MONTHLY MARKET REVIEW April 2018

Transcription

1 MONTHLY MARKET REVIEW April The decline in risk assets subsided in April and U.S. equity market volatility fell from elevated levels exhibited in recent months. Earnings reports in the U.S. were generally positive, with more than 8% of companies in the S&P 5 exceeding expectations thus far in the first quarter reporting cycle, which Bloomberg reported as an all-time high. The initial GDP release showed U.S. economic growth was positive in the first quarter and exceeded expectations, but the pace of growth slowed once again. With this backdrop, equity market returns were generally positive and high yield credit spreads tightened. Non-U.S. developed market equities posted strong gains in local terms, led by the U.K and Europe. However, the rising U.S. dollar served as a headwind muting gains for U.S.-based investors. The U.S. dollar (USD) reversed course and rose during April, erasing much of the first quarter s decline. The Dollar Spot Index rose 1.9%, with gains across five of the six underlying member currencies, and finished April down only.3% YTD. The chart to the right shows how the USD appreciated against all developed market currencies aside from the Canadian dollar. In addition, the dollar rallied against a large majority of non-managed, emerging markets currencies. 2.%.% -2.% -4.% -6.% -8.% -1.% Sweden Switz Japan April 218 Currency Change Against the USD N. Zealand Norway U.K. Euro Denmark Australia Canada Russia S. Africa Brazil Mexico Turkey Israel Czech Rep India Poland Hungary Developed Emerging Market Returns MTD QTD YTD 1 Yr 2 Yr 3 Yr 5 Yr 7 Yr 1 Yr Market Returns MTD QTD YTD 1 Yr 2 Yr 3 Yr 5 Yr 7 Yr 1 Yr S&P Blbg Barc TIPS MSCI EAFE (USD) FTSE EPRA/NAREIT Developed MSCI EM (USD) S&P NA Natural Resources Blbg Barc Aggregate Bloomberg Commodity Blbg Barc Long Treasury Fund Weighted HFRI Blbg Barc Global TSY (Unhedged) Blbg Barc 1-3 Month Treasury

2 MONTHLY MARKET REVIEW April 218 U.S. economic data reported during the month was mixed, with somewhat weak housing data and a softer GDP report but solid durable goods orders and rising consumer confidence. Perhaps most important, inflation reports came in stronger than expected, with import prices rising 3.6% year-over-year and core CPI growth of 2.1%, modestly above the Federal Reserve s 2% target. Also several commodity prices, including oil, rose during the month. As a result, inflation expectations widened with the five-year breakeven inflation level the difference between five-year TIPS and five-year nominal Treasuries rising from 1.9% to 2.1%. Over the next 1 years, inflation expectations rose 1 bps to 2.2%. Following the March 218 hike, the markets expected two additional hikes in 218. However, as a result of widening inflation expectations, markets started to consider the possibility of three more hikes in 218. According to the CME Group s FedWatch tool, markets projected a 93.8% chance of a 25 bps rate hike at the June meeting, to a range of %. Furthermore, futures prices predict a 66.7% chance that the Fed could hike by another 25 bps at its September meeting. If this holds true, the federal funds rate would enter the fourth quarter of 218 at %. The prospect of higher front-end rates was positive for the U.S. dollar during the month. The U.S. Treasury yield curve shifted higher during April. For the first time since 214, the U.S. 1-year Treasury yield breached the 3.% level toward the end of the month, before ending April modestly lower. For the month, the 1-year yield rose 21 bps, and is up 5 bps YTD. Yields also moved higher at the front end of the curve. For the first time since 28, the 2-year yield topped 2.5% intra-month before ending just below that level. Yields were pushed higher during the month due to the potential for higher Treasury issuance and rising inflation expectations. Soon after the debt ceiling was suspended, the Treasury Department increased the issuance of U.S. Treasuries. Tax reform is projected to increase the U.S. fiscal deficit, which will need to be financed with incrementally more issuance. At the same time and amid rising supply, foreign demand for U.S. Treasuries fell during the month. Foreign participation rates in the 1-year auction during the month came in at 12.8%, down from the 23.2% participation rate observed in mid-march. As previously noted, inflation expectations as measured by the difference between the yields on nominal Treasuries and TIPS have risen, partially due to increasing commodity prices. Toward the end of the month, speculator s net short exposure on U.S. 1-year Treasury note futures hit a record high, indicating that bearish sentiment on U.S. interest rates is elevated. Marketable real assets posted strong results during the month, led by natural resource equities (+7.8%), and master limited partnerships (+8.1%), both of which traded higher as oil prices rallied (+5.6% WTI). Crude prices have increased 13.5% YTD and 39% over the trailing 12- month period on declining global inventories, driven by robust global demand and restricted aggregate output from the Organization of the Petroleum Exporting Countries and Russia. Most recently, higher prices have been supported by rising geopolitical concerns, including that the U.S. may renew sanctions against Iran and that Venezuela s economic crisis may cause further declines in that country s exports. While investor sentiment toward the energy sector has been notably negative in recent periods despite higher oil prices, the combination of the most recent legup in oil prices and another quarter of strong earnings for the sector appear to have reversed that trend in April. Metals and mining stocks also posted positive returns (+3.4%), on a combination of generally higher metals prices, strong Chinese import data, and some easing of concerns around the impact of protectionist U.S policies on global economic growth. Elsewhere in real assets, U.S. REITs advanced 1.3% despite a rise in U.S. interest rates. The sector rallied as REITs reported generally stronger than expected earnings. The industrial (+4.8%) and lodging/hotel (+3.9%) sub-sectors led the advance on easing supply concerns combined with robust space demand and generally strong earnings. Within the retail sector, higher quality retail REITs posted stronger than expected earnings. Recently, share prices were driven down by concerns over the impact of ecommerce on brick and mortar retailers and ongoing store closing announcements. 2

