COVID-19: Macroeconomic outlook and future return prospects

Philip Saunders makes the case for increased future return prospects in light of extreme market moves due to the coronavirus crisis. The paper covers the multi-asset team’s capital markets assumptions research and a closer look at some of the most interesting opportunities across asset classes.

Apr 2, 2020

22 Minutes

Philip Saunders makes the case for increased future return prospects in light of extreme market moves due to the coronavirus crisis. The paper covers the multi-asset team’s capital markets assumptions research and a closer look at some of the most interesting opportunities across asset classes.
Authored by Philip Saunders, Co-Head of Multi-Asset Growth
With special thanks to:
Marc Abrahams — Head of Multi-Asset Quantitative Analysis
James Elliot – Head of Multi-Asset
Mike Hugman – Portfolio Manager, Fixed Income
Dan Morgan — Analyst, Multi-Asset
Jennifer Moynihan – Product Specialist, Multi-Asset
Russell Silberston – Investment Strategist – Macro-economic and Policy Research

02 April 2020

The views expressed in this communication are those of the contributors at the time of publication and do not necessarily reflect those of Ninety One as a whole.

Market context

The coronavirus (COVID-19) pandemic is having an unprecedented global impact, with an estimated one third of the world’s population under lockdown and many countries closing borders. This human crisis and the associated demand shock have coincided with a Saudi Arabia and Russia led oil price war, which has aggravated the problem of an oil glut caused by sharply lower demand. The fall in the oil price added to the stress in credit markets already evident from the COVID-19 related fall in global demand. Market weakness itself has become a third shock, primarily through the mechanism of dramatically tighter liquidity conditions as investors have desperately sought to raise cash and de-lever.

These three shocks have combined to result in disorderly price action and dislocation across all asset classes. At this point, ‘growth’ assets such as equities and credit have been shunned and ‘defensive’ assets, such as government bonds and US dollar cash, favoured.

Figure 1: Market returns for the first quarter of 2020

Source: Bloomberg, as at 31 March 2020. Asset class returns are in local currency unless stated. Currency returns are vs. US dollar. For further information on indices, please see the Important information section.

The market falls have been widespread, with little more than the US dollar and a few developed market bonds delivering a positive return in the first quarter of 2020. Equity market volatility has exceeded what were, at the time, considered extreme levels of the global financial crisis (GFC). The speed of these moves is faster than we experienced throughout 2007–09, with some equity markets falling 30-40% in less than 20 trading sessions.

The closest parallels to the current bear market in terms of its speed and extent are the ‘crashes’ of 1987, 1998, 2008 and 2011. Each of these was associated with extreme market dislocation and triggered material policy responses although only one of them, that of 2008, actually led to a recession. History doesn’t necessarily repeat itself and the current episode certainly has some distinctive characteristics, both negative – it was triggered by an unprecedented global pandemic, and positive – the speed and the quantum of the policy response but the former crashes probably provide a more useful guide than comparisons with the average bear market. While we remain at the steepest point of the exponential curve at time of writing, it is difficult for anyone to find confidence in estimates of when the COVID-19 pandemic will peak. For uncertainty to subside, investors need to see the trajectory of the spread of the disease to be firmly on a downward path in Europe and the United States. The longer that takes, the greater the economic disruption and the higher the risks are for a more negative outcome.

Figure 2: Daily new confirmed COVID-19 case count

Source: Worldometer - https://www.worldometers.info/coronavirus/ as at 31 March 2020

One thing is clear, the global economy will experience a significant shock to growth in this and most likely the next quarter, with most observers expecting falls in real global GDP of around 6-8% in Q2 2020 and 1-3% in Q3 2020. Resulting falls in the annual global GDP for 2020 are between 1.5%-4%. This compares to real global GDP falls of just -0.1% during the GFC1. It is this reality, and both the speed and precipitous nature of the falls, a function of lockdown measures designed to slow and thereby control the virus outbreak, that has led to a policy response from governments and central banks around the world that is unprecedented.

Policymaker support comparable to war time

Policymakers globally have moved to provide support by announcing widespread stimulus measures and supplying vast amounts of liquidity to the market. The US Federal Reserve (Fed) alone expanded its balance sheet by almost US$1 trillion in the space of just two weeks to Wednesday, 25 March. The sheer extent and speed (see Figure 3) of this move is only truly understood when put in the context of the Fed’s previous quantitative easing (QE) programs. These amounted to US$4 trillion across the three rounds, but were carried out over the space of six years from 2008-2014.

