21st March 2019 EM Assets Win Out from the “Powell Pivot”
Investors still cautious despite 2019Q1 rally in risk assets Investor attitudes towards risk assets have only improved modestly compared with our December survey. Bear in mind that while Global equities have rallied strongly since Christmas, they were only 4% higher during this fieldwork period than that of our previous survey in early December. Investors now ascribe a 53% probability to stocks being higher a year from now, and a 62% probability to stocks beating bonds. But they are also braced for higher equity volaltility, and remain worried about the possibilities of a US bear market and/or a global recession. They are wary of credit, less confident about corporate earnings, biased towards defensives and think higher equity valuations are unlikely. ASR’s Composite “Optimism” Indicator (p12) - based on seven “risk-on” trades - remains well below the average of the past four years. “Powell Pivot” prompts major rethink of interest-rate probabilities The Fed’s decision to move to ‘patient’ has led to some dramatic change in interest- rate probabilities. The likelihood of higher US 2yr yields a year from now has fallen to 54%. For the first time in this survey, more investors expect the US yield curve to steepen than to flatten. 16% of respondents even think that both 2yr and 10yr yields could be lower a year from now. While the panel still expects bond yields to be higher a year from now, the probabilities have fallen as inflation fears have receded. EM assets in favour due to softer US rate expectations & weaker USD Emerging Markets are back in favour. EM equities are expected to trounce Developed Market peers, while EM bonds are expected to outperform US HY Credit. 38% of respondents expect both trades to happen over the coming year. The change in US monetary policy and the prospect of a softer USD have been important catalysts. Investors’ Views Fracture Further Asset Survey 2019Q1 Asset Survey
- A big data analysis (see p15) of our panellists’ responses reveals how this year’s weak economic data and strong equity-market performance has created rifts between investors. Our panel seems to be transitioning away from the old investment regime to a new one. This has fragmented the three groups seen in the Q4 2018 poll into five ‘tribes’. This is one of the widest ranges of groupings since we started running the survey.
Multi The cluster of bullish panellists has fallen from a half to a third of all respondents, but in contrast to the previous survey, this group is now expecting business confidence to rise over the coming year. The division over the inflation outlook is still a differentiator for the two groups that believe business activity has stabilised and colours their outlook for yields, if not for equities where they are neutral. The final two groups of investors David Bowers are bearish on risk assets, but they differ on whether the economy will slow enough to +44 (0) 20 7073 0733 fall into recession and so drive bond yields lower. [email protected] The Fieldwork Charles Cara th th +44 (0) 20 7073 0738 The fieldwork was conducted between 28 February and 14 March 2019. A record [email protected] 252 asset managers participated in this wave, representing $4.7 trillion of assets. Ian Harnett +44 (0) 20 7073 0737 [email protected] Authorised and Regulated by the Financial Conduct Authority 1-2 Royal Exchange Buildings, London, EC3V 3LF Investment Strategy | 21st March 2019
Highlights from the Survey ASR’s Multi-Asset Survey is a survey of probabilities. Every quarter we ask more than 200 CIOs, asset allocators, economists and multi-asset strategists about the outlook for financial markets for the next 12 months. However, instead of asking them about they are positioned (as some surveys do), we ask them about the likelihood of certain financial events A Survey of Probabilities occurring: for example, how likely do they think it is that the dollar will be higher; how likely it is that stocks will outperform bonds; or how likely it is that 10yr bond yields will be higher? We are trying to map how they see the financial world in terms of probabilities. Where possible we contrast those probabilities
with how often those events have in fact occurred over the past
decade. This is a cartographical tool that can help identify pockets of ‘groupthink’ (where everyone sees the world in the same way).
1. The Macro Environment. The past three months have seen a major rethink on the business cycle as a result of the “Powell Less negative on the cycle Pivot” on US monetary policy. Investors are now much less short-term but recession confident that the business cycle will be weaker a year from now. That said, the risk of a global recession still remains elevated fears remain elevated (38% probability) and our panel is becoming more convinced
that US unemployment rate will be higher in a year’s time (54%).
2. Inflation. There has been a significant collapse in inflation expectations over the past six months. Investors continue to Significant collapse in think that the probability of core PCE deflator exceeding 2% is inflation expectations greater than 50% (as they have done ever since we introduced the question in 2016). In Japan and eurozone, investors have practically given up expecting to core CPI inflation to exceed 2% - in both countries, the probability is now sub-30%.
