BNY Mellon Strategic Municipals, Inc. · NYSE:LEO
BNY Mellon Strategic Municipals — BNY Mellon Investment Management — Investor Presentation (August 2021)
67 slides from BNY Mellon Strategic Municipals's investor presentation, August 2021
Slide 1: Global Macro Outlook: Transitory?
Global Macro Outlook Transitory? Global Economics and Investment Analysis Group BNY Mellon Investment Management August 2021
Slide 2: Agenda
Agenda • Our outlook • Investment conclusions • Economic backdrop • Market pricing and performance • Reasons to remain optimistic • Risks • Inflation • Summary 2
Slide 3: Our outlook
Our outlook
Slide 4: The outlook: our scenarios
The outlook: our scenarios 45% 30% 15% 10% Good Recovery Tight Money Overheating Bad Recovery • Vaccines stay effective • Recovery and inflationary pressure • Even stronger recovery • Vaccine insufficient similar to ~‘overheating’ • Global herd immunity reached within • Supply constraints lead to ev
Slide 5: The outlook: GDP forecasts
The outlook: GDP forecasts US GDP Euro area GDP China GDP Index, 2019 Q4 = 100 Index, 2019 Q4 = 100 Index, 2019 Q4 = 100 130 130 130 125 125 125 120 120 120 115 115 115 110 110 110 105 105 105 100 100 100 95 95 95 90 90 90 85 85 85 80 80 80 2019 2020 2021 2022 2023 2019 2020 2021 2022 2023 2019 2020
Slide 6: The outlook: inflation risk has shifted higher
The outlook: inflation risk has shifted higher US CPI forecast – fan chart US CPI forecast – scenarios 7.0 7.0 6.0 6.0 5.0 5.0 4.0 4.0 % y/y % y/y 3.0 3.0 2.0 2.0 1.0 1.0 0.0 0.0 2021 Q3 2019 Q1 2019 Q2 2019 Q3 2019 Q4 2020 Q1 2020 Q2 2020 Q3 2020 Q4 2021 Q1 2021 Q2 2021 Q4 2022 Q1 2022 Q2 2022 Q3 2
Slide 7: The outlook: equities, rates, and fixed income
The outlook: equities, rates, and fixed income S&P 500 US federal funds rate US ten-year government bond yields Index % % 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 2023 2018 2019
Slide 8: Investment Conclusions
Investment Conclusions Equities • Positive but conscious of downside risk. Overall, equities remain the most attractive option in risk assets. • Good environment for security and stock selection as market transitions to mid-cycle theme. • Sectors including cyclicals, secular growth and healthcare sh
Slide 9: Economic backdrop
Economic backdrop
Slide 10: There have been a wide range of recovery paths
There have been a wide range of recovery paths Index of real GDP in G4 economies Q2 2021 GDP vs. Q4 2019 (%) 10.0 Q2 2021 GDP % change vs. Q4 2019 8.0 6.0 4.0 2.0 0.0 -2.0 -4.0 -6.0 -8.0 Data as of Q2 2021. For left side chart, data as of Q1 2021 for Japan and UK. Source: Bloomberg and Fathom Consul
Slide 11: The US outspent and outperformed
The US outspent and outperformed The current crisis is expected to have a heterogeneous impact on countries in the medium term Global pandemic-related fiscal stimulus Medium term level of GDP vs IMF pre-pandemic forecast 1 US Per cent of GDP Mexico -1 Turkey Percent Saudi Arabia India -3 Argentina R
Slide 12: Retail sales quickly recovered
Retail sales quickly recovered Aided by massive fiscal stimulus, consumer spending is strong Data as of June 2021. Source: Bloomberg Charts are provided for illustrative purposes and are not a reliable indicator of current or future performance 12
Slide 13: There was a V-shaped recovery in manufacturing
There was a V-shaped recovery in manufacturing Major economies’ industrial production Available data as of June 2021. Source: Bloomberg Charts are provided for illustrative purposes and are not a reliable indicator of current or future performance 13
Slide 14: World trade rebounded as well
World trade rebounded as well Global exports level Data as of May 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 illustrative purposes and are not a re
Slide 15: Headline improvements masked strong demand shifts
Headline improvements masked strong demand shifts Stay at home and online spending surged while in-person leisure and recreation lagged but is improving Travel and leisure is gradually returning to pre-Covid levels Services spending relative to goods is expected to pick up Baseline refers to pre-pan