Figure 3: Pace of US Federal Reserve balance sheet expansion ($ millions)
 

Source: Bloomberg, NY Fed Statement issued Monday 21 March 2020.

The combined monetary and fiscal support amounts to c.12% of global GDP at time of writing and it’s only increasing – these are historically enormous amounts of support equal only to war time episodes. In the US and Europe, the amount of stimulus is over 50% of GDP, already greater than the stimulus delivered during the GFC.

Figure 4: Summary of key stimulus measures to date (% of GDP)
 

Source: Bloomberg. Federal Reserve websites and press releases, ECB website and press releases, UK Government website, speech transcripts and March 2020 Budget. ML ‘China Economic Watch’ as at 31 March 2020.

In the short term, the success of the actions taken to address chronic market illiquidity is key to curbing the severity of the market reaction to the pandemic – the Fed has been at the centre of this. Conditions in the US government bond market have improved and the international shortage of US dollar liquidity, which had led to an across-the-board surge in the US dollar, are showing signs of moderating. The Fed has been given new powers and resources to buy corporate bonds for the first time, allowing it to begin to stabilise a dysfunctional US corporate bond market. We believe that this will prove to be decisive in allowing extreme volatility to subside over the coming months, reducing the risk of further market dislocation, particularly in investment grade credit markets and potentially setting the scene for a relief rally, once the market has a greater degree of certainty that the current escalation in new COVID-19 cases, particularly in the US, is beginning to slow.

Macroeconomic outlook

With a sharp contraction in global growth in the short term now inevitable, we believe there is a key judgement call to be made by investors:

Is the combination of a pandemic, an oil price war and a market liquidity shock a sufficiently toxic combination to cause the world economy to slip into a sustained recession?

OR

Will the liquidity measures enable markets to function normally and will the combined monetary and fiscal support keep the global economy and the population solvent until the point at which demand slowly re-emerges?

Next, we set out the three scenarios our multi-asset team is monitoring as part of its investment process:

Central scenario – growth recovers after a period of significant disruption and weakness

Notwithstanding the short-term shock to growth, over the medium term the balance of probabilities now suggests that the impact of the COVID-19 pandemic could be more modest than is currently feared by markets. Policies of strict isolation appear to be working to break the spread of the disease and have been adopted broadly by governments across the world. The response by policymakers has been unusually rapid and the quantum of fiscal and monetary measures have a strong chance of success in curtailing the impact of the deep recession that is currently underway, thus creating the conditions for recovery in the second half of the year. Markets are forward-looking and will anticipate this. 


While social distancing may continue for some time after initial lockdowns, there will be a process of adaption around existing business practices. Developments in China appear to be constructive. The spread of the virus has been contained by the strict lockdown measures enforced by the authorities, and the probability is that the interruption to global supply chains – to which China remains critical – will be limited to the first half of the year.

If the pattern is similar in the West, the actual disruption could prove to be shorter-lived than markets currently fear. Under this scenario steps taken by key central banks are now considered to have a high likelihood of success in addressing the immediate problem of illiquidity and disorderly markets. Notwithstanding this, the shock to investor confidence will have to be worked out in the form of a continued period of market volatility.

Downside scenario – extended viral pandemic leading to protracted recession and deeper bear market

A number of issues could derail the above central case and we continue to pay close attention to the downside risk scenario. For a more negative outcome to play out, the interaction of the three shocks on economic activity would have to be more material and lasting, resulting in a deeper and, in all probability, more drawn out bear market in growth assets. The longer the period of severe disruption to economic activity the greater the risk of such an outcome. While China has shown signs of getting the outbreak under control, there remains a risk of a re-emergence of the virus and/or higher and later peaks of the outbreaks in Europe and the US. If economies reopen too early, triggering outbreaks of the virus later in the year, this would cause further disruption to economic activity. The risk is that this extended disruption is too much for businesses to withstand, even with the significant policymaker support.

Under this scenario, an eventual market low point could still be some way off. That said, at time of writing, prices have already moved materially to reflect a negative outcome, as investors have de-risked and illiquidity has resulted in extreme price movements. Even under this scenario significant relief rallies are still likely to occur, potentially offering opportunities to rebalance portfolios if the environment shows signs of longer-term damage to final demand.

