March 22, 2017 Boston, MA

Transcription

1 March 22, 2017 Boston, MA

2 Make or Break: Five Pivotal Drivers in 2017 Holly H. MacDonald Chief Investment Strategist

3 Past performance is no guarantee of future results. This material is provided for your general information. It does not take into account the particular investment objectives, financial situation, or needs of individual clients. This material has been prepared based on information that Bessemer Trust believes to be reliable, but Bessemer Trust makes no representation or warranty with respect to the accuracy or completeness of such information. This presentation does not include a complete description of any fund or portfolio mentioned herein and is not an offer to sell any securities. Investors should carefully consider the investment objectives, risks, charges, and expenses of each fund or portfolio before investing. Views expressed herein are current only as of the date indicated, and are subject to change without notice. Forecasts may not be realized due to a variety of factors, including changes in economic growth, corporate profitability, geopolitical conditions, and inflation. The mention of a particular security is not intended to represent a stock-specific or other investment recommendation, and our view of these holdings may change at any time based on stock price movements, new research conclusions, or changes in risk preference. Index information is included herein to show the general trend in the securities markets during the periods indicated and is not intended to imply that any referenced portfolio is similar to the indices in either composition or volatility. Index returns are not an exact representation of any particular investment, as you cannot invest directly in an index. Sector and industry classifications included in this presentation utilize the Global Industry Classification Standard ( GICS ). GICS is the exclusive property and a service mark of Morgan Stanley Capital International Inc. ( MSCI ) and Standard & Poor s ( S&P ), a division of The McGraw-Hill Companies, Inc. Neither MSCI nor S&P makes any express or implied warranties or representations or shall have any liability for any direct, indirect, special, punitive, consequential, or any other damages (including lost profits) with respect to GICS data or results obtained therefrom. 3

4 Agenda Five Pivotal Drivers U.S. Politics Inflation Federal Reserve European Politics Geopolitical Risk Conclusion 4

5 U.S. Politics: Markets Reward Pro-Business Policies Expectations for Completed Legislation in 2017 U.S. Business Sentiment (ISM surveys) Highly Likely Possible Not Likely Deregulation across financials, energy Corporate tax reform Partial repeal of ACA Infrastructure bill tied to repatriation Individual tax reform Renegotiation of trade deals Full repeal of Dodd-Frank Mexican-funded border wall Jan 13 Oct 13 Jul 14 Apr 15 Jan 16 Oct 16 As of February 28, A PMI reading above (below) 50 indicates an expansion (contraction) in business activity. Source: Bessemer Trust, Institute for Supply Management 5

6 U.S. Politics: Focus on Domestic Cyclical Equities Equities Sectors Regions Pro-business policies should benefit earnings, business confidence, jobs, and consumer activity Cyclical, domestic, value-oriented stocks to benefit relatively more Preference for the U.S. within global context Credit Generally supportive, but cognizant of relative value Currency Broadly U.S. dollar positive, but currency policy still uncertain 6

7 Inflation: Commodity Bounce Suggests Higher Inflation YoY 4.5% G7 CPI is Ticking Up as Commodity Prices Recover YoY 40% 3.5% 2.5% 1.5% 0.5% -0.5% Commodity Prices (3-month lead, Right Axis) Average G7 CPI (Left Axis) 20% 0% -20% -40% -1.5% % As of December 31, 2016, for CPI average, and January 31, 2017, for commodity prices. Headline CPI includes all items in BLS s urban consumer basket of goods. Average CPI is based on headline CPIs of the G7 countries. Source: Bloomberg, U.S. Bureau of Labor Statistics, Italy ISTAT, UK Office for National Statistics, Japan Ministry of Internal Affairs and Communications, INSEE National Statistics Office of France, STCA - Statistics Canada, German Federal Statistical Office 7

8 Inflation: Rising U.S. Wages as Labor Market Tightens YoY 4.0% 3.5% 3.0% 2.5% 2.0% Wages are Rising as the Labor Market Continues to Tighten Job Openings (Right Axis) Millions % Average Hourly Earnings (Left Axis) 1.0% As of January 31, 2017, for hourly earnings and December 31, 2016, for job openings. Source: Bloomberg, U.S. Bureau of Labor Statistics 8

9 Inflation: Market Impact Depends on Broader Picture GDP Growth Slowing Improving Inflation Growth Falling Bonds Stocks (growth-oriented) Rising Commodities Gold TIPS Stocks (value-oriented) Commodities Assets likely to benefit in different scenarios As of February 28,

10 Federal Reserve: Lack of Continuity at the Fed Adds to Uncertainty Over Policy Outlook Yellen Chair Board of Governors (Term Ends in Feb. 2018) Fischer Vice Chair Board of Governors (Term Ends Jun. 2018) Dudley New York Fed Vice Chair (Permanent Member) (Facing Mandatory Retirement in 2018) Tarullo Board of Governors (Retiring April 2017) Brainard Board of Governors Powell Board of Governors Evans Chicago Fed Harker Philadelphia Fed Kaplan Dallas Fed Kashkari Minneapolis Fed Vacant Seat Vacant Seat As of February 28, Source: Federal Reserve 10

