Caspar Rock, Chief Investment Officer

Caspar Rock, Chief Investment OfficerCazenove Capital

Valuation sentiment and risk

What we are covering today

Understanding the way we think….our investment philosophy

A whistle stop tour of earnings and valuation in different regions

The importance of sentiment to portfolio construction

What risks are on the horizon

Our current portfolio positioning

How we think

Business cycle philosophy Making the right active asset allocation decisions

Absolute return Government bonds Developed market equities Developing market equities

Corporate bonds Cash Developing market equities Commercial property

Government bonds Absolute return Commercial property Commodities

Cash Corporate bonds Commodities Developed market equities

Commercial property Developed market equities Corporate bonds Absolute return

Developed market equities Commercial property Absolute return Corporate bonds

Developing market equities Developing market equities Cash Cash

Commodities Commodities Government bonds Government bonds

Overweight

Market

Underweight

SlowdownOutput above trendGrowth deceleratingInflation rising

RecessionOutput below trendGrowth deceleratingInflation falling

RecoveryOutput below trendGrowth acceleratingInflation falling

ExpansionOutput above trendGrowth acceleratingInflation rising

Since the 1950s to present

Over the last 20 years

Asset performance through the cycleUS equities vs. government bonds

Source: Schroders, 31 October 2017. Note: Performance of S&P 500 vs. US 10-year government bonds are total returns adjusted for volatility and calculated over a completed cycle. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.

Long term structural trends

Source: istock.

The economic environment

Why is core inflation so subdued?

Source: Bloomberg, 24 October 2017.

Company 2006 Today

Sears 27.8bn 0.8bn

JCPenny 18.1bn 1.1bn

Nordstrom 12.4bn 7.3bn

Kohl’s 24.2bn 7.5bn

Macy’s 24.2bn 6.3bn

Best Buy 28.4bn 17.0bn

Target 51.5bn 32.1bn

Walmart 214.0bn 237.8bn

Amazon 17.5bn 462.6bn

Leverage Credit Ratings Zombies!

Where are rates headed in the longer term

Source: BIS September/October 2017.

% of GDP Percentage points Per cent

170

180

190

200

210

220

230

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Valuation

UKEarnings forecasts and forward P/E valuation

Source: Datastream. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.

8

9

10

11

12

13

14

15

16

17

Median +1 Standard deviation ‐1 Standard deviation

-20

-15

-10

-5

0

5

10

15

20

25

2012 2013 2014 2015 2016 2017

2014 2015 2016 2017 2018

% Y/Y

USEarnings forecasts and forward P/E valuation


% Y/Y

0

2

4

6

8

10

12

14

16

2012 2013 2014 2015 2016 2017

2014 2015 2016 2017 2018

10

11

12

13

14

15

16

17

18

19


Europe ex-UKEarnings forecasts and forward P/E valuation


% Y/Y

-5

0

5

10

15

20

2012 2013 2014 2015 2016 2017

2014 2015 2016 2017 2018

8

9

10

11

12

13

14

15

16

17


Asia ex-JapanEarnings forecasts and forward P/E valuation


% Y/Y

0

5

10

15

20

25

2012 2013 2014 2015 2016 2017

2014 2015 2016 2017 2018

9

10

11

12

13

14


Emerging marketsEarnings forecasts and forward P/E valuation


% Y/Y

-5

0

5

10

15

20

25

2012 2013 2014 2015 2016 2017

2014 2015 2016 2017 2018

8

9

10

11

12

13

14


Europe ex-UK US

Long-term valuationsCyclically Adjusted P/E – CAPE

Source: Cazenove Capital, Thompson Reuters, October 2017. Past performance is not a guide to future performance. The value of aninvestment and the income from it may go down as well as up and investors may not get back the amount originally invested.

5

10

15

20

25

30

35


5

10

15

20

25

30

35


Asia Pacific ex-Japan Index Emerging Markets

Long-term valuationsCyclically Adjusted P/E – CAPE

Source: Cazenove Capital, Thompson Reuters, October 2017. Past performance is not a guide to future performance. The value of aninvestment and the income from it may go down as well as up and investors may not get back the amount originally invested.

5

10

15

20

25

30

35

40


5

10

15

20

25

30

35

40


Investment Grade Spreads

Source: Bloomberg, November 2017.

