Global Investment Outlook – A U.S. Perspective Global Interdependence Center Central Banking Series - Singapore February 20, 2017
Bill Kennedy, CFA Chief Investment Officer
Cyclical Economic Activity Is Beating Expectations
Citigroup Economic Surprise Index 50 25 0 -25 -50 Jan-13
Jul-13
Jan-14
Jul-14
Jan-15 DM
Jul-15
Jan-16
Jul-16
Jan-17
EM Source: Citi Research, Bloomberg, Fieldpoint Private
Please See Important Disclosures in Back of Presentation
2
Forward-Looking Economic Indicators are Turning Positive
Source: Strategas Please See Important Disclosures in Back of Presentation
3
13-Years Without a Pay Raise
Source: Hoisington Investment Management, Quarterly Review and Outlook – 4Q2016 Please See Important Disclosures in Back of Presentation
4
Spike in Interest Rates Cyclical and Structural % Attribution to Nominal Yield Increase (Jul – Dec, 2016) 100%
80%
11%
Growth
24%
Inflation
14%
64%
Structural
70%
16%
60%
40%
20%
0%
5-yr Treasury Note Yield Change in Term Premium
10-yr Treasury Note Yield
Change in Inflation Premium
Change in Real Yield
Source: FRBNY, Bloomberg, Fieldpoint Private Please See Important Disclosures in Back of Presentation
5
Investment Outlook Depends on Perspective
Please See Important Disclosures in Back of Presentation
6
Investment Risks Depend on Perspective
Source: World Economic Forum Please See Important Disclosures in Back of Presentation
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Higher Discount Rates = Lower Asset Values
Higher discount rates decrease valuations
Building blocks of the discount rate EQUITY CREDIT SOVEREIGN
Discount Rate
Asset Fair Value Real policy rate
Inflation premium
Term premium
Credit risk premium
Equity risk premium
Source: PIMCO, Fieldpoint Private
Please See Important Disclosures in Back of Presentation
8
Future Returns Are Highly Correlated to Starting Yields U.S. Equity Yield (adjusted) 10yr avg EPS / Price 1881-2016
15% 13% 11% 9% 7% 5% 3% 1%
1881
1896
1911
1926
1941
1956
1971
1986
2001
2016
Source: Bloomberg, Fieldpoint Private Please See Important Disclosures in Back of Presentation
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Focus On Price, Not Predictions Asia-ex EAFE EM stocks Japan Mexico US Large Health Care US Core US Mid Germany US Small Credit (HY) Floating Rate Notes Credit (IG) AGG (US) EM Debt AGG (Global) 3-7 yr UST Cash ILS REITs TIPS Commodities Managed Futures 60/40 -2
-1
0
1
2 3 Expected Real Return (%)
4
5
6
7
Expected yields for equities include dividend yield plus adjusted earnings yield using 10yr rolling average EPS. Expected yield for fixed income includes current yield to maturity. Bloomberg data used for current yields. Federal Reserve Bank and IMF data used for inflation expectations. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. For illustration purposes and should not be considered investment advice or a recommendation of any particular security, strategy or investment product.
Please See Important Disclosures in Back of Presentation
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Assets Behave Differently Across Macro Regimes Regime I: Accelerating Growth & Inflation # of quarters: 23 Dollar Commodities Rates Credit Stocks Avg return
Excess Return -3.7% 9.4% 2.7% 3.9% 7.7% 4.0%
Regime II: Accelerating Growth, Decelerating Inflation # of quarters: 54 Rank 5 1 4 3 2
Regime III: Decelerating Growth, Accelerating Inflation # of quarters: 49 Dollar Commodities Rates Credit Stocks Avg return
Excess Return -0.3% 14.2% 5.3% 4.0% 2.5% 5.1%
Rank 5 1 2 3 4
Dollar Commodities Rates Credit Stocks Avg return
Excess Return 2.0% 1.5% 4.9% 6.8% 11.4% 5.3%
Rank 4 5 3 2 1
Regime IV: Decelerating Growth & Inflation # of quarters: 46 Dollar Commodities Rates Credit Stocks Avg return
Excess Return 0.9% -0.4% 8.8% 10.2% 8.3% 5.5%
Rank 4 5 2 1 3
Source: Fieldpoint Private. For illustration purposes only. Analysis based on 172 quarters of GDP and CPI (core) data and real returns by asset class. Excess returns shown based on median rolling price returns from Q4 1974 to Q3 2016.
Please See Important Disclosures in Back of Presentation
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Major Investment Themes for 2017 1.
Deglobalization Accelerates As Populism and Protectionist Policies Spread
2.
Continued Slowdown in Trade Hurts Global Growth
3.
Fiscal Activism Will Boost U.S. GDP Growth Above the FOMC’s Baseline
4.
Inflation Will Temporarily Spike on Commodity Price Base Effects and Rising Wages
5.
Real Yields Will Rise for Structural and Cyclical Reasons
6.
The Yield Curve Steepens (Trumponomics), Then Flattens (Fed Expectations)
7.
The Dollar Appreciates as Long as Monetary Policy Divergence Exists
8.
Credit Default Cycle is Deferred Until 2018 and Credit Spreads Tighten
9.
U.S. Corporate Earnings Breakout from a Three Year Slump
10. Active Management Outperforms Passive As Cross Asset Correlations Decline
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