macroeconomic outlook: risks and opportunities€¦ · retail revolution disruption is all around...

Macroeconomic Outlook:Risks and Opportunities

Kristina HooperChief Global Market Strategist, Invesco

For Canadian Institutional Exchange use only. In Canada, this document is restricted to accredited investors as defined under National Instrument

45-106. No portion of this communication may be reproduced or redistributed. All figures in USD unless otherwise noted.

Monetary policy Changing world order Innovation–driven

disruption

▪ Normalization on hold

▪ Need for stimulus in

face of global

slowdown and trade

wars

▪ Need for “dry powder”

to combat the next

crisis

▪ De-

globalization/shifting

alliances

▪ Destabilized institutions

▪ Artificial intelligence

▪ Retail revolution

Disruption is all around us

Source: Invesco, as of Dec 31, 2019.

Key takeaways

Investors need to be

prepared for greater

change driven by three

key forces:

▪ Monetary policy

▪ Geopolitics

▪ Innovation

For Canadian institutional exchange use only. Not for further distribution.2

-1.4

-1.2

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

1.2

1.3

1.4

1.5

1.6

Jan.29

Mar.18

Apr.29

Jun.10

Jul.29

Sep.16

Nov.5

Dec.16

Num

ber o

f Hik

es/C

uts

Implie

d

Mark

et Im

plie

d P

olic

y R

ate

(%

)

Number of Hikes/Cuts Implied (RHS)

Implied Policy Rate (LHS)

0

2

4

6%

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17

20

19

Federal Funds Rate Target 10-Year Treasury Yield

The Federal Reserve turns from a burgeoning domestic economy to managing trade war woes

2020

2021F

Federal Funds Rate: Projections & Actual

Fed reverses course as bond market signals recession fears

Federal Funds Rate: Market Anticipation for 2020

Market participants expect one cut in 2020

Sources: Federal Reserve Board, Bloomberg, Invesco, 1/28/20. Past performance does not guarantee future results.

3

2022F


Federal Funds Rate* (Left-Axis) and 1-Year Ahead

Recession Probability** (Right-Axis) Since 1970

Length of Economic Expansions (From Trough to Peak)

Since World War II

The Fed’s dovish pivot, interest rate cuts and renewed asset purchases have extended the cycle

Sources: Federal Reserve Bank of New York, FRED, Haver, Invesco, 12/31/19. *Effective. **As predicted by the Treasury spread. Notes: Shaded areas denote National Bureau of

Economic Research (NBER)-defined US recessions. The NBER doesn’t define recessions by two consecutive quarters of declining real GDP. Rather, recessions are significant declines in

activity across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production and wholesale-retail sales. An investment cannot

be made in an index. See page 34 & 35 for index definitions.

24

0

10

20

30

40

50

60

70

80

90

100%

0

2

4

6

8

10

12

14

16

18

20%

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Perc

entP

erc

ent

Recession Probability (Right) Federal Funds Rate (Left)

80

3745

39

24

106

36

58

12

92

120

73

126

0

20

40

60

80

100

120

140

193

8-1

94

5

194

5-1

94

8

194

9-1

95

3

195

4-1

95

7

195

8-1

96

0

196

1-1

96

9

197

0-1

97

3

197

5-1

98

0

198

0-1

98

1

198

2-1

99

0

199

1-2

00

1

200

1-2

00

7

200

9-?

??

?

Month

s

NBER US Business Cycle Expansions (Trough to Peak)


Last year, 64 central banks eased and only 11 tightened

Sources: Central Bank News, Invesco, 12/31/19. Notes: In 2018, only 32 central banks eased and 43 tightened for global net tightening of 11. Easing monetary policy stance = Cutting a

main interest rates, lowering reserve requirements, launching new low-cost loan programs or purchasing assets. *Mozambique has cut rates, but raised reserve requirements more.

**Turkey has cut rates, but raised reserve requirements more, cut the amount of foreign currency that can be used as reserves and suspended one-week repo auctions for a period in

May.