3. Bonds. Investors continue to cling on to the belief that bond yields are more likely to rise over the next 12 months (despite Consensus expecting higher the benign inflation outlook). But the collapse in 10yr yields since bond yields is being October has clearly challenged those probabilities. At 56%, the challenged probability of higher US yields a year from now is the lowest reading the survey has ever recorded. 4. Other US Interest Rates. The abrupt shift in Fed policy has had a dramatic impact on investors’ rate expectations. Just three months ago, investors put the probability of higher US 2yr yields Major fall is the probability at 65%; today it has fallen sharply to 54%. Interestingly the that 2yr Yields will be higher probability is still above 50%; investors are still reluctant to a year from now contemplate lower 2yr rates a year from now. The probability of higher real yields has also fallen – this is particularly important for the dollar and for real assets. However, our panel is less confident that US “TIPS” will beat Conventionals suggesting some downward bias to inflation breakevens. 5. Corporate Credit & EM Debt. Despite a strong performance from US corporate credit in 2019Q1, investors’ ‘love-affair’ with Credit remains out of favour the asset class is over. Since 2017H1 our panellists have become less convinced the IG credit can outperform Treasuries; they have become progressively less convinced that HY credit can outperform IG credit; and they have become more convinced
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that EM bonds will beat US HY credit. That partly reflects a preference for sovereign paper over corporate, but there is also EM bonds (and EM assets in growing interest in EM assets more generally, prompted by lower general) are in favour expectations of higher US interest rates and a weaker dollar. 6. Global Equities. Despite (or maybe because of) the 17% rally since their lows on Christmas Eve, investors place a probability Lacklustre equity drivers of only 53% on higher Global equities. The chances of higher corporate earnings is a modest 54% and the probability of higher multiples remains below 50% for the fifth survey running.
7. Risk Appetite. One of the reasons for the cautious equity view is the elevated fear of a US bear market within the next 12 months especially relative to its historical base. The concern is Investors still quite risk- underpinned by the high probability (67%) investors are giving averse despite the rally in to increased equity volatility over the next 12 months. 27% of risk assets in 2019Q1 respondents think that both higher equity volatility and lower global equities are likely over the coming year. Another cross- check on risk appetite is whether investors think that cyclical stocks can outperform defensive stocks. Our panel puts this probability at less than 50% for the third survey running, suggesting a risk-averse stance. 8. Equity Allocation. Investors are increasingly confident that EM Equities are expected to Emerging Market (EM) equities are set to outperform Developed outperform DM Equities Market (DM) equities over the next 12 months (implied probability: 60%). 38% of the panel not only think it likely that EM equities will beat DM, but also expect EM Bonds to outperform US High Yield. Interestingly, they remain strangely ambivalent when it comes to choosing between US and non-US equity markets: typically, EM equity outperformance has been strongly correlated with US equity underperformance. Investors place a 54% probability on the ‘Value’ factor beating ‘Growth’. Investors still think it likely 9. Asset Allocation. Investors believe stocks will beat bonds over that stocks will beat bonds the next 12 months, with a probability of 62% (although that is over the next 12 months the second lowest reading in the survey’s history). Investors are becoming increasingly sceptical that the dollar can continue to appreciate – especially given the downward shift in short-rate and real-yield expectations. Our summary indicator – ASR’s But remain “risk-off” Composite Optimism Indicator (COI) based on seven survey relative to the average of questions – has shown a small rebound, but remains in “risk off” the past four years territory, well below the average of the past four years. 10. Commodities. The rethink on the prospects for US real yields and the more cautious view on USD has helped fuel expectations Investors more confident that the gold price will be higher a year from now. Industrial gold is headed higher commodities are expected to trade in line with gold, whereas the consensus is for oil to outperform gold.
11. Some Informational Gifts: (a) the percentage of respondents More people now expect US thinking that 2yr and 10yr US yields will both be higher a year yield curve to steepen than from now has fallen to just 33% (compared with almost 80% a to flatten over coming year year ago); (b) more people now expect US yield curve to steepen than to flatten; (c) investors are questioning the relationship between bond yields and stocks: 33% of participants assume a positive correlation – that’s half as many four years ago.
