BNY Mellon Strategic Municipals, Inc. · NYSE:LEO
BNY Mellon Strategic Municipals — BNY Mellon Investment Management — Investor Presentation (October 2021)
66 slides from BNY Mellon Strategic Municipals's investor presentation, October 2021
Slide 1: Global Macro Outlook: Air Pocket
FOR INSTITUTIONAL, PROFESSIONAL, QUALIFIED INVESTORS AND QUALIFIED CLIENTS. FOR GENERAL PUBLIC DISTRIBUTION IN THE US ONLY. Global Macro Outlook Air Pocket Global Economics and Investment Analysis Group BNY Mellon Investment Management October 2021
Slide 2: Agenda
Agenda • Outlook and forecasts • Economic backdrop • Market performance and pricing • Investment conclusions • Summary 2
Slide 3: Outlook and forecasts
Outlook and forecasts
Slide 4: The outlook: our scenarios
The outlook: our scenarios 40% 25% 25% 10% Good Recovery Tight Money Overheating Bad Recovery • Vaccines stay effective • Recovery and inflationary pressure • Even stronger recovery as excess • Vaccine insufficient similar to ~‘overheating’ savings are spent • Excess savings remain largely • Some re
Slide 5: GDP forecasts
GDP forecasts US GDP Euro area GDP China GDP Index, 2019 Q4 = 100 Index, 2019 Q4 = 100 Index, 2019 Q4 = 100 115 125 115 120 110 110 115 105 105 110 100 100 105 100 95 95 95 90 90 90 85 85 85 2019 2020 2021 2022 2023 2019 2020 2021 2022 2023 2019 2020 2021 2022 2023 Mean Good recovery Mean Good Recov
Slide 6: Equities, rates, and fixed income forecasts
Equities, rates, and fixed income forecasts S&P 500 US federal funds rate US ten-year government bond yields Index Per cent Per cent 6,000 4.5 4.5 4.0 4.0 5,500 3.5 3.5 5,000 3.0 3.0 4,500 2.5 2.5 4,000 2.0 2.0 3,500 1.5 1.5 1.0 3,000 1.0 0.5 2,500 0.5 0.0 2,000 -0.5 0.0 2018 2019 2020 2021 2022 202
Slide 7: Inflation risk is skewed to the upside
Inflation risk is skewed to the upside US CPI forecast – fan chart US CPI forecast – scenarios Four-quarter percentage change Four-quarter percentage changes 7.0 7.0 6.0 6.0 5.0 5.0 4.0 4.0 3.0 3.0 2.0 2.0 1.0 1.0 0.0 2020 Q4 2021 Q2 2021 Q4 2022 Q2 2019 Q1 2019 Q2 2019 Q3 2019 Q4 2020 Q1 2020 Q2 20
Slide 8: Economic backdrop
Economic backdrop
Slide 9: The global recovery was faster but less synchronized than expected
The global recovery was faster but less synchronized than expected World GDP index GDP % change: Q4 2019 - Q2 2021 Data in left as of Q3 2021. Q3 2021 forecasted. Source: Refinitiv Datastream and Fathom Consulting Charts are provided for illustrative purposes and are not a reliable indicator of curr
Slide 10: Stimulus led the way but excess savings are key to further progress
Stimulus led the way but excess savings are key to further progress Global pandemic-related fiscal stimulus Per cent of GDP Mexico Turkey Saudi Arabia India Argentina Russia Korea China Portugal South Africa Switzerland Spain France Italy Brazil Ireland Germany Greece Canada Japan Hong Kong Australi
Slide 11: Growth momentum has softened, particularly in China
Growth momentum has softened, particularly in China Global PMIs Source: Bloomberg as of September 2021 Charts are provided for illustrative purposes and are not a reliable indicator of current or future performance 11
Slide 12: Regulatory pressure, credit tightening, Covid-restrictions weighing on Chinese growth
Regulatory pressure, credit tightening, Covid-restrictions, power outages, higher input costs, and supply chain disruptions weighing on Chinese growth Data as of August 2021. Source: GEIA, Bloomberg, Macrobond, PBOC, NBS 12
Slide 13: Retail sales quickly recovered but momentum has moderated