0

100

200

300

400

500

600

700

01/0

3/20

0304

/11/

2003

7/18

/200

310

/24/

2003

1/30

/200

405

/07/

2004

8/13

/200

411

/19/

2004

2/25

/200

506

/03/

2005

09/0

9/20

0512

/16/

2005

3/24

/200

66/

30/2

006

10/0

6/20

0601

/12/

2007

4/20

/200

77/

27/2

007

11/0

2/20

0702

/08/

2008

5/16

/200

88/

22/2

008

11/2

8/20

0803

/06/

2009

06/1

2/20

099/

18/2

009

12/2

4/20

0904

/01/

2010

07/0

9/20

1010

/15/

2010

1/21

/201

14/

29/2

011

08/0

5/20

1111

/11/

2011

2/17

/201

25/

25/2

012

8/31

/201

212

/07/

2012

3/15

/201

36/

21/2

013

9/27

/201

301

/03/

2014

04/1

1/20

147/

18/2

014

10/2

4/20

141/

30/2

015

05/0

8/20

158/

14/2

015

11/2

0/20

152/

26/2

016

06/0

3/20

1609

/09/

2016

12/1

6/20

163/

24/2

017

6/30

/201

710

/06/

2017

EU IG UK IG US IG

High Yield and Emerging Market Debt Spreads

Source: Bloomberg, November 2017.

0

500

1,000

1,500

2,000

2,500

15/12/2002

15/03/2003

15/06/2003

15/09/2003

15/12/2003

15/03/2004

15/06/2004

15/09/2004

15/12/2004

15/03/2005

15/06/2005

15/09/2005

15/12/2005

15/03/2006

15/06/2006

15/09/2006

15/12/2006

15/03/2007

15/06/2007

15/09/2007

15/12/2007

15/03/2008

15/06/2008

15/09/2008

15/12/2008

15/03/2009

15/06/2009

15/09/2009

15/12/2009

15/03/2010

15/06/2010

15/09/2010

15/12/2010

15/03/2011

15/06/2011

15/09/2011

15/12/2011

15/03/2012

15/06/2012

15/09/2012

15/12/2012

15/03/2013

15/06/2013

15/09/2013

15/12/2013

15/03/2014

15/06/2014

15/09/2014

15/12/2014

15/03/2015

15/06/2015

15/09/2015

15/12/2015

15/03/2016

15/06/2016

15/09/2016

15/12/2016

15/03/2017

15/06/2017

15/09/2017

Local EMD Spread EU HY US HY Hard EMD

Sentiment

Consensus on the sell side...“This macro dynamic supports an overshoot in valuations!”

Source: Cazenove Capital October 2017.

Broker JP Morgan Goldman Sachs Citigroup MRB Commerzbank Morgan Stanley State Street

Equity Over Over Over Over Over Over Over

Bonds Under Under Under Under Under Under Under

Credit Over Neutral Neutral Over Over Neutral n/a

Commodities Neutral Over Under Under Neutral n/a n/a

Cash Under Over Over Neutral Neutral Neutral n/a

In the US, markets really don’t believe the Federal ReserveImplied Fed Funds Target Rate

Source: Bloomberg November 2017.

Implied Fed Funds Target Rate

Source: Google.com.24

What is a cynic?

Source: Gettyimages.

“Knowing the price of everything and the value of nothing.”

Increase in passive usage 2012–2017European Domiciled ETF, index and active mutual fund assets by exposure

Source: BlackRock. European Domiciled Funds only, ETF data from BlackRock Global Business Intelligence as at 28 February 2017; Mutual Fund data from Lipper FundFile as at 28 February 2017, excludes FoFs, LifeFunds, DC and Mandates.1Other DM includes exposures such as World, Japan, Australia.

