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WorldwideEconomicsHCWE & Co., Cambria CA
Advancing Risky Asset Prices: the Second Phase
David Ranson, [email protected]
HCWE Inc.
Prepared for the CFA Society of Texas – Austin
September 29, 2017
2 - ©2017 HCWE & Co. prod: 2Sig-4Assets
exhibit: 1
1 - © 2017 HCWE & Co. Updated January 3, 2013 prod: 2Sig-4Assets
Two Market Signals and Four Primary Asset Classes
PHYSICAL &FOREIGNASSETS
DOMESTICSTOCKS
DOMESTICBONDS
GOLD
market signalsof economic anxiety
and currency instability
increasing anxietystrengthening currency
increasing anxietyweakening currency
diminishing anxietystrengthening currency
diminishing anxietyweakening currency
3 - ©2017 HCWE & Co. prod: ClassifyEconScenarios/ClassifyAssetScenarios
exhibit: 2
source: ClassifyEconScenarios-112415
Four Primary Economic Scenarios
deflationaryslowdown
deflationaryexpansion
inflationaryslowdown
inflationaryexpansion
inflationdecelerating
growthdecelerating
growthaccelerating
inflationaccelerating
Updated March 29, 2016© 2014 H.C. Wainwright & Co. Economics Inc.
1 - © 2017 HCWE & Co. Updated January 3, 2013 prod: ClassifyAssetScenarios
Using Scenarios to Classify Assets
inflationdecelerating
growthdecelerating
growthaccelerating
inflationaccelerating
haven assets
risky assets
“soft”assets
vulnerableto
inflation
“hard”assets
boostedby
inflation
4 - ©2017 HCWE & Co. prod: AssetClass
exhibit: 3
1Updated July 21, 2015
© 2015 HCWE Inc. prod: SpecExh/AssetClass
Treasury bondsMBS
high-grade bondsgold
US equities
non-precious commoditiesadjustable rate debtforeign currenciesemerging equities
REITs
commercialreal estate
C-grade bonds
B-grade bondsMLPsEAFE
Baa-Aaa spreadhas widened
Baa-Aaa spreadhas narrowed
NEUTRAL
gold pricehas risen
gold pricehas fallen
NW
SW SE
EW
S
N
NE
NORTH: heightened business risk
EAST:currency
weakeningor
instability
An Asset-Allocation “Compass”
5 - ©2017 HCWE & Co. prod: RiskHardResponse.ai prog: 14 FMTAA TURN
exhibit: 4
Response of Risky-Hard Assets to Market Signals from Credit Spreads and Goldcalendar-year average dats from 1987
Data: monthly returns from high-yield bonds (Bank of America Merrill Lynch), US all-equity REITs (FTSE NAREIT) and unweighted indices of commod-ity groups (Thomson Reuters Commodity Research Bureau) and emerging equity markets (Morgan Stanley Capital International).
s4
s3
s2
s1
emerging marketsequity REITscommoditieshigh-yield bonds
following-year performance of:
0
5
10
15
20
25
30PERCENT
24.4
14.7
10.2 10.0
15.7
12.2
2.1
10.0 9.9
5.3
2.8
0.2
spreads weredown and
gold was up(7 years)
gold and spreadshad moved in the
same direction(18 years)
spreads wereup and goldwas down(4 years)
AVERAGESfor yearsin which:
6 - ©2017 HCWE & Co. prod: DoubleTurn-Sig prog: 7 HIGHYIELD PARADIGM
exhibit: 5
1 - © 2017 HCWE & Co. Updated November 8, 2017 prod: DoubleTurn-Sig prog: 7 HIYIELD PARADIGM
A Rare Double Turning Point in Market Signals from Spreads and Goldmonth-average data from the beginning of 2015
Data: Month-average yields on Baa and Aaa corporate bonds (Moody’s/Federal Reserve Board) and month-average spot prices for gold (Metals Week).
