2020 Investment Outlook: Risks and Opportunities for Investors in Global Markets

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ftserussell.com
2020 Investment Outlook:
What’s discounted and what could
disrupt consensus expectations?
Philip Lawlor, managing director, Global Markets Research
December 2019ftserussell.com
Global macroeconomic and
asset allocation insights
Originally presented at a webinar on Dec 11th
Click to Watch-on-Demand

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FTSE Russell is not an investment firm and this presentation is not advice about any investment
activity. None of the information in this presentation or reference to a FTSE Russell index constitutes
an offer to buy or sell, or a promotion of a security. This presentation is solely for informational
purposes. Accordingly, nothing contained in this presentation is intended to constitute legal, tax,
securities, or investment advice, nor an opinion regarding the appropriateness of making any
investment through our indexes.
Views expressed are subject to change. These views do not necessarily reflect the opinion of FTSE
Russell or London Stock Exchange Group plc.
This presentation was first introduced during a webinar on Dec 11th
Click to Watch-on-Demand

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The journey travelled
Economic cycle
Credit (financial conditions) cycle
Profit cycle
Valuation cycle
Weighing 2020’s pros and cons
Assessing the 2020 Outlook through the Prism of Cycle Analysis

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Russell 1000 vs. FTSE All-World ex US (Rebased) FTSE All-World Index vs. FTSE World Bond Index
(Rebased, TR Local Currency)
Year-To-Date Performance – The Journey
Source: FTSE Russell, Refinitiv. November 2019. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Global equities and bonds have enjoyed a banner year
85
90
95
100
105
110
115
120
Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19
FTSE All-World Index vs FTSE World Government
Bond Index 7-10yr (Rebased, TR, LC)
FTSE All-World
FTSE WGBI 7-10yr
80
85
90
95
100
105
110
115
Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19
Russell 1000 FTSE All-World ex US

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US Yield Curve vs US ISM Manufacturing Index Eurozone and US Leading Indicators
Last 12 Months – Economic Outlook Went from Exuberance to Gloom
Growth outlook deteriorated as tight late-2018 financial conditions and geopolitics took their toll
46
50
54
58
62
95
100
105
110
115
Oct-14 Oct-15 Oct-16 Oct-17 Oct-18 Oct-19
Eurozone Economic Sentiment Indicator
US ISM Manufacturing Index (RHS)
35
40
45
50
55
60
65
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
US Yield Curve (10-2 Year, %)
US ISM Manufacturing Index (RHS, 3M MA)

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Last 12 Months – Persistent Drop in Global GDP Forecasts
12-Month-Rolling Consensus GDP Forecasts
5.8
5.9
6.0
6.1
6.2
6.3
6.4
6.5
6.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
2.8
3.0
Aug-17 Nov-17 Feb-18 May-18 Aug-18 Nov-18 Feb-19 May-19 Aug-19 Nov-19
US Eurozone UK China (RHS)

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Good News: Global Leading Indicators Already Near Post-GFC Lows
LEIs have now suffered a two-standard-deviation decline, levels typically marking cycle troughs
-4
-3
-2
-1
0
1
2
3
4
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
Z-Score
US ISM Manufacturing Index (Z-Score 6m % Chg) Eurozone Economic Sentiment Indicator (Z-Score 6m % Chg)

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Source: FTSE Russell, Refinitiv. November 2019. The FTSE Financial Conditions gauges financial conditions across regions, using a Z-scoring methodology that compares the current
reading of each financial condition variable against its long-term average, measuring these divergences in terms of standard deviations, which are clustered into bands 1 through 5.
Past performance is no guarantee of future results. Please see the end for important legal disclosures.
Financial Conditions Have Eased Globally
FCI scores reflect shifts in monetary policy, bond yields, currencies and corporate bond spreads
1.0
2.0
3.0
4.0
5.0
US UK Eurozone Japan China
Current Score November 2018 Peak
TighteningLoosening
Neutral [3]
Regional FTSE Financial Conditions Indicator (FCI) Scores