Upside scenario – The disease is successfully contained, economic activity rebounds and abundant liquidity fuels a ‘V’ shaped market recovery

We place a lower probability to this scenario than the central and downside scenarios outlined above. Investors are not currently pricing in a strong rebound in activity in the second half of the year, but such an outcome should not be weighted at zero percent. Briefer-than-anticipated disruptions to economic activity combined with solid underlying US and Chinese economic momentum, the substantial and effective fiscal measures, weaker oil prices and abundant liquidity could eventually combine to produce a positive shock. Similarly, widespread virus antibody testing would accelerate a return-to-work and drive a more rapid recovery of global economic activity.

Future return prospects

The sharp moves in markets have led to material changes to our proprietary capital market assumptions (10 year forward looking projections). These are summarised below where we compare two sets of return assumptions just six months apart, as at 30 September 2019 and 31 March 2020.

Figure 5: Future return prospects across asset classes

 
Single asset classes



Multi-asset proxy portfolios


In US dollars US equity Global equity EM equity US 10Y treasuries US investment grade US high yield EM hard currency 50:50 portfolio of global equity and developed market bonds 50:50 portfolio of global equity and diversified fixed income
Sep-19 4.9% 6.5% 8.4% 1.2% 2.8% 4.5% 4.2% 3.8% 4.5%
Mar-20 7.3% 8.4% 9.4% 0.0% 3.7% 7.8% 8.2% 4.3% 5.8%
Source: Ninety One proprietary capital market assumptions as at 30 September 2019 and 31 March 2020. Estimates are nominal, gross of fees and ignore alpha. Modelling involves risks, assumptions and uncertainties. These estimates reflect the view of Ninety One’s multi-asset team, while the views of other teams across Ninety One may differ. Past performance does not guarantee future results. Actual returns could be materially higher or lower than projected. For information on our Capital Markets Assumptions methodology, please see Important Information. 50% diversified fixed income = 20% global government bonds, 20% Investment grade credit, 5% High yield, 5% EM hard currency.

These future return expectations are broken down as follows:

Figure 6: Return forecast breakdowns*
 

Source: Ninety One proprietary Capital Market Assumptions as at 31 March 2020. *All returns in USD with the exception of EM equity shown in local currency – annualised forecast return in USD is 9.4% versus 11.9% in local currency.

A general criticism of these types of assessments of long-term value is that they do not necessarily help with timing market moves, but extreme valuations do send powerful signals about prospective returns over the medium term and this is perhaps the critical element of ensuring that the broad allocation of assets in any investment plan is able to achieve its long-term targets, as such it should form part of any disciplined long-term investment process. We have made no changes to our longer-term growth assumptions (an important driver of expected future returns), which are based on trend nominal GDP per capita growth.

We do not expect the pandemic to substantially alter demand patterns over the long run, although it may be the case that the reaction to the pandemic reinforces pre-existing trends in the move to a global digital economy. With the exception of US 10-year Treasuries, anticipated future returns across asset classes have significantly increased as a result of more attractive equity and credit valuations.

With respect to the return assumptions in Figure 5, it is worth considering what we would need to see for realised returns to fall back to the lower levels of September 2019:

  1. US equity: Dividend growth would need to average 2.2% each year for the next decade. For reference, since World War II the lowest rolling 10-year dividend growth rate has been above 2% p.a.
  2. US investment grade credit: The margins of comfort afforded by valuations in investment grade credit are very high by historic standards. We estimate that total credit losses for investment grade bonds would need to be 1.2% every year for the next decade to invalidate the likelihood of the higher returns from this asset class. To put this in context total credit losses for the lowest quality level of investment grade credit (Baa) are estimated to have been as high as 1.6% in a single year of the Great Depression of the 1930s2 but this did not persist for 10 years. We estimate that the average for that decade was closer to 1%. In the tech bust and recession of 2001-3 and the GFC investment grade total credit losses peaked at 0.4% p.a., but even during the GFC this level of loss only persisted for 2 years.

On a related note, the yield proxies across our income focused strategies spiked to 6% p.a. during March, levels last seen post the GFC. This points to compelling opportunities from an income perspective looking ahead – and it is worth noting that in all asset classes income delivers the majority of long term returns, even in equities where although lower than in other asset classes, it still accounts for 60% of historic long term returns.

