FUND SPOTLIGHT 2 - Summer 2019

ISSUE 2

INSIDE THIS ISSUE: PREMIER Multi-asset volatility- targeted solutions SCHRODERS Two common errors that investors make FIDELITY Revisiting the case for quality INVESCO Five questions that investors are asking me OCTOPUS Intergenerational planning – why it can be tricky and how to get it right Plus much more...

FUND SPOTLIGHT – 3

WE L C OM E . . . ...TO THE SECOND EDITION OF OUR FUND SUPPLEMENT, FUND SPOTLIGHT.

In Octopus’ article they highlight that the life experiences of millennials (those born between 1981 and 1996) and their baby boomer parents (born between 1946 and 1964) differ enormously. This poses a challenge for financial advisers working with clients on intergenerational planning. Generations expert Dr Eliza Filby and Ben Charrington, Head of Estates and Probate at Octopus Investments, share their thoughts on this important topic on page 13. In M&G’s article ‘Making a difference (and a return)’, they highlight the M&G Positive Impact Fund which provides such an opportunity for those who want to make a difference with their investments without giving up returns. They believe that impact investment should increasingly help drive solutions, and can do so while delivering attractive investment returns to investors. Read their full article on page 18. Plus there are plenty more articles and information from other fund specialists such as Aberdeen, BlackRock, Blackfinch, BMO, Brewin Dolphin, Columbia Threadneedle, Deepbridge, Investec, Kuber, Sinfonia and Vanguard.

We open up this edition with an article from Fidelity, ‘Revisiting the case for quality’. With the outlook for earnings growth and valuations precarious, Fidelity Global Dividend Fund Manager Dan Roberts discusses why dividends could be a valuable source of returns for investors in the year ahead. He outlines how he goes about identifying sustainable dividend payers that possess the competitive and financial strength to prosper across cycles. On page 8 Simon Morris, Head of Strategic Partners at Premier Asset Management, provides an overview of the Liberation fund range, Premier’s multi-asset, multi-manager volatility-targeted solutions. The past six months have highlighted two common errors that investors frequently make. The first relates to a misunderstanding about the way investments compound over time and the second is the way that emotions can cloud our judgement. Both can be remedied relatively easily. Schroders article outlines how to overcome these two common errors highlighting the impact of compounding and how to keep investments balanced. ALSO IN THIS ISSUE On page 11 Mark Barnett, Head of UK Equities at Invesco responds to recent investor questions, sharing his thoughts on topical issues such as; his outlook for the UK economy, the potential catalysts for a revaluation of the UK equity market, what part of his portfolio offers the biggest potential at the current time plus more.

4 – FUND SPOTLIGHT

Dan Roberts Portfolio Manager - Fidelity Global Dividend Fund

R E V I S I T I N G T H E C A S E F O R Q U A L I T Y

WITH THE OUTLOOK FOR EARNINGS GROWTH AND VALUATIONS PRECARIOUS, FIDELITY GLOBAL DIVIDEND FUND MANAGER DAN ROBERTS DISCUSSES WHY DIVIDENDS COULD BE A VALUABLE SOURCE OF RETURNS FOR INVESTORS IN THE YEAR AHEAD. HE OUTLINES HOW HE GOES ABOUT IDENTIFYING SUSTAINABLE DIVIDEND PAYERS THAT POSSESS THE COMPETITIVE AND FINANCIAL STRENGTH TO PROSPER ACROSS CYCLES. When thinking about future returns from global equity markets, it can be helpful to break the sources of investment return into three components: yield, growth and valuation change. The sum of these three components gives an investor their total return. In very good years, for example 2017, a positive return will come from all three components. Last year, however, we saw a significant multiple compression due to a combination of rising US rates and the emergence of a more negative narrative around the health of the global economy. This resulted in an overall negative return from global equities in GBP terms last year, despite a positive contribution from earnings and dividends.

