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Capital Markets Overview for Board of Regents€¦ · 2009 2010 2011 2012 2013 2014 2015 Q1 APRIL...
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Texas Tech University System Capital Markets Overview for Board of Regents August 2016 Timothy Bruce, Partner
Transcript of Capital Markets Overview for Board of Regents€¦ · 2009 2010 2011 2012 2013 2014 2015 Q1 APRIL...
Texas Tech University SystemCapital Markets Overview for Board of Regents
August 2016
Timothy Bruce, Partner
2009 2010 2011 2012 2013 2014 2015 Q1 APRIL MAY YTDBarclays US STRIPS 20+ Yr -36.0% 10.9% 58.5% 3.0% -21.0% 46.4% -3.7% 11.4% -0.9% 1.5% 12.0%
Barclays US Long Credit 16.8% 10.7% 17.1% 12.7% -6.6% 16.4% -4.6% 6.8% 2.4% 0.0% 9.4%
Alerian MLP 76.4% 35.9% 13.9% 4.8% 27.6% 4.8% -32.6% -4.2% 11.0% 2.5% 9.1%
Barclays US Govt/Credit Long 1.9% 10.2% 22.5% 8.8% -8.8% 19.3% -3.3% 7.3% 1.2% 0.3% 9.0%
Bloomberg Commodity 18.9% 16.8% -13.3% -1.1% -9.5% -17.0% -24.7% 0.4% 8.5% -0.2% 8.8%
Barclays US Corporate HY 58.2% 15.1% 5.0% 15.8% 7.4% 2.5% -4.5% 3.4% 3.9% 0.6% 8.1%
JPM GBI-EM Global Diversified 22.0% 15.7% -1.8% 16.8% -9.0% -5.7% -14.9% 11.0% 2.6% -5.4% 7.7%
Citi WGBI 2.6% 5.2% 6.4% 1.6% -4.0% -0.5% -3.6% 7.1% 1.3% -1.5% 6.8%
JPM EMBI Global Diversified 29.8% 12.2% 7.3% 17.4% -5.3% 7.4% 1.2% 5.0% 1.8% -0.2% 6.7%
FTSE NAREIT Equity REITs 28.0% 28.0% 8.3% 18.1% 2.5% 30.1% 3.2% 6.0% -2.4% 2.4% 6.0%
Credit Suisse Leveraged Loan 44.9% 10.0% 1.8% 9.4% 6.2% 2.1% -0.4% 1.3% 1.9% 0.9% 4.2%
Russell 2500 34.4% 26.7% -2.5% 17.9% 36.8% 7.1% -2.9% 0.4% 1.5% 2.1% 4.0%
S&P 500 26.5% 15.1% 2.1% 16.0% 32.4% 13.7% 1.4% 1.3% 0.4% 1.8% 3.6%
Russell 1000 28.4% 16.1% 1.5% 16.4% 33.1% 13.2% 0.9% 1.2% 0.5% 1.8% 3.5%
Barclays US Agg Bond 5.9% 6.5% 7.8% 4.2% -2.0% 6.0% 0.5% 3.0% 0.4% 0.0% 3.5%
Barclays Municipal 12.9% 2.4% 10.7% 6.8% -2.6% 9.1% 3.3% 1.7% 0.7% 0.3% 2.7%
Barclays US Agg Interm 6.5% 6.1% 6.0% 3.6% -1.0% 4.1% 1.2% 2.3% 0.2% 0.0% 2.5%
MSCI EM 78.5% 18.9% -18.4% 18.2% -2.6% -2.2% -14.9% 5.7% 0.5% -3.7% 2.3%
Russell 2000 27.2% 26.9% -4.2% 16.3% 38.8% 4.9% -4.4% -1.5% 1.6% 2.3% 2.3%
MSCI ACWI (TTUS Proxy) 34.6% 12.7% -7.3% 16.1% 22.8% 4.2% -2.4% 0.2% 1.5% 0.1% 1.8%
Barclays US Govt/Credit 1-3 Yr 3.8% 2.8% 1.6% 1.3% 0.6% 0.8% 0.7% 1.0% 0.1% -0.1% 1.0%
Credit Suisse Hedge Fund 18.6% 10.9% -2.5% 7.7% 9.7% 4.1% -0.7% -2.2% 0.3% N/A -1.9%
MSCI EAFE 31.8% 7.8% -12.1% 17.3% 22.8% -4.9% -0.8% -3.0% 2.9% -0.9% -1.1%
Index Performance Summary as of 5/31/2016
2
Source: Morningstar Direct
2016 May 2016 Commentary
• After a rocky start to the year, almost all major asset classes have continued to respond positively into the second quarter and are positive year-to-date.