Figure 7: Income accounts for a significant proportion of cross-asset returns
 

Source: Ninety One, Dec 1999 to Dec 2019

The key message is that we can say with some confidence that long-term future returns on growth assets are expected to be materially higher from here and much stronger than consensus estimates have been for several years, albeit with a price to pay in the shorter term of continued volatility.

Asset class views

While the recent market movements are clearly unnerving, the indiscriminate selling and market anomalies have created opportunities across asset classes, especially for active investors. It is now about staying disciplined, weathering the volatility and having enough flexibility to build risk selectively when it makes sense to do so. Investment grade credit and well capitalised, defensive/less cyclical equities are two example shorter-term opportunities we have focused on. Longer term, we maintain our view that Asian equities will benefit from positive structural trends as China transitions towards a more consumer-led economy.

Using our central case for the macroeconomic outlook as a guide, below we summarise our views across asset classes.

Developed market debt

The absolute level of global bond yields mean that investors have had to be selective for yields to offer much in the way of defensive exposure during this period. While US 10-year Treasury yields fell around 1.0% over the year to date, German bund yields have fallen a mere 0.1% despite European equities falling over 30%. The aggressive rate cutting action combined with the vast levels of QE undertaken year to date mean that countries who previously had room to ease monetary policy further (e.g. the US) have now converged with those countries already on ultra-low rates. Right now, the only developed markets offering above 1% yields are New Zealand (1.25%) and Norway (1.07%).

Given that central banks prior to the virus outbreak were easing monetary policy in an attempt to meet their inflation targets, it is now likely that interest rates will remain low for a significant period of time as countries remain further from those inflation targets, hampered by this years’ economic disruption. We would expect to see much greater blurring of the lines between fiscal and monetary policy going forward.

Equities

Quality and lower risk stocks have heavily outperformed value stocks so far this year. Similarly, large cap stocks have outperformed small cap. This is a trend that has been in place for some time and as such there has been a reinforcement of those trends in the under and outperformance of different areas of the equity market so far. It is tempting to discuss potential regime change brought on by the possible higher inflationary implications of the quantum of fiscal stimulus, but at this stage, the demand disruption brought about by COVID-19 reinforces existing headwinds to global inflation and is more likely to prove challenging or insurmountable for highly leveraged businesses in structurally-challenged industries. It is clear that many ‘value’ areas of the market also have these negative characteristics. The market is likely to continue to reward greater resilience from those companies with stronger balance sheets, lower leverage and resilient growth characteristics.

Figure 8: Factor performance relative to MSCI AC World
 

Source: Citi Pure style indices – MSCI AC World factors as at 26 March 2020

Where the market has yet to differentiate is between those areas that will see temporary versus lasting effects from the virus outbreak disruption. This creates an opportunity for investors able to identify the areas with structural growth tailwinds that remain unaffected or even strengthened by this period.

One of our key concerns over the last three years has been the sustainability of capital allocation for US companies, in particular. Many companies have used debt to raise share buybacks over the last five years and very large acquisitions have been done at elevated valuations. This period of weakness will expose those companies that have unsustainable capital allocation and we came into this period owning companies that we believe have a much more balanced approach to capital allocation, growing dividends progressively and opportunistically acquiring companies at good valuations.

We have not materially added to our equity risk levels; we feel it’s too early given the likely volatility that will persist in the short term and wide range of future outcomes. Our core equity approach for the multi-asset growth strategies has always focused on higher quality companies that demonstrate strong return persistence characteristics, for example those with recurring revenue streams (e.g. subscription-based models) that we can access at attractive valuations. We also prefer asset light businesses and this group saw material valuation de-rating earlier this year enabling us to use that as an opportunity to increase exposure to selected companies. Asset light business have little capital requirements so generate high levels of free cash flow meaning that they are well positioned from a balance sheet and liquidity perspective to withstand the current environment.

Regionally, we maintain our conviction across Asian equities where we believe there to be positive structural trends driven by China’s transition towards a consumer led growth model, which are likely to have been reinforced by recent macro developments. Attractive valuations emerged following volatility in this region earlier in the year. The rapid and seemingly effective response to the original coronavirus outbreak, in both medical and economic terms, has insulated China from the worst impacts of the more recent global panic. Limited foreign ownership and liquidity support from the Chinese authorities have reduced correlations with global markets.