3 MONTHLY MARKET REVIEW April 218 While the exceptionally long trailing period of low and generally declining interest rates makes it difficult to analyze REIT and real estate performance in a rising rate environment, in periods when interest rates have risen materially in the last several decades, REITs have fared relatively well. Year Ended Change in 1-Year Ending Yield Russell 3 Idx FTSE EPRA/ NAREIT Dev. Idx FTSE NAREIT Eq. REIT Idx Sep NA 3.7 May NA 11.3 Sep NA 6.6 Oct Jan May Jun Dec Dec ABOUT PRIME BUCHHOLZ Prime Buchholz LLC was established in 1988 and has grown to become a leading, uniquely independent investment advisory firm providing comprehensive investment solutions for more than 25 institutional clients. Headquartered in Portsmouth, NH with offices in Boston and Atlanta Prime Buchholz was one of the first investment advisors to develop in-depth expertise in alternative investments such as hedge funds, private equity, and real assets. Our clients include educational endowments, private and public foundations, cultural and faith-based organizations, health care and insurance organizations, pension plans, and high net worth families. We work closely with our clients to create, implement, and monitor investment policies and asset allocation strategies to meet their unique investment goals. Long-term client partnerships are a cornerstone at Prime Buchholz. We are employee-owned, and clients can expect personal service from a deeply experienced team that puts client needs first. Tel: Indices referenced are unmanaged and cannot be invested in directly. Index returns do not reflect any investment management fees or transaction expenses. This report is intended for informational purposes only; it does not constitute an offer, nor does it invite anyone to make an offer to buy or sell securities. Information herein has been obtained from third-party sources that are believed to be reliable; however, the accuracy of the data is not guaranteed and may not have been independently verified. The content of this report is current as of the date indicated and is subject to change without notice. It does not take into account the specific investment objectives, financial situations, or needs of individual or institutional investors. All commentary contained within is the opinion of Prime Buchholz and intended solely for our clients. Unless otherwise noted, FactSet was the source for data used in this report. Some statements in this report that are not historical facts are forward-looking statements based on current expectations of future events and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Past performance is not an indication of future results. 218 Prime Buchholz LLC MK1812_5418 3