3 For full Research Library click here Now available on Bloomberg, Thomson Reuters & Factset Investment Strategy | 21st March 2019 Macro Environment MAS.1: Probability of Higher Business Confidence a Year from Now
The past three months have seen an abrupt reassessment of the business cycle. The likelihood of a further slowdown from current levels has receded. Note though that the turnaround has stopped short of investors expecting the business cycle to be stronger a year from now
Source: ASR Ltd. / Datastream from Refinitiv / Extel
MAS.2: Probability of a Global Recession in the Next 12 Months
Investors may have become less negative about the cycle, but the probability of a global recession remains elevated… and has actually increased since December’s survey
Source: ASR Ltd. / Datastream from Refinitiv / Extel
What is fascinating is that MAS.3: Probability of Higher US Unemployment Rate in 12m Time the probability that the US unemployment rate will be higher a year from now has also risen.
This suggests that the policy response at the start of this year has been insufficient to persuade investors that the “downturn” phase of the business cycle can be averted
Source: ASR Ltd. / Datastream from Refinitiv / Extel
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Core Inflation MAS.4: Probability that US Core PCE Deflator will Exceed 2%
Investors still believe that there is a 52% probability that the US core PCE deflator will exceed 2% a year from now. This could constrain how much the Fed will be able to ease.
Source: ASR Ltd. / Datastream from Refinitiv / Extel
MAS.5: Probability that eurozone Core CPI will Exceed 2%
The latest survey has seen a major decline in the probability that we will see eurozone core CPI exceed CPI over the next 12 months. History is on investors’ side: eurozone core CPI has never exceeded 2% over the past decade
Source: ASR Ltd. / Datastream from Refinitiv / Extel
MAS.6: Probability that Japanese core CPI will Exceed 2%
The probability that Japanese core CPI will exceed 2% in the next 12 months remains one of the least likely events to occur, according to our panel
Source: ASR Ltd. / Datastream from Refinitiv / Extel
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Bond Yields MAS.7: Probability of Higher10yr Treasury Yields a Year from Now
Our panel of asset allocators continues to live in hope of higher 10yr Treasury yields. But the experience of the past 6 months where yields have tested 2.5% rather than broken 3.5% has lowered the implied probabilities from 70% during 2017/18 to just 56% in March 2019.
Source: ASR Ltd. / Datastream from Refinitiv / Extel
MAS.8: Probability of Higher10yr Bund Yields a Year from Now
The fall in Treasury yields has impacted the probability of higher Bund yields, which has fallen. Bund yields have slumped from 56bp in October to just 8bp today. That said, investors have put a 58% probability on Bund yields being higher a year from now.
Source: ASR Ltd. / Datastream from Refinitiv / Extel
MAS.9: Probability of Higher10yr JGB Yields a Year from Now
Japanese JGB yields fell from 15bp in October to minus 4bp – alongside the decline in US and German yields. Investors are putting a 50% chance that yields will be higher a year from now
Source: ASR Ltd. / Datastream from Refinitiv / Extel
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US Short Rates / Real MAS.10: Probability of Higher 2yr Treasury Yields a Year from Now Yields / TIPS
The “Powell Pivot” has had a dramatic effect on expectations for US 2yr yields. A year ago, higher 2yr rates was one of the highest conviction calls in our Survey, with an implied probability of more than 70%. Investors still think rates more likely to be higher a year than lower –
but only just. Source: ASR Ltd. / Datastream from Refinitiv / Extel
MAS.11: Probability of Higher US Real Yields a Year from Now
A year ago, the Conventional Wisdom was fairly certain that US real yields were headed higher. That has begun to change. Over the past three months, following the “Powell Pivot” US real yields have halved. Such a shift in expectations for real yields has implications for the dollar and for real assets more generally (e.g. commodities and real estate)
Source: ASR Ltd. / Datastream from Refinitiv / Extel
MAS.12: Probability that US TIPS Will Beat Conventionals With the less bearish expectations for 10yr Treasuries and reduced concern that core PCE deflator will exceed 2%, it is no surprise that investors have downgraded the likelihood that TIPS will return more than Conventionals over the next 12 months.However, they have stopped short of projecting falling inflation breakevens.