Credit

The rapid widening of credit spreads seen during mid-March, led to 10-20% falls across credit markets. Global high yield bonds were hardest hit in the sell-off and spreads have widened to over 1000bps. Since 2000, high yield spreads have only been wider during the GFC and the tech-bust recession of 2001-3 so there is value, but the dislocation in investment grade bonds has been greater, with spreads in investment grade closer to their GFC highs and implied default rates in investment grade trading in excess of anything that has been seen in even short periods during the worst recessionary episodes historically.

Figure 9: Historic global investment grade spreads
 

Source: Bloomberg, as at 26 March 2020

To put the moves in a cross-asset context, whereas equities fell by c.30%, we believe the moves in investment grade were of a size typically associated with a fall in equities of about 50%. At these levels, investment grade can withstand defaults several times higher than seen in a typical recession and still deliver positive excess returns over the medium term.

The speed and extent of the moves in investment grade credit were a reflection of the rush to sell even ‘safe haven’ assets in favour of cash and as a consequence this liquidity stress led to the price distortions of mid-March being even greater within credit-related exchange traded funds (ETFs). However, the monetary measures introduced by the Fed have alleviated funding stress and this support from policymakers makes a compelling buying opportunity for selective credit, with a preference at this stage for investment grade, where the valuation dislocations against history have been even greater than in high yield. A selective approach also reduces the risk that investors become inadvertent holders of high yield if/when lower-rated debt in the investment grade universe is downgraded. We added to credit through a combination of ETFs initially to take advantage of the short-term price distortions, followed by direct purchases later in March.

Emerging market debt

Emerging market debt has experienced similar dislocations to other areas of fixed income. In aggregate, emerging market hard currency sovereign spreads have widened by 65% of the equivalent margin seen in 2008/2009, with high yield market spreads widening by nearly 95% and investment grade by 55%. More than 16 countries within the JP Morgan EMBI Global Diversified (hard currency debt) universe have spreads above 1000bps, despite the fact only two are in active default/restructuring. It is notable that fundamentals across emerging markets, in terms of rates of inflation and company health are strong relative to history and current accounts are in aggregate surplus.

Figure 10: GDP-weighted current account balance in emerging market economies (ex-China), % GDP
 

Source: Haver Analytics. January 1994 to December 2019. Universe: 20 selected emerging markets

With developed market interest rates likely to remain low for several years and the long-term returns on developed market government bonds impaired at these yield levels, emerging market debt becomes an increasingly important consideration as a source of income for investors. Real interest rate differentials for a number of emerging market debt markets have only previously been this high during the GFC. Those countries that have both high real rates and relatively low levels of inflation are likely to prove attractive – the combination of the two allows countries to hold onto capital and cut rates more aggressively during downturns.

History suggests that for emerging market debt the question of funding stress in developed markets is equally important as it is for developed markets. The extension of $60 billion of swap lines by the Fed to four major emerging market central banks is relevant. The measures taken by global central banks will see the most immediate spread reversion occurring in dislocated investment grade markets within emerging market debt, where the degree of spread move has been similar to investment grade spreads in developed markets.

Figure 11: Absolute changes in JP Morgan EMBI Global Diversified index (investment grade) spread vs. US Treasuries, bps
 

Source: Bloomberg. Ninety One. March 2020. The chart tracks the spread of the JP Morgan EMBI yield vs. US Treasuries for six other crisis periods and today. Crisis periods start on the following dates and last for one year: 20 July 1998; 12 April 2002; 29 August 2008; 7 July 2011; 30 July 2014; current crisis: 12 February 2020 (to 19 March 2020)

Gold

At current prices, gold looks attractive both on an absolute basis and relative to history. Gold is typically bought as a store of value in times of negative real interest rates, heightened economic uncertainty and/or periods of weak equity market performance; all factors that are present today. We do not view gold as an outright defensive asset, owing to its variable correlation with growth assets through time.

Over the year to date, the asset class has behaved variably, suffering volatility from the market liquidity squeeze in March; as investors rushed to access cash and the US dollar rallied. An overvalued US dollar, coupled with the vast quantity of liquidity supplied by central banks to markets and exceptionally low short and longer-term interest rates, should be very supportive for gold from here. As such, we hold a meaningful allocation to this asset within our growth strategies.