Countries Easing1. Angola

2. Argentina

3. Armenia

4. Australia

5. Azerbaijan

6. Bahrain

7. Botswana

8. Brazil

9. Belarus

10. Chile

11. China

12. Congo

13. Costa Rica

14. Denmark

15. Dominican Republic

16. Egypt

17. Euro Area

18. Gambia

19. Ghana

Countries Tightening1. Czech Republic

2. Georgia

3. Hungary

4. Kazakhstan

5. Mozambique*

6. Norway

7. Pakistan

8. Sweden

9. Tunisia

10. Turkey**

11. Zambia

Countries Easing20. Honduras

21. Hong Kong

22. Iceland

23. India

24. Indonesia

25. Jamaica

26. Jordan

27. Kenya

28. Kuwait

29. Kyrgyz Republic

30. Lesotho

31. Macao

32. Macedonia

33. Malaysia

34. Malawi

35. Mauritius

36. Mexico

37. Moldova

38. Morocco

Countries Easing39. Namibia

40. Norway

41. New Zealand

42. Nigeria

43. Paraguay

44. Peru

45. Philippines

46. Qatar

47. Russia

48. Rwanda

49. Saudi Arabia

50. Serbia

51. Seychelles

52. Singapore

53. Sri Lanka

54. South Africa

55. South Korea

56. Swaziland

57. Tajikistan

Global Net Easing

= 53

Countries Easing58. Tanzania

59. Thailand

60. Uganda

61. United Arab Emirates

62. United States of America

63. Ukraine

64. Vietnam


Desperately seeking new tools for new policy challenges

Sources: Federal Reserve, Invesco, 12/31/19. Past performance does not guarantee future results.

In the event of an economic downturn, the Fed is well-prepared. Since the 2008-2009 financial crisis,

Federal Reserve policymakers have been researching new policy tools, first for rate hikes and then to

better prepare themselves in the event of the next recession.

The core lesson here is that, in the event of seismic shifts in the economic situation, the Fed has many

tools. We don’t need normalized rates to have ammunition for the next recession.

Federal Funds Rate Targeting

Repurchase agreements (RP)

Federal Funds Rate Targeting

Reverse-repurchase agreements (RRP)

Interest paid on excess reserves (IOER)

▪ Through temporary buying and selling of Treasury securities, the Fed effectively

controlled the interbank lending rates by manipulating the supply of Treasury

securities available in the market

▪ The Fed uses a combination of tools to set a floor- (RRP) and-ceiling (IOER) for

interbank lending rates, constraining money supply despite large cash reserves at

banks

▪ With this combination of tools, the Fed maintains a strong grip on money supply

growth

Yield Curve Flattening

“Operation Twist” Experiment

Quantitative Easing, Quantitative Tightening

▪ In 1961, the Fed sought to flatten the yield curve by selling some short-term

government debt securities and using the proceeds to buy longer-term government

debt securities.

▪ Considered marginally successful

▪ This policy maneuver reappeared in 2011 in another Operation Twist

▪ The Fed can transact in secondary markets to “clean up” toxic, non-performing

securities

▪ Can also selectively affect term permia of sovereign yield curve

▪ Can organically shrink balance sheet to tighten policy by releasing hold of portion of

market

Forward Guidance

▪ Can disclose future path of policy to influence market perceptions and predictions

Old Toolbox (Pre-2008) New Toolbox (Post-2008)

6 For Canadian institutional exchange use only. Not for further distribution.6

➢ Christine Lagarde, President of the European Central Bank is re-assessing

negative rates

➢ Lagarde calling on euro area countries to provide more fiscal stimulus

➢ Likelihood that Quantitative Easing will not have the same impact if it’s re-started

The European Central Bank: actively seeking new tools for new policy challenges

7

Source: Invesco, 12/31/19. Past performance does not guarantee future results.


44

46

48

50

52

54

56

58

-6 -4 -2 0 2 4 6

Trade Wars Have Made Their Mark on Growth

Yearly Purchasing Managers Indexes (July 2018 vs. July 2019) and Year-Ago Figure for the U.S.

Global growth: central banks are tailwinds while geopolitical risks are headwinds

Sources: 12/31/19 and 12/31/18 (US for reference), Bloomberg, Markit, Nikkei, ISM. Past performance does not guarantee future results. For illustrative purposes only. An investment

cannot be made in an index.

The global growth story has been one of convergence. In the developed world, positive economic

fundamentals have helped buoy consumer sentiment despite the ongoing U.S.-China trade war, while

business sentiment has drifted. This has helped lift economic growth and investment. Emerging

economies, though, have struggled as the Fed has continued on its course of tightening.

In the United States, purchasing managers indices suggest continued growth momentum, albeit at a

moderating pace. Manufacturing has been particularly hard-hit by the tariff duel with China, which is

reflected in a sharp decline in new orders. The services sector has remained resilient. Small businesses

have relished in the Trump presidency, according to a survey of small business health conducted by the

National Federation of Independent Businesses (NFIB). At the broadest levels, U.S. growth appears to be

on track to moderate but continue this expansion.

