Market Themes CACTTC Southern Area Conference market update - verus.pdf · Mar-13. Nov-13. Jul-14....

MARCH 2018

Market Themes

CACTTC Southern Area Conference

HighlightsEconomic and equity environment

― How long can the expansion and equity bull market last?

Rising interest rates

― Are the fears over higher interest rates overblown?

The end of the central bank stimulus era

― How will central bank tightening impact fixed income markets?

Historically tight credit spreads

― Is there a sufficient premium for credit risk?

Opportunities in emerging market debt

― Are higher yields in emerging markets attractive?

March 2018CACTTC Southern Area Conference 2

Economic and equity environment

March 2018CACTTC Southern Area Conference

3

Global GDP growth

March 2018

CACTTC Southern Area Conference

Source: Bloomberg, as of 12/31/17

4

-6%

-3%

0%

3%

6%

Jan-05 Nov-08 Sep-12 Jul-16

U.S.

-6%

-3%

0%

3%

6%


Eurozone

-6%

-3%

0%

3%

6%


Japan

0%

4%

8%

12%


BRICS

How long can expansions continue?


Source: Australia Trade and Investment Commission

5

0 5 10 15 20 25 30

Switzerland (1983 to 1990)

Germany (1981 to 1991)

U.S. (2009 to current)

Italy (1983 to 1992)

Sweden (1993 to 2008)

France (1993 to 2008)

Spain (1993 to 2008)

U.K. (1992 to 2008)

Japan (1975 to 1993)

U.S. (1991 to 2008)

Canada (1991 to 2008)

South Korea (since 1998)

Netherlands (1981 to 2003)

Poland (since 1995)

Ireland (1986 to 2007)

Australia (since 1991)

# Years without recession

Equity performance



6

90

100

110

120

130

140

150

Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18

S&P 500 MSCI EAFE MSCI Emerging Markets

Global earnings momentum


Source: MSCI, as of 2/28/18, year-over-year growth in forward earnings

7

-60%

-40%

-20%

0%

20%

40%

60%

Mar-08 Sep-09 Mar-11 Sep-12 Mar-14 Sep-15 Mar-17

US International Developed Emerging Markets

Forward P/E ratios



8

0

2

4

6

8

10

12

14

16

18

20

Mar-08 Sep-09 Mar-11 Sep-12 Mar-14 Sep-15 Mar-17

U.S. EAFE Emerging Markets

The return of volatility



9

0

5

10

15

20

25

30

35

40

45

Feb-13 May-14 Aug-15 Nov-16 Feb-18

CBOE VIX Index

Rising rates?


10

Long-term sovereign rates



11

-1%

0%

1%

2%

3%

4%

5%

6%

Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17 Feb-18

U.S. Germany Japan U.K.

Interest rate increases in perspective


Source: Verus, Bloomberg, as of 2/28/18

Increases in long-term interest rates over the past six months have been modest

12

0.74

0.53

0.300.27

0.47

0.30

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

6-Month Net Change in 10-Year Yields Z-Score

U.S. Germany U.K.

Duration concerns



13

4.0

4.5

5.0

5.5

6.0

6.5

7.0

Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17

Mod

ified

Adj

uste

d Du

ratio

n

BBgBarc U.S. Agg Treasury Index Duration

What is driving U.S. rates higher?



14

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18

Nominal Real Breakeven

Economic backdrop


Source: Bloomberg, GDP and PCE data as of 12/31/17, consensus forecasts as of 2/28/18

15

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

Mar-11 Nov-11 Jul-12 Mar-13 Nov-13 Jul-14 Mar-15 Nov-15 Jul-16 Mar-17 Nov-17

Real GDP Growth (YoY) Core PCE Inflation (YoY)

2018 YE Bloomberg Consensus Forecasts

U.S. Treasury curve


Source: Bloomberg

16

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 30Y

U.S. Treasury Curve as of 2/28/18 U.S. Treasury Curve as of 2/28/17

+107 bps

+48 bps

Interest rates versus earnings yield



17

-10%

-5%

0%

5%

10%

15%

20%

Apr-68 Apr-71 Apr-74 Apr-77 Apr-80 Apr-83 Apr-86 Apr-89 Apr-92 Apr-95 Apr-98 Apr-01 Apr-04 Apr-07 Apr-10 Apr-13 Apr-16