4 MONTHLY MARKET REVIEW April 218 Key Valuation Metrics Summary Current Period 1 Year Ago 15-Year Avg Equities Trailing P/E (x) S&P MSCI EAFE MSCI EM Credit OAS (bps) Blbg Barc Aggregate Blbg Barc High Yield Blbg Barc IG Corporate Deflation Hedging Nominal Yields 1-Year U.S. Treasury Year U.S. Treasury Inflation Hedging 1-Year U.S. TIPS S&P Energy Equity Trailing P/E (x) MSCI U.S. REIT Index Dividend Yield Non-U.S. Bonds Blbg Barc Global Treasury ex-u.s. Yield Blbg Barc EM Local Currency Govt. Yield * * Emerging markets local debt data from July 31, 28 to present Historical Trailing PE 15-Yr Avg Current S&P MSCI EAFE MSCI EM S&P 5 MSCI EAFE MSCI EM Market Yields Historical U.S. Inflation Avg Current YOY Core CPI YOY CPI S&P 5 Yield 1-Year Treasury Yield YOY Core CPI YOY CPI 4

5 MACRO ENVIRONMENT MONTHLY MARKET REVIEW April 218 Historical Central Bank Policy Rates Market Inflation Forecast BOJ BOE ECB Fed U.S. Breakeven 1-year Index U.S. Breakeven 1-year Index Avg. Year-Over-Year U.S. Corporate Profits Quarterly U.S. GDP Growth As of December 31, 217 As of March 3,

6 GLOBAL EQUITY MONTHLY MARKET REVIEW April 218 Equity Market Returns MTD QTD YTD 1 Year 2 Year 3 Year 5 Year 7 Year 1 Year S&P Russell Russell Russell NASDAQ Composite MSCI ACWI (USD) MSCI ACWI (Local) MSCI ACWI ex-u.s. (USD) MSCI ACWI ex-u.s. (Local) MSCI EAFE (USD) MSCI EAFE (Local) MSCI EM (USD) MSCI EM (Local) MSCI Frontier Markets London - FTSE 1* GBP Japan - Nikkei 225* JPY Hong Kong - Hang Seng* HKD China - Shanghai Composite* CNY *Returns in local currency Equity Volatility MSCI ACWI Returns by Sector MSCI ACWI Sectors MTD QTD YTD 1 Year 2 Year 3 Year 5 Year 7 Year 1 Year Consumer Disc Consumer Staples Energy Financials Health Care Industrials IT Materials Telecom Utilities MSCI ACWI Returns by Region MTD QTD YTD 1 Year 2Year 3 Year 5 Year 7 Year 1 Year MSCI ACWI Developed Markets MSCI EAFE MSCI U.K MSCI Europe ex-u.k MSCI Japan MSCI Asia ex-japan Emerging Markets MSCI EM MSCI EMEA MSCI Russia MSCI EM Asia MSCI China MSCI India MSCI EM LatAm MSCI Brazil VIX V2X (Europe) Index VIX Index Avg V2X (Europe) Index Avg 6

