BNY Mellon Strategic Municipals, Inc. · NYSE:LEO
BNY Mellon Strategic Municipals — BNY Mellon Investment Management — Investor Presentation (December 2021)
57 slides from BNY Mellon Strategic Municipals's investor presentation, December 2021
Slide 1: Global Macro Outlook: Dialing Down
FOR INSTITUTIONAL, PROFESSIONAL, QUALIFIED INVESTORS AND QUALIFIED CLIENTS. FOR GENERAL PUBLIC DISTRIBUTION IN THE US ONLY. Global Macro Outlook Dialing Down Global Economics and Investment Analysis Group BNY Mellon Investment Management December 2021
Slide 2: Agenda
Agenda • Outlook and forecasts • Economic backdrop • Market pricing and performance • Investment conclusions • Appendix 2
Slide 3: Outlook and forecasts
Outlook and forecasts
Slide 4: The outlook: our scenarios in brief
The outlook: our scenarios in brief 40% 25% 25% 10% Peak Disruption Spending Boom Shortages Persist China’s Challenge • Factors pushing inflation • Supply improves similarly to • Supply shortages and labor • China real estate slowdown higher fade, particularly in ‘Peak Disruption’ market imbalances
Slide 5: GDP forecasts
GDP forecasts Forecasts begin in Q4 2021 and were calculated as of November 17, 2021. The solid lines show the most likely (highest probability) scenario mode or the “peak disruption” and mean (probability-weighted average) forecasts. The darker bands towards the center of the fan chart show the mor
Slide 6: Equities, Fed Funds, and UST yields forecasts
Equities, Fed Funds, and UST yields forecasts S&P 500 Index 6,500 6,000 5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000 2019 2020 2021 2022 2023 2024 Mean Peak disruption Forecasts begin in Q4 2021 and were calculated as of November 17, 2021. The solid lines show the most likely (highest probability
Slide 7: Inflation will slow, but could remain elevated through 2022
Inflation will slow, but could remain elevated through 2022 US CPI forecast – fan chart US CPI forecast – scenarios Forecasts begin in Q4 2021 and were calculated as of November 17, 2021. The solid lines show the most likely (highest probability) scenario mode or the “peak disruption” and mean (prob
Slide 8: Economic backdrop
Economic backdrop
Slide 9: The global recovery was V-shaped but varied across regions
The global recovery was V-shaped but varied across regions World GDP, indexed to 100 in Q4 2019 G7 + China GDP since 2020 110 105 100 Index, 2019 Q4 = 100 95 World GDP* 90 85 80 75 70 65 2007 2009 2011 2013 2015 2017 2019 2021 Data as of Q3 2021. Source: Fathom Consulting and Bloomberg. *Based upon
Slide 10: Economic momentum softened in 2H 2021 but improved into year-end
Economic momentum softened in 2H 2021 but improved into year-end Global PMIs Citi economic surprise index Latest data available as of December 13, 2021. Source: Bloomberg Charts are provided for illustrative purposes and are not a reliable indicator of current or future performance 10
Slide 11: Consumer demand remains strong, particularly in the US
Consumer demand remains strong, particularly in the US Retail sales indexed to 100 on 12/31/2018 – US, China, UK, Eurozone Data as of November 2021. Source: Bloomberg Charts are provided for illustrative purposes and are not a reliable indicator of current or future performance 11
Slide 12: Relative demand shifts were substantial and have yet to normalize
Relative demand shifts were substantial and have yet to normalize Goods consumption (% of total) US income and consumption, Jan 2018 = 100 Data as of September 2021 for left and October 2021 for right. Source: Fathom Consulting and Bloomberg. Charts are provided for illustrative purposes and are not
Slide 13: A draw down from excess savings could drive a 'spending boom'
A draw down from excess savings could drive a ‘spending boom’ Distribution of US excess savings USD per household, thousands % of annual disposable income Data as of September 2021. Source: Fathom Consulting Charts are provided for illustrative purposes and are not a reliable indicator of current or
Slide 14: Industrial production returned to pre-Covid levels