Conclusion

The triple shocks of the coronavirus pandemic, the oil price war and a liquidity market event have resulted in market volatility exceeding that of the GFC. The speed and extent of the market moves over 2020 to date place this year firmly amongst the record ‘crashes’ of 1987, 1998, 2008 and 2011.

While the volatility is unsettling, it does create buying opportunities for both single asset class and multi-asset investors and highlights the importance of maintaining a top down perspective across asset classes as well as the ability to select bottom-up opportunities from within asset classes.

Future return prospects for growth assets have improved materially, as highlighted by the changes in our own capital market assumptions, giving powerful long-term indications of value and enhanced returns from here. The debt default rates and dividend yields required to invalidate those higher return prospects are substantial against historic standards, giving us confidence that returns will be higher from here, but at the price of persistent volatility in the shorter term.

We believe current valuations present buying opportunities in selective areas and we recommend that investors work through markets and securities to uncover the genuine long-term opportunities, while being highly mindful of the wide range of potential short-term mark to market outcomes from here. 

1 Source: Nomura 2020 estimates for global real GDP. Historic GDP data from IMF World Economic Outlook database October 2019.
2 Deutsche Bundesbank Eurosystem, Stress Testing Credit Risk: The Great Depression Scenario, October 2011

All investments carry the risk of capital loss. The value of investments, and any income generated from them, can fall as well as rise and will be affected by changes in interest rates, currency fluctuations, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which the investment strategy invests. If any currency differs from the investor’s home currency, returns may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results.



Important information
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Indices
Indices are shown for illustrative purposes only, are unmanaged and do not take into account market conditions or the costs associated with investing. Further, the manager’s strategy may deploy investment techniques and instruments not used to generate Index performance. For this reason, the performance of the manager and the Indices are not directly comparable. Figure 1 Indices: China equity = Shanghai Stock, Emerging market debt (hard currency) = JPM EMBI Global diversified, Global high yield = BofA ML Global high yield, Japan equity = TOPIX, Asia ex-Japan equity = MSCI AC Asia ex-Japan (USD), US equity = S&P 500, Europe ex-UK equity = MSCI Europe ex-UK, Global equity (USD) = MSCI AC (USD), Listed property = REITs, Commodities = Commodities - Bloomberg, Emerging market equity (USD) = MSCI EM (USD), UK equity = FTSE All Share, World government bonds = FTSE World government bonds, Global investment grade credit = BofA ML Global investment grade.

Ninety One Long-term Capital Markets Assumptions

Our expected returns estimates are for illustrative purposes only, are not a guarantee of performance and are subject to change. They are provided merely as a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. They should not be relied upon as recommendations to buy or sell securities. Forecasts of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. The outputs of the assumptions are provided for illustration/discussion purposes only and are subject to significant limitations. Expected return estimates are subject to uncertainty and error. Expected returns for each asset class are conditional on an economic scenario; actual returns in the event the scenario comes to pass could be higher or lower, as they have been in the past, so an investor should not expect to achieve returns similar to the outputs shown herein. Because of the inherent limitations of all models, potential investors should not rely exclusively on the model when making a decision. Unlike actual portfolio outcomes, the model outcomes do not reflect actual trading, liquidity constraints, fees, expenses, taxes and other factors that could impact the future returns. Note that these asset class assumptions are passive, and do not consider the impact of active management. All estimates in this document are in US dollar terms unless noted otherwise.



Methodology
We take a consistent approach to generating return assumptions across all asset classes: Total return = income + income growth + change in price to income (revaluation). For equities: Income = current dividend yield, Growth = nominal GDP per capita growth (15 year trend) + annual net issuance (15 year trend), Revaluation = reversion to 15 year average dividend yield (using 15 year trend DPS). For fixed income: Income = Current yield (to worst for credit) for notional 10 year bonds (with the exception of high yield where limited data beyond 5 years and emerging markets which is index based), Growth = roll return (duration X 1 year yield change from current curve) + expected credit loss (15 year average), Revaluation = reversion to fair value (government bonds = forward yield, spread = 15 year average). Currency conversion assumes hedging based on Covered Interest Rate Parity (CIRP). Additional information available on request.