Retail sales quickly recovered but momentum has moderated Retail sales indexed to 100 on 12/31/2018 – US, China, UK, Eurozone Data as of August 2021. Source: Bloomberg Charts are provided for illustrative purposes and are not a reliable indicator of current or future performance 13
Slide 14: Supply chain issues stalled the improvement in global trade
Supply chain issues stalled the improvement in global trade Global exports level Data as of July 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 illustr
Slide 15: Manufacturing remains strong
Manufacturing remains strong Major economies’ industrial production Available data as of August 2021. Source: Bloomberg Charts are provided for illustrative purposes and are not a reliable indicator of current or future performance 15
Slide 16: Covid-inflicted demand shifts are normalizing
Covid-inflicted demand shifts are normalizing US in-person services consumption is steadily improving Baseline refers to pre-pandemic levels in Jan/February 2020. Data as of September 30, 2021. Source: Bloomberg Charts are provided for illustrative purposes and are not a reliable indicator of curren
Slide 17: But some changes are structural
But some changes are structural US services spending relative to goods has lagged but recovered to pre-Covid levels Data as of September 2021. Source: Bloomberg Charts are provided for illustrative purposes and are not a reliable indicator of current or future performance 17
Slide 18: As growth slowed, inflation increased
As growth slowed, inflation increased Citi growth surprise index Citi inflation surprise index Source: Bloomberg as of September 2021 Charts are provided for illustrative purposes and are not a reliable indicator of current or future performance 18
Slide 19: Leading to lower sentiment
Leading to lower sentiment US business and consumer confidence Investor sentiment – bullish vs. bearish 115 Feb. 2020 Recovery peak US Confidence index rebased to 100 on 12/31/2019 Latest April 2021 110 105 June 2021 October 2020 100 95 90 85 80 Conference Board NFIB Small Business CEO Confidence In
Slide 20: Fear of delta may be involved
Fear of delta may be involved New Covid-cases UK Household Spending plans World Europe US APAC Daily new global confirmed Covid cases, 900 7-day moving avg. (thousand) 800 700 600 500 400 300 200 100 0 Source: Fathom Consulting, Bank of England, and Bloomberg as of October 6, 2021 Charts are provide
Slide 21: Causing some social, leisure, and travel activity data to slow
Causing some social, leisure, and travel activity data to slow Travel and Dining Out Google Mobility – Retail and Recreation US TSA Checkpoint Total Traveler 10 Canada US Germany 2500 20 Throughput (LS, thous.) France Italy 0 US Opentable Seated Diners % y/y (RS) Google mobility - retail and recreat
Slide 22: Higher inflation has lasted longer than expected
Higher inflation 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 August 2021. Source: Bloomberg. Charts are provided for illustrative purposes and are not a reliable indicator of curre
Slide 23: Supply chain blockages and labor mismatch may be to blame
Supply chain blockages and labor mismatch may be to blame US ISM Mfg. PMI – New orders, backlogs, delivery times US vacancy vs. unemployment rate Data as of August 2021. Source: Bloomberg Charts are provided for illustrative purposes and are not a reliable indicator of current or future performance
Slide 24: Shipping costs have risen sharply
Shipping costs have risen sharply Global composite container price index* *The World Container Index assessed by Drewry reports actual spot container freight rates for major East West trade routes, consisting of 8 route-specific indices representing individual shipping routes and a composite index.