Year/Year Difference

Weakening Strengthening

Exp

an

din

gC

on

tracti

ng

Turkey

Taiwan

Russia

MexicoIndonesia

Vietnam

U.S. 12/18

South

Africa

U.S. 12/19

UK

EUBrazil ChinaGlobal

Japan

India

Korea


49

50

51

52

53

54

55

56

14 15 16 17 18 19

JPM Global Purchasing Managers Index (PMI)

Growth: geopolitical tensions drag down manufacturing

Uncertainty weighs on cyclical and potential growth via investment;Industrial sector and surplus/commodity economies are most exposed

Composite

(JPM PMI)

Services

Manufacturing

Source: Haver, 1/28/2020. Past performance does not guarantee future results.


50

100

150

200

250

300

350

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

GFC

Eurozone crisis

Chinagrowth

Brexitvote

Trumpelection

Tradetensions

Global Economic Policy Uncertainty Index*

High, rising and recurrent uncertainty

Risk – probabilistic, quantifiable scenarios; manageable outcomes Uncertainty – unknowable/unquantifiable; cannot be risk-managed

Source: Bloomberg; Invesco, 12/31/19. *Based on current price GDP weights. GFC = Global Financial Crisis. Past performance does not guarantee future results.


US Economic Policy Uncertainty (Left-Axis, Inverted) and

Business Spending Growth (Right-Axis) Since 1993

US-China Trade, Maximum Tariffs Threatened (Left-Axis)

and Estimated Economic Impact (Right-Axis, Inverted)

Uncertainty is fading alongside trade progress; will Capex soon recover?

Sources: FRED, Haver, Invesco, Scott Baker, Nicholas Bloom and Steven J. Davis at www.PolicyUncertainty.com, US Census Bureau, 12/31/19. Notes: EPU = Economic Policy

Uncertainty. Core capital expenditures (capex) = Manufacturers’ new orders for nondefense capital goods excluding aircraft. NBER = National Bureau of Economic Research. Shaded

areas denote NBER-defined US recessions. The estimated economic impact of the US-China trade war is based on full-year 2018 data. GDP = Gross domestic product. See page 34 &

35 for index definitions.

-40

-30

-20

-10

0

10

20

3025

75

125

175

225

275

1993 1997 2001 2005 2009 2013 2017 2021

Ye

ar-O

ve

r-Ye

ar %

Ch

an

ge

Ind

ex,

Inve

rte

d

Core Capital Expenditures (Right) US EPU (Left)

Low uncertainty,

high capex

High

uncertainty,

low capex

$539.7

$120.1$134.9

$30.0

-0.6%

-0.2%

-0.8%

-0.7

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

-0.0 0

100

200

300

400

500

600

700

$800

USA China

Sh

are

of 2

01

8 G

DP

, Inve

rted

Bill

ion

s o

f U

S D

olla

rs

Bi-Lateral Goods Imports (Left) 25% Tariff (Left) GDP Impact (Right)

US

GD

P

= $

20.9

T

Ch

ina

GD

P

= $

13.6

T

Tariffs are bad for

both the US and China,

but they aren’t

the end of the world.


0

2

4

6

8%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019(est)

2020(est)

Annual G

row

th R

ate

Emerging economies Developed economies World

Key takeaways

▪ While global growth is

strong, some countries

have far higher growth

rates than other countries

▪ Upside risks for some

countries have increased

while downside risks have

increased for others

▪ Some economies have

experienced lengthy

expansions while others

are just beginning

economic expansions

Divergence and global growth

*Forecast through year-end.

Source: IMF, latest available as of 1/6/2020. There is no guarantee any referenced forecasts/outlooks will come to pass.

*

International Monetary Fund GDP Forecasts*


-15.0

-10.0

-5.0

0.0

5.0

10.0

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

% g

row

th r

ate

Key takeaways

▪ Economic policy

uncertainty has typically

had a strong negative

correlation to business

investment, so it’s not

surprising to see a

significant drop in

business investment in

the wake of the Brexit

referendum

UK Business Investment

Economic policy uncertainty affecting UK business investment

Source: UK Office for National Statistics, as of 12/31/2019.


Europe is narrowing its budget deficit at a time when its economy needs support

Sources: FRED, Wikipedia, Invesco, 4/30/19. *Note: Top national and sub-national tax rates. Past performance does not guarantee future results.

U.S. and Euro Area General Government

Net Lending/Borrowing (% of GDP) Since 2001

U.S. and Major Euro Area Corporate, Income, and Consumption

Tax Rates (Current)

45 47 47 5045

33 28 3033

25

20 22 1912

21

0

10

20

30

40

50

60

70

80

90

100%

France Italy Germany U.S. Spain

Ta

x R

ate

Income* Corporate* Consumption*

-14

-12

-10

-8

-6

-4

-2

0%

2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Sh

are

of G

DP

U.S. Budget Balance Euro Area Budget Balance

Deficit

Europe should

spend more

or cut taxes,

but it faces

political

constraints.