In the case of the Fidelity Global Dividend Fund, this approach results in a portfolio that is cheaper than the market on a dividend yield and free cash-flow yield basis and similarly valued in terms of price/earnings ratio. However, the quality of the assets in the fund is higher than the market, with more resilient return profiles and a lower level of debt. Important information This information is for investment professionals only and should not be relied upon by private investors. The value of investments and any income from them can go down as well as up so the client may get back less than they invest. Past performance is not a reliable indicator of future returns. The Fidelity Global Dividend Fund can use financial derivative instruments for investment purposes, which may expose it to a higher degree of risk and can cause investments to experience larger than average price fluctuations. The annual management charge for the income share class is taken from capital, therefore distributable income may be higher but the fund’s capital value may be eroded, which will affect future performance. Changes in currency exchange rates may affect the value of an investment in overseas markets. This fund invests in emerging markets which can be more volatile than other more developed markets. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document and current and semi- annual reports, free of charge on request, by calling 0800 368 1732. Issued by Financial Administration Services Limited and FIL Pensions Management, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0119/23241/SSO/NA

Interestingly, as the US Federal Reserve continued to raise rates in the fourth quarter, high-dividend strategies generally outperformed the broader market, which challenges the consensus assumption that rising rates lead to the underperformance of dividend-based strategies. In terms of what may lie in store for investors over the coming months, given the uncertain outlook around valuations and growth, I think it makes sense to emphasise dividends as a component of total return, and to do so by investing in assets that trade at an attractive yield and will be well-supported throughout a range of economic scenarios. LOOKING PAST THE HEADLINE YIELD FOR A MARGIN OF SAFETY It is important, however, to look beyond a high headline yield and hone in on those companies that possess the quality and resilience to deliver sustainable dividend growth over time. As a result, I do not simply invest in the highest yielding or cheapest companies, as a high headline yield can often be a sign of stress in the underlying business. So, while I place significant emphasis on the price I am being asked to pay for a stock, I also demand certain characteristics from companies – such as a strong balance sheet, predictable cash flows and management that recognises the importance of good capital allocation – to help provide clarity over a stock’s true value and sustainability of its earnings and dividend.

6 – FUND SPOTLIGHT

N O T- S O - P L A S T I C FA N TA S T I C

MOUNTING HOSTILITY TOWARDS SINGLE-USE PLASTICS WILL CREATE CLEAR WINNERS AND LOSERS. Plastic is the environmental issue of the moment. Campaigners have long argued against the use of single-use plastics and sought to highlight the scourge they create for the natural world. But it was a BBC documentary, Blue Planet II, that produced a literal sea change in how the US, Europe and the UK view plastics. The documentary graphically highlighted the extent to which plastics have infected food chains, and the immense suffering they inflict on sea creatures. The response from consumers has been stark, with many people moving swiftly to reduce their usage of plastic. Companies have been equally quick to put in place policies that cut down reliance on plastic. Governments too are reacting, with the UK and Europe both announcing strategies to regulate plastics. By contrast, the investment community has been slow to react. Many investment managers have talked up the need for action. However, that rhetoric has not necessarily been reflected in portfolios. This is surprising. There are likely to be some clear winners and losers among plastics manufacturers. Simply put, companies with the capital to invest in the production of more sustainable forms of plastic, or that have limited exposure to single-use plastics, stand to prosper. Conversely, less well-capitalised companies dependent on single-use plastic will struggle to adapt. Companies able to invest in the production of more sustainable forms of plastic, or that have limited exposure to single-use plastics, stand to prosper.

production of Sealed Air Corporation is single- use plastic, and a number of their products are market-leading. The company’s bonds are supported by strong free cashflow, a solid balance sheet and healthy debt levels. Most crucially, Sealed Air Corporation is investing to adapt to a world intent on using plastic more sustainably. The company has combined product innovation with its work on sustainability. It is also undertaking various initiatives aimed at increasing usage of recyclable materials. Additionally, it is developing bio-materials that are recyclable or that degrade much faster than petroleum- based products. Not all companies are quite so forward- thinking. Some firms in the US high-yield market are heavily indebted, with as much as two-thirds of production dedicated to single-use plastics. Their lack of financial resource leaves them in a precarious position. Such firms will face stark choices about the direction that they want – and are able – to take in the future. What applies to the US high-yield market does not apply to all jurisdictions. Asian consumers have been almost silent on the issue of single-use plastics. Consequently, there is little impetus for change in companies in the region. The very raw outrage of many western consumers about plastic might fade over time. But companies and governments are moving in a direction that means that some of the changes being sought are likely to prove durable. As our love affair with plastic sours, the investment community must hasten to catch up with the shift of mood.