Slide 16: US consumer confidence mixed but expected to continue improving
US consumer confidence mixed but expected to continue improving Confidence remains below pre-Covid levels Data as of July 2021. Source: Bloomberg Charts are provided for illustrative purposes and are not a reliable indicator of current or future performance 16
Slide 17: Business confidence is growing overall
Business confidence is growing overall CEO and Small Business Confidence Small business optimism is the NFIB (National Federation of Independent Businesses) index. Available data as of August 2021. Source: Bloomberg Charts are provided for illustrative purposes and are not indicative of the past or
Slide 18: Market pricing and performance
Market pricing and performance
Slide 19: Stock markets continue to advance led by the US
Stock markets continue to advance led by the US Since Q1 2021 there has been a greater divergence in equity performance across countries Data as of August 9, 2021. Source: Bloomberg. Charts are provided for illustrative purposes and are not a reliable indicator of current or future performance 19
Slide 20: The rally in the US has become more broad-based but big tech is still leading
The rally in the US has become more broad-based but big tech is still leading Big tech’s leadership has resumed 200 S&P 500 S&P 500 Equal Weighted Index Russell 2000 Index Top 5 Tech* 180 Index rebased to 100 on 12/31/2019 160 140 120 100 80 60 *Top 5 Tech: largest 5 stocks by market cap in S&P 500
Slide 21: Earnings have led the rally but remain supported by elevated valuations
Earnings have led the rally but remain supported by elevated valuations Change in S&P 500, Earnings, and Price-Earnings since July 2020 150 12-mth. fwd. PE 12-mth. fwd. EPS Price S&P 500 Price, EPS, and PE rebased to 140 100 on 7/1/2020 130 120 110 100 90 80 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20
Slide 22: Cyclicals and value have more upside despite recent underperformance
Cyclicals and value have more upside despite recent underperformance Upwards risk to inflation and yields on the back of a strong growth recovery favors cyclicals and value Data as of August 9, 2021. Source: Bloomberg Charts are provided for illustrative purposes and are not indicative of the past o
Slide 23: Relative earnings momentum and valuation supports value
Relative earnings momentum and valuation supports value S&P 500 Value – Growth Earnings Difference S&P 500 Growth vs. Value PE 15 2020 S&P 500 Value/Growth PE 2021 1.1 Average 10 1.0 5 Earnings growth difference: S&P 500 Value - Growth 0.9 0 0.8 -5 0.7 -10 0.6 -15 0.5 -20 0.4 -25 0.3 -30 Data as of
Slide 24: Earnings recovered quicker in the US but momentum favors international
Earnings recovered quicker in the US but momentum favors international 12-month forward EPS estimate % difference in positive earnings est. revisions 30% S&P 500 12-mth. fwd EPS (LS) SPX vs. MSCI EAFE 220 260 US earnings 25% SPX vs. MSCI EM momentum Euro Stoxx 50 12-mth. fwd EPS (RS) 250 stronger 21
Slide 25: Stocks in the rest of the world are historically cheap vs. the US
Stocks in the rest of the world are historically cheap vs. the US Relative 12-mth forward PE ratio: US vs international 1.10 Developed Markets ex-US / US: 12-mth fwd. PE 1.05 Emerging Markets / US: 12-mth fwd. PE Relative 12-mth forward PE ratio 1.00 0.95 0.90 0.85 0.80 0.75 0.70 0.65 0.60 May-06 Ma
Slide 26: The sharp uptick in yields through Q1 reversed course and the yield curve flattened
The sharp uptick in yields through Q1 reversed course and the yield curve flattened Developed economies’ 10-year government bond yield (%) US Treasury Yield Curve (%) Data as of August 9, 2021. Source: Bloomberg Charts are provided for illustrative purposes and are not indicative of the past or futu
Slide 27: Lower long-term yields were driven by a decline in long-term real rates
Lower long-term yields were driven by a decline in long-term real rates Decomposition of change in 1-year, 1-year Decomposition of change in 1-year, 10-year forward interest rates since the start of Q2 2021 forward interest rates since the start of Q2 2021 Inflation compensation Real rates Inflation