Source: Statista, as of October 31, 2019. Most recent data available.

A deeper dive into Europe

Key takeaways

Although unemployment in

the European Union has

reached 6.3% — which is

close to pre-recession lows —

and youth unemployment in

the EU is at 15.2%, there are

dramatic differences in

economic conditions of the

member countries.

For example, youth

unemployment in Germany is

5.7% while youth

unemployment in Greece is

33.0%. Such economic

differences have helped to

aggravate political differences

as the EU navigates through

political changes and

challenges.

5.7

6.9

9.9

10.4

11.2

14.2

19.2

27.1

32.2

33.0

0 5 10 15 20 25 30 35

Germany

Netherlands

Austria

Poland

United Kingdom

European Union

France

Italy

Spain

Greece

%

Youth unemployment rate % as of October 31, 2019


-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8%

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8%

2009 2011 2013 2015 2017 2019

Pe

rce

ntP

erc

en

t

Call Rate (Left-Axis) Federal Funds Rate (Right-Axis)

0

20

40

60

80

100%

2007 2009 2011 2013 2015 2017 2019

Sh

are

of G

DP

Japan Central Bank Assets U.S. Central Bank Assets

Japan and U.S. Short-Term Interest Rates

Since 2011

Japanese monetary policy is easy, but what else can the bank of Japan do?

“Six years ago, the Bank introduced

QQE (quantitative and qualitative

easing), which is a more powerful

measure than before, and has

persistently continued with …

monetary easing.”

Haruhiko Kuroda,

BoJ Governor

May 17, 2019

Japanese

interest rates

are already

at rock bottom.

Japan and U.S. Central Bank Assets as a % of GDP

Since 2007

Sources: Haver, Invesco, 9/30/19. Most recent data available. Note: GDP = gross domestic product. BoJ = Bank of Japan. Fed = Federal Reserve. Call rate = uncollateralized overnight.

Past performance does not guarantee future results.


-14

-12

-10

-8

-6

-4

-2

0

2%

2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Sh

are

of G

DP

U.S. Budget Balance China Budget Balance

U.S. and China General Government

Net Lending/Borrowing (% of GDP) Since 2001

50.3

45.0

33.0

25.0

11.7

16.0

0

10

20

30

40

50

60%

U.S. China

Ta

x R

ate

Income* Corporate* Consumption*

U.S. and China Corporate, Income, and Consumption

Tax Rates (Current)

China has cut taxes, widened the deficit, and is stimulating its economy

Sources: FRED, Wikipedia, Invesco, 9/30/19. Most recent data available. *Note: Top national and sub-national tax rates. Past performance does not guarantee future results.

China has cut tax rates

below those of the U.S.

Deficit

Surplus

As a share of GDP,

China’s deficit

is 1.5% wider

than that of the U.S.


Source: Organization for Economic Cooperation and Development as of Jan. 20, 2020. *See slide 34 & 35 for index definition.

A deeper dive into China

Key takeaways

After months of significant

fiscal and monetary

stimulus, China has shown

signs of improvement. The

recent signing of the US-

China Phase 1 trade deal

should provide a strong

tailwind to the Chinese

economy. We expect

China to utilize both fiscal

and monetary stimulus as

needed in order to realize a

GDP growth rate of 6% in

2020.46

48

50

52

54

9/17 12/17 3/18 6/18 9/18 12/18 3/19 6/19 9/19 12/19

China Caixin Manufacturing Purchasing Managers Index (PMI)*

%

Diffu

sio

n I

ndex


Correlation

coefficient

= -0.8

Canada and the emerging markets benefit from many of the same developments

Sources: Bloomberg L.P., Haver, Invesco, 12/31/19. *Canadian dollar spot exchange rate = the price of 1 CAD in USD (USD/CAD). Notes: CRB price returns in USD. TSX price returns in

CAD. EM price returns in USD. Shaded areas denote global manufacturing recessions. An investment cannot be made in an index. See page 34 & 35 for index definitions. Past

performance does not guarantee future results.

Correlation

coefficient

= 0.7 Correlation

coefficient = 0.8

Global Manufacturing Activity (Left-Axis), Early-Stage Commodities, Canadian Dollar, Canadian Stocks and

Emerging Market Stocks (Right-Axis) Since 1998

-80-70-60-50-40-30-20-100102030405060708090100%

30

35

40

45

50

55

60

65

70

75%

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Ye

ar-O

ve

r-Ye

ar %

Ch

an

ge

Diffu

sio

n In

de

x

JP Morgan Global Mfg PMI (Left-Axis) CRB BLS Raw Industrials (Right-Axis)Canadian Dollar* (Right-Axis) S&P/TSX Composite (Right-Axis)MSCI Emerging Markets (Right-Axis)

Correlation

coefficient

= 0.7

Less trade friction,

lower policy uncertainty,

easing financial conditions,

improving global growth,

a weaker U.S. dollar

and higher commodity prices


-3

-2

-1

0

1

2

3

4

1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018

10-yr - 2-yr US Treasury spread (%) and…

10-Year – 2-Year US Treasury Spread (%) and Recessions

A deeper dive into the US – US yield curve inversion andrecessions

Note: Numbers below zero reflect an inverted yield curve.