• The month began with investors speculating the Federal Open Market Committee might raise rates in June however this expectation was quickly quelled as US job growth numbers fell short of expectations and inflation remained well short of the Fed’s 2% target.
• US equity returns were modestly positive in May as investors digested mostly lukewarm economic data.
– The S&P 500 returned 1.8% and the Russell 2000 gained 2.3% on the month.
• The prospect of rising rates sent a scare through emerging markets as the MSCI EM Index declined 3.7% and was primarily driven by falling equity prices and currency depreciation in Latin American. This decline was also felt in local currency debt as the JP Morgan GBI-EMGlobal Diversified Index fell 5.4% in May but remained up 7.7% on the year.
• US fixed income returns were mostly neutral as the 10 year Treasury yield increased one basis point to 1.84% on the month and the Barclays US Aggregate Bond Index was flat.
• US high yield issues saw continued marginal spread compression and returned 0.6% as represented by the Barclays US Corporate High Yield Index.
• The Citigroup WGBI Index fell 1.5% as government bond yields in developed countries continued to move slightly higher and the US dollar rallied.
May 2016 Commentary
4
2016 Capital Markets Key Themes
• US economic cycle and US central bank policy are at the forefront of major cyclical and secular forces informing our Assumptions and Actions
– These factors interact to create a supportive environment for risk assets in the near term but ultimately push long term capital market forecasts lower relative to history
• The US economy is nearly 7 years removed from the previous recession but the health of US consumers can extend the expansion
– Prolonged US economic cycle has the potential to push the US dollar higher
• Persistent US Dollar strength tightens global monetary conditions and materially weakens the US corporate earnings profile
– A strong dollar strains international borrowers with dollar based debt– Outsized credit growth in Asia, specifically China, at risk from a stronger US dollar
• Influence of central bank policies in the developed world remain broadly supportive for risk assets but come with long term effects
– US policy is slowly diverging from Europe and Japan but gradual expected pace of hikes provides a positive backdrop for US equities and credit in the near term
– Extraordinary central bank measures from Europe and Japan continue to expand and support a strong bias to equities in these markets
Key Themes
6
• US economic expansion continues as Federal Reserve begins policy shift– Economic conditions and health of US consumers remain supportive for growth– US Corporate earnings quality has weakened under pressure from profit margin declines
• Central Banks continue to dictate the global investment outlook– Subdued market expectation of Fed action over next 36 months; a surprise Fed rate
increase poses risk to both US equities and interest rates– ECB and BoJ likely to maintain and expand accommodative monetary policies– Easing in China is broadly stimulative in the near term but currency policy is unpredictable