Earnings Yield Spread U.S. 10-Year Treasury Yield S&P 500 Earnings Yield

Global central banks


18

Central bank policy rates



19

-1%

0%

1%

2%

3%

4%

5%

6%

Mar-03 Jun-04 Sep-05 Dec-06 Mar-08 Jun-09 Sep-10 Dec-11 Mar-13 Jun-14 Sep-15 Dec-16

U.S. Eurozone Japan

Short-term sovereign yields



20

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17

U.S. Germany Japan U.K.

U.S. monetary policy expectations



21

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Mar-12 Jan-13 Nov-13 Sep-14 Jul-15 May-16 Mar-17 Jan-18 Nov-18 Sep-19

Effective Fed Funds Rate Market Pricing Fed Dot Plot

Fed balance sheet expectations


Source: Bloomberg, Federal Reserve, as of 1/31/18

22

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

$4.5

$5.0

Jan-07 Apr-08 Jul-09 Oct-10 Jan-12 Apr-13 Jul-14 Oct-15 Jan-17 Apr-18 Jul-19 Oct-20

Trill

ions

Treasuries MBS Other

Treasuries

MBS

Other

Central bank balance sheets


Source: Federal Reserve, ECB, BOJ, as of 1/31/18

23

$0

$2

$4

$6

$8

$10

$12

$14

$16

Jan-08 Jul-09 Jan-11 Jul-12 Jan-14 Jul-15 Jan-17

Trill

ions

Fed ECB BOJ

Credit markets


24

Credit spreads



25

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17

High Yield Investment Grade

Default rates


Source: BofA Merrill Lynch, as of 12/31/17

26

0%

5%

10%

15%

20%

25%

Jan-98 Sep-99 May-01 Jan-03 Sep-04 May-06 Jan-08 Sep-09 May-11 Jan-13 Sep-14 May-16

BofA-ML US HY par weighted default rate Energy

Opportunities in emerging markets


27

Fixed income opportunity set


Source: JPMorgan, as of 12/31/17

28

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

$110

Mar-90 Mar-92 Mar-94 Mar-96 Mar-98 Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16

Asse

ts ($

) in

trill

ions

U.S. Developed ex-US EM

Dev ex-US: $44 Trillion

US: $39 Trillion

EM: $21 Trillion

EMD local currency yields



29

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

EMD Local Yield Average

EMD hard currency spreads



30

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17

Emerging market currency


Source: JPMorgan, as of 2/28/18

31

60

70

80

90

100

110

120

Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18

35% drawdown

HighlightsEconomic and equity environment

― How long can the expansion and equity bull market last?

Rising interest rates

― Are the fears over higher interest rates overblown?

The end of the central bank stimulus era

― How will central bank tightening impact fixed income markets?

Historically tight credit spreads

― Is there a sufficient premium for credit risk?

Opportunities in emerging market debt

― Are higher yields in emerging markets attractive?


Notices & disclosuresPast performance is no guarantee of future results. This document is provided for informational purposes only and is directed to institutional clients and eligible institutional counterparties only and is not intended for retail investors. Nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security or pursue a particular investment vehicle or any trading strategy. This document may include or imply estimates, outlooks, projections and other “forward-looking statements.” No assurance can be given that future results described or implied by any forward looking information will be achieved. Investing entails risks, including possible loss of principal. Additional information about Verus Advisory, Inc. is available on the SEC’s website at www.adviserinfo.sec.gov.

Verus – also known as Verus Advisory™.


Market Themes CACTTC Southern Area Conference market update - verus.pdf · Mar-13. Nov-13. Jul-14....

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Transcript of Market Themes CACTTC Southern Area Conference market update - verus.pdf · Mar-13. Nov-13. Jul-14....