Samantha Lamb Head Of Fixed Income Esg, Aberdeen Standard Investments

The US high-yield debt universe includes many companies producing single-use plastics. For instance, almost all of the

8 – FUND SPOTLIGHT

SIMON MORRIS, HEAD OF STRATEGIC PARTNERS AT PREMIER ASSET MANAGEMENT, PROVIDES AN OVERVIEW OF THE LIBERATION FUND RANGE, PREMIER’S MULTI-ASSET, MULTI-MANAGER VOLATILITY-TARGETED SOLUTIONS. The Premier Liberation fund range consists of four actively managed, diversified multi-manager funds, managed by Premier’s award-winning multi-asset investment team. The funds are managed to be aligned with Distribution Technology risk profiles 4, 5, 6 and 7, based on volatility boundaries that are provided to Premier and updated quarterly. TAILORED VOLATILITY OUTCOMES Each fund has an objective to generate long-term capital growth, income or a combination of the two but is also managed to be aligned with a specific volatility level. In this range of funds, Premier Liberation No. IV Fund is expected to have the lowest volatility and also the lowest expected returns over the long-term, whilst Premier Liberation No. VII Fund is expected to have the highest volatility and potential for higher returns over the long-term than the other three funds in the range. DIVERSIFIED, MULTI-ASSET PORTFOLIOS The Liberation funds typically invest in funds and other investments managed by carefully selected, specialist fund managers. This includes funds providing exposure to equities, bonds, commercial property and alternative assets, to create a diversified investment portfolio to spread risk and help the multi-asset team manage the volatility. PROVEN INVESTMENT APPROACH Premier’s multi-asset team continually research new investment ideas, monitor existing investments and actively manage the holdings in each fund with the aim of keeping the portfolios on track to meet their long-term investment objectives. Since the multi-asset team started managing the funds to be aligned with specific volatility levels in 2012, the desired volatility profile has been achieved, with risk steadily increasing from Premier Liberation No. IV (lowest expected volatility) to Premier Liberation No. VII (highest expected volatility). M U LT I - A S S E T V O L AT I L I T Y-TA R G E T E D S O L U T I O N S

Source: FE Analytics, data from 01.12.2012 to 30.04.2019. Monthly annualised volatility, based on C accumulation share class. The Liberation fund range can help advisers identify funds that have the potential to deliver the right long-term outcomes to meet their clients’ risk/reward profile. Please note these funds are not currently on the Tenet Panel. Therefore, appointed representatives who deem it suitable for a particular client need to follow the off panel approval process. FIND OUT MORE

Contact Simon Morris, Head of Strategic Partners, on 07738 958 072 or email simonmorris@premierfunds.co.uk

This article is for information purposes and is only to be issued to financial intermediaries. It is not for use with customers. It expresses the opinion of the author and does not constitute advice. Past performance is not a reliable indicator of future returns. These funds are currently managed to be aligned to the Distribution Technology risk profiles. Distribution Technology is not authorised to provide financial advice. Premier does not have any influence or control over the risk profiles or the methodology used to create them, and we are unable to provide assurances as to their accuracy or that they will not change, or that Premier will continue to manage these funds to be aligned with these risk profiles in the future. Premier cannot accept any liability which may arise as a result of any reliance on these risk profiles. The risk profiles do not indicate a promise, forecast or illustration of future risk profiles or performance returns.