Industrial production returned to pre-Covid levels Major economies’ industrial production Available data as of October 2021. Source: Bloomberg Charts are provided for illustrative purposes and are not a reliable indicator of current or future performance 14
Slide 15: US business and consumer confidence still lagging
US business and consumer confidence still lagging US business and consumer confidence 110 Feb. 2020 Recovery peak Latest US Confidence index rebased to 105 June 2021 October 2020 100 on 12/31/2019 100 95 90 85 80 Conference Board Consumer Confidence NFIB Small Business Optimism Index CEO Confidence
Slide 16: Supply chain bottlenecks have slowed global trade
Supply chain bottlenecks have slowed global trade… Global exports level Data as of September 2021. The world export volume index is a measure of the monthly value of global exports in goods. Source: Bloomberg and CPB Netherlands Bureau for Economic Policy Analysis Charts are provided for illustrativ
Slide 17: But there are some signs of 'peak bottlenecks'
…But there are some signs of “peak bottlenecks” Global shipping costs US ISM Mfg. PMI – New orders, backlogs, delivery times Latest data available as of December 13, 2021. Source: Bloomberg Charts are provided for illustrative purposes and are not a reliable indicator of current or future performanc
Slide 18: However labor shortages are still extreme
However labor shortages are still extreme An historically tight job market could keep inflationary pressure higher for longer Jobs hard to fill vs. job openings US Consumer Confidence: jobs hard to get - plentiful NFIB: National Federation of Independent Businesses. Data as of November 2021. Source:
Slide 19: Labour mismatch and early retirements may be to blame
Labour mismatch and early retirements may be to blame US vacancy vs. unemployment rate Contributions to change in labor force participation 0.5 Shadow labor force % change from Q3 2019 to Q3 2021) 0.0 Family responsibilities -0.5 Retirement Other -1.0 In school Disability/illness -1.5 Effect on LFP
Slide 20: Continuing weakness in Chinese activity is resulting in policy loosening
Continuing weakness in Chinese activity, especially retail sales, is resulting in policy loosening and a bottoming of the credit impulse :Li Keqiang Index is a proxy for economic activity. Data as of November 2021. Source: GEIA, Bloomberg, Macrobond, PBOC, NBS Charts are provided for illustrative pu
Slide 21: China's real estate led weakness more than expected
China’s real estate led weakness more than expected Residential housing starts and tier-2 city average home prices (% y/y) 50 Tier 2 City Avg Home Price Residential Housing Starts 40 30 20 % y/y 10 0 -10 -20 -30 -40 Data as of October 2021. Source: Bloomberg, Macrobond, SouFun-CREIS, and China Natio
Slide 22: Inflation is historically high and has lasted longer than expected
Inflation is historically high and has lasted longer than expected US headline CPI, core CPI, and core PCE OECD inflation CPI: consumer price index. PCE: personal consumption expenditure. Data as of November 2021. Source: Bloomberg. Charts are provided for illustrative purposes and are not a reliabl
Slide 23: Meaning inflation is no longer 'transitory'
Meaning inflation is no longer “transitory” Input costs remain elevated and firms are raising prices Inflation surprise index Source: Bloomberg as of November 2021 Charts are provided for illustrative purposes and are not a reliable indicator of current or future performance 23
Slide 24: Inflation is becoming more widespread
Inflation is becoming more widespread US CPI – trimmed mean and median Core PCE inflation - trimmed mean and median 4.5 PCE core PCE median 4.0 Trimmed Mean PCE Inflation 3.5 3.0 % 2.5 2.0 1.5 1.0 0.5 2000 2003 2006 2009 2012 2015 2018 2021 Data as of October 2021. PCE: personal consumption expendit
Slide 25: Driving market estimates higher
Driving market estimates higher US 10-and-2-year breakeven inflation (%) Data as of December 15, 2021. 25
Slide 26: Higher commodity prices are adding to upward pressure
