Craig Botham, Economist

An economic update

May 2017

2016 – image of the year Donald and Nigel at Trump towers

1

Source: Splashnews.com.

– UK: the election, Brexit and beyond – Europe: out of the woods? – President Trump – policy uncertainty and macro implications – What are we missing? – Asset allocation

Key issues

2

Source: Schroders.

Synchronised global upswing Developed markets vs. emerging markets PMIs

3

Source: Thomson Datastream, Markit, Schroders Economics Group, 27 March 2017. Thomson Reuters Datastream, Schroders, updated 28 April 2017.

Global growth forecasts Forecasts holding up (for once)

4

Source: Thomson Reuters Datastream, Schroders, updated April 2017.

UK - The election, Brexit and beyond

UK general election to clear the way for softer Brexit May to gain 100 seat majority and Brexit breathing space

6

Source: Schroders Economics Group. 20 April 2017.

GBP: the Brexit barometer

1.20

1.25

1.30

1.35

1.40

1.45

1.50

1.55

1.60

Jan 15 Jul 15 Jan 16 Jul 16 Jan 17

GBP/USD

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Jun 16 Jul 16 Aug 16 Sep 16 Oct 16 Nov 16 Dec 16 Jan 17 Feb 17 Mar 17 Apr 17

5-poll moving average (% share of popular vote)

Con Lab UKIP Lib Dem Others

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Y/Y

Core Food, Tobacco and Alcholic beverages Energy UK CPI

UK economy deteriorating – inflation set to rise further Schroders UK CPI forecast

7

Source: Thomson Datastream, ONS, Schroders Economics Group. 27 March 2017.

UK economy deteriorating Consumption drivers under pressure, investment is weak

8

Source: Thomson Datastream, ONS, Schroders Economics Group. 4 April 2017.

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

06 07 08 09 10 11 12 13 14 15 16

y/y

Real household disposable income Savings rate

-20%

-15%

-10%

-5%

0%

5%

10%

15%

06 07 08 09 10 11 12 13 14 15 16 17

4q/4q

UK household consumption UK business investment

Investment slows as uncertainty rises Disposable income vs. savings rate

– Near term: weaker sterling and higher inflation slow consumption

– Negotiation period: 2017–2019: uncertainty to weigh on activity (capex vulnerable)

– Low interest rates persist with periodic bouts of GBP weakness

– 2019: no deal (cliff edge), UK goes to WTO status, stagflation environment as tariffs rise

– 2019: no deal, but agreement to keep talking (transition period), growth and rates firm

– If deal struck in 2019, UK growth picks up and rates begin to normalise

– Ability of economy to grow without inflation depends on trade and migration deal

Deal or no deal? The macro environment to 2019 and beyond

9

Source: Schroder Economics group, The Times.

UK Germany

Beyond Brexit Case study: competitiveness in the UK and Germany

10

Note: All exchange rates are trade weighted, real effective exchange rates based on relative unit labour cost. Source: Thomson Datastream, Schroders Economics Group, 10 March 2017.

70

80

90

100

110

2000 2002 2004 2006 2008 2010 2012 2014 2016

Sterling nominal effective exchange rate, 1q MA

Sterling real effective exchange rate, 1q MA

Q1 2000 = 100

90

95

100

105

110

115

120

125

130

2000 2002 2004 2006 2008 2010 2012 2014 2016

Euro nominal effective exchange rate, 1q MA

Germany real effective exchange rate, 1q MA

Q1 2000 = 100

70

80

90

100

110

2000 2002 2004 2006 2008 2010 2012 2014 2016

Sterling nominal effective exchange rate, 1q MA

Sterling real effective exchange rate, 1q MA

Q1 2000 = 100

90

95

100

105

110

115

120

125

130

2000 2002 2004 2006 2008 2010 2012 2014 2016

Euro nominal effective exchange rate, 1q MA

Germany real effective exchange rate, 1q MA

Q1 2000 = 100

Eurozone – out of the woods?

-6%

-4%

-2%

0%

2%

4%

6%

-6%

-4%

-2%

0%

2%

4%

6%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Eurozone GDP growth, Y/Y Belgian National Bank survey (standardised) Markit PMI, EZ Composite (standardised)

Growth booming Eurozone GDP vs. BNB survey and PMIs

12

Source: Thomson Datastream, Markit, Belgian National Bank, Eurostat, Schroders Economics Group. Updated 27 March 2017.

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2012 2013 2014 2015 2016 2017 2018

Y/Y

Core Food incl. alcohol & tobacco Energy Headline

Inflation is close to its peak Energy base effects have caused inflation to rise, but only temporarily

13

Source: Thomson Datastream, Eurostat, Schroders Economics Group. Updated 27 March 2017.