• Rise of political populism fuels equity and currency market uncertainty– Populist movements are destabilizing for the established political and economic order
posing a risk for the cohesion of the European Union and global trade relationships– However, elevated risk offers an opportunity should market sentiment be overly pessimistic
• Large currency adjustments across most emerging countries have provided a foundation to support improved capital market returns
– Continued political and economic reform is needed across EM to stimulate economic growth– Chinese Yuan (RMB) depreciation has been incremental relative to other EM FX adjustments
and fears of further adjustment remain an over-hanging concern
• Embrace illiquidity in opportunistic credit and private credit strategies – Stressed credit liquidity magnifies the scale of price movements in traditional credit assets– Credit markets ability to absorb an exodus from crowded positions is challenged
Key Themes
7
2016 Market Review – Market Slides Through May 2016
Near Term Broad Market Performance Summary as of 5/31/2016
/2015
9
Source: Bloomberg, Standard and Poors, Russell, MSCI, Barclays, Citigroup, JP Morgan *1 Yr Range: Represents range of cumulative high/low daily index returns for an investment made one year ago
‐35%
‐30%
‐25%
‐20%
‐15%
‐10%
‐5%
0%
5%
10%
15%
1 Yr Range
1 Yr Return
3 Month Return
Long Term Broad Market Performance Summary as of 5/31/2016
Source: Bloomberg, Standard and Poors, Russell, MSCI, Barclays, Citigroup, JP Morgan
10
Inflation has increased off lows Unemployment steadily improving
Corporate profits lower off cyclical highs Manufacturing trending higher after dip
US Economic Indicators
11
Source: Bloomberg, Federal Reserve, Bureau of Labor Statistics Source: Bloomberg, Bureau of Labor Statistics
Source: Bloomberg, Institute for Supply ManagementSource: Bloomberg, Bureau of Economic Analysis
60%
65%
70%
75%
80%
85%
90%
‐3%‐2%‐1%0%1%2%3%4%5%6%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
CPI (LHS)Capacity Utilization (RHS)
0%2%4%6%8%
10%12%14%16%18%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
US UnemploymentU‐6 Unemployment
6%
7%
8%
9%
10%
11%
12%
13%
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Corporate Profits (% of GDP)
35
40
45
50
55
60
65
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
US ISM PMI
Inflation remains muted Europe unemployment trending lower
Manufacturing continues to lag Leading indicators mostly neutral
International Economic Indicators
12
Source: Bloomberg, Japan Ministry of Internal Affairs and Communications, Eurostat Source: Bloomberg, Japan Ministry of Internal Affairs and Communications, Eurostat
Source: Bloomberg, OECDSource: Bloomberg, OECD, Eurostat
‐3%
‐2%
‐1%
0%
1%
2%
3%
4%
5%
Jan‐04
Oct‐04
Jul‐0
5
Apr‐06
Jan‐07
Oct‐07
Jul‐0
8
Apr‐09
Jan‐10
Oct‐10
Jul‐1
1
Apr‐12
Jan‐13
Oct‐13
Jul‐1
4
Apr‐15
Jan‐16
Japan CPI
Euro CPI0%
2%
4%
6%
8%
10%
12%
14%
Jun‐01
Apr‐02
Feb‐03
Dec‐03
Oct‐04
Aug‐05
Jun‐06
Apr‐07
Feb‐08
Dec‐08
Oct‐09
Aug‐10
Jun‐11
Apr‐12
Feb‐13
Dec‐13
Oct‐14
Aug‐15
Europe UnemploymentJapan Unemployment
‐10%‐8%‐6%‐4%‐2%0%2%4%6%8%