Slide 25: Deflationary pressure from China is waning
Deflationary pressure from China is waning China and core inflation shocks Per cent of world GDP 5-YMA, percentage points 3.5 0.20 3.0 0.15 2.5 0.10 2.0 0.05 1.5 0.00 1.0 -0.05 0.5 -0.10 0.0 -0.15 1995 1998 2001 2004 2007 2010 2013 2016 2019 OECD core inflation shock (RHS) Chinese exports Source: Fa
Slide 26: Record job openings in the US are hard to fill
Record job openings in the US are hard to fill Labor shortages could translate into longer-than-expected upward inflation pressure Jobs hard to fill vs. job openings Job openings vs. transition from unemployed to employed 38 Dec. 2000 - Feb. 2020 Transition rate from unemployed to Mar. 2020 - Presen
Slide 27: But some changes in the job market may linger
But some changes in the job market may linger US - % willing to return to previous job (same pay/hours) Yes Unsure No 100 90 19.8 18.1 20.7 22.7 27.2 27.6 30.2 29.2 30.7 30.9 80 12.1 14 70 13.5 13.1 10.6 11.5 13.5 14.8 60 17.4 16.8 % 50 40 68.2 68 65.7 64.2 30 62.2 60.9 56.3 55.9 52 52.3 20 10 0 Jul
Slide 28: US inflationary pressure is highest in goods but services has risen too
US inflationary pressure is highest in goods but services has risen too US CPI by major component 30 Core goods including used cars Core goods excluding used cars Core services 25 Three-month annualized % chg. 20 15 10 5 0 -5 -10 10 11 12 13 14 15 16 17 18 19 20 21 Data as of August 2021. Source: Re
Slide 29: Relative price changes vs 'true' inflation
Relative price changes vs ‘true’ inflation Relative price changes appear to be driving most of the observed price pressure. Increases in proxies for ‘true’ inflation have remained relatively more muted. Trimmed mean, median and Core PCE inflation Median PCE inflation, and dispersion (10th-90th perce
Slide 30: Higher energy and food prices are adding to upward pressure
Higher energy and food prices are adding to upward pressure Oil and natural gas UN food price index Data as of July 2021 for right and October 8, 2011 for left chart. Source: Bloomberg Charts are provided for illustrative purposes and are not a reliable indicator of current or future performance 30
Slide 31: Higher input costs for firms means higher prices for consumers
Higher input costs for firms means higher prices for consumers Manufacturing input costs and firms raising prices Employee costs and compensation plans Available data as of September 2021. Source: Bloomberg. Charts are provided for illustrative purposes and are not a reliable indicator of current or
Slide 32: Driving estimates for future inflation higher
Driving estimates for future inflation higher UMichigan Consumer Survey of Expected Inflation % Data as of September 2021. Source: Bloomberg. Charts are provided for illustrative purposes and are not a reliable indicator of current or future performance 32
Slide 33: Keeping expectations anchored is key but gets harder at 3%-4% or higher
Keeping expectations anchored is key but gets harder at 3%-4% or higher US household inflation expectations vs actual inflation One-year ahead inflation forecast, University of Michigan survey, per cent 12 10 8 6 4 2 0 -5 0 5 10 15 20 Actual inflation over past year, per cent 1978-1995 1996 to prese
Slide 34: Monetary policy is easy but communication turned more hawkish
Monetary policy is easy but communication turned more hawkish Rates would be a lot higher under the kind of policy rule the Fed used to follow 4.5 Taylor Rule Actual Fed funds rate forecast Fed funds rate forecast, one year ahead (%) 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2015 2016 2017 2018 2019 2020
Slide 35: Market pricing and performance
Market pricing and performance
Slide 36: Ex-China, equities have been resilient
Ex-China, equities have been resilient MSCI global indices since 2020 MSCI global indices since 2007 US US EM ex- China EAFE China China EM ex- China EAFE MSCI indices in USD. Data as of October 7, 2021. Source: Bloomberg 36
Slide 37: But breadth is weakening
But breadth is weakening % of stocks above 200-day moving average Data as of October 8, 2021. Source: Bloomberg Charts are provided for illustrative purposes and are not a reliable indicator of current or future performance 37