Source: ASR Ltd. / Datastream from Refinitiv / Extel
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Credit & EM Debt MAS.13: Probability that US IG Credit will Beat Treasuries
A good first quarter for US corporate credit has dispelled some of the concerns in our previous Survey. But the chart is a powerful reminder of how much credit has fallen out of favour over the past 2 years. Note the big divergence with the historic baseline probability.
Source: ASR Ltd. / Datastream from Refinitiv / Extel
MAS.14: Probability that US HY Credit will Beat US IG Credit
US High Yield has performed well in 2019Q1. However, on a 12-month view, investors remain mildly sceptical that HY will beat investment- grade. Again, look at the divergence between the current implied probability and the historic baseline probability.
Source: ASR Ltd. / Datastream from Refinitiv / Extel
MAS.15: Probability that EM Bonds will Beat US High-Yield Credit US corporate credit may have fallen out of favour, but EM sovereign bonds have taken their place. Partly this reflects a preference for sovereign over corporate debt, and partly because the Powell Pivot has lifted some of the pressures on Emerging-Market assets. EM bonds tend to beat US HY when the US equity risk premium is under upward pressure.
Source: ASR Ltd. / Datastream from Refinitiv / Extel
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Global Equity Drivers MAS.16: Probability that Global Equities will be Higher in 12m Time
Despite the 17% rally in Global equities from their low-point on Christmas Eve, the probability that equities will be higher a year from now has not really changed from three months ago. This is in sharp contrast with the baseline probability which shows that equities have risen 70% of the time over the past decade.
Source: ASR Ltd. / Datastream from Refinitiv / Extel
MAS.17: Probability that Global Corporate Earnings will be Higher
There is clearly some concern around the outlook for Global Corporate Earnings. Investors still place a 54% probability of earnings being higher a year from now… but that compares with a 70% probability a year ago.
Source: ASR Ltd. / Datastream from Refinitiv / Extel
MAS.18: Probability that Global Equity PEs are Higher in 12m Time
What makes matters worse is that investors have low conviction around multiple expansion – they are putting a 49% probability on equity PEs being higher a year from now.
Only 18% of respondents think it likely that both earnings and multiples will be higher a year from now; while 16% of those polled
think that both are unlikely. Source: ASR Ltd. / Datastream from Refinitiv / Extel
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Equity Risk Appetite MAS.19: Probability of 20% Drawdown in US Equities in next 12m
Equity investors remain nervous. When asked about the chances of a 20% drawdown in US equities within the next 12 months, investors give it a probability of 48%. This is very high relative to history, and is consistent with a move into the “Late Cycle” phase of the business cycle – traditionally a testing time for risk assets.
Source: ASR Ltd. / Datastream from Refinitiv / Extel
MAS.20: Probability that Equity Volatility (VIX) will be Higher Investors appear to have bought into the idea that equity volatility is unsustainably low. They are placing a 67% probability on it being higher a year from now – one of the highest convictions in the Survey.
27% of the panel think it likely that VIX will be higher and equities lower; 31% expect VIX to be higher and IG credit to underperform UST, and 33% expect VIX to be higher and for HY to Source: ASR Ltd. / Datastream from Refinitiv / Extel underperform IG credit. MAS.21: Probability that Cyclicals will Outperform Defensives
Despite the strong rally in Global equities and a sense that the business cycle may be stabilising, there is still a reluctance to embrace Cyclicals over Defensives. The latter are supported by the strong performance from bonds, while the former face the headwind of lacklustre growth and the absence of pricing power.
Source: ASR Ltd. / Datastream from Refinitiv / Extel
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Equity Allocation MAS.22: Probability that EM Equities will Beat DM Equities
Emerging Markets (EM) are back in favour. Investors are putting a 60% probability on EM equities outperforming Developed Markets (DM) over the next 12 months – an aggressive stance relative to history.
38% of respondents think that not only will EM equities outperform DM, but that EM bonds will outperform HY. 27% of those
polled not only expect EM Source: ASR Ltd. / Datastream from Refinitiv / Extel equities to beat DM, but are MAS.23: Probability that US Equities will Beat non-US Equities looking for the US dollar to weaken.
The view on US equities vs non-US stocks remains in limbo. Normally, a bullish view on EM tends to take place against a background of US equity under- performance. But investors have come down firmly on the fence with a probability of 50%.