10%
May‐06
Jan‐07
Sep‐07
May‐08
Jan‐09
Sep‐09
May‐10
Jan‐11
Sep‐11
May‐12
Jan‐13
Sep‐13
May‐14
Jan‐15
Sep‐15
YoY % Cha
nge in M
anufacturin
g
GermanyFranceItalyJapan
97.0
98.0
99.0
100.0
101.0
102.0
103.0
Apr‐06
Dec‐06
Aug‐07
Apr‐08
Dec‐08
Aug‐09
Apr‐10
Dec‐10
Aug‐11
Apr‐12
Dec‐12
Aug‐13
Apr‐14
Dec‐14
Aug‐15
OECD Leading
Indicator S
A
Euro AreaJapanUKCanada
EM inflation is varied by country Relatively healthy Debt/GDP ratios
Marginal improvement in account balances EM is greater than 50% of global output
Emerging Market Economic Indicators
13
Source: Bloomberg Source: Bloomberg, IMF
Source: Bloomberg, IMFSource: Bloomberg
‐2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
Brazil China Mexico SouthAfrica
SouthKorea
Taiwan Turkey
CPI
Most Recent
1 Yr Previous
0%
20%
40%
60%
80%
100%
120%
Gross Gov't Deb
t as % of G
DP
‐20%
‐15%
‐10%
‐5%
0%
5%
10%
15%
20%
Jun‐06
Jan‐07
Aug‐07
Mar‐08
Oct‐08
May‐09
Dec‐09
Jul‐1
0Feb‐11
Sep‐11
Apr‐12
Nov‐12
Jun‐13
Jan‐14
Aug‐14
Mar‐15
Oct‐15
Accoun
t Balan
ce (%
of G
DP)
Mexico Brazil South AfricaTurkey Malaysia Indonesia
0%10%20%30%40%50%60%70%80%90%
100%
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
GDP PP
P as % of W
orld
Developed
Emerging
Equity volatility decreasing off recent highs Treasury volatility has declined recently
Currency volatility remains elevated Commodity volatility has increased
Volatility
14
Source: Bloomberg, CBOE Source: Bloomberg, Merrill Lynch
Source: Bloomberg, Merrill LynchSource: Bloomberg, Deutsche Bank
05
101520253035404550
Jun‐11
Sep‐11
Dec‐11
Mar‐12
Jun‐12
Sep‐12
Dec‐12
Mar‐13
Jun‐13
Sep‐13
Dec‐13
Mar‐14
Jun‐14
Sep‐14
Dec‐14
Mar‐15
Jun‐15
Sep‐15
Dec‐15
Mar‐16
VIX Index
405060708090
100110120130
Jun‐11
Sep‐11
Dec‐11
Mar‐12
Jun‐12
Sep‐12
Dec‐12
Mar‐13
Jun‐13
Sep‐13
Dec‐13
Mar‐14
Jun‐14
Sep‐14
Dec‐14
Mar‐15
Jun‐15
Sep‐15
Dec‐15
Mar‐16
MOVE Index
4
6
8
10
12
14
16
18
May‐11
Aug‐11
Nov‐11
Feb‐12
May‐12
Aug‐12
Nov‐12
Feb‐13
May‐13
Aug‐13
Nov‐13
Feb‐14
May‐14
Aug‐14
Nov‐14
Feb‐15
May‐15
Aug‐15
Nov‐15
Feb‐16
May‐16
CVIX Index
579
11131517192123
Jul‐1
1Oct‐11
Jan‐12
Apr‐12
Jul‐1
2Oct‐12
Jan‐13
Apr‐13
Jul‐1
3Oct‐13
Jan‐14
Apr‐14
Jul‐1
4Oct‐14
Jan‐15
Apr‐15
Jul‐1
5Oct‐15
Jan‐16
Apr‐16
Bloomberg Commodity 90D Vol
Major central bank policy divergence Fed’s projected policy rate firming above market expectations
Many developed central banks have maintained low interest rates
EM central bank policies vary by country economic conditions
Central Banks
15
Source: Bloomberg, Federal Reserve, Bank of Japan, ECB, NEPC Source: Bloomberg, Federal Reserve, NEPC
Source: BloombergSource: Bloomberg
$0.00$0.50$1.00$1.50$2.00$2.50$3.00$3.50$4.00$4.50$5.00
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Trillions (b
alan
ce she
et assets) Fed
ECB
BoJ
‐0.5%0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%
2015 2016 2017 2018 2019 2020 2021
FOMC ParticipantsFOMC MedianFed Funds Futures
Long Term
‐1.0% 0.0% 1.0% 2.0% 3.0% 4.0%
AustraliaCanada
ECBJapan
New ZealandNorway
SingaporeSwitzerland
UKUS
Target central bank rate
1 Yr Previous
Current
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0%
BrazilChinaIndia
IndonesiaMalaysiaMexicoPolandRussia