Source: Bloomberg, 12/31/2019. NBER = National Bureau of Economic Research.

Yield

curve

inversion

Recession

start

Difference

(months)

8/78 1/80 17

9/80 7/81 10

12/88 7/90 19

5/98 3/01 34

12/05 12/07 24

Average 21

%

Shaded areas are recessions as per NBER


Individual income taxes

Corporate income taxes

Social insurancetaxes and

contributions

Other Taxes

Revenue Shortfall

Non-discretionary

Defense only

Discretionary ex-Defense

Interest expenses

0

1500

3000

4500

Revenues Outlays

0%

2%

4%

6%

8%

10%

12%

14%

Jun 2009 -> Dec 2016

2019 2020 2021 2025 2029

Sp

en

din

g o

n In

tere

st a

s a

Sh

are

of T

ota

l O

utla

ys

Costly Fiscal Accommodation

Rising deficits are becoming more costly to finance

Federal Budget Balance, 12-Month Moving Total

Large deficit driving fiscal expansion – to what end?

US federal debt and deficit climbing, leaving less room for maneuver

Sources: U.S. Treasury, Bureau of Economic Analysis, Congressional Budget Office, Invesco, 7/31/19.Past performance does not guarantee future results.

10-Year Interest RateActual or CBO Projection

%Spending on Debt InterestActual or CBO Projection

2.1% 2.3%2.7% 3.1% 3.2%

2.4%

CBO Projections


• Still no visibility on Democratic nominee

• Expect a rise in volatility

• Expect sell-offs in particular sectors

US presidential election will likely cause uncertainty

Source: Invesco Global Market Strategist Office as at January 2020.


US trade policy

▪ Disregard for World Trade Organization

▪ Rejection of Multilateral Agreements in Favor of Bilateral Agreements

▪ Tariff Dispute with China – Lack of Prioritization of Key Issues (Intellectual

Property and Market Access)

▪ Tariff Dispute with EU

▪ Can lead to:

– Lower Efficiency and Productivity

– Disruption of Global Supply Chains – loss of comparative advantage

– Inflation

– Economic Policy Uncertainty

– Spillover Into Foreign Policy

23 For Canadian institutional exchange use only. Not for further distribution.

Source: Invesco Global Market Strategist Office as at January, 2020

23

International trade is an increasingly important part of global GDP

Source: World Bank, as of December 31, 2018. 2017 is latest data available. Historical data may not represent future results.

0

20

40

60

80%

Percentage of world GDP attributed to international trade

1960 1970 1980 1990 2000 2010 2017


Progress made by World Trade Organization (WTO)

Source: World Trade Organization, 2017. Latest Data available. Historical data may not represent future results.

0

2

4

6

8

10

12

14%

Average Tariff Rate of WTO Members


Potential negative impact of tariffs

Increase in

Input Costs:

▪ Reduced Profit Margins

▪ Demand Destruction

▪ Reduction in Consumer

Spending Elsewhere

= Lower

Growth and

Higher

Inflation

Loss of

Comparative

Advantage

Disruption

of Global

Supply

Chains

Economic

Policy

Uncertainty

Reduced

Capital

Spending


▪ Time is passing and

we think that most

economies are in the

late-expansion phase

of the cycle

▪ We do not believe that

recession is imminent,

though we think we

see it on the horizon

▪ Our research suggests

that equity, real estate

and industrial

commodities usually

continue to outperform

at this stage of the

cycle

The economic and asset allocation rollercoaster

The chart shows our view of the cyclical positioning of the world’s 10 largest economies. The selection of preferred assets is based on our research published in “Asset allocation in

pictures” in November 2017. Source: Invesco.


Valuations appear more attractive outside the US

Sources: MSCI and Standard & Poor’s, as of Jan 20, 2020. Past performance is not a guarantee of future results. An investment cannot be made directly in an index.