Source: ASR Ltd. / Datastream from Refinitiv / Extel
MAS.24: Probability that Global ‘Value’ will Beat Global ‘Growth’
The fact that Growth has outperformed Value in the recent rally has not deterred investors from placing a 54% probability on Value to outperform Growth over the next 12 months. Historical precedent suggests this is a brave call with Value only beating Growth 35% of the time over the past decade.
Source: ASR Ltd. / Datastream from Refinitiv / Extel
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Asset Allocation MAS.25: Probability that Global Equities will Beat Global Bonds
Investors still expect Global stocks to beat bonds over the next 12 months, with a implied probability of 62%. That said, that is the second lowest reading since we started the survey.
Source: ASR Ltd. / Datastream from Refinitiv / Extel
MAS.26: Probability that US Dollar will be Higher a Year from Now
For the second survey running investors believe that the probability of a stronger USD a year from now is less than 50%. The prospect of lower US interest rates – particularly real yields – has been a major contributory factor. The chart shows the secular decline in expectations of dollar strength.
Source: ASR Ltd. / Datastream from Refinitiv / Extel
MAS.27: ASR Composite ‘Optimism’ Indicator (COI) ASR’s “Composite Optimism Indicator” (COI) takes seven long-running questions that would normally be associated with “risk-on”. It shows just how much investor expectations have fallen below the average of the past four years.
Source: ASR Ltd. / Datastream from Refinitiv / Extel
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Commodities MAS.28: Probability that Gold will be Higher a Year from Now
As the secular dollar strength evaporates, and expectations of higher real yields fade, so commodities start to look relatively attractive. Investors are gradually placing an higher probability that the gold price will be higher a year from now.
Source: ASR Ltd. / Datastream from Refinitiv / Extel
MAS.29: Probability that Industrial Metals will Outperform Gold
Investors find it hard to choose between gold and industrial metals – although history suggests that this is in fact a call on US bond yields by another name, with gold outperforming industrial metals when yields are falling.
Source: ASR Ltd. / Datastream from Refinitiv / Extel
MAS.30: Probability that Oil Outperforms Gold over next 12m
There is more confidence that oil will outperform gold over the next 12 months.
Source: ASR Ltd. / Datastream from Refinitiv / Extel
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Crossbreak Charts MAS.31: % Respondents with Different Views on US 2y & 10y Yields
One of this survey’s innovations is the ability to look at how investors have answered pairs of questions over time.
For example, the adjacent chart shows that four surveys ago almost 80% of the panel expected both US 2yr and 10yr yields to be higher in a year’s time. Today only 33% of our respondents hold that view.
And 16% now believe that Source: ASR Ltd. / Datastream from Refinitiv / Extel both could be lower. MAS.32: % Respondents Expecting Higher Equities with…
We can now explore better what is driving expectations of higher equities. This chart shows how many are equity bulls because of stronger earnings… and how many are bullish because of higher multiples? The answers are surprising. Only 30% of our panel think that higher equities and higher corporate earnings are both ‘likely’, while only 23% of respondents expect both higher equities and higher Source: ASR Ltd. / Datastream from Refinitiv / Extel multiples. Note the declining trends. MAS.33: Tracking the Relationship Between Stocks & Bonds
The final crossbreak looks at the relationship between stocks and bonds. The dark line shows the percentage of our panel that believe there is a positive correlation between US bond yields and global equities (currently 35%). In contrast, 18% of respondents expect higher bond yields and lower equity prices (a negative correlation).
Source: ASR Ltd. / Datastream from Refinitiv / Extel
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Mixed economic and market signals create rifts in our panel Contrasting messages from the economy and markets… A big data analysis of our panellists’ responses reveals how this year’s weak economic data and strong equity market performance has created rifts between investors. Our grouping algorithm now sees our panel as …has fragmented the views best split into 5 groups (MAS. 34) instead of the 3 groups that we have of our panel usually seen in the previous surveys. Our panel seems to be inching its way from the old investment regime to a new one.