0
10
20
30
40
50
0
10
20
30
40
50
left
2017I
2016I
2015I
PERCENT PERCENT
MONTH AVERAGE
Baa-Aaa yield ratio price of gold
percentage by whichthe Baa yield exceedsthe Aaa yield (left scale)
percentage by whichgold exceeds price
end of 2015(right scale)
7774
696769 68 67 72
69
69
70
99
9091
96
94
105
115
127
140
149
139
95 90
145
138131
117
103
103 9492
9087
85
basis point spread
7 - ©2017 HCWE & Co. prod: CommodPriceTurn prog: 14FMTAA TURNING-f1
exhibit: 6
1 - © 2017 HCWE & Co. Updated November 8, 2017 prod: CommodPriceTurn prog: 14 FMTAA TURNING-f1
The Turnaround in Commodity Pricesmonth-end price data from the beginning of 2015
Data: Reuters Bridge Commodity Research Bureau.
Textiles
Industrial metals
Foodstuffs
Crude oil
Raw industrial materials
2017I
2016I
2015I80
90
100
110
120
130
140
150
160
170INDEX end of 2015 = 100
MONTHS
industrialmetals
raw industrialmaterials
foodstuffs
crude oil
textiles
8 - ©2017 HCWE & Co. prod: EmergReAwaken prog: 13 Webcast WC0916-e7
exhibit: 7
1 - © 2017 HCWE & Co. Updated November 8, 2017 prod: EmergReAwaken prog: 13 WEBCAST WC0916-e7
The Outlook for the Emerging World Re-Awakensmonth-end data from the end of 2014
Data: Monthly total returns from emerging markets (Morgan Stanley Capital International/HCWE & Co.).
s4
s3
s2
s1
2017I
2016I
2015I80
90
100
110
120
130
160
150
140
INDEX (End of 2015 = 100)
MONTH END
emerging marketsequal-weighted
emerging marketsvalue-weighted
Chinafrontiermarkets
9 - ©2017 HCWE & Co. prod: HighYield-Turn prog: 7 HIYIELD TAROUND
exhibit: 8
1 - © 2017 HCWE & Co. Updated November 9, 2017 prod: HighYield-Turn prog: 7 HIYIELD TAROUND
The Turnaround in the High-Yield Marketmonth-end data from the beginning of 2015
Data: Month-end yields for Baa and Aaa corporate bonds (Moody’s/Federal Reserve Board) and total-return indices for BB-grade, B-grade and C-grade corporate bonds (Bank of America Merrill Lynch) and SPUSDHYT, an index of distressed corporate debt (Standard & Poor’s).
distressed
C-grade
B-grade
BB-grade
2017I
2016I
2015I90
100
110
120
130
140
150
190
180
170
160
INDEX (End of 2015 = 100)
MONTH END
BB-grade
B-grade
C-grade
distressed
10 - ©2017 HCWE & Co. prod: ReitsAwaken prog: 6GREITS GREITS
exhibit: 9
1 - © 2017 HCWE & Co. Updated November 10, 2017 prod: ReitsAwaken prog: 6 GREITS GREITS
The Roller-Coaster Advance in Equity REITsmonthly data since the beginning of 2015
Data: Month-end total-return indices of US and international real estate investment trusts (National Association of Real Estate Investment Trusts/FTSE/Bloomberg).
s4
s3
s2
s1
2017I
2016I
2015I90
95
100
105
110
115
120INDEX End of 2015 = 100
MONTH END
US REITsdeveloped
world ex US
developedworld
Asia
11 - ©2017 HCWE & Co. prod: StocksHardRisky prog: N/A
exhibit: 10
1 - © 2017 HCWE & Co. Updated November 8, 2017 prod: StocksHardRisky prog: N/A
Data: Month-end total-return indices for the S&P 500 (University of Chicago/Dimensional Fund Advisors), the EAFE index (Morgan Stanley Capital International) and an equal mix of four hard-risky assets: emerging-market equities (MSCI), diversified spot commodities (Thomson Reuters Commodity Research Bireau/HCWE & Co.), and US equity REITs (National Association of Real Estate Investment Trusts). The commodity index gives equal weight to crude oil, industial metals, foodstuffs and textiles and is rebalanced monthly.