South AfricaSouth Korea
Turkey
Target central bank rate
1 Yr Previous
Current
Global valuations are mixed Earnings growth has trended lower
Margins declining outside of EM Global equity returns have been mostly negative over one year
Global Equity
16
Source: Bloomberg, Standard and Poors, MSCI *MSCI EAFE is ex UK Telecom Source: Bloomberg, Standard and Poors, MSCI
Source: Bloomberg, MSCISource: Bloomberg, MSCI
0
5
10
15
20
25
30
35
40
MSCI ACWI MSCI EAFE MSCI EM S&P 500
PE Ratio
+1 Std Dev ‐1 St Dev5/29/2015 5/31/2016
‐50%‐40%‐30%‐20%‐10%0%
10%20%30%40%50%
Jun‐06
Feb‐07
Oct‐07
Jun‐08
Feb‐09
Oct‐09
Jun‐10
Feb‐11
Oct‐11
Jun‐12
Feb‐13
Oct‐13
Jun‐14
Feb‐15
Oct‐15
Rolling
12‐Mo Ch
ange
in EBIT
S&P 500MSCI EAFEMSCI EM
0%
2%
4%
6%
8%
10%
12%
14%
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Profit Margins
MSCI ACWIMSCI EAFEMSCI EMS&P 500
‐20%
‐15%
‐10%
‐5%
0%
5%
10%
15%
MSCI ACWI MSCI ACWIIMI
MSCI EAFE MSCI EM SP 500
3 Month Return
1 Yr Return
Valuations near or above historical norms Growth recovery marked by inconsistency
Profit margins lower off highs Trailing performance has been mixed
US Equity
17
Source: Bloomberg, Standard and Poors, Russell *Russell 2000 PE is index adjusted positive Source: Bloomberg, Bureau of Economic Analysis
Source: Bloomberg, Standard and Poors, RussellSource: Bloomberg, Standard and Poors, Russell
0
5
10
15
20
25
30
35
S&P 500 Russell 2000 Russell 1000Growth
Russell 1000Value
PE Ratio
+1 Std Dev ‐1 St Dev5/29/2015 5/31/2016
‐10%
‐8%
‐6%
‐4%
‐2%
0%
2%
4%
6%
20162015201420132012201120102009200820072006
US Real GDP Growth
‐8%‐6%‐4%‐2%0%2%4%6%8%
10%12%
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
Profit Margins
S&P 500Russell 2000
‐10%
‐5%
0%
5%
10%
15%
SP 500 Russell 2500 Russell 2000 Russell 1000Growth
Russell 1000Value
3 Month Return
1 Yr Return
PE levels varied by region/country Global growth remains subdued
Margins elevated but not at extremes Returns positive in short term
International Equity
18
Source: Bloomberg, MSCI, FTSE *UK represented by FTSE 100 Index Source: Bloomberg
Source: Bloomberg, MSCISource: Bloomberg, MSCI
05
101520253035404550
Europe Japan United Kingdom
PE Ratio
+1 Std Dev ‐1 St Dev5/29/2015 5/31/2016
‐15%
‐10%
‐5%
0%
5%
10%
15%
20162015201420132012201120102009200820072006
Eurozone
Japan
UK
0%1%2%3%4%5%6%7%8%9%
10%
Profit Margins
MSCI EAFE
‐15%
‐10%
‐5%
0%
5%
10%
15%
MSCI EAFE EAFE (Local) EAFE Small Cap EAFE SC (Local)
3 Month Return1 Yr Return
Regional valuations show divergence Slowing growth in major economies
Profit margins in line with history Recent rally in EM but one year returns mostly negative
Emerging Markets Equity
19
Source: Bloomberg, MSCI Source: Bloomberg
Source: Bloomberg, MSCISource: Bloomberg, MSCI
05
101520253035404550
China Brazil South Africa India Russia South Korea
PE Ratio
+1 Std Dev ‐1 St Dev5/29/2015 5/31/2016
‐15%
‐10%
‐5%
0%
5%
10%
15%
20%
20162015201420132012201120102009200820072006
Brazil RussiaIndia China
0%
2%
4%
6%
8%
10%
12%
14%
Profit Margins
MSCI EM‐20%
‐15%
‐10%
‐5%
0%
5%
10%
15%
MSCI EM EM (Local) EM SmallCap
EM SC(Local)
Frontier
3 Month Return1 Yr Return