11 Federal Reserve: As Fed Begins to Normalize the Policy Rate, Focus Begins to Shift Toward the Balance Sheet Federal Reserve Balance Sheet and Policy Rate Fed Talk 6% 5% 4% Fed Funds Rate (L) Fed Balance Sheet (R) Trillions $5 $4 $3 The Committee wishes to use variations in the Fed Funds Rate target as the Fed s key active tool of policy... [but will look to reduce the size of the Fed s balance sheet when]... monetary policy normalization is well under way. ~ Fed Chair Yellen 3% 2% Policy Rate Normalization Began (Dec 2015) $2 It is reasonable to be having that debate and discussion sometime in 2017 about at least what our plan of action should be. ~ Dallas Fed President Kaplan 1% $1 0% $0 As of January 20, Source: Bloomberg, Federal Reserve 11

12 Federal Reserve: Even if Rates Rise, Bonds Remain Important Hypothetical Annualized 3-Year Bond Returns By Yield Shock 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 0.7% Sharp & Sizeable Rise 1.4% Gradual & Sizeable Rise Annualized Return by Year 3 2.6% Gradual & Little Rise Current 5-Year Yield: 1.9% Sharp & Sizeable Rise: Yields jump to 3% in year 1 and 5% by year 3 Gradual & Sizeable Rise: Yields increase to 4% by year 3 Gradual & Little Rise: Yields increase to 2.5% by year 3 As of February 28, The analysis assumes the Treasury yield curve remains at its current level of slope between the 3-, 4-, and 5-year Treasury yield. Source: Bloomberg, Bank of America Merrill Lynch 12

13 European Politics: Brexit Just the Warm-Up 90% 80% 70% 60% 50% France Germany U.K. Positive View of the EU is Waning in Core EU Nations Percent of Survey Respondents Who Have a Somewhat Favorable or Very Favorable Opinion of the EU Italy Spain 40% 30% As of June 7, Source: Pew Research Center 13

14 European Politics: Le Pen Victory Considerations Future of the EMU and EU Russian influence / world order LE PEN VICTORY Dollar strength Expansion of European populist movement 14

15 European Politics: Market and Portfolio Implications Negatives: Political risk Need for reform Low potential growth Shift in central bank policy Positives: Easy central bank policy Valuations Economic momentum 15

16 Geopolitics: Investor Fear Index Low Despite High Economic Policy Uncertainty U.S. Economic Policy Uncertainty and Investor Fear Index U.S. Economic Policy Uncertainty (Left Axis) Gulf War I Clinton Election Russian Crisis, LTCM Default Asian Financial Crisis 9/11 Gulf War II Lehman Failure, TARP Stimulus Debate Debt Ceiling Dispute Eurozone Crisis Fiscal Cliff Gov't Shutdown Trump Elected President Brexit As of December 31, *VIX is charted as the monthly average of the daily values for the Chicago Board Options Exchange SPX Volatility Index, which reflects the market estimate of future volatility based on the weighted average of the implied volatilities for a wide range of strikes. The U.S. Economic Policy Uncertainty is the news-based economic policy uncertainty index. Source: Bloomberg, Chicago Board Options Exchange, Politicaluncertainty.com 16

17 Geopolitics: Investor Fear Index Low Despite High Economic Policy Uncertainty U.S. Economic Policy Uncertainty and Investor Fear Index U.S. Economic Policy Uncertainty (Left Axis) VIX Index* (Right Axis) Gulf War I Clinton Election Russian Crisis, LTCM Default Asian Financial Crisis 9/11 Gulf War II Lehman Failure, TARP Stimulus Debate Debt Ceiling Dispute Eurozone Crisis Fiscal Cliff Gov't Shutdown Trump Elected President Brexit As of December 31, *VIX is charted as the monthly average of the daily values for the Chicago Board Options Exchange SPX Volatility Index, which reflects the market estimate of future volatility based on the weighted average of the implied volatilities for a wide range of strikes. The U.S. Economic Policy Uncertainty is the news-based economic policy uncertainty index. Source: Bloomberg, Chicago Board Options Exchange, Politicaluncertainty.com 10 17

18 Geopolitics: Investing in an Uncertain World Event Start Date S&P 500 Maximum Drawdown Total Return During Event U.S. 10-Year Gold Treasury Gulf War I Aug % 6.8% -1.1% Mexican Crisis Dec % -1.5% -2.1% Asian Financial Crisis Jul % -6.1% 5.9% LTCM Collapse Sep % 2.2% 8.9% Sept. 11 Attack Sep % 0.4% 7.5% Operation Iraqi Freedom/Gulf War 2 Mar % 5.4% 4.9% Lehman Collapse Sep % -18.6% 8.3% Euro Area Crisis Mar % -1.0% 0.1% Debt Ceiling and Government Shutdown Oct % 2.2% 0.4% Crimean Invasion Feb % 6.6% 3.0% Median -7.7% 1.3% 4.0% Bonds Absolute Return Hedge Funds Defensive Part of Portfolios Equities Managed Volatility Consumer Staples U.S. Bias Strategic Opportunities As of February 28, Source: BCA Research 18

19 Agenda Five Pivotal Drivers U.S. Politics Inflation Federal Reserve European Politics Geopolitical Risk Conclusion 19

20 Our Views for 2017 We are constructive on equities for the year ahead, with a preference for domestically oriented, cyclical U.S. stocks European equities attractively valued, but French election a huge binary risk Even with modest Fed hikes this year, bonds remain a key defensive part of portfolios risk this year is unexpectedly hawkish change in voting Fed members and/or preemptive unwind of balance sheet Inflation set to gradually rise in 2017; combination of inflation AND growth key for assetallocation decisions Geopolitical risks perennial but a relatively greater focus this year for us, given shifting global political landscape 20

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