Slide 38: Volatility has picked up
Volatility has picked up VIX daily and trailing 20-day average Data as of October 8, 2021. Source: Bloomberg 38
Slide 39: Big Tech's leadership has grown
Big Tech’s leadership has grown Top 5 big tech vs. the rest of US equities 220 S&P 500 S&P 500 Equal Weighted Index Russell 2000 Index Top 5 Tech* 200 Index rebased to 100 on 12/31/2019 180 160 140 120 100 80 60 *Top 5 Tech: largest 5 stocks by market cap in S&P 500 - Facebook, Google, Amazon, Apple
Slide 40: Relative factor performance has been mixed
Relative factor performance has been mixed Growth vs. value, large vs. small cap, and quality vs. S&P 500 since 2020 Growth outperforming Quality outperforming Large cap outperforming Data as of October 8, 2021. Source: Bloomberg Charts are provided for illustrative purposes and are not a reliable i
Slide 41: Strengthening domestic recoveries helped EM decouple from China
Strengthening domestic recoveries helped EM decouple from China MSCI China vs. MSCI EM ex-China Data as of October 8, 2021. Source: Bloomberg Charts are provided for illustrative purposes and are not a reliable indicator of current or future performance 41
Slide 42: There is significant inter-country variation in EM valuations
There is significant inter-country variation in EM valuations Current forward P/E vs 10-year average 8 Thailand India 6 Forward P/E vs 10 year average US 4 China DM 2 Russia Philippines Indonesia 0 Taiwan South Korea -2 Turkey Mexico -4 Brazil South Africa -6 -8 5 10 15 20 25 30 Forward P/E DM: deve
Slide 43: Global equity PEs decreased but remain historically high
Global equity PEs decreased but remain historically high Global PEs since 2007 Change in Global PEs YTD 25 China US 25.0 1/1/2021 7/1/2021 9/24/2021 UK Japan 23 Emerging Markets Euro area 21 20.0 12-mth. forward PE ratio 12-mth. forward PE ratio 19 15.0 17 15 10.0 13 11 5.0 9 7 0.0 5 China US UK Jap
Slide 44: Higher real yields could send valuations lower
Higher real yields could send valuations lower S&P 500 forward PE vs. 10-year real yield (%) 24 S&P 500 12-mth. fwd PE (LS) -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 20
Slide 45: So earnings are key to further progress
So earnings are key to further progress Change in S&P 500, Earnings, and Price-Earnings YTD 130 12-mth. fwd. PE 12-mth. fwd. EPS Price 125 S&P 500 Price, EPS, and PE rebased to 120 115 100 on 1/1/2021 110 105 100 95 90 85 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 Sep-21 Data as
Slide 46: But earnings estimates moderating reflect growing supply chain disruption
But earnings estimates moderating reflect growing supply chain disruption Change in forward earnings estimates 10 S&P 500: 3-mth % change in forward EPS est.(LS) 10 Euro Stoxx: 3-mth % change in forward EPS est. (RS) 5 5 0 0 -5 Euro Stoxx 50 -5 S&P 500 -10 -10 -15 -15 -20 -20 -25 -25 -30 2018 2019 2
Slide 47: International multiples relative to the US are low
International multiples relative to the US are low US vs. non-US equity valuations 1.1 Developed Markets ex-US / US: 12-mth fwd. PE 1.1 Emerging Markets / US: 12-mth fwd. PE Relative 12-mth forward PE ratio 1.0 1.0 0.9 0.9 0.8 0.8 0.7 0.7 0.6 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 J
Slide 48: There's a lot of cash on the sidelines
There’s a lot of cash on the sidelines US money market fund assets ($ trillion) Weekly data as of October 6, 2021. Source: Investment Company Institute (ICI) and FactSet Charts are provided for illustrative purposes and are not a reliable indicator of current or future performance 48
Slide 49: Yields are increasing and the curve has re-steepened
Yields are increasing and the curve has re-steepened Developed economies’ 10-year government bond yield (%) US, German, and UK Yield Curve (%) Data as of October 8, 2021. Source: Bloomberg Charts are provided for illustrative purposes and are not a reliable indicator of current or future performance
Slide 50: Expected short rates have been driving yields higher across the curve