Simon Morris Head of Strategic Partners

Issued by Premier Asset Management, which is the marketing name used to describe the group of companies, including Premier Portfolio Managers Limited and Premier Fund Managers Limited, that are authorised and regulated by the Financial Conduct Authority. For your protection, calls are recorded and may be monitored for training and quality assurance purposes.

FUND SPOTLIGHT – 9

Duncan Lamont Head of Research and Analytics

TWO C OMMO N E R R O R S T H AT I N V E S T O R S M A K E … A N D H OW T O O V E R C OM E T H E M

COMPOUNDING AND PORTFOLIO REBALANCING COULD HAVE HELPED INVESTORS OVERCOME EMOTIONAL URGES DURING A TURBULENT SIX MONTHS FOR STOCK MARKETS. DUNCAN LAMONT EXPLAINS. The past six months have highlighted two common errors that investors frequently make. The first relates to a misunderstanding about the way investments compound over time and the second is the way that emotions can cloud our judgement. Both can be remedied relatively easily. THE IMPACT OF COMPOUNDING In relation to the first, the US stock market fell by 13.7% in the fourth quarter of 2018 but has since rallied by 13.9% this year so far (as of 12 April 2019). 13.9 is more than 13.7 so that means investors are up overall, right? Wrong. Investors are actually down by 1.7% over this period. This very common mistake arises because people often prefer to add numbers together in their heads but investments compound from one period to the next. A 13.9% return on $100 would indeed lead to a gain of $13.90, if the investment was made at the start of 2019. But, in this situation, a $100 investment made at start of October 2018 has fallen by 13.7% by the year end, to $86.30. As a result, you have less capital to earn that 13.9% return on.

Instead you only make back $12.00 (13.9% x 86.30). This takes your final amount to $98.30. While this may seem a bit abstract, understanding the difference between arithmetic returns (i.e. adding them together) and geometric returns (i.e. compounding them together over multiple periods) is really important. This same mistake can also result in borrowers underestimating how much it will ultimately cost to repay a loan. KEEPING YOUR INVESTMENTS BALANCED Turning to the second common error, think back to the end of 2018. The fourth quarter was a horrid time to be investing in the stock market. There was no hiding place as everything fell sharply. Sentiment was rock bottom and the emotional response would have been to sell. However, partly as a consequence of the market declines but also because earnings grew strongly in 2018, earnings-based measures of valuations had fallen to their cheapest levels for several years. Although valuations are usually a poor guide to short- term performance, markets rallied sharply from that nadir. As well as the US market being up 13.9%, Europe, the UK and emerging markets have all risen by around 10%. Even the laggard, Japan, managed almost 8%. With hindsight, it would have been a great time to invest. But, we are hard-wired as emotional beings so overcoming the urge to sell is not easy. Getting over our tendency to extrapolate the recent past into the future takes discipline.

One relatively easy way to take emotion out of the equation entirely is to follow a rebalancing policy.

For example, decide (or use an independent financial adviser to help you decide) what percentage of your investments you want in the stock market, bonds, cash and so on. If one asset class outperforms the others, its weight in the portfolio will rise. Rebalancing involves selling some of that winner, to bring its weight back to where you intended it to be, and reinvesting the gains in assets that have performed less well. This is “buy low-sell high” in practice. It’s not rocket science. And it could have resulted in you buying equities at the turn of the year, even though the voice in your head may have been telling you to do the opposite. Again, if ever unsure whether an investment is suitable for you, seek advice from an independent financial adviser. Of course it is true that markets may have continued to fall but valuations are one of the best indicators of long-term returns. Long- term investors should heed their messages. Important information: Please remember that the value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. This marketing material is for professional investors or advisers only. This site is not suitable for retail clients.

FUND SPOTLIGHT – 11

F I V E Q U E S T I O N S T H AT I N V E S T O R S A R E A S K I N G M E

MARK RESPONDS TO RECENT INVESTOR QUESTIONS, SHARING HIS THOUGHTS ON TOPICAL ISSUES.