The number of committed The more pessimistic tone of the survey means that only one group, the Bulls has declined to 35% Bulls, comprising 35% of the panel, has a positive view of both the economy and the equity market (MAS. 35). These panellists expect business confidence to rise, unemployment to fall and risk assets to outperform safe ones. About the only procyclical measure they expect to fall during the next 12 months is inflation, despite these investors
being positive on Oil and Industrial Goods prices relative to Gold. Meanwhile others panellists are cautious for a variety of All the other groups are cautious on the economy and expect Business reasons. Confidence to fall and unemployment to rise (slightly). Instead, what divides them is their views on inflation, bond yields and earnings, which then sets the tone for the rest of their asset allocation views. Most pessimistic are the Recession Bears which comprises 13% of the panel (MAS. 36). These investors are the most cautious on business Some fear a recession confidence and the risks of recession. They expect bond yields, corporate earnings and equities all to fall. These investors are seeking shelter in Treasuries and the USD. Almost as pessimistic as the Recession Bears are the No Recession Bears While others fear a with 15% of the panel. They key difference is that they do not expect slowdown strong enough to a recession and expect stable inflation to limit any rally in US Treasuries hit equity prices (MAS. 37). As they are cautious on equities (MAS. 38), both for earnings and multiples, they are indifferent between equities and bonds.
The Falling inflation group does not see any sign of inflation returning
either in the US or in the rest of the world, which leads to an expectation The two remaining groups of falling yields all along the curve. In fact no group expects the yield are neutral on equities… curve to change shape. The Falling inflation group is also neutral on equities (although there is an inconsistency in that they prefer equities over bonds).
Taking the opposite stance on inflation (MAS. 39) is the Accelerating …but have starkly different inflation group (17%) which expects it to accelerate despite rising views on inflation and hence unemployment and a neutral view on commodity prices. Maybe because of rising inflation, they have the strongest views on yields, expecting the bond market them to rise in the US and in Germany and Japan. They expect
corporate earnings to remain stable, so the credit markets are not expected to sell off, but they do think that equities have rallied far enough for now. What unites all of these groups are views that Emerging Market Sovereign bonds are better than US High Yield, that the VIX is going higher and that Value will finally start outperforming Growth, as well as the implied view that the Yield Curve slope is not going to change.
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MAS. 34: Average response of the 5 groups identified in our Machine Learning Analysis
Business confidence higher
lobal recession uestion
S unemployment rate higher
S core inflation at or higher
urozone core CPI inflation over
apan core CPI inflation over
S year Treasury yields higher
S year Treasury yields higher
S real yields higher ( )
S TIPS returns beat Treasuries
Bund ields igher
apan year yields higher
S corporate bond returns beat Treasuries
S corp. bonds beat S I
sov. bonds beat S corp. bonds ( )
lobal equities higher ( )
lobal corporate earnings higher ( )
lobal equity valuations higher
S equities outperform non S equities
equities outperform D equities
lobal cyclicals outperform defensives
alue outperform rowth
I higher
drawdown in S equities
old Price igher
Industrial etals beat old
Oil outperforms old
lobal equities outperform bond returns
SD trade weighted inde higher
unlikely S unlikely ven Chance S likely likely Response Group o Recession Bears ( ) Bulls ( ) Accelerating inflation ( )
alling inflation ( ) Recession Bears ( )
Source: ASR Ltd. / Extel
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MAS. 35: Comparison of ‘Bulls’ Group (35%) with Survey 0.75 More Likely than Consensus
0.25
-0.25
More Unlikely than Consensus Bulls vs Survey
-0.75
VIX higher VIX
Goldhigher
EPS higherEPS ($)
EM Eq DMEq EM beat
USD TWI higher TWI USD
Global recession Global
20% fall 20%Eqfall US in
Bus. conf.higher Bus.
US HYIG beatUS US
JP core infl.> JPcore 2%
Equities bt Equities Bonds bt
EZ core infl. > 2% core EZ infl. >
US core infl. core > US infl. 2%
Jp 10y Ylds Higher Ylds 10y Jp
Equities higher ($) Equities higher
US Eq beat Eq US beat non-US
US 2-yrhigher yldsUS
Cycl Eq Cycl beat Defns
Bund Yields Higher Yields Bund
Equity valns higher Equityvalns
US TIPS US beat Conv.
