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January 2014
Rebecca H. PattersonChief Investment OfficerBessemer Trust
The Year Ahead: Looking for Surprises
Agenda
1. What The CFA Thinks
2. Where You Might Be Surprised
3. Macro and Market Views For the Year Ahead
4. Key Takeaways
3
What CFA Members Think: Getting More Upbeat
4
As of October 17, 2013.Source: CFA Institute
2012 2013 2014
34%
40%
63%
Percent of Members Expecting Global Economy to Expand in
Coming Year
Percent of Members Expecting a Global Financial Bubble to Burst in
2014
Not Antic-ipating a Bubble
Real Estate
Equities Bonds Other
47%
26%
13%10%
4%
Asset Class of Potential Bubble
Room For At Least Three Surprises
1. Emerging-Market Growth
2. Geopolitics
3. Shift in Federal Reserve Policy
5
Emerging Markets: Not Enough Focus?
6
Biggest Risk to Global Capital Markets in 2014
Wea
k Ec
onom
ic Con
ditio
ns
Politica
l Ins
tability
System
ic Disr
uptio
ns
Growth
Rat
es A
mon
g Em
erging
Eco
nom
ies
Exce
ss R
egulat
ion
Wea
k Reg
ulat
ion
Other
0%
5%
10%
15%
20%
25%
30%
35%
As of October 17, 2013.Source: CFA Institute
U.S. Dollar and Yields: Headwinds for Emerging Markets
7
1As of December 31, 2013. EM/DM reflects MSCI Emerging Markets Index divided by MSCI World Index, with both indices in U.S. dollars and indexed at 1 on January 4, 1995. The Trade-Weighted U.S. Dollar Index is a weighted average of the foreign exchange value of the U.S. dollar against the currencies of a broad group of major U.S. trading partners.2Reflects IMF estimates for 2013.Source: FactSet, Federal Reserve, International Monetary Fund
-4
-3
-2
-1
0
1
2
3
4
5
6% GDP
Developed Mar-kets
Emerging Mar-kets
Em
erg
ing
Mark
ets
O
utp
erf
orm
Develo
ped
Mark
ets
O
utp
erf
orm
Rising Dollar Suggests Emerging-Market Underperformance1 Current Account Balance2
Surplus
Deficit
1995 2000 2005 20100.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
70
80
90
100
110
120
130
Trade-Weighted U.S. Dollar In-dex (R)
EM Index/DM In-dex (L)
2014 Elections Create Policy Uncertainty, Especially in Emerging Markets
As of November 30, 2013. European Union includes 28 member states. GDP is based on IMF estimates for 2013.Source: International Monetary Fund
Country 2014 Election GDP ($B)E.U. May 17,267U.S. November 16,724 Brazil October 2,190 India May/June 1,758 Indonesia April/July 868Turkey August 822Sweden September 552Belgium May 507 South Africa April/July 354World 73,454 % of World GDP 56%
8
Geopolitical Risks: Could History Repeat?
Source: Bloomberg
9#twitter-hashtag
Yom Kippur War/Oil Embargo 1973-1974
Iranian Revolution1979-1980
Invasion of Kuwait1990
205%
163%
132%
Percent Change in Price of Oil During Periods of Conflict
Feb 12 Aug 12 Feb 13 Aug 1385
90
95
100
105
110
115
120
125
130
0.5
1.0
1.5
2.0
2.5
3.0$/bbl YoY % Chg
Crude Oil Price (L)
CPI (R)
2009 2010 2011 2012 2013
(25,000)
(20,000)
(15,000)
(10,000)
(5,000)
0
U.S. Energy Trade Balance
Bill
ion
sU.S. Economy To Positively Surprise this Year?