Mark Barnett Head of UK Equities

Q: WHAT IS YOUR OUTLOOK FOR THE UK ECONOMY? Underlying economic and corporate data suggest that the UK economy is relatively robust despite the persistent negativity seen since the EU Referendum result. Bearing in mind the increase in government spending confirmed in the Chancellor’s Spring Statement, coupled with the Treasury’s flexibility to provide further injections after Brexit, it feels reasonable to expect the UK economy to remain resilient. Q: YOU’VE TALKED ABOUT THE DE-RATING OF DOMESTIC EQUITIES VERSUS INTERNATIONALLY ORIENTATED COMPANIES SINCE THE EU REFERENDUM, BUT WHERE DO YOU SEE THE FLOOR? HOW MUCH WORSE CAN THINGS GET? Investing in equity markets is inherently risky and nobody can predict with certainty how much further valuations could deteriorate. However, if we look at data from the past fifteen years we can see that the floor (in P/E terms) has historically been around a 30 per cent discount to the wider market. We are experiencing levels of pessimism not seen since the financial crisis:

Q: WHAT PART OF YOUR PORTFOLIO DO YOU THINK OFFERS THE BIGGEST POTENTIAL AT THE CURRENT TIME AND WHY? To my mind, the exposure to UK domestically orientated companies offers the most opportunity within the portfolios at present. Clarity on our future relationship with the European Union would likely prove a positive catalyst for companies that have de-rated under sustained political uncertainty. Absent a two-year extension, and the additional uncertainty that would come with that decision, it feels we are nearing a point of clarity, if not resolution. Q: INCOME IS IMPORTANT, BUT WHAT ARE YOU DOING ABOUT CAPITAL PRESERVATION? Whilst the portfolios all have a focus on providing income, clearly capital growth is a crucial component of total return. In respect of the portfolios I manage, recent capital growth has been disappointing, relative to the performance of the FTSE All-Share index. As a fellow investor in the portfolios, I feel the effects of any relative underperformance alongside my clients. What I would say is that I remain confident in my investment approach and in the opportunities that currently sit within the portfolios. Despite the volatile and somewhat irrational market pricing we have seen recently, my investment process has not changed. I believe that over time, my positioning of the portfolios will bear out, and that the portfolios have the potential to deliver both income growth and growth in capital.

Figure 1

Investment risks 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. Important information This article is for Professional Clients only and is not for consumer use. Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals

and are subject to change without notice. This article is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities. Issued by Invesco Asset Management Limited, Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH, UK. Authorised and regulated by the Financial Conduct Authority.

Source: Barclays as at 31 December 2018. Market = FTSE 350 index.

The inference from this data is that the market is pricing in an impending recession of 3-4 per cent. This feels overly pessimistic and is not supported by underlying economic growth, which has proven relatively resilient. Q: WHAT DO YOU CONSIDER THE POTENTIAL CATALYSTS FOR A REVALUATION OF THE UK EQUITY MARKET? Cheapness. Valuations themselves can become the catalyst for reassessment when discounts become unsupportable. If not, we are likely to see M&A activity. We’ve already seen some of this over the past few months. For example, Dairy Crest, a British focussed dairy business, accepted a bid from Canadian rival Saputo earlier this year. More broadly, any material uplift in the value of sterling versus international currencies and an end to the Brexit uncertainty could also be potential catalysts for a revaluation of the UK Equity market.