15.4

18.6

16.1

21.5

12.9

14.7 14.7

18.3

1.7 1.7 1.43.6

0

5

10

15

20

25

MSCI EmergingMarkets Index

MSCI EAFE Index MSCI Pacific Index S&P 500 Index

Trailing price-earnings (P/E) Forward price-earnings (P/E) Price-to-book (P/B) value

Key takeaways

▪ Some regions outside the

US currently have more

attractive valuations than

the US

▪ Historically, lower valuation

stocks have fallen less than

the overall stock market

during downward periods

▪ Investors might consider

ensuring they are well

diversified internationally, with

exposure to areas of the globe

with lower valuations


Large-, Mid- and Small-Cap Long-Term Earnings Growth

Since 1995 to 2019

Average Effective Federal Corporate Tax Rates:

Large, Mid and Small Caps (2016, 2017 and 2018)

US SizeUS mid caps have had the best earnings growth, recently helped by lower taxes

Sources: Bloomberg L.P., Strategas Research Partners, Invesco, 12/31/19. Notes: The effective corporate tax rate = The actual percentage of profits a business pays in taxes after

deductions, etc. EPS = earnings per share. An investment cannot be made in an index. See page 34 & 35 for index definitions. Past performance does not guarantee future results.

Trailing 12-Month Earnings Per Share

6.6

8.2

6.3

0

1

2

3

4

5

6

7

8

9%

S&P 500 Index Russell Midcap Index Russell 2000 Index

Com

pound A

nnual G

row

th R

ate

26.0

34.1

55.4

22.919.2

33.8

20.3

16.3

35.2

0

10

20

30

40

50

60%

S&P 500 Index Russell Midcap Index Russell 2000 Index

Perc

ent

2016 2017 2018


0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1988 1992 1996 2000 2004 2008 2012 2016 2020

Ratio

MSCI EM/World Index Trendline +/-1 SE

EM overbought,

DM oversold

75

80

85

90

95

100

105

110

115

120

1988 1992 1996 2000 2004 2008 2012 2016 2020

Index

USD: Major Currencies Trendline +/-1 Standard Error

USD overbought

The US Dollar Relative to Major Currencies* Since

1988 (Trend and Overbought/sold Thresholds)

Emerging Market Relative to Developed Market Stocks

Since 1988 (Trend and Overbought/sold Thresholds)

Emerging Market

Equities

A flat to weaker USD should boost emerging markets relative to US stocks

Sources: Bloomberg L.P., FRED, Invesco, 12/31/19. *The Federal Reserve’s Real Trade Weighted US Dollar Index. Notes: Real = Inflation adjusted. Price indices in US dollars. An

investment cannot be made in an index. See page 34 & 35 for index definitions. Past performance does not guarantee future results.

USD oversold

A structural USD

bear market

may lie ahead!

One of the best

buying opportunities

in 20 years for

EM stocks?

EM oversold,

DM overbought

EM EM


-100

-50

0

50

100

150

200

250%

0

5

10

15

20

25

30

35

40%

2000 2003 2006 2009 2012 2015 2018 2021

Ye

ar-O

ve

r-Ye

ar %

Ch

an

ge

Ye

ar-

Ove

r-Y

ea

r %

Ch

an

ge

SSE Composite Index (Right) CN M1 Monetary Aggregate (Left)

-9

-4

1

6

11

16

21

26

31

36

41%1%

2

3

4

5

6

7

8

2008 2010 2012 2014 2016 2018 2020 2022

Ye

ar-O

ve

r-Ye

ar %

Ch

an

ge

Pe

rce

nt,

In

ve

rte

d, A

dva

nce

d 7

Mo

nth

s

CN M1 Monetary Aggregate (Right) 3-Month SHIBOR (Left)

Low interest rates today mean

potentially higher money supply

tomorrow.

Institutional Interest Rate (Inverted, Left-Axis) and

Money Supply Growth (Right-Axis) Since 2008

Money Supply Growth (Left-Axis) and Large-Cap

Equity Returns (Right-Axis) Since 2000

Chinese Equities

Beijing’s easy monetary policy stance should continue to give Chinese stocks a boost

Sources: Bloomberg L.P., Haver, Invesco, People’s Bank of China, 12/31/19. Notes: SHIBOR = Shanghai Interbank Offered Rate. CN = China. SSE = Shanghai Stock Exchange. M1 and

SSE Composite Index in yuan. An investment cannot be made in an index. See page 34 & 35 for index definitions. Past performance does not guarantee future results.

Correlation

coefficient = -0.8

Chinese stocks

may keep

benefitting from

liquidity injections.


