGHTS INVESTMENT STRATEGY Capital Market Line as of 30 September 2019 (Local Currency) 21 KEY 19 Most Liquid Less Liquid ndonesian uit Less More Least Liquid 17 Correlated Correlated Select sset Class M ata uit M MA uit 15 Produtiit Baset Turish uit Indian Equity aanese uit S Midstrea nerg 13 M uit S uit Sall Broad Euroean inanials hinese uit A Shares ) M Asian uit % 11 ( oodities - ndustrial Metals n r u Taiwanese Equity t e R ussian uit 9 d Priate uit e Euroean uit S uit inanials t M ororate c e Meian Got Bond eal state p x M Sovereign E 7 S lials S Ban oans Priate nrastruture US Equity 5 S nter redit edge unds S igh ield S G oo Bond isted Priate uit S Tiber 3 ABS M oal Priate redit Asian redit urren ebt MBS S Muniial S ong redit M S MBS 1 TBill S TPS S Got Bond -1 aanese Got Bond Geran Got Bond -3 0 5 10 15 20 25 Expected Risk (%) 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) 21 KEY Most Liquid 19 Less Liquid Less More Least Liquid Correlated Correlated 17 M ata uit Select sset Class ndian uit oodities - ndustrial Metals Produtiit Baset Euroean Sall a uit nternational Sall a uit 15 S Midstrea nerg aanese uit M uit Euroean inanials 13 Chinese Equity (A Shares) oodities -Energy S uit Sall Broad M MA uit 11 Meian Got Bond ndonesian uit S uit inanials ) % ( eal state Russian Equity 9 EM Asian Equity n r u Priate uit t US Bank Loans US Cyclicals e R European Equity 7 M ororate M Sovereign d e t Priate nrastruture c US Equity e p Hedge Funds x EM Local Currency Debt E 5 Asian Credit S igh ield S G oo Bond isted Priate uit 3 ABS Private Credit S Tiber US Municipal US Long Credit 1 3M US TBill US TIPS German Govt Bond Japanese Govt Bond MBS -1 US Inter Credit MBS US Govt Bond -3 0 5 10 15 20 25 30 35 Expected Risk (%) 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.
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