MSCI ACWI returns led by Energy and Materials in short term S&P 500 broadly positive in short term
Returns positive across EM in short term Global energy sector weight has fallen
Global Equity by Sector
20
Source: Bloomberg, MSCI Source: Bloomberg, Standard and Poors
Source: Bloomberg, MSCISource: Bloomberg, MSCI
‐15%
‐10%
‐5%
0%
5%
10%
15%
20%
3‐Mo Return1 Yr Return
‐15%
‐10%
‐5%
0%
5%
10%
15%
20%
3‐Mo Return1 Yr Return
‐30%‐25%‐20%‐15%‐10%‐5%0%5%
10%15%20%
3‐Mo Return1 Yr Return
0%
5%
10%
15%
20%
25%
Sector W
eigh
t of A
CWI
5/31/2016
5/29/2015
Developed currencies mostly positive versus the dollar recently
EM currencies suffered in unique fashions over the past year
Yen expected to decline versus USD Dollar strength has retreated slightly year
Currencies
21
Source: Bloomberg Source: Bloomberg
Source: Bloomberg, Federal ReserveSource: Bloomberg
60
70
80
90
100
110
120
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
USD Trade Weighted Index
‐8%‐6%‐4%‐2%0%2%4%6%8%
10%12%
JapaneseYen
PoundSterling
Euro SwissFranc
CanadianDollar
AustralianDollar
3 Month Spot Change1 Yr Spot Change
‐35%‐30%‐25%‐20%‐15%‐10%‐5%0%5%
10%15%
3 Month Spot Change1 Yr Spot Change
‐2.5%‐2.0%‐1.5%‐1.0%‐0.5%0.0%0.5%1.0%1.5%2.0%2.5%3.0%
Euro Yen BritishPound
SwissFranc
Aus Dollar Yuan(O/S)
Chan
ge versus USD
3M Currency Fwd12M Currency Fwd
Spread levels above historical medians Yields have mostly declined
Similar yield/duration tradeoff among major US indices
Returns marked by recent credit and high yield rally
US Fixed Income
22
Source: Bloomberg, Barclays Source: Bloomberg, Barclays
Source: Bloomberg, BarclaysSource: Bloomberg, Barclays
0
200
400
600
800
1000
1200
1400
1600
1800
Aaa Aa A Baa Ba B Caa
Spread
(bps)
+2 Std Dev+1 Std Dev‐1 St Dev5/29/20155/31/2016
0%1%2%3%4%5%6%7%8%9%10%
Month End Yield3‐Mo Previous Yield
0%
1%
2%
3%
4%
5%
6%
7%
8%
0 1 2 3 4 5 6 7 8
Yield
Duration
BC AggBC US TreasuryBC CreditBC MBSBC High YieldBC MunicipalBC TIPS
‐2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%3 Month Return1 Yr Return
European periphery yields at small premium relative to Germany Global yields are at or near historic lows
Low global yields relative to duration Global bonds positive in USD terms
International Developed Fixed Income
23
Source: Barclays, Bloomberg, *European periphery spreads are over equivalent German Bund Source: Bloomberg
Source: Bloomberg, Citigroup, BarclaysSource: Bloomberg, Citigroup, Barclays
0
100
200
300
400
500
600
OAS
or E
quivalen
t (bp
s)
5/31/2016
5/29/2015
‐0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
10 Yr G
ovt Y
ield
Month End Yield3‐Mo Previous Yield1 Yr Previous Yield
‐1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
0 1 2 3 4 5 6 7 8 9 10 11 12 13
Yield
Duration
WGBIBC MultiverseBC Glob Infl‐LinkedBC EuroAggBC Pan‐Euro HY
0%1%2%3%4%5%6%7%8%9%10%
WGBI(Local)
WGBI(USD)
WGBI exUS (Local)
WGBI exUS (USD)
BCMultiverse
BC GlobInfl‐Linked
3 Month Return1 Yr Return
Spreads have widened recently Emerging market bond yield changes have varied directionally
EM yields higher versus global counterparts Currency effect pronounced in EMD returns
Emerging Markets Fixed Income
24