hard-risky
ROW
S&P
2017I
2016I
2015I85
90
95
100
105
110
115
120
125
130
135INDEX (End of 2015 = 100)
MONTH END
hard-risky
S&P
ROW
The Comparative Performance of Stocks and Hard-Risky Assetsmonth-end total-return data from the beginning of 2015
12 - ©2017 HCWE & Co. prod: GoldHardRisky prog: 14 FMTAA TURN
exhibit: 11
1 - © 2017 HCWE & Co. Updated November 8, 2017 prod: GoldHardRisky prog: 14 FMTAA TURN
How Gold Led the Turnaround in Hard-Risky Assetsmonth-end price data from the beginning of 2015
Data: Month-end total-return indices for spot gold (Metals Week), C-grade high-yield bonds (Bank of America Merrill Lynch), US equity REITs (National Association of Real Estate Investment Trusts), emerging market equities (Morgan Stanley Capital International), and diversified spot commodities (Thom-son Reuters Commodity Research Bureau/HCWE & Co.). The commodity index gives equal weight to crude oil, industrial metals, foodstuffs, and textiles, and is rebalanced monthly.
hard-risky assets
gold
2017I
2016I
2015I90
100
110
120
140
130
INDEX (End of 2015 = 100)
MONTH END
gold hard-risky assets
13 - ©2017 HCWE & Co. prod: PlungReversAdvancPersist prog: N/Ace
exhibit: 12
1 - © 2017 HCWE & Co. Updated November 20, 2017 prod: PlungRevers-AdvancPersist prog: N/A
Data: Year-end prices for US large-cap stocks (1814-1925 Ibbotson Associates/Morningstar; and 1925-2008 University of Chicago/Dimensional Fund Advisors).
Stock-market Plunges Tend to Reverse, but Advances Tend to Persistmonthly price changes since 1949
-10
0
10
20
30
0 1 2 4 6 8 10 12 14 16 18
median cumulative price change following months that the market:
PERCENT
MONTHS
rose less than 5%
fell more than 5%
fell less than 5%
rose more than 5%
14 - ©2017 HCWE & Co. prod: StockPriceChanges prog: N/A
exhibit: 13
1 - © 2017 HCWE & Co. Updated November 20, 2017 prod: StockPriceChanges prog: N/A
Data: Year-end prices for US large-cap stocks (1814-1925, Ibbotson Associates/Morning Star; 1925-2008, University of Chicago/Dimensional Fund Advisors).
Persistence and Reversal in Annual Changes in US Stock Pricesfrom 1814
0
2
4
6
8
10
12
14
16
18
series 1
fellmore than25% pts.
relative tothe mean
fellbetween
5 and25% pts.
relative tothe mean
changedless than5% pts.
relative tothe mean
rosebetween
5 and25% pts.
relative tothe mean
rosemore than25% pts.
relative tothe mean
PERCENT
3.6
0.7
4.9
10.3
15.1
AVERAGESfor yearsin which
stocks prices:
(16 yearsaveraging
39%)(62 yearsaveraging
17%)
(50 yearsaveraging
3%)(54 yearsaveraging
-11%)
(11 yearsaveraging
-29%)
following-year stock-marketprice change
HCWE15 - ©2017 HCWE & Co.
What Are We to Conclude?
• Commodities and many other risky asset classes are often volatile, but they have a marked tendency to climb or to drop back together
• Domestic equities fall into a separate, “soft,” category of risky assets – favored by a dollar that is strong/stable rather than weak/unstable
• The contrast between a rising and declining hard-risky market could hardly be more dramatic than the experience of the past two or three years
• Assets in this category include energy and non-energy commodities, emerging equity markets, high-yield and floating rate bonds, and real-estate investment trusts
• All of these assets bottomed simultaneously in February of 2016
• Month to month, a simple mix of these would have scarcely missed a beat as they advanced from the bottom to produce a cumulative return of 40 percent
• At any given time, a stock-market advance is much likely to persist rather than be reversed
• Contrary to popular wisdom, the residual life expectancy of a bull market does not decline with age
• The second phase of the risky-hard asset advance is likely to be slower and could be more volatile
• It will continue to be pockmarked by temporary cross currents such as this year’s drop in the energy sector
P . O . B o x 1 1 0 8 · C a m b r i a , C A 9 3 4 2 8 · U S A
P h o n e + 1 ( 9 7 8 ) 4 6 8 - 4 5 75 · w w w . h c w e . c o m
WorldwideEconomicsHCWE & Co., Cambria CA
16 - ©2017 HCWE & Co.
©2017 HCWE & Co. All rights reserved. No portion of this report may be reproduced in any form without prior written consent. The information has been compiled from sources we believe to be reliable, but we do not hold ourselves responsible for its correctness.
Opinions are presented without guarantee.