7 GLOBAL BONDS MONTHLY MARKET REVIEW April 218 Bond Market Returns MTD QTD YTD 1 Year 2 Year 3 Year 5 Year 7 Year 1 Year Curr. Blbg Barc 1-3 Month Treasury USD Blbg Barc 1-3 Year Treasury USD Blbg Barc Long Treasury USD Blbg Barc Intermediate Treasury USD Blbg Barc Emerging Markets USD Blbg Barc EM Local Crncy (Unhedged) Blbg Barc EM Local Crncy (Hedged) Blbg Barc Global TSY (Unhedged) USD Blbg Barc Global TSY (Hedged) USD Blbg Barc Glob TSY x-u.s. (Unhedged) USD Blbg Barc Global TSY x-u.s. (Hedged) USD Blbg Barc Municipal Bond USD Blbg Barc Aggregate USD Blbg Barc Eurozone Government EUR - Austria EUR - Belgium EUR - Finland EUR - France EUR - Germany EUR - Ireland EUR - Italy EUR - Netherlands EUR - Portugal EUR - Spain EUR Blbg Barc Sterling Gilt GBP Blbg Barc Japan Treasury JPY Blbg Barc G4 Treasury USD Blbg Barc Majors USD Currency Rates (per U.S. Dollar) (% change) MTD QTD YTD 1 Year 2 Year 3 Year 5 Year Current Spot Rate U.S. Dollar Spot (DXY)* Canadian Dollar Japanese Yen British Pound Euro Swiss Franc Australian Dollar Brazilian Real Chinese Yuan/Renminbi GBP/Euro Yen/Euro *Index measures value of USD relative to basket of foreign currencies Yield % 35% 3% 25% 2% 15% 1% 5% % U.S. Treasury Yield Curves Year 12/31/217 3/31/218 4/3/218 TIPS 12/31/217 TIPS 3/31/218 TIPS 4/3/218 Foreign Holdings of U.S. Treasury Securities As of February 28, 218 % Held by Foreign Investors Total Foreign Holdings of U.S. Treasury Secs. ($B) 7, 6, 5, 4, 3, 2, 1, 7

8 FLEXIBLE CAPITAL MONTHLY MARKET REVIEW April Short Interest Ratio - Total U.S. Markets 4,5 Deal Count & Volume ($B) $8 6. 4, $ Total Deal Count 3,5 3, 2,5 2, 1,5 1, 5 $6 $5 $4 $3 $2 $1 Total Deal Volume ($B) $ Credit Market Returns MTD QTD YTD 1 Year 2 Year 3 Year 5 Year 7Year1 Year Blbg Barc U.S. Corporate S&P Leveraged Loan Blbg Barc High Yield Blbg Barc MBS Blbg Barc CMBS Blbg Barc ABS HFRI Index Returns MTD QTD YTD 1 Year 2 Year 3Year 5Year 7Year1 Year Fund Weighted FI-Convertible Arb Distressed Restructuring Equity Hedge (L/S) Eq. Market Neutral Event Driven Macro/CTA Merger Arbitrage Relative Value Arb Deal Count Average Deal Count Volume (USD) Average Volume ($B) Option-Adjusted Spreads IG Corp. HY Corp. IG Corp. Avg HY Corp. Avg 8

9 REAL ASSETS MONTHLY MARKET REVIEW April 218 Real Asset Returns MTD QTD YTD 1 Year 2Year 3 Year 5 Year 7 Year 1 Year FTSE EPRA/NAREIT Dev d EPRA/NAREIT U.S EPRA/NAREIT Europe EPRA/NAREIT Asia S&P NA Nat. Resources S&P GSCI Alerian MLP Index Bloomberg Commodity Blbg Barc TIPS Current MTD QTD YTD 1 Year 2 Year* 3 Year* 5 Year* Price Gold $/oz $1,316.2 WTI Crude Oil $/bbl $68.57 Brent Crude Oil $/bbl $74.69 *Annualized Price Change Bloomberg Commodity Returns MTD QTD YTD 1 Year 2Year 3 Year 5 Year 7 Year 1 Year Bloomberg Commodity Agriculture Energy Industrial Metals Precious Metals Livestock , 1,8 1,6 1,4 1,2 1, Historic Gold Price ($/oz.) $16 $14 $12 $1 $8 $6 $4 $2 $ MSCI U.S. REIT Index Div. Yield MSCI U.S. REIT Index 1-Year Treasury Yield MSCI U.S. REIT Index Yield Avg 1-Year Treasury Yield Avg WTI Crude Oil Spot Price ($/bbl) Inflation Adjusted Price Nominal Spot Price 9