FUND SPOTLIGHT – 13

Ben Charington Head of Estates and Probate, Octopus

Dr Eliza Filby Generations Expert

I N T E R G E N E R AT I O N A L P L A N N I N G – WH Y I T C A N B E T R I C K Y A N D H OW T O G E T I T R I G H T

This generation was encouraged in the 1980s to buy assets that accumulated in value, amid a culture that incentivised long-term behaviour. There has not been that culture at all for millennials. It’s therefore unsurprising that as they enter their mid-life stage, the financial services industry is scrambling to engage with them and finding it difficult. This generation is set to inherit the largest transfer of wealth in history. The financial services industry has a role to play in educating millennials so they are ready. BC: If no planning is done then a big chunk of the wealth someone’s built up goes to the government as inheritance tax. So good intergenerational planning is clearly important for those wanting to pass as much as possible to their beneficiaries, and for those beneficiaries themselves. But it’s also very important for financial advisers. Getting this right means an adviser has the opportunity to take on a whole new generation of clients. It also means retaining assets under advice built up with the original client and unlocking the planning opportunity for their beneficiaries and their wider estates. Firms that successfully retain assets while taking on a younger client base should increase the value of their business. WHAT CAN INHIBIT SUCCESSFUL INTERGENERATIONAL PLANNING? EF: It’s always difficult talking about money. There’s also a power imbalance between generations. One generation has all the money, and millennials can feel infantilised by their parents. The financial services industry sometimes mirrors that, concentrating its attention on millennials’ parents and not on those who will receive the wealth. The industry struggles to educate millennials in a medium they understand and prefer, like video. What needs to be realised is that millennials will have a very different life cycle to their parents. They can expect to work until they’re 80. Therefore it makes sense to think of a pension as more of a social care fund. Millennials will see the world during their working life. They’re not saving for that retirement cruise. Intergenerational planning should account for

The life experiences of millennials (those born between 1981 and 1996) and their baby boomer parents (born between 1946 and 1964) differ enormously. This poses a challenge for financial advisers working with clients on intergenerational planning. Below, generations expert Dr Eliza Filby and Ben Charrington, Head of Estates and Probate at Octopus Investments, share their thoughts on this important topic. Ben Charrington: Inheritance is changing for a number of reasons. The two big ones are that people are living longer, and the value of their estates has increased. Because their parents are living longer, beneficiaries tend to be older when they receive their inheritance. And because estates are larger, we’ve seen an increase in inheritance tax receipts, which hit a record high last year. Eliza Filby: The intergenerational transfer that’s happening right now is having a profound impact on how people think about money, and on how millennials and their parents navigate that. There are examples of millennials and their parents deciding to exchange money while the parents are alive, for instance to help their children get on the housing ladder. But this is complicated by the fact that baby boomers are living longer, so need their money for longer to cover living costs and potentially care costs. We see this reflected in public as a political divide, with generations pitted against each other. Crucially, this public tension tends not to exist in private. Families are closer than ever before, with grandparents doing an awful lot of childcare. Families are taking the initiative and beginning to have those conversations. WHY IS INTERGENERATIONAL PLANNING SO IMPORTANT? EF: Baby boomers are the best financially planned generation in history. One in five baby boomers in the UK is a millionaire, many as a result of rising property prices, so they need the right estate planning. HOW IS THE NATURE OF INHERITANCE CHANGING?

the very different life cycle millennials will have.

BC: Talking about death is one of the hardest conversations an adviser can have with their client. It can be even harder for them to talk to their children about it. So we see a lot of procrastination, which gets in the way of good planning. “I’ll put this off until I retire” or “I’ll do it when I turn 75.” All that happens is the conversation gets harder to have and sometimes ends up not being had at all. I would also add that the probate process is not given enough respect. People usually go to a solicitor and leave them to deal with it. Financial advisers and the expertise they bring are too often left out of the process. I got a phone call recently from a beneficiary who was clearing out her father’s house. During the probate process, they had taken an investment they had with us and sold it down and taken it as cash. The solicitor and the beneficiary didn’t know they could have claimed inheritance tax relief on this investment. Had she not picked up the phone, the beneficiary would’ve been out of pocket for £80,000. Financial advisers can prevent this sort of thing, but only if they are involved during the probate process. ESTATE PLANNING THROUGH THE GENERATIONS Octopus has put together practical tips and information on engaging with the next generation as part of estate planning. You will find them – along with further findings from our research – at octopusinvestments.com/ intergenerational. For professional advisers and paraplanners only. Not to be relied upon by retail investors. Personal opinions may change and should not be seen as advice or a recommendation. Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London EC1N 2HT. Registered in England and Wales No. 03942880. We record telephone calls. Issued: May 2019. CAM008184.