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Fed vs. Market Interest-Rate Forecasts Number of Central-Bank Rate Cuts vs. Rate Hikes
The Return of Financial Repression and the Fed ‘Put’
Synchronous global central-bank easing, led by Fed pivot, and renewed balance-sheet expansion
0
10
20
30
40
50
2015 2016 2017 2018 2019 (YTD)
No of Central Bank Interest Rate Hikes
No of Central Bank Interest Rate Cuts
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2014 2015 2016 2017 2018 2019 2020 2021
Fed Funds Rate (%)
Current OIS Market Implied Rate Expectations (%)
Current Fed Projections (%, Sept 2019)
Dec 2018 Fed Projections (%)

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FTSE All-World Consensus EPS Estimate Trails (USD)
The Profit Cycle: Analyst Revisions Tend to Lag the Economic Cycle
How plausible are bottom-up consensus EPS growth forecasts?
2015 2016
2017
2018
2019
2020
2021
14
16
18
20
22
24
2013 2014 2015 2016 2017 2018 2019
EPS(USD)
Regional Consensus EPS Growth Forecasts
2019
3m
Ago
2020
3m
Ago
2021
3m
Ago
Russell 1000 0.8 1.7 9.9 10.9 10.9 10.6
Russell 2000 -3.0 10.1 37.2 27.3 18.9 13.7
FTSE World ex US -1.8 1.0 9.5 9.3 8.3 7.4
FTSE UK -2.4 0.6 7.3 8.5 6.0 7.4
FTSE Europe ex UK 1.4 3.3 10.5 10.4 8.3 7.9
FTSE Japan -1.5 1.5 6.5 6.3 8.1 6.9
FTSE Asia Pacific ex Japan -12.2 -9.5 11.8 11.6 10.2 7.8

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US Nominal GDP Growth vs. US Revenue Growth Revenue Growth Pre- and Post Global Financial Crisis
Top-Down Focus – Revenue Growth Has Become Scarcer
Lower bond yields > lower nominal GDP growth > lower revenue growth > operating-leverage risk
0
5
10
15
20
25
US UK Europe ex
UK
Japan Asia Pacific
ex Japan
Revenue Gorwth 10 Years Pre-GFC
-15
-5
5
15
25
1995 2000 2005 2010 2015 2020
US Nominal GDP Growth (x2)
US Revenue Growth
Forecast NGDP (x2)
Forecast Revenue Growth

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Regional 12 Month Forward PE Ratio Comparison
Current
10yr
Average
Current
Relative
Average
Relative
Russell 1000 18.0 15.4 1.30 1.20
Russell 2000 24.5 21.7 1.77 1.69
FTSE World ex US 13.9 12.8
FTSE UK 12.8 12.5 0.77 0.86
FTSE Europe ex UK 13.8 10.8 0.82 0.73
FTSE Japan 14.0 13.7 0.84 0.96
FTSE Asia Pacific ex Japan 13.9 11.0 0.85 0.77
Regional 12-Month-Forward PEs
Where Do Valuations Stand?
All developed markets are now at premiums (in red) to their 10-year average PE multiples
8
10
12
14
16
18
20
Nov-16 May-17 Nov-17 May-18 Nov-18 May-19 Nov-19
Russell 1000 FTSE UK
FTSE Eur ex UK FTSE Japan
FTSE Asia Pac ex Japan

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Gauging the Quality of the Rally – Do Index Gains Match EPS Growth?
Equity appreciation has exceeded EPS growth everywhere but the UK
FTSE World
Russell 1000
FTSE World ex US
Russell 2000
FTSE UK
FTSE Eur ex UK FTSE Japan
FTSE Asia Pac ex Japan
0
5
10
15
20
25
30
35
40
45
50
0 5 10 15 20 25 30 35 40
3-Year%ChginPriceIndex
3-Year % Chg in 12m Forward EPS
Re-Rating
De-Rating
Three-Year Changes in Index Levels vs. Forward EPS Forecasts (%)

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2020 Outlook – Weighing the Pros and Cons
What is discounted?
• Slowing growth (but not a recession)
• Trade conflict will eventually get resolved
• Monetary accommodation (Fed Put)
• Low but positive EPS growth
What would surprise markets in 2020?
Positively
• Rapid trade resolution – US electoral cycle
• Positive inflection/confirmation of bottoming in leading indicators
• Fiscal stimulus
Negatively
• Extended trade dispute and higher tariffs
• A recession
• A profit recession
• Eventual tightening of financial conditions (Fed rate hikes)

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(Monthly - 3 FX versions)
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2020 Investment Outlook: Risks and Opportunities for Investors in Global Markets

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