Source: Bloomberg, JP Morgan Source: Bloomberg
Source: Bloomberg, JP MorganSource: Bloomberg, JP Morgan
0
200
400
600
800
1000
1200
1400May‐06
Jan‐07
Sep‐07
May‐08
Jan‐09
Sep‐09
May‐10
Jan‐11
Sep‐11
May‐12
Jan‐13
Sep‐13
May‐14
Jan‐15
Sep‐15
May‐16
Spread
in bps
EMBI Glob Div EMBI Glob Div IGEMBI Glob Div HY CEMBI Div Broad IGCEMBI Div Broad HY
0%2%4%6%8%
10%12%14%16%18%
10 Yr L
ocal Govt Y
ield
Month End Yield3‐Mo Previous Yield1 Yr Previous Yield
0%1%2%3%4%5%6%7%8%9%
10%
0 1 2 3 4 5 6 7 8
Yield
Duration
JPM EMBI CompositeJPM GBI‐EM Glob DivCEMBI IGCEMBI HYEMBI HYEMBI IG
‐6%
‐4%
‐2%
0%
2%
4%
6%
8%
JPM EMBIGlob Div
JPM GBI‐EMGlob Div
CEMBI IG CEMBI HY ELMI+ Comp
3 Month Return1 Yr Return
Treasury yield curve relatively stable Japan yield curve has shifted downwards
Global yield curves trending lower Global yields have trended lower over long term
Rates
25
Source: Bloomberg Source: Bloomberg
Source: BloombergSource: Bloomberg
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
1Y 3Y 5Y 7Y 10Y
15Y
20Y
25Y
30Y
5/31/20162/29/20165/29/20155/30/2014
‐1.0%‐0.5%0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%
1Y 3Y 5Y 7Y 10Y
15Y
20Y
25Y
30Y
UK Month End UK 3M PreviousJapan Month End Japan 3M PreviousGerm Month End Germ 3M Previous
‐0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
US 10 Yr ‐ 2 YrJapan 10 Yr ‐ 2 YrGermany 10 Yr ‐ 2 Yr
‐1%
0%
1%
2%
3%
4%
5%
6%
7%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Japan 10 YrJapan 2 YrGermany 10 YrGermany 2 Year
Long duration yields have fallen over last few years
Lower yields driven by low inflation expectations and real rates
Yields are low but spreads above historic averages Returns recently positive
Long Rates and Liability
26
Source: Bloomberg, Citigroup, Barclays Source: Bloomberg, US Treasury, Barclays, NEPC
Source: Bloomberg, BarclaysSource: Bloomberg, BofA Merrill Lynch, Barclays *No index for 20+ year corporate
1%
2%
3%
4%
5%
6%
7%
Jan‐11
May‐11
Sep‐11
Jan‐12
May‐12
Sep‐12
Jan‐13
May‐13
Sep‐13
Jan‐14
May‐14
Sep‐14
Jan‐15
May‐15
Sep‐15
Jan‐16
May‐16
Citigroup Pension Liability IndexBC Long CreditBC 20‐30 Yr STRIPS
‐1%0%1%2%3%4%5%6%7%8%9%10%
Long
credit y
ield (b
y compo
nent) Spread (BC Long Cred OAS)
Inflation (LT Yield ‐ LT Real Yield)Real Rate (LT Real Yield)
0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%5.0%
0‐5 Years 5‐10 Years 10‐15 Years 15+ Years 20+ Years
US Corp Spread
US Gov't Yield
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
20‐30 YrSTRIPS
US AggLong Treas
US LongCredit
US LongGovt/Credit
US LongCredit A+
Long CorpA+
3‐Month Return
1 Year Return
US real yields have decreased slightly Global real yields mostly negative
US inflation expectations remain low Global inflation expectations have seen small recent uptick
Inflation and Real Rates
27
Source: Bloomberg *3-Mo data not available for Germany 4 year rate Source: Bloomberg
Source: BloombergSource: Bloomberg
‐0.2%‐0.1%0.0%0.1%0.2%0.3%0.4%0.5%0.6%0.7%0.8%
US 5 Yr US 10 Yr
Real Yields
3M Previous Month End3M Forward 1 Yr Fwd
‐1.4%‐1.2%‐1.0%‐0.8%‐0.6%‐0.4%‐0.2%0.0%0.2%0.4%0.6%
US 5 Yr Germany 4Yr
Britain 5 Yr France 5 Yr Australia 5Yr
Month End3‐Mo Previous
1.50%
1.70%