-35-30-25-20-15-10-50510152025303540455055%

50

53

56

59

62

65

68

71

74

77%

2009 2011 2013 2015 2017 2019 2021

Year-O

ver-Y

ear %

Change

Diffu

sio

n Index,

3-M

onth

Movin

g A

vera

ge

TSX (Right) CFIB Business Barometer: Manufacturing (Left)

Correlation

coefficient

= -0.8

2

3

4

5

6

7

8

9

10

11

12

0.55

0.65

0.75

0.85

0.95

1.05

1.15

1992 1998 2004 2010 2016 2022

Ratio

US

D/C

AD

TSX Composite Index/S&P 500 Index (Right) Canadian Dollar (Left)

Canadian Dollar (Reciprocal, Left-Axis) and Canadian

Relative to US Equities (Right-Axis) Since 1992

Canadian Manufacturing Outlook (Left-Axis) and

Canadian Equities (Right-Axis) Since 2009

Is long-term Canadian equity underperformance coming to an end?

Sources: Bloomberg L.P., Canadian Federation of Independent Business, Haver, Invesco, 12/31/19. Notes: USD = US dollar. CAD = Canadian dollar. USD/CAD = The price of 1 CAD in

USD. TSX Composite Index and S&P 500 Index in CAD. Business Barometer > 50 = Owners expect their businesses’ performance to be stronger in the next year. An investment cannot

be made in an index. See page 34 & 35 for index definitions.. Past performance does not guarantee future results.

Canadian independent

business owners see light

at the end of the tunnel.

Correlation

coefficient

= 0.7

Falling lines =

Canadian dollar

weakness and equity

underperformance

Correlation

coefficient = 0.8

?

?


Cyclicals Defensives

Europe United States United States

Japan United States Canada

China

Emerging MarketsDeveloped Markets

Value Growth

Small Caps Larger Caps

EM

Blend

LC

C

MC

Currently Favored Equity Segments (Blue)

Favor EM and China over DM and the US; within DM, focus on a US large- and mid-cap blend

Source: Invesco, 12/31/19. Notes: EM = Emerging markets. DM = Developed markets.


Expectations Index is a sub-index that measures overall consumer sentiments

toward the short-term (6-month) future economic situation and is used to derive

(approx. 60%) the Consumer Confidence Index, a widely used economic

indicator. The sub-index is compiled from data gathered from a survey of 5,000

households on questions regarding expected business and employment

conditions as well as expected income in the near-term.

Consumer Price Index (CPI) is a measure that examines the weighted

average of prices of a basket of consumer goods and services, such as

transportation, food and medical care. The CPI is calculated by taking price

changes for each item in the predetermined basket of goods and averaging

them; the goods are weighted according to their importance. Changes in CPI

are used to assess price changes associated with the cost of living.

ISM Manufacturing Index is based on surveys of more than 300

manufacturing firms by the Institute of Supply Management (ISM). The ISM

Manufacturing Index monitors employment, production, inventories, new orders

and supplier deliveries. A composite diffusion index monitors conditions in

national manufacturing and is based on the data from these surveys.

ISM Non-Manufacturing Index is an index based on surveys of more than 400

non-manufacturing firms’ purchasing and supply executives, within 60 sectors

across the nation, by the Institute of Supply Management (ISM). The ISM Non-

Manufacturing Index tracks economic data, like the ISM Non-Manufacturing

Business Activity Index. A composite diffusion index is created based on the

data from these surveys, that monitors economic conditions of the nation.

China Caixin Manufacturing Purchasing Managers Index (PMI) is a

composite indicator designed to provide an overall view of activity in the

manufacturing sector and acts as a leading indicator for the whole economy.

When the PMI is below 50.0 this indicates that the manufacturing economy is

declining and a value above 50.0 indicates an expansion of the manufacturing

economy.

Bloomberg Barclays Corporate Bond Index is an unmanaged index

considered representative of publicly issued US corporate and specified foreign

debentures and secured notes that meet the specified maturity, liquidity, and

quality requirements. To qualify, bonds must be SEC-registered.

Bloomberg Barclays Global Aggregate ex-US Index is an unmanaged index

considered representative of bonds of foreign countries.

Bloomberg Barclays Municipal Custom High Yield Composite Index is

generally representative of bonds that are noninvestment grade, unrated or

rated below Ba1.

Bloomberg Barclays Municipal High Yield Bond Index measures the

noninvestment- grade and nonrated US dollar-denominated, fixed-rate, tax

exempt bond market within the 50 United States and four other qualifying

regions (Washington D.C., Puerto Rico, Guam and the Virgin Islands).

Bloomberg Barclays US Aggregate Index is an unmanaged index

considered representative of the US investment-grade, fixed-rate bond market.

Bloomberg Barclays US Corporate High Yield Index is an unmanaged index

that covers the US dollar-denominated, non investment grade, fixed-rate,

taxable corporate bond market.

Bloomberg Barclays US Government Index is a market-value-weighted

index of US government and government agency securities (other than

mortgage securities) with maturities of one year or more.