10 INDEX DESCRIPTIONS MONTHLY MARKET REVIEW April 218 Mergers and Acquisitions (M&A) is a general term used to refer to the consolidation of companies. A merger is a combination of two companies to form a new company, while an acquisition is the purchase of one company by another in which no new company is formed. Deal count and volume each quantify the mergers and acquisitions activity occurring within a given time period. Deal count represents the actual number of deals that were completed each month, while volume represents the total dollar value of the deals that were completed during the month. The premium is the difference between the actual cost for acquiring a target firm versus the estimate made of its value before the acquisition. Short Interest Ratio is an indicator that is derived by dividing the short interest by the average daily volume for a stock. This indicator is used by both fundamental and technical traders to identify the prevailing sentiment the market has for a specific stock. U.S. Corporate Profits is a statistic reported quarterly by the Bureau of Economic Analysis (BEA) that summarizes the net income of corporations in the National Income and Product Accounts (NIPA). Corporate profits are an economic indicator that calculates net income using several different measures: profits from current production; book profits, and after-tax profits. Bloomberg Barclays Aggregate Index comprises government securities, mortgagebacked securities, asset-backed securities, and corporate securities to simulate the universe of bonds in the market. The maturities of the bonds in the Index are over one year. Bloomberg Barclays Global Treasury ex-u.s. Index includes government bonds issued by investment-grade countries outside the United States, in local currencies, that have a remaining maturity of one year or more and are rated investment grade. Bloomberg Barclays U.S. TIPS Index is a rules-based, market value-weighted Index that tracks inflation protected securities issued by the U.S. Treasury. Chicago Board Options Exchange Volatility Index (VIX) measures traders' expectations of volatility in the stock market by tracking bid/ask quotes on the Standard & Poor's 5 Stock Index. Bloomberg Commodity Index is composed of futures contracts on physical commodities. It is composed of commodities traded on U.S. exchanges, with the exception of aluminum, nickel, and zinc, which trade on the London Metal Exchange (LME). FTSE EPRA/NAREIT Developed Index is designed to represent general trends in eligible real estate equities worldwide. Relevant real estate activities are defined as the ownership, disposure, and development of income-producing real estate. The Index series includes a range of regional and country indices. HFRI Fund Weighted Composite Index is designed to represent the performance of domestic and offshore hedge funds across all strategies with the exception of fund of funds. Comprised of over 2 hedge funds, it is a fund weighted index in that all funds, regardless of assets under management or other factors, are given an equal weighting. HFRI Equity Hedge Index is designed to represent the overall composition of the equity hedge (also known as long/short equity) universe. The Index is constructed with equally weighted composites of constituents as reported by the hedge fund managers listed within the Hedge Fund Research (HFR) database. HFRI Event Driven Index is an equally weighted index that represents constituents investing in opportunities created by significant transactional events as reported by the hedge fund managers listed within the HFR database. HFRI Macro Index tracks investment managers which trade a broad range of strategies in which the investment process is predicated on movements in underlying economic variables and the impact these have on equity, fixed income, hard currency and commodity markets. MSCI ACWI (All Country World Index) is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The Index consists of a mix of developed and emerging market country indices. MSCI China Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of Chinese companies listed on the Hong Kong exchange, which are frequently referred to as H shares. MSCI EAFE Net Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. MSCI EM (Emerging Markets) Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. Russell 3 Index measures the performance of the largest 3, U.S. companies, representing approximately 98% of the investable U.S. equity market. Russell 3 Growth Index measures the performance of the broad growth segment of the U.S. equity universe. It includes those Russell 3 companies with higher price-to-book ratios and higher forecasted growth values. Russell 3 Value Index measures the performance of the broad value segment of U.S. equity value universe. It includes those Russell 3 companies with lower price-to-book ratios and lower forecasted growth values. Russell Midcap Index measures the performance of the midcap segment of the U.S. equity universe. The Index is a subset of the Russell 1 Index. It includes approximately 8 of the smallest securities based on a combination of their market cap and current Index membership. S&P 5 Index is a gauge of the U.S. equities market and includes 5 leading companies in leading industries of the U.S. economy. U.S. Dollar Index indicates the general international value of the U.S. dollar (USD) by averaging the exchange rates between the USD and six major world currencies. 1