Country Event risk Date Probability Market impact

Hungary Migrant quota rejected in referendum 2 October 2016 High Low

Austria Re-run of presidential election with far-right Freedom party winning 4 December 2016 Medium Low

Italy Constitutional referendum, leading to Renzi losing his job 4 December 2016 Medium Medium

Netherlands General election with the Party for Freedom calling an EU referendum 15 March 2017 High Low

UK Article 50 triggered By end of March 2017 High Low

France Presidential elections with Front National winning 23 April and 7 May 2017 Low Extreme

UK Snap general election with the Conservative party losing its majority 8 June 2017 Low Medium

Germany Federal election with Alternative for Deutschland winning 24 September 2017 Very low Extreme

Italy 5 Star Movement wins Italian election By May 2018 Medium High

Eurozone has resisted populist pressure…so far A roadmap and guide to upcoming events

14

Source: Schroders Economics Group. 20 April 2017.

20

22

24

26

28

30

32

34

36

Jan 16 Mar 16 May 16 Jul 16 Sep 16 Nov 16 Jan 17 Mar 17

Share of popular votes (10-poll moving average)

5 Star Movement Democratic party

Five star have taken the lead in Italy Elections due by May 2018 spell trouble for the eurozone

15

Source: Wikipedia, Schroders Economics Group. Updated 24 March 2017.

Relative wage costs1 Germany: soaring trade surplus2

Structural problems will weigh on Eurozone after the elections No one can keep up with Germany

16

1Source: Thomson Reuters Datastream, Schroders, updated 28 April 2017. 2Source: Thomson Reuters Datastream, Schroders, updated 15 February 2017.

US – can Trump deliver?

Return of animal spirits in the US Confidence has surged in the US and capex is likely to follow

18

Source: Thomson Datastream, Schroders Economics Group, 23 March 2017.

-20

0

20

40

60

80

100

120

-20

-15

-10

-5

0

5

10

15

03 05 07 09 11 13 15 17RecessionUS non-res private fixed investment growthCEO economic outlook survey, 1Q lag, rhs

%, y/y

80

85

90

95

100

105

110

20

40

60

80

100

120

03 05 07 09 11 13 15 17RecessionUS consumer confidenceNFIB small business optimism,rhs

Index

-20

0

20

40

60

80

100

120

-20

-15

-10

-5

0

5

10

15

03 05 07 09 11 13 15 17RecessionUS non-res private fixed investment growthCEO economic outlook survey, 1Q lag, rhs

%, y/y

80

85

90

95

100

105

110

20

40

60

80

100

120

03 05 07 09 11 13 15 17RecessionUS consumer confidenceNFIB small business optimism,rhs

Index

-6

-4

-2

0

2

4

6

8

10

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

GDP growth (4q/4q) 5-year moving average

%

4% growth

But 4% growth is a long shot Economy has not grown at 4% since 2000

19

Source: Thomson Reuters Datastream, Schroders Economic Group, 27 March 2017.

As is the promise to create 25 million jobs Late cycle US has limited labour market capacity

20

Source: Bureau of Labour Statistics, Thomson Datastream, Schroders Economics Group. 24 March 2017.

0

5

10

15

20

25

30

94 96 98 00 02 04 06 08 10 12 14 16

Unemployment level, U3 Unemployment level, U6 25m aim

Million

What are we missing?

Risks

Is the market complacent? Fed tightens, but volatility falls to new low

22

Source: Thomson Reuters Datastream, Schroders, updated 28 April 2017.

US rates could rise considerably further Taylor rule says 3.5% by end 2018

23

Fed rate setters expect 3% Market does not believe the “dots”

24

Global liquidity could continue to rise Even as the Fed shrinks its balance sheet

25

Central banks stay easy while inflation remains quiescent Wages remain contained despite low unemployment

26

Source: Thomson Reuters Datastream, Schroders, updated 28 April 2017.

Asset allocation views Global Market Perspective Q2 2017

27

Key: +/- market expected to outperform/underperform (maximum ++ minimum ---) 0 indicates a neutral position. The above asset allocation is for illustrative purposes only. Actual client portfolios will vary according to mandate, benchmark, risk profile and the availability and riskiness of individual asset classes in different regions. (Last quarter). Source: Schroders Global Market Perspective, April 2017.

Equity + Bonds - Alternatives + Cash 0

By region By Sector By Sector

US 0 Government - Commodities +

Europe ex UK + US - Gold 0

UK 0 Eurozone Bunds

Gilts

-- (-)

-

UK Property

EU Property

-

+

Pacific ex Japan (AUS, NZ, HK and Sing.) 0 Inflation-linked 0

Japan 0 (+) Investment grade -

Emerging Markets + (0) High Yield 0

Emerging market (USD) 0

Emerging market (LC debt) + (++)

Important information For professional investors and advisers only. This material is not suitable for retail clients. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. Schroders has expressed its own views and these may change. The data contained in this document has been sourced by Schroders and should be independently verified before further publication or use. This presentation is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Unit Trusts Limited (Schroders) does not warrant its completeness or accuracy. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. We accept no responsibility for any errors of fact or opinion and assume no obligation to provide you with any changes to our assumptions or forecasts. Forecasts and assumptions may be affected by external economic or other factors. Issued in May 2017 by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA. Registered No: 1893220 England. Authorised and regulated by the Financial Conduct Authority

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