10
Jobs and Housing
Stimulus
Oil and Inflation
Net Federal Fiscal Stimulus/Drag
Drag
As of December 31, 2013, except for Building Permits and CPI (as of November 30, 2013). Crude oil price represents Brent. Source: Commodity Research Bureau, FactSet, Federal Reserve, Strategas Research Partners, U.S. Census Bureau, U.S. Department of Labor
2003 2005 2007 2009 2011 2013 2015 2017 2019-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%% GDP
Jan 10 Jan 11 Jan 12 Jan 13500
600
700
800
900
1,000
1,100
250,000
300,000
350,000
400,000
450,000
500,000
550,000
Thousands
Jobless Claims (R)
Building Permits (L)
Net Federal Fiscal Stimulus/Drag
Stimulus
Drag
Actual Estimated
European, Japanese Economies Also Showing Relative Improvement
As of December 31, 2013. Consumer confidence is measured on a scale of -100 to 100, where -100 indicates extreme lack of confidence about the economy, 0 indicates a neutral view, and 100 indicates extreme confidence. Bank of Japan’s balance sheet assets are indexed at 100 on December 31, 2006.Source: Bank of Japan, European Commission, FactSet, Strategas Research Partners
11
Low Risk
High Risk
Bank of Japan Adding LiquidityEMU Borrowing Costs Lower, Confidence Higher
Jul 12 Oct 12 Jan 13 Apr 13 Jul 13 Oct 133.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.010-Year Bond Yields%
Spain
Italy
2010 2011 2012 2013
(30)
(25)
(20)
(15)
(10)
(5)
0
Euro Area Consumer Confidence
80
100
120
140
160
180
200BoJ Balance Sheet
China: Longer-term Challenges Remain but Near-term Looks Stable
12
Exports by Region: Looking Up
1992 1996 2000 2004 2008 201230
32
34
36
38
40
42
44
46
48
50
% GDP
Household Consumption
Investment
Domestic Rebalancing Still Needed
As of December 31, 2013, except for right chart, which is as of December 31, 2012. Exports shown represent a 5-month moving average.Source: Bloomberg, The World Bank
2008 2009 2010 2011 2012 2013-30
-20
-10
0
10
20
30
40
50
% Change,
YoY
Asia, ex-HKU.S.EU
Cyclical Assets Helped by Global Liquidity, Not Just Fed
13
Actual as of October 31, 2013 with J.P. Morgan estimates thereafter.Source: Bank of England, Bank of Japan, European Central Bank, Federal Reserve, J.P. Morgan
1.2
2.2
3.2
4.2
5.2
10
15
20
25
30
% % of GDP
Global Policy Rate (L)
G-4 Central BankBalance sheets (R)
1997 1999 2001 2003 2005 2007 2009 2011 2013600
800
1000
1200
1400
1600
1800
2000
As of December 31, 2013. P/E ratio represents price-to-earnings ratio for next 12 months, based on FactSet aggregated consensus estimates.Source: FactSet, Standard & Poor’s
Bottom-Up: U.S. Equity ValuationsNot at Highs
14
The S&P 500 Index
+106% +101%
Dec 31, 1996
Level = 741P/E = 15.9x
Oct 9, 2002Level = 777P/E = 13.8x
-49%
Mar 24, 2000
Level = 1527
P/E = 25.2x
Oct 9, 2007Level = 1565
P/E = 15.2x
Mar 9, 2009
Level = 677P/E = 10.2x
Dec 31, 2013
Level = 1848
P/E = 15.4x
-57%+173%
Market Positioning Not Even Close to Stretched
Left chart as of November 30, 2013. Right table as of December 31, 2013. Fund flows reflect cumulative net flows into mutual funds and ETFs from January 1, 2007 through November 30, 2013. Source: FactSet, Strategas Research Partners
15
Cumulative Net Fund Flows
Start End
Duration (Months
)
Total Percent Return
8/12/82 8/25/87 60 229%
12/04/87 7/16/90 31 65%
10/11/90 3/24/00 113 417%
10/09/02 10/09/07 60 101%
3/09/09 --- 57 203%
Four Most Recent Bull Markets
2007 2008 2009 2010 2011 2012 2013$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
496
1,346
Billion
Bonds
Equi-ties
Key Taper Transmission Channels
16
Taper BeginsHigher Longer-
Dated U.S. Treasury yields
Stronger U.S. Dollar
Pressure on Emerging Markets
Pressure on Commodity
Prices
• Low inflation• Moderate EM demand• Greater supplies
• EM debt positioning• Focus on deficit
countries with inflation• 2014 political risk
Positioning Going into 2014
Asset Class Outlook
Traditional Government Bonds
Credit
Commodities
Developed Market Equities
Emerging Market Equities and Debt
U.S. Dollar
17#twitter-hashtag