Higher commodity prices are adding to upward pressure CRB commodity index* UN food price index Data as of November 2021 for right and December 13, 2021 for left chart. Source: Bloomberg Charts are provided for illustrative purposes and are not a reliable indicator of current or future performance 26
Slide 27: Wage growth continues to increase
Wage growth continues to increase Atlanta Fed wage growth tracker Employee cost index and compensation plans Latest available data as of November 2021. Source: Bloomberg. Charts are provided for illustrative purposes and are not a reliable indicator of current or future performance 27
Slide 28: Consumer inflation expectations 1-year ahead are historically high
Consumer inflation expectations 1-year ahead are historically high UMichigan Consumer Survey of Expected Inflation % Data as of November 2021. Source: Bloomberg. Charts are provided for illustrative purposes and are not a reliable indicator of current or future performance 28
Slide 29: Persistently high inflation is driving monetary policy to turn more hawkish
Persistently high inflation and above-target estimates is driving monetary policy to turn more hawkish Global central bank policy - # raising vs. cutting rates 20 Number of central banks raising rates vs 10 cutting policy rates 0 -10 -20 -30 -40 2014 2015 2016 2017 2018 2019 2020 2021 Data as of Nov
Slide 30: Market pricing and performance
Market pricing and performance
Slide 31: The recovery is unusually strong, but could downshift in 2022
The recovery is unusually strong, but could downshift in 2022 S&P 500 post-bear market lows Performance indexed to 100 on date of 240 3/23/2020 3/9/2009 8/10/1982 220 bear market low 200 180 160 140 120 100 166 331 419 100 111 122 133 144 155 177 188 199 210 221 232 243 254 265 276 287 298 309 320 3
Slide 32: US equities have outpaced global markets, particularly China
US equities have outpaced global markets, particularly China MSCI global indices since 2020 US EM ex- China EAFE China MSCI indices in USD. Data as of December 13, 2021. Source: Bloomberg Charts are provided for illustrative purposes and are not a reliable indicator of current or future performance
Slide 33: Strengthening domestic recoveries in EM have limited Chinese contagion
Strengthening domestic recoveries in EM have limited Chinese contagion MSCI China vs. MSCI EM ex-China Data as of December 13, 2021. Source: Bloomberg Charts are provided for illustrative purposes and are not a reliable indicator of current or future performance 33
Slide 34: Breadth weakened but showing signs of stabilizing
Breadth weakened but showing signs of stabilizing % of stocks above 200-day moving average Data as of December 13, 2021. Source: Bloomberg Charts are provided for illustrative purposes and are not a reliable indicator of current or future performance 34
Slide 35: Growth and quality factors led in Q4
Growth and quality factors led in Q4 MSCI US and EAFE QTD factor returns (%) S&P 500 QTD sector returns (%) 18 MSCI US and EAFE Factor Returns QTD US EAFE S&P 500 and Sector Returns in Q4 (%) 10% 16 8% 14 6% 12 10 4% 8 2% 6 0% 4 -2% 2 0 -4% -2 Data as of December 13, 2021 for left and December 10, 2
Slide 36: Equity volatility has picked up since Omicron news broke
Equity volatility has picked up since Omicron news broke VIX daily and trailing 20-day average Data as of December 13, 2021. Source: Bloomberg Charts are provided for illustrative purposes and are not a reliable indicator of current or future performance 36
Slide 37: Earnings remain supportive but estimates are softening
Earnings remain supportive but estimates are softening Change in forward earnings estimates 10 S&P 500: 3-mth % change in forward EPS est.(LS) 10 5 Euro Stoxx: 3-mth % change in forward EPS est. (RS) 5 0 0 -5 -5 Euro Stoxx 50 S&P 500 -10 -10 -15 -15 -20 -20 -25 -25 -30 -30 2018 2019 2020 2021 Data a
Slide 38: Valuations held up except in EMs and remain supported by low real yields
Valuations held up except in EMs and remain supported by low real yields 12-mth. forward PE since 2019 Decomposition of S&P 500 earnings yield S&P 500 MSCI CHINA 12 23 MSCI EM 21 10 8 19 6 17 % 4 15 2 13 0 11 -2 9 10-year real yields Excess earnings yield Earnings yield PE: price to earnings ratio.