Slide 28: But US interest rates remain higher than other advanced economies
But US interest rates remain higher than other advanced economies US, Euro area, and UK 1-year forward interest rate curves (%) 2.00 1.75 US Euro area UK 1.50 1.25 % 1.00 0.75 0.50 0.25 0.00 0 5 10 15 20 25 30 35 40 45 49 -0.25 -0.50 Maturity (years) -0.75 Chart shows forward OIS curves. Data as of
Slide 29: The amount and timing of rate hikes shifted post the June Fed meeting
The amount and timing of rate hikes shifted post the June Fed meeting Number of US rate hikes/cuts as implied by the market 5 3-years ahead Number of rate hikes (+) or cuts (-) 2-years ahead 4 1-year ahead 3 2 1 0 -1 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Data as of August 3, 2021. Source: Bloomb
Slide 30: The market isn't pricing in any credit risk in the US, the euro area or the UK
The market isn’t pricing in any credit risk in the US, the euro area or the UK 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 A
Slide 31: Default rates have remained contained vs. prior recessions
Default rates have remained contained vs. prior recessions Corporate 12-month trailing default rates (%) 15% Global Speculative US Speculative Non US speculative 13% 11% 9% 7% 5% 3% 1% -1%2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Data as
Slide 32: Stock-bond return correlation tends to be positive when inflationary pressures rise
Stock-bond return correlation tends to be positive when inflationary pressures rise and the market prices earlier rate hikes Rolling 120-day US stock and bond return correlation* 1 0.8 120-day rolling return correlation 0.6 0.4 0.2 0 -0.2 -0.4 -0.6 -0.8 -1 Apr-90 Apr-93 Apr-96 Apr-99 Apr-02 Apr-05 A
Slide 33: Cash on the sidelines is substantial
Cash on the sidelines is substantial US money market fund assets ($ trillion) Weekly data as of July 28, 2021. Source: Investment Company Institute (ICI) and FactSet. Charts are provided for illustrative purposes and are not indicative of the past or future performance of any BNY Mellon product. 33
Slide 34: Reasons to remain optimistic
Reasons to remain optimistic
Slide 35: Pent-up demand and savings remain elevated
Pent-up demand and savings remain elevated Household and corporate savings US household saving (% disposable income) Corporate* cash + deposits (% GDP) 70 Corporate* Cash + Deposits (% GDP) Japan US UK Euro area 60 50 40 30 20 10 0 *Non-financial corporate. Data as of Q1 2021 for right chart and Jun
Slide 36: Household leverage is low
Household leverage is low Data as of Q1 2021. Source: Bloomberg Charts are provided for illustrative purposes and are not a reliable indicator of current or future performance 36
Slide 37: Monetary stimulus remains supportive and financial conditions are historically easy
Monetary stimulus remains supportive and financial conditions are historically easy Central bank balance sheets – total assets Chicago Fed Financial Conditions Index 10 US Euro area Japan China 9 8 7 USD, Trillions 6 5 4 3 2 1 0 Data as July 30, 2021. The Chicago Fed’s National Financial Conditions
Slide 38: Real-time mobility data improving and is near or has surpassed pre-Covid levels
Real-time mobility data improving and is near or has surpassed pre-Covid levels Google mobility data – retail and recreation relative to baseline (%) Data as July 30, 2021. Source: FactSet Charts are provided for illustrative purposes and are not a reliable indicator of current or future performance
Slide 39: Risks
Risks
Slide 40: Record job openings are hard to fill
Record job openings are hard to fill Labor shortages could translate into longer-than-expected upward inflation pressure NFIB: National Federation of Independent Businesses. Data as of July 2021. Source: Bloomberg 40
Slide 41: Some temporary factors are holding back employment growth
Some temporary factors are holding back employment growth It’s likely that some of these factors are temporary and related to virus risks, fiscal aid, and school closures Transition rate from unemployed to employed vs job openings rate Transition Rate from Unemployed to Employed, Percent of Unemploy