16 – FUND SPOTLIGHT

Maya Bhandari Portfolio Manager, Multi-asset

C H I N E S E WH I S P E R S

IN THE YEAR SO FAR, EQUITY CASH FLOWS, PROXIED BY EARNINGS GROWTH EXPECTATIONS, HAVE WEAKENED ACROSS EACH MAJOR EQUITY BLOC OR REGION, SHIFTING LEFT IN FIGURE 1. YET STOCK MARKET RETURNS HAVE RISEN – MOVING UP VERTICALLY – APPARENTLY SHRUGGING OFF THE WEAKER CASH FLOW PICTURE. In local currency terms investors across asset markets, including equities, have enjoyed the best start to a year since 2007, albeit after a nasty fourth quarter. FIGURE 1: EVOLUTION OF EARNINGS GROWTH EXPECTATIONS AND EQUITY MARKET RETURNS OVER PAST THREE QUARTERS

corporate earnings would verify recent optimism. China accounts for more than a third of world economic growth and at least half of demand for some commodity markets – so even a whisper of Chinese stimulus often does the trick. Will “this time is different” for how China influences the rest of the world? There is one reason to think it might be: the policy focus on deleveraging while meeting a growth target creates a dilemma, which may be a lot less helpful for other economies. As my former colleague David Lubin at Citi puts it: “Because of the credit-dependent nature of China’s growth model, it can’t reach those targets simultaneously. Increasing GDP implies rising indebtedness, which creates financial vulnerability; and increasing financial stability requires deleveraging, which threatens GDP.” A result of this is that China flip flops between the two inconsistent objectives, creating shorter and more volatile cycles. It is focussing on boosting consumption rather than credit-heavy investment, which alters the transmission mechanism from China to other countries. This is not to say there will be no benefit from Chinese stimulus, rather it may not be the previous “shot in the arm”. Clipping back overall risk in our dynamic fund range feels right, but we are mindful of developments that could alter our assessments on cash flows and discount rates. Portfolios are light on duration, using cash-like assets and low duration credit to anchor more volatile holdings including in EM Asian, Japanese and European equities. Find out more www.columbiathreadneedle.co.uk Note all article content is as at May 2019. Important information: For investment professionals only, not to be relied upon by private investors. Past performance is not a guide to future performance. The value of investments and any income is not guaranteed and can go down as well as up and may be affected by exchange rate fluctuations. This means that an investor may not get back the amount invested. Your capital is at risk. This material is for information only and does not constitute an offer or solicitation of an order to buy or sell any securities or other financial instruments, or to provide investment advice or services. The mention of any specific shares or bonds should not be taken as a recommendation to deal. The analysis included in this document has been produced by Columbia Threadneedle Investments for its own investment management activities, may have been acted upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice and should not be seen as investment advice. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed. This material includes forward-looking statements, including projections of future economic and financial conditions. None of Columbia Threadneedle Investments, its directors, officers or employees make any representation, warranty, guarantee or other assurance that any of these forward looking statements will prove to be accurate. Issued by Threadneedle Asset Management Limited (TAML). Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority. Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies. columbiathreadneedle.com 1 We could add in dividends, but they tend to grow in line with earnings and nominal economic growth.

Source: Columbia Threadneedle/Bloomberg. Marker indicates 2 May, line shows history over previous three quarters starting end-Feb ‘19, end-Nov ‘18 and end-Aug ‘18.

What is going on? While earnings expectations are manifestly lower than a year ago, so too are the rates at which those future earnings are discounted. Between January and September 2018 these moved choppily sideways, stepping higher around February, while earnings expectations evolved favourably. But from October cash flows drifted a touch lower, whereas discount rates jolted higher – by nearly 200bps. This year, while cash flows have weakened more perceptibly, discount rates have fallen more and markets have rallied. Our forecast is for global economic growth to decelerate to just below consensus, and for slightly higher discount rates than those currently priced in. An improvement in growth and cash flows, meanwhile, is plausible. Global economic data have stabilised and earnings revisions are positive for the first time since autumn. Easing Chinese policy, which has clearly benefited China, positively affecting other economies and

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