Slide 39: But are vulnerable to tighter policy
But are vulnerable to tighter policy S&P 500 forward PE vs. 10-year real yield (%) S&P 500 12-mth. fwd PE (LS) 24 -1.5 US 10-year real yield (%, inverted, RS) -1.0 22 -0.5 10-year real yield (%) S&p 500 12-mth fwd. PE 20 0.0 0.5 18 1.0 16 1.5 14 2.0 2.5 12 3.0 10 3.5 2003 2004 2005 2006 2007 2008 20
Slide 40: Rate expectations have increased
Rate expectations have increased Number of US rate hikes/cuts as implied by the market 8 3-yr. 2-yr. 1-yr. 7 Number of rate hikes (+) or cuts (-) 6 5 4 3 2 1 0 -1 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Dec-21 Data as of December 10, 2021. Source: Macrobond. Char
Slide 41: Interest rate implied vol rose with higher macro and policy uncertainty
Interest rate implied vol rose with higher macro and policy uncertainty 1y1y swaption implied volatility 100 US dollar Sterling Euro 90 80 70 Basis points 60 50 40 30 20 10 0 Data as of December 15, 2021. Source: Barclays Live. Charts are provided for illustrative purposes and are not a reliable ind
Slide 42: 10-year yields were flat or lower in Q4
10-year yields were flat or lower in Q4 10-yr government bond yield (%) Data as of December 13, 2021. Source: Bloomberg Charts are provided for illustrative purposes and are not a reliable indicator of current or future performance 42
Slide 43: But shorter-term rates increased so curves flattened
But shorter-term rates increased so curves flattened signaling tighter policy 10-yr – 2-yr government bond curve spread (%) Data as of December 13, 2021. Source: Bloomberg Charts are provided for illustrative purposes and are not a reliable indicator of current or future performance 43
Slide 44: Forward rates fell as higher expected short rates were offset by lower term premium
Forward rates fell as higher expected short rates were offset by a lower term premium Change in US forward rates, decomposed into expected short rates and term premium components 0.6 0.4 0.2 0 % -0.2 -0.4 -0.6 -0.8 -1 1y 1y1y 1y2y 1y3y 1y4y 1y5y 1y6y 1y7y 1y8y 1y9y Data shows change between October
Slide 45: Inflation expectations are key for what may happen to real rates
Inflation expectations are key for what may happen to real rates Inflation expectations have increased but remain anchored. Households appear willing to tolerate inflation between -1% and 3%. But when current inflation moves above 3%, expected inflation turns up The Fed’s Index of Common Inflation E
Slide 46: Market pricing does not suggest worries about inflation in the long run
But market pricing does not suggest worries about inflation in the long run US real interest rates are far below neutral at the short end, providing accommodation, and in line with low estimates of R* further out. Inflation is priced to remain significantly above target for several years, but to fal
Slide 47: Risk pricing in fixed income has been low and steady
Risk pricing in fixed income has been low and steady US IG and HY corporate spreads* (%) Spreads to German Bunds** (%) HY: high yield. IG: investment grade. *OAS: option adjusted spread. **Bunds are another way to describe German 10-year government bond yields. Data as of December 13, 2021. Source:
Slide 48: Spreads across the credit spectrum increased in Q4 but remain tight
Spreads across the credit spectrum increased in Q4 but remain tight USD corporate credit spreads since 2000 Change in spreads since October 1 3000 80 Option-adjusted spread (basis points) Option-adjusted spread (basis points) 70 2500 60 2000 50 1500 40 1000 30 20 500 10 0 IG AAA AA A BAA HY BA B CAA
Slide 49: Financial conditions remain loose as the Fed begins tapering
Financial conditions remain loose as the Fed begins tapering Financial conditions index Fed balance sheet forecast 11,000 Mean Peak disruption Securities bought outright, USD, billions 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2017 2018 2019 2020 2021 2022 2023 2024 Data as of December 14, 20
Slide 50: FX and rate volatility have increased alongside a higher USD
FX and rate volatility have increased alongside a higher USD US majors dollar index FX and interest rate volatility Data as of December 13, 2021. Source: Bloomberg. Charts are provided for illustrative purposes and are not a reliable indicator of current or future performance 50
Slide 51: Investment conclusions
Investment conclusions
Slide 52: Investment conclusions
Investment conclusions Equities • Positive but conscious of downside risk. Overall, equities remain the most attractive option in risk assets. That said, risk temperature has increased compared with Q4 • Higher inflation and interest rates risk led us to dial down risk exposure in portfolios. • Sect
Slide 53: Appendix
Appendix
Slide 54: Definitions
Definitions Purchasing Manger Indices (PMI) An economic indicator derived from monthly surveys of private sector companies. A level above 50 indicates expansion compared to the prior month and below 50 contraction. MSCI All-Country World The MSCI All-Country World Index is an index that tracks the p
Slide 55: Disclosures
Disclosures FOR INSTITUTIONAL, PROFESSIONAL, QUALIFIED INVESTORS AND QUALIFIED CLIENTS. FOR GENERAL PUBLIC DISTRIBUTION IN THE U.S. ONLY. This material should not be considered as investment advice or a recommendation of any investment manager or account arrangement. Any statements and opinions expr
Slide 56: BNY Mellon Global Economics and Investment Analysis Team
BNY Mellon Global Economics and Investment Analysis Team 56
Slide 57: BNYM-VPCBPRS-0821
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