Expected short rates have been driving yields higher across the curve US Treasury Yield forward curve, decomposed into expected short rates and term premia 0.25 0.20 0.15 Percent 0.10 0.05 0.00 -0.05 -0.10 1y 1y1y 1y2y 1y3y 1y4y 1y5y 1y6y 1y7y 1y8y 1y9y Term premia - forwards Expected rates - forwar
Slide 51: Higher long-term yields were driven by a rise in inflation compensation
Higher long-term yields were driven by a rise in inflation compensation Decomposition of change in 1-year, 1-year Decomposition of change in 1-year, 10-year forward interest rates since July 2021 forward interest rates since July 2021 Inflation compensation Inflation compensation Real rates Real rat
Slide 52: Rate expectations have increased
Rate expectations have increased Number of US rate hikes/cuts as implied by the market 6 Number of rate hikes (+) or cuts (-) 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 3-years ahead 2-years ahead 1-year ahead Data as of October 1, 2021. Source: Macrobond. Charts a
Slide 53: Risk pricing in fixed income remains historically low
Risk pricing in fixed income remains historically low 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 October 8, 2021. Source: B
Slide 54: Spreads across the credit spectrum are tight
Spreads across the credit spectrum are tight USD corporate credit spreads since 2000 (max, min, median and most recent) 3000 Option-adjusted spread (basis points) Max Min Median Current 2500 2000 1500 1000 500 0 IG AAA AA A BAA HY BA B CAA Data as of September 27, 2021. Source: Barclays Live Charts
Slide 55: Default rates suggesting no need to worry
Default rates suggesting no need to worry Corporate 12-month trailing default rates (%) 15% 13% Global Speculative US Speculative 11% Non US speculative 9% 7% 5% 3% 1% -1% Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Jan-19 Jan-21 Available data as of August 2021. Source: Moody’s I
Slide 56: Financial conditions remain loose as Fed tapering gets started
Financial conditions remain loose as Fed tapering gets started Financial conditions index Fed balance sheet and fan chart forecast 11,000 Mean 10,000 Good Recovery Securities bought outright, 9,000 8,000 US $ billions 7,000 6,000 5,000 4,000 3,000 2019 2020 2021 2022 2023 Data as of October 1, 2021
Slide 57: The USD has gained 5.0% YTD and option prices suggest more upside
The USD has gained 5.0% YTD and option prices suggest more upside US majors dollar index 3-month USD risk reversals* 0.5 3-month USD risk reversal 0 -0.5 Percent -1 -1.5 -2 -2.5 -3 -3.5 -4 Data as of October 12, 2021 for left and September 24, 2021 for right chart. *Chart shows a simple average of r
Slide 58: Options signal a 40% probability of US inflation >3% in the next 5-years
Options signal a 40% probability of US inflation >3% in the next 5-years Option-implied probability of CPI inflation averaging >3% or <1% over the next 5-years 70% % chance CPI over next 5-years >3% % chance CPI over next 5-years <1% 60% 50% 40% 30% 20% 10% 0% 2010 2011 2012 2013 2014 2015 2016 2017
Slide 59: Despite higher pressure, the market thinks inflation is temporary
Despite higher pressure, the market thinks inflation is temporary US breakeven inflation curve 3.0 9/1/2020 3/1/2021 6/1/2021 10/8/2021 2.8 US Breakeven Inflation Curve (%) 2.6 2.4 2.2 2.0 1.8 1.6 1.4 1.2 1.0 2-yr 5-yr 10-yr 30-yr Data as of October 8, 2021. Breakeven inflation is a measure of the m
Slide 60: Investment conclusions
Investment conclusions
Slide 61: 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 Q3. • Good environment for active asset allocation, characterized by sector and stock selection. • We
Slide 62: Summary
Summary
Slide 63: Summary
Summary • Headed into Q4 the main themes adding to uncertainty are: o Slowing economic growth momentum o Persistently high inflation • Growth remains supported by: o Healthy consumer and corporate balance sheets o Lagged impact of fiscal stimulus o Easy financial conditions • Going forward, what we
Slide 64: 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 65: 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 66: BNY Mellon Investment Management
Se BNY MELLON | INVESTMENT MANAGEMENT 3> BNY MELLON | INVESTMENT MANAGEMENT
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