Bloomberg Barclays US TIPS Index is an unmanaged index that measures

the performance of the US Treasury Inflation-Protected Securities (TIPS)

market.

Bloomberg Commodity Index is a broadly diversified index that allows

investors to track commodity futures through a single, simple measure.

Index definitions

3434

Chicago Board Options Exchange (CBOE) Volatility Index (VIX) shows the

market’s expectation of 30-day volatility. It is constructed using the implied

volatilities of a wide range of S&P 500 Index options. This volatility is meant to

be forward looking and is a widely used measure of market risk, often referred

to as the “investor fear gauge.”

FTSE EPRA/NAREIT Developed ex-US Index is designed to track the

performance of listed real estate companies and REITs.

FTSE NAREIT All Equity REITs Index is an unmanaged index considered

representative of US REITs.

JPMorgan GBI-Emerging Markets Diversified Composite Index is a

comprehensive global local emerging markets index, and consists of liquid,

fixed-rate, domestic currency government bonds.

MSCI EAFE Index is an unmanaged index considered representative of stocks

of Europe, Australasia and the Far East.

MSCI Emerging Markets Index is an unmanaged index considered

representative of stocks of developing countries.

MSCI World Index is an unmanaged index considered representative of stocks

of developed countries.

Russell 1000 Index is an unmanaged index considered representative of

large-cap stocks.

Russell 1000 Growth Index is an unmanaged index considered representative

of large-cap growth stocks.

Russell 1000 Value Index is an unmanaged index considered representative

of large-cap value stocks.

Russell 2000 Index is an unmanaged index considered representative of

small-cap stocks.

Russell Midcap Index is an unmanaged index considered representative of

mid-cap stocks.

S&P 500 Index is an unmanaged index considered representative of the US

stock market.

S&P/LSTA Leveraged Loan Index is a weekly total return index that tracks

the current outstanding balance and spread over Libor for fully funded term

loans.

The BofA Merrill Lynch 3–7 Year Municipal Index tracks the performance of

US dollar-denominated, investment grade, tax-exempt debt that is publicly

issued by US states and has a remaining term to final maturity between three

and seven years.

The BofA Merrill Lynch 3-Month US Treasury Bill Index represents an

unmanaged market index of US Treasury securities maturing in 90 days that

assumes reinvestment of all income.

The Russell Indices are trademarks/service marks of the Frank Russell Co.

Russell® is a trademark of the Frank Russell Co.

Unmanaged index returns do not reflect fees, expenses, or sales charges. An

investment cannot be made directly in an index.

Index definitions

3535

For Canadian institutional use only. In Canada, this document is restricted to

accredited investors as defined under National Instrument 45-106. No portion of

this communication may be reproduced or redistributed. All figures in USD unless

otherwise noted.

All material presented is compiled from sources believed to be reliable and current, but

accuracy cannot be guaranteed. Past performance is not indicative of future results. This

is not to be considered an offer to buy or sell any financial instruments. As with all

investments, there are associated inherent risks. Please obtain and review the offering

memorandum and all financial material carefully before investing. These are the personal

views of the author as at the date indicated, and not necessarily the views of Invesco.

The author's comments are for information purposes only and should not be considered

a recommendation to buy or sell any security. The author's views may have changed

since the date indicated and are not intended to convey any specific investment advice.

Any statement that necessarily depends on future events may be a forward-looking

statement. Forward-looking statements are not guarantees of performance. They involve

risks, uncertainties and assumptions. Although such statements are based on

assumptions that are believed to be reasonable, there can be no assurance that actual

results will not differ materially from expectations. Investors are cautioned not to rely

unduly on any forward-looking statements. In connection with any forward-looking

statements, investors should carefully consider the areas of risk described in the most

recent simplified prospectus.

Published February 6, 2020. NA 1477

The value of investments and any income will fluctuate (this may partly be the results of

exchange rate fluctuations) and investors may not get back the full amount invested.

Property and land can be difficult to sell, so investors may not be able to sell such

investments when they want to. The value of a property is generally a matter of an

independent valuer’s opinion.

Where Invesco has expressed opinions, they are based on current market conditions

and are subject to change without notice. The value of investments and any income will

fluctuate (this may partly be the result of exchange rate fluctuations) and investors may

not get back the full amount invested.

All data provided by Invesco unless otherwise noted. All material presented is compiled

from sources believed to be reliable and current, but accuracy cannot be guaranteed.

Past performance is not indicative of future results. As with all investments, there are

associated inherent risks. Please obtain and review all financial material carefully before

investing.

Important information

36

Invesco is a registered business name of Invesco Canada Ltd.* Invesco® and all associated trademarks are trademarks of Invesco Holding Company Limited,

used under licence. © Invesco Canada Ltd., 2020.


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