US Real Ylds higherRealYlds US
US 10-yr 10-yr US higher ylds
Ind Metals beat Gold Metals Ind beat
US unemploy. US higher
US Corp bnds bt Sovsbt Corp US bnds
Oil outperforms outperforms Oil Gold EM Sov bnds bt USbt Sov HY EM bnds Value Eq GrowthEq Value beat iews e pressed in ‘notches’ Source: ASR Ltd. / Extel MAS. 36: Comparison of ‘Recession Bears’ (13%) Group with Survey 0.80 More Likely than Consensus
0.40
0.00
-0.40
More Unlikely than Consensus Recession Bears vs Survey
-0.80
VIX higher VIX
Goldhigher
EPShigher ($)
EM Eq DMEq EM beat
USD TWI higher TWI USD
Global recession Global
20% fall 20%Eq fall US in
Bus. conf.higher Bus.
US HY IGUS beat US
JP core infl.> 2%core JP
Equities bt Equities Bondsbt
EZ core infl. > 2% core EZ > infl.
US core infl. core > US infl. 2%
Jp 10y Ylds Higher Ylds 10y Jp
Equities ($) Equities higher
US Eq beat Eq US beat non-US
US 2-yrhigher ylds US
Cycl Eq Cycl beat Defns
Bund Yields Higher Yields Bund
Equity valns higher Equity valns
US TIPS beatUS Conv.
US Real Ylds higherRealYlds US
US 10-yr 10-yr US higher ylds
Ind Metals beat Gold Metals Ind beat
US unemploy. higher US
US Corp bnds bt SovsbtCorp US bnds
Oil outperforms outperforms Oil Gold EM Sov bnds bt USbt Sov HY EM bnds Value Eq beat Growth Eq Value beat iews e pressed in ‘notches’ Source: ASR Ltd. / Extel
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MAS. 37 Comparison of ‘Recession Bears’ (13%) Group with ‘No Recession Bears’ (15%) Group 2 Very Likely
1
0
-1
Recession Bears No Recession Bears Very Unlikely
-2
VIX higher VIX
Goldhigher
EPS higherEPS ($)
EM Eq DMEq EM beat
USD TWI higher TWI USD
Global recession Global
20% fall 20%Eq fall US in
Bus. conf.higher Bus.
US HYIG beatUS US
JP core infl.> 2%JPcore
Equities bt Equities Bonds bt
EZ core infl. > 2% core EZ > infl.
US core infl. core > US infl. 2%
Jp 10y Ylds Higher Ylds 10y Jp
Equities ($) Equities higher
US Eq beat Eq US beat non-US
US 2-yrhigher yldsUS
Cycl Eq Cycl beat Defns
Bund Yields Higher Yields Bund
Equity valns higher Equityvalns
US TIPS US beat Conv.
US RealYldshigher US
US 10-yr 10-yr US higher ylds
Ind Metals Gold Ind beat
US unemploy. US higher
US Corp bnds bt Sovsbt Corp US bnds
Oil outperforms outperforms Oil Gold EM Sov bnds bt USbt Sov HY EM bnds Value Eq GrowthEq Value beat Views expressed in ‘notches’ Source: ASR Ltd. / Extel MAS. 38 Comparison of ‘No Recession Bears’ (15%) Group with Survey 0.75 More Likely than Consensus
0.25
-0.25
No Recession Bears vs Survey
-0.75 More Unlikely than Consensus
VIX higher VIX
Goldhigher
EPShigher ($)
EM Eq DMEq EM beat
USD TWI higher TWI USD
Global recession Global
20% fall 20%Eq fall US in
Bus. conf.higher Bus.
US HY IGUS beat US
JP core infl.> 2%core JP
Equities bt Equities Bonds bt
EZ core infl. > 2% core EZ > infl.
US core infl. core > US infl. 2%
Jp 10y Ylds Higher Ylds 10y Jp
Equities ($) Equities higher
US Eq beat Eq US beat non-US
US 2-yrhigher ylds US
Cycl Eq Cycl beat Defns
Bund Yields Higher Yields Bund
Equity valns higher Equity valns
US TIPS beatUS Conv.
