THE SKINNY - Cafaro Greenleaf · Cafaro Greenleaf | Market Commentary 2 with many cross-currents...
Transcript of THE SKINNY - Cafaro Greenleaf · Cafaro Greenleaf | Market Commentary 2 with many cross-currents...
Cafaro Greenleaf | Market Commentary 2
with many cross-currents transpiring through global
markets. The S&P ended slightly negative for 2015, treasury
bonds (i.e. 10 year) were essentially flat even as the Federal
Reserve raised rates for the first time in 7 years; international
stocks (i.e. MSCI ex/ US) were down nearly 6%.
So what are the dynamics heading into the 2016?
AFTER A DIFFICULT END TO 2015, WE HAVE STARTED 2016
Global Growth Outlook
THE SKINNY | January 2016
The World Bank predicted the global economy would grow 3 percent this year, below a forecast of 3.4 percent made in June.
The US is raising interest rates while most foreign developed
and developing economies are still lowering them – hence, a
continued structural strength in the US dollar, which maybe
a headwind to earnings growth and asset prices.
Growth projections globally are declining – driven mostly
by China, where estimates are now for GDP growth to be
about 6% in 2016 (likely lower based on actual macro data);
the European Union and Japan which are unable to see
any visible signs of improvement despite unprecedented
stimulus by their respective central banks; emerging
markets – Brazil and China are experiencing their own
growth issues, while in India, it may take some time for
Prime Minister Modi’s reform policies to fully manifest
themselves into its economy.
Source • World Bank
2014 estimate
0 1 2 3 4 5 6 7
2015 forecast 2016 forecast
WORLD
High Income
Euro zone
Japan
United States
Developing countries
East Asia & Pacific
Europe & Central Asia
Latin America & Caribbean
Middle East & North Africa
South Africa
Sub-Saharan Africa
Real GDP Growth (%)
Cafaro Greenleaf | Market Commentary 3
Oil prices have yet to find a bottom. Despite posturing
by OPEC and rig count reductions globally, oil
prices continue to languish given the supply glut we
are experiencing compounded by a global growth
slowdown that has led to constrained demand for
crude. Albeit, there isn’t much more room to the
downside, there also doesn’t appear to be many
positive catalysts supporting a substantial rebound
in oil prices (abundant capacity stored in offshore
tankers). Moreover new supply from Iran will likely
create more medium term havoc. In short, we believe
you need a clearing of prices – a rationalization of
marginal producers in order for the market to cleanse
and have an opportunity for prices to rise.
The pace of any potential rate rise will be extremely
slow – The Federal Reserve is guiding to 4 rate hikes
in 2016. That said, we contend that it is very possible
should equity market deteriorate substantially that
they move even slower or possibly suspend any
future rate hikes.
WHY AN EQUITY MARKET SWOON IS SOMEWHAT REMOTE?
The financial health of corporations are in much
better conditions than they were during the previous
distress periods. Corporations have much lower
debt loads and their liquidity and funding ratios
are much higher. We are still in an extraordinarily
low interest rate environment that many companies
are still able to support share repurchases via new
debt issuances.
U.S. Crude Oil Inventories & Rig Count
Federal Funds Rate Expectations
Price of Oil Brent Crude, Nominal Prices, USD/barrel
Source • JP Morgan research
Million Barrels, Number of Active Rigs
FOMC & Market Expectations for the Fed Funds Rate
Jul. 2008: $135.73
Inventories (incl. SPR) Active rigs
Jun. 2014: $111.93
Dec. 2008: $43.09
Dec. 2015: $38.01
1,200
1,150
1,100
1,050
1,000
950
‘13 ‘14 ‘15
2,500
2,000
1,500
1,000
500
0
7%
6%
5%
4%
3%
2%
1%
0%
$160
$140
$120
$100
$80
$60
$40
$20
$0
‘99 ‘03 ‘07 ‘11 ‘15 Long run
0.38%
1.38%
2.38%
3.25%
FOMC Dec. 2015 ForecastsPercent
2015 2016 2017 2018
Change in real GDP, Q4 to Q4Unemployment rate, Q4PCE inflation, Q4 to Q4
2.15.00.4
2.44.71.6
2.24.71.9
2.04.72.0
2.04.92.0
Longrun
3.50%
0.84%
1.35%
FOMC year-end estimates
Market expectations on 12/16/15
Federal funds rate
FOMC long-run projection
Source • JP Morgan research
Cafaro Greenleaf | Market Commentary 4
Since we will continue to be in a low interest rate
and slow growth environment – large cap value
oriented names tend to outperform other styles given
their dividend orientation which can substitute for
bond yields. Large caps tend to outperform small
caps during periods of heightened volatility owing to
their ability to access the capital markets and more
defensible business models.
WHAT IS GOING TO BE MORE FAVORABLY POSITIONED AND WHAT IS GOING TO BE MORE CHALLENGED?
Within fixed income, treasuries and investment
grade corporates and agency mortgage back
securities should continue to out-perform as they
have throughout 2015. Given what we have seen
in the high-yield market (depressed oil prices),
investors’ appetite for more credit sensitive bonds
will be muted. Moreover, we believe non-US fixed
income will continue to be challenged given that most
foreign central banks are devaluing their currencies.
Empirical evidence also shows that active
management is more favorably inclined than passive.
The reason is that active managers are able to
allocate their holdings more to defensive areas such
as value, and more specifically utilities and REITs,
which are less sensitive to economic conditions.
Sources : JP Morgan Research and Bloomberg.com
Source • Interactive Investors
MARKET PHASE Bottom
20%Improving but
ignored
30%Solid underlying
performance
Value
Growth
40%Sweet summer of
growth
20%Optimistic, long-
duration projection
30%Overawareness of
deteriorating conditions
20%Attractive, but no
takers
20%Abundant bargains
30%Willingness to
pay up
20%Revised models justify stretching
20%Shocked recognition of outlandish prices paid
60%Exhaustion, disbelief
& demoralization
60%Doubt, ref lection
& conversion
30%Faith, hope
& charity
60%Euphoria, greed &
extrapolation
50%Fear, panic & loathing
Early Stage Recovery
Mid-StageBull Market
Peak of Bull Market
Bear Market
INVESTMENT STYLE
FUNDAMENTALS
VALUATION
PSYCHOLOGY/ TECHNICAL
General vertical direction (but not
horizontal direction) of recent price
movements
Balance Sheet