DREXEL UNIVERSIY
LeBow College of Business Transitioning to a new Equilibrium of Growth-driven Market GIC Conference London PRESENTED BY
GEORGE TSETSEKOS Dean Emeritus and Francis Professor of Finance May 8, 2014
Transition
From Crisis to Stability Crisis in US ďƒ Global Amplification Policy Responses
Stability Transition
Moving towards normalization • USA o Normalization of monetary policy- EXIT? o Too soon or too late?
• Emerging Markets o
More financial balancing needs as liquidity moves abroad
• EuroZone o From GreekExit to Movement toward integrations o Progress but picture is mixed
• Japan o From deflation to reflection o Much work needed
Rotational Markets with limited equity
upside
Global Inflation is Contained
Change in Total US Non-Farm Payroll Employment
US Auto Sales Rebound
CAPEX Spending
Recovery in the EuroZone
EU Recovery and the Periphery
Japan: Modest GDP Gains and an uptick in
Inflation
The Business Cycle and Equity Market Performance
Opportunity in Growth Stocks
S&P 500 P/E
Attribution of Equity Market Performance
Emerging Markets
Interest Rates and Capital Flows to EM
Volatility and EM Capital Flows High Volatility
Low Volatility
Emerging Markets (EMS) Attractive P/Es vs. Global Averages
Convertibles Shining again
US Equity Market Performance
Rising rates Led to Sideways Market
Sector Allocation during Rising Interest rates environment
•During Periods of Rising Interest Rates… •Cyclical sectors historically outperform defensive sectors
•Past performance is no guarantee of future results. Source: Wells Capital “Confidence Runs Through Stock Market. Sectors shown have material differences and represent segments of the S&P 500. Daily fluctuations in specific market sectors are often more extreme than fluctuations in the overall market.
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Global Outlook: Cautiously Optimistic US: Economic Recovery Poised to Continue at Moderate Pace » A number of important metrics beat expectations last week •
Strength in job growth, GDP, auto sales, manufacturing while unemployment fell below 6.3%
» FOMC has started tapering » Grand rotation may have begun; money flowing out of bonds and into equities – RISK ON! » A resilient consumer is well positioned to support recovery
Euro zone: GDP Growth Improving, More Work Ahead » Promising strides for EU, structural imbalances remain » Valuations in Europe compelling; pointing toward economic improvement
EMs: Still a Source of Global Growth » Near-term growth has slowed, but secular stories remain intact » Growth of EM middle class important long-term theme
Global: Dominant Theme of Synchronized Global Expansion » Global manufacturing numbers improved significantly » Recent positive data for Eurozone, Spain, UK, Japan, Indonesia, India, Canada, Australia, Malaysia and Taiwan » Global economic growth; good for the U.S. z
Returns Performance
Higher Multiples contributed to Sell-off
High Growth, High Correlation