1.90%
2.10%
2.30%
2.50%
2.70%
2.90%
5y5y US Breakeven
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
May‐11
Sep‐11
Jan‐12
May‐12
Sep‐12
Jan‐13
May‐13
Sep‐13
Jan‐14
May‐14
Sep‐14
Jan‐15
May‐15
Sep‐15
Jan‐16
Infla
tion Breakeven
US 10 Yr UK 10 YrGermany 10 Yr France 10 YrAustralia 10 Yr
Yields higher relative to last year Gradual recovery in occupancy rates
PE Ratios near or above averages MLPs have rebounded after selloff
Inflation Sensitive Growth Assets
28
0
500
1000
1500
2000
2500
1985
1986
1988
1990
1992
1994
1996
1997
1999
2001
2003
2005
2007
2008
2010
2012
2014
Thou
sand
s
US Housing Starts SA
Source: Bloomberg, Alerian, Nareit, Standard and Poors Source: Bloomberg, CB Richard Ellis
Source: Bloomberg, US Census Bureau Source: Bloomberg, Alerian, Nareit, Standard and Poors
0%1%2%3%4%5%6%7%8%9%
Alerian MLP NAREIT Global NAREIT US S&P Glob NatRes
Dividen
d Yield
Month End Yield
1 Yr Previous Yield
75%
80%
85%
90%
95%
100%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
US Occup
ancy Rate
Office IndustrialRetail Multi‐Family
0
5
10
15
20
25
30
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
PE Ratio
Alerian MLPNAREIT GlobalNAREIT USS&P Glob Nat Res
‐30%
‐20%
‐10%
0%
10%
20%
30%
Alerian MLP NAREIT Glob NAREIT US NCREIFProperty
S&P GlobNat Res
3 Mo Return1 Yr Return
Backwardation in major commodity futures Precipitous fall in oil prices with slight recovery
US fuel production closing gap with consumption
Commodity indices negative over one year after oil-induced decline
Commodities
29
Source: Bloomberg Source: Bloomberg
Source: Bloomberg, Standard and PoorsSource: Bloomberg, US Department of Energy *Crude oil and liquid fuels
‐4% ‐2% 0% 2% 4% 6% 8% 10%
Copper
Corn
Gold
Natural Gas
Oil
Soybeans
3‐Mo Future Roll Yield
0200400600800100012001400160018002000
0
20
40
60
80
100
120
140
160
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
$/Troy
Oun
ce
$/Ba
rrel
Crude Oil Spot (LHS)Gold Spot (RHS)
75
80
85
90
95
100
0
5
10
15
20
25
US ProductionUS ConsumptionWorld Production (RHS)World Consumption (RHS)
Crude oil and liquid fuels
‐30%‐25%‐20%‐15%‐10%‐5%0%5%
10%15%20%25%
BloombergCommodity
GSCI GSCI Non‐Energy
3‐Month Return
1 Yr Return
Information Disclaimer
• Past performance is no guarantee of future results.
• The goal of this report is to provide a basis for monitoring financial markets. The opinions presented herein represent the good faith views of NEPC as of the date of this report and are subject to change at any time.
• Information on market indices was provided by sources external to NEPC. While NEPC has exercised reasonable professional care in preparing this report, we cannot guarantee the accuracy of all source information contained within.
• All investments carry some level of risk. Diversification and other asset allocation techniques do not ensure profit or protect against losses.
• This report is provided as a management aid for the client’s internal use only. This report may contain confidential or proprietary information and may not be copied or redistributed to any party not legally entitled to receive it.
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