Slide 42: Structural labor market damage is a concern
Structural labor market damage is a concern There are some signs job losses are becoming more permanent Data as of July 2021. Source: Bloomberg Charts are provided for illustrative purposes and are not a reliable indicator of current or future performance 42
Slide 43: The labor market recovery has been uneven
The labor market recovery has been uneven Those who can least afford to be impacted have suffered the most % change in US employment relative to % change in US consumer spending Jan. 2020 by income relative to Jan. 2020 by zip code 18 17.1 15 9.9 16 10 5 3.7 14 0 11.7 12 -5 10 9.3 -10 8 -15 -22.2 6
Slide 44: Global Covid-cases remain elevated
Global Covid-cases remain elevated 7-day moving average in new confirmed cases 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 APAC: Asia Pacific. Data as of August 9, 2021. Source: Bloomberg 44
Slide 45: Vaccine rollout success and willingness varies significantly
Vaccine rollout success and willingness varies significantly % of population vaccinated US vaccination rates by county 35% vaccination rate in a given range 30% % of US counties with a total 25% 20% 15% 10% 5% 0% Percent of Total Population Fully Vaccinated Data as of July 30, 2021. Source: Our Worl
Slide 46: Vaccine effectiveness against hospitalizations remains key
Vaccine effectiveness against hospitalizations remains key Comparing vaccine efficacy to infections and hospitalizations vs. the Alpha and Delta variants Efficacy against symptomatic infection Efficacy against hospital admission Alpha Delta Alpha Delta Alpha Delta Alpha Delta Data as of July 9, 2021
Slide 47: UK Covid-19 hospitalizations are growing less rapidly but to alarming levels
UK Covid-19 hospitalizations are growing less rapidly but to alarming levels UK Covid-19 hospitalizations relative to peak level* 100% Return to working from 90% home and 10pm curfew Second lockdown Hospitalizations as a % of peak* 80% 70% Third lockdown 60% 50% 40% 30% 20% 10% 0% -69 -48 -99 -96 -9
Slide 48: Equity valuations are historically high
Equity valuations are historically high US and Europe forward PEs PE: price to earnings ratio. NTM: next 12-months. Data as of August 3, 2021. Source: FactSet. Charts are provided for illustrative purposes and are not indicative of the past or future performance of any BNY Mellon product. 48
Slide 49: Valuations are vulnerable to higher real yields
Valuations are vulnerable to higher real yields S&P 500 forward PE and US 10-yr. Treasury real yield Data as of August 3, 2021. Source: FactSet Charts are provided for illustrative purposes and are not indicative of the past or future performance of any BNY Mellon product. 49
Slide 50: Fed policy uncertainty remains elevated
Fed policy uncertainty remains elevated The gap between the market and Fed has narrowed but there remains a significant gap between current FOMC projections and that implied by a policy rule it used to follow more closely pre-Covid Market vs. Fed Rate Estimates The Fed’s Rate Forecast, 2-year ahead
Slide 51: Inflation and rate expectations depend on the policy response which is complicated
Inflation and rate expectations depend on the policy response which is complicated A schematic representation of the Fed’s reaction to different economic conditions In red, we highlight today’s starting point. In green we show where the Fed currently sits on the decision tree, and in blue we show wh
Slide 52: Vulnerabilities in credit with rising rates
Vulnerabilities in credit with rising rates There are vulnerabilities in the least profitable firms, the firms most exposed to the pandemic and the firms where structural challenges provide ongoing headwinds US HY-IG spread forecast Higher credit loss rates likely to be concentrated in a few sectors
Slide 53: The key risk: inflation
The key risk: inflation
Slide 54: Despite increasing inflationary pressure, expectations remain anchored