US Real Ylds higherRealYlds US
US 10-yr 10-yr US higher ylds
Ind Metals Gold Ind beat
US unemploy. higher US
US Corp bnds bt SovsbtCorp US bnds
Oil outperforms outperforms Oil Gold EM Sov bnds bt USbt Sov HY EM bnds Value Eq beat Growth Eq Value beat iews e pressed in ‘notches’ Source: ASR Ltd. / Extel
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MAS. 39 Comparison of ‘Accelerating Inflation’ (17%) Group with ‘Falling Inflation’ (20%) Group 2 Very Likely
1
0
-1 Accelerating Inflation Very Unlikely Falling inflation
-2
VIX higher VIX
Goldhigher
EPS higherEPS ($)
EM Eq DMEq EM beat
USD TWI higher TWI USD
Global recession Global
20% fall 20%Eq fall US in
Bus. conf.higher Bus.
US HYIG beatUS US
JP core infl.> 2%JPcore
Equities bt Equities Bonds bt
EZ core infl. > 2% core EZ > infl.
US core infl. core > US infl. 2%
Jp 10y Ylds Higher Ylds 10y Jp
Equities ($) Equities higher
US Eq beat Eq US beat non-US
US 2-yrhigher yldsUS
Cycl Eq Cycl beat Defns
Bund Yields Higher Yields Bund
Equity valns higher Equityvalns
US TIPS US beat Conv.
US RealYldshigher US
US 10-yr 10-yr US higher ylds
Ind Metals Gold Ind beat
US unemploy. US higher
US Corp bnds bt Sovsbt Corp US bnds
Oil outperforms outperforms Oil Gold EM Sov bnds bt USbt Sov HY EM bnds Value Eq GrowthEq Value beat iews e pressed in ‘notches’ Source: ASR Ltd. / Extel How we find our groups of similar investors The basis of this group analysis is that there are only a limited number of generic categories of investors. An investor’s answers are the combination of their generic categories’ answer and some individual variation (i.e. ‘noise’). So we try to classify investors into one of these generic categories. MAS. 40: Fitting two normal distributions to a dataset Our approach is ‘unsupervised’: ahead of the analysis we do not know either the number of generic categories, or even their views! However, this is not an insurmountable problem. We can use a Bayesian approach: that is, we create a model of the generic categories and see whether we can get it to fit the data. The parameters of the model (the number of clusters and their means and variances) are then adjusted until the ‘most likely’ model is found. So, in the example in MAS. 40, the data is the bars, which are modelled by superimposing two normal distributions (each distribution represents a generic type). Increasing the number of distributions might lead to a better fit. However, this runs the risk of over-fitting, and so each extra group increases a penalty factor when calculating how good a fit the model Source: W. Härdle, Fraley & Raftery is. Transferring this idea to our survey, the bars would be the responses to a question, and so the two distributions in the MAS. are equivalent to two basic investor categories. Of course our survey has 29 questions with discrete responses which makes the maths more complex in practice but are still possible to solve using the algorithms provided by the mclust package in R.
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Methodology – What we Mean by ‘Implied Probabilities’ ASR’s Multi-Asset Survey is a Survey of Probabilities.
Every quarter we contact around 200 asset allocators and multi-asset strategists from around the world. We ask them “how likely” they think certain financial and economic events are to occur in the next 12 months. All thirty questions are framed with a binary outcome (will ‘X’ happen or will it not happen?) with a fixed time horizon. Each question offers five options: (1) very likely (2) somewhat likely, (3) even chance, (4) somewhat unlikely, (5) very unlikely. We then ascribe notional probabilities to each of the five options. For example, if someone responds “very likely”, we apply a 90% probability to their response. If they reply “very unlikely”, we apply a 10% probability. If someone says “even chance”, then we apply a 50% probability. By applying different probabilities to the responses, we can calculate an overall probability. This is more sophisticated than other surveys, which just calculate a “net balance” (e.g. % respondents that are ‘optimists’ minus % respondents that are ‘pessimists’). Our approach captures differences in convictions. Small changes in the implied probabilities matter: a 5% point change over a quarter can indicate an important shift. A 10% point change can reflect a profound change in expectations. These “implied probabilities” are powerful as they can be used in multiple ways. First, we can compare them with the probabilities that are implied in the market. Secondly, we can compare them with our own views and see where we are most different from the consensus. And thirdly, we can compare them with the historic baseline probability (how often has this event occurred over the past decade). For example, an implied probability of 50% may sound like a neutral call, but if the event has only occurred 20% of the time over the past decade, then this 50% probability is in fact a much more aggressive call that it may first appear. It is ‘big’ relative to the history of the past ten years.
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