259 4781,093 1,423 920 1,310 445491 3,941 4,183

European Equities

North American Equities

Other DM Equities1

Emerging Market Equities

Fixed Income

ETFsIndex Mutual FundsActive

AuM, $ Billion100%

11% 12%

13% 14%

76% 74%

2012 2017

11%23%

19%

21%

70%56%

2012 2017

3% 6%7% 11%

90% 83%

2012 2017

7% 8%7% 10%

86% 82%

2012 2017

2% 4%3% 4%

95% 92%

2012 2017

But buying an active fund must be an active decision

Active

Passive

Current portfolio positioning

The sector effects of home bias

Description Strategic policy allocation GBP 50/50 MSCI ACWI allocation

GBP 50/50 vs. MSCI ACWI

UK US Europeex UK Japan Pacific ex

Japan EM

Strategic £ 50.0% 29.8% 8.3% 4.0% 2.3% 5.6% 100.0%

Financials 22.7% 14.1% 20.1% 12.4% 23.4% 21.5% 19.4% 18.3%

Information Technology 1.2% 22.4% 5.7% 11.4% 29.1% 23.4% 10.2% 16.8%

Consumer Discretionary 8.5% 12.5% 11.6% 19.6% 9.6% 11.8% 10.6% 12.3%

Health Care 8.1% 14.0% 13.7% 7.1% 2.2% 2.5% 9.8% 11.2%

Industrials 9.8% 10.2% 15.4% 20.9% 7.9% 7.1% 10.6% 10.8%

Consumer Staples 14.1% 9.3% 12.3% 8.2% 4.6% 6.7% 11.7% 9.5%

Energy 14.0% 6.3% 3.9% 0.9% 4.3% 6.3% 9.7% 6.4%

Materials 8.6% 2.8% 8.1% 7.1% 4.6% 7.3% 6.6% 5.3%

Telecommunications 6.8% 2.2% 3.8% 4.6% 5.1% 6.0% 5.0% 3.3%

Real Estate 2.0% 2.9% 1.3% 5.3% 5.9% 3.4% 2.5% 3.2%

Utilities 4.2% 3.1% 3.1% 1.8% 3.3% 2.7% 3.6% 3.1%

Unassigned/cash 0.3% 1.0% 0.9% 1.4% 0.3%

Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

1.1%

(6.6%)

(1.7%)

(1.3%)

(0.2%)

2.2%

3.3%

1.4%

1.7%

(0.6%)

0.5%

0.3%

Why hold alternatives in a portfolio?

Risk

Return

Complexity/liquidity

Current viewsEquities

Equities

UK ▼ Less positive view given continued uncertainty over Brexit and concern over increasingly squeezed consumers

European ▼ Optimistic growth expectation likely priced in while the stronger euro may weigh on overseas earnings growth

North America ▲ Upside risk in growth from post-hurricane reconstruction and inflation from the tight labour market

Japanese ■ Stronger trade activity and household consumption supported growth

Asia Pacific ■ Weak dollar and pick-up in global trade is helpful to Asia Pacific

Emerging markets ▲ Similar to Asia Pacific, stronger earnings and less dollar pressure is positive for the region

Key

▲ Up from last quarter No change■ Down from last quarter▼

Neutral Neutral/negative Negative

Positive Positive/neutral

Current viewsFixed income

Equities

Government bonds ▼ We remain more negative on conventional sterling and euro bonds. US treasuries are relatively more attractive given the rise in yields already seen

Investment grade ▼ Credit spreads provide some pick-up in yields but we prefer short-dated bonds

High yield ▲ High yield spreads are at a historically tight level so we would be wary of high yield spread duration exposure

Inflation-linked ■ Inflation-linked government bonds remain more attractive than conventional government bonds and give protection against unexpected inflation

Emerging markets ■ Selectively, local emerging market bonds offer good interest rate and currency exposure

Key




Current viewsAlternatives and cash

Alternatives

Absolute: equity ■ Equity market dispersion should provide opportunities

Absolute: fixed income ■ Lower liquidity and flatter rate profiles reduce the attractiveness of many strategies

Absolute: macro ■ Increased volatility across many asset classes should counter flatter rate cycles

Commercial property (UK) ■ Post-Brexit concerns have resulted in the marking down of property but income characteristics are still attractive

Precious metals ■ Gold is attractive as a diversifier, as portfolio insurance and as an inflation hedge

Industrial metals ■ Ongoing excess supply is likely to weigh on prices for some time

Energy ■ Oil continues to be volatile as politics and supply concerns dominate the market

Cash

■ Cash does not yield much but gives opportunities in periods of weakness

Key




What I hope you have learned today

We think about both the business cycle and long-term structural trends

Synchronised growth, improving trade, but has there been a change in inflation patterns?

Earnings are abundant, valuations are not cheap but there are pockets of value

Be mindful of sentiment

The risks to our thesis

Our current portfolio positioning

Thank you

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Disclaimers, risk warnings and regulatory status

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Disclaimers, risk warnings and regulatory status

Caspar Rock, Chief Investment Officer

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