Despite increasing inflationary pressure, expectations remain anchored Fed Index of Common Inflation Expectations (%) US Inflationary Impulse vs. CPI Z-score Four-quarter percentage changes 8 6 6 5 4 4 2 3 0 2 -2 1 -4 0 -6 -1 -8 -2 2004 2006 2008 2010 2012 2014 2016 2018 2020 Impulse CPI *Impulse sh
Slide 55: Options signal a 40% probability of inflation averaging >3% in the next 5-years
Options signal a 40% probability of inflation averaging >3% in the next 5-years Option-implied probability of CPI inflation averaging >3% or <1% over the next 5-years 70.0% % chance CPI over next 5-years >3% % chance CPI over next 5-years <1% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 2010 2011 2012 2
Slide 56: The market thinks higher inflation is more a near-term concern
The market thinks higher inflation is more a near-term concern The US breakeven curve has inverted as short-term estimates rose substantially more than longer term 3.0 9/1/2020 3/1/2021 6/1/2021 8/10/2021 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
Slide 57: Inflationary pressures in the US: relative price changes vs 'true' inflation
Inflationary pressures in the US: relative price changes vs ‘true’ inflation Relative price changes appear to be driving most of the observed price pressure. Proxies for ‘true’ inflation have remained relatively unchanged. Trimmed mean, median and Core PCE inflation Median PCE inflation, and dispers
Slide 58: There are many signs of supply side disruption from Covid-19
There are many signs of supply side disruption from Covid-19 US ISM Manufacturing PMI – Input Prices and Order Backlogs ISM: Institute for Supply Management. Data as of July 2021. Source: Bloomberg Charts are provided for illustrative purposes and are not indicative of the past or future performance
Slide 59: Input costs have risen from higher commodity prices and supply side bottlenecks
Input costs have risen from higher commodity prices and supply side bottlenecks. Global Input and Output prices PMIs Cross-country wage growth 75.0 Four-quarter percentage changes, 2021 Q1 70.0 6.0 5.0 65.0 Diffusion index 4.0 60.0 3.0 55.0 2.0 50.0 1.0 45.0 0.0 40.0 -1.0 Manufacturing Input prices
Slide 60: Higher cost pressure is driving more firms to raise prices
Higher cost pressure is driving more firms to raise prices NFIB small business % of firms raising prices NFIB: National Federation of Independent Businesses. Data as of July 2021. Source: Bloomberg Charts are provided for illustrative purposes and are not a reliable indicator of current or future pe
Slide 61: Data is coming in hotter than already high expectations, particularly in the US
Data is coming in hotter than already high expectations, particularly in the US Citi Inflation Surprise Index for US, Global, and EM A higher index means actual inflation data is being reported higher than consensus estimates. Data as of July 2021. Source: Bloomberg Charts are provided for illustrat
Slide 62: US realized inflation is gathering momentum
US realized inflation is gathering momentum Headline CPI, core CPI, and core PCE (Fed’s preferred measure) CPI: consumer price index. PCE: personal consumption expenditure. Data as of June 2021. Source: Bloomberg. Charts are provided for illustrative purposes and are not a reliable indicator of curr
Slide 63: Consumers are raising their estimates
Consumers are raising their estimates UMichigan Consumer Survey of Expected Inflation % Data as of July 2021. Source: Bloomberg. Charts are provided for illustrative purposes and are not a reliable indicator of current or future performance 63
Slide 64: Conclusions
Conclusions • The Fed thinks upward price pressure is transitory but has signaled it stands Key risks: ready to act if not − Non-temporary upward inflation pressure • So far markets also see inflation as more of a near-term risk but uncertainty − Destabilizing inflation expectations is heightened −
Slide 65: 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 66: 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 67: BNY Mellon Investment Management
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