2016 Investment Outlook: Crosscurrents

Transcription

1 216 Investment Outlook: Crosscurrents January 13, 216 MODERATED BY: Celia Dallas Chief Investment Strategist Wade O Brien Managing Director, Global Investment Research Christopher Hunter Managing Director, Head of Cambridge Associates Beijing Office

2 Copyright 216 by Cambridge Associates LLC. All rights reserved. This report may not be displayed, reproduced, distributed, transmitted, or used to create derivative works in any form, in whole or in portion, by any means, without written permission from Cambridge Associates LLC ( CA ). Copying of this publication is a violation of US and global copyright laws (e.g., 17 U.S.C. 11 et seq.). Violators of this copyright may be subject to liability for substantial monetary damages. The information and material published in this report is nontransferable. Therefore, recipients may not disclose any information or material derived from this report to third parties, or use information or material from this report, without prior written authorization. This report is provided for informational purposes only. The information presented is not intended to be investment advice. Any references to specific investments are for illustrative purposes only. The information herein does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction. Some of the data contained herein or on which the research is based is current public information that CA considers reliable, but CA does not represent it as accurate or complete, and it should not be relied on as such. Nothing contained in this report should be construed as the provision of tax or legal advice. Past performance is not indicative of future performance. Broadbased securities indexes are unmanaged and are not subject to fees and expenses typically associated with managed accounts or investment funds. Investments cannot be made directly in an index. Any information or opinions provided in this report are as of the date of the report, and CA is under no obligation to update the information or communicate that any updates have been made. Information contained herein may have been provided by third parties, including investment firms providing information on returns and assets under management, and may not have been independently verified. Cambridge Associates, LLC is a Massachusetts limited liability company with offices in Arlington, VA; Boston, MA; Dallas, TX; and Menlo Park, CA. Cambridge Associates Fiduciary Trust, LLC is a New Hampshire limited liability company chartered to serve as a non-depository trust company, and is a wholly-owned subsidiary of Cambridge Associates, LLC. Cambridge Associates Limited is registered as a limited company in England and Wales No and is authorised and regulated by the Financial Conduct Authority in the conduct of Investment Business. Cambridge Associates Limited, LLC is a Massachusetts limited liability company with a branch office in Sydney, Australia (ARBN ). Cambridge Associates Asia Pte Ltd is a Singapore corporation (Registration No G). Cambridge Associates Investment Consultancy (Beijing) Ltd is a wholly owned subsidiary of Cambridge Associates, LLC and is registered with the Beijing Administration for Industry and Commerce (Registration No ).

3 Economic Crosscurrents Concerns Slowing Economic Growth Struggling Emerging Markets Commodity Price Weakness Widening Credit Spreads Shrinking Global Trade The Bright Side Growth Stabilizing Developed Markets Still 2/3 of Global GDP Wealth Transfer Supports Consumer/Services Sectors Defaults Remain Low and Focused in Commodities More Importantly, Services Growth Remains Strong

4 What do credit spreads price in? Barclays High-Yield Option-Adjusted Spread December 31, 24 December 31, 215 Basis Points US High-Yield Five-Year Cumulative Breakeven Default Rates As of December 16, 215 Percent (%) 2, Barclays High Yield ex Energy Barclays High Yield Barclays High Yield Energy ,5 1, 1, High Yield ex Energy High Yield High Yield Energy Sources: Barclays, Bloomberg L.P., J.P. Morgan Securities, Inc., and Lombard Street Research. Note: Breakeven default rates assume a 3% recovery rate.

5 Federal Reserve Median Fed Funds Rate Projections As of December 16, 215 Policy Rate (%) 4. Pace of Fed rate hikes will be gradual Median Annual Projections Median Longer-run Projection Source: Federal Reserve. Note: Longer-run projections represent each participant s assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the economy.

6 Cumulative US Market Performance Around Fed Rate Hikes S&P 5 Jun 24 Jun 1999 Feb 1994 Mar 1988 Stocks and bonds often rise after rate hikes Ten-Year US Treasury Average 12-Month Return: 7.1% 8 7 Average 12-Month Return: 8.5% 6 6 Time in Months From First Hike Time in Months From First Hike Sources: Standard & Poor's and Thomson Reuters Datastream. Notes: Data are daily. One month represents 2 weekdays. Average return is arithmetic mean.

7 EM Asia s outperformance is less dependent on commodities Rolling 12-Month Correlation of Emerging Markets Regions Equities Excess Return vs Developed Markets to Commodities December 31, 24 December 31, 215 US Dollar.6 EM Asia.5.4 EMEA EM LatAm Sources: Bloomberg L.P. and MSCI Inc. MSCI data provided "as is" without any express or implied warranties. Notes: Data are daily. Rolling 12-month returns reflect the performance during the previous 261 weekdays. Commodities are represented by the Bloomberg Commodity Total Return Index; EM Asia by the MSCI EM Asia Index; EMEA by the MSCI EMEA Index; and EM LatAM by the MSCI EM Latin America Index.

8 EM debt levels: more manageable than assumed Emerging Markets Debt to GDP Percent (%) 1 Q2 27 Q Non-Financial Corporate Debt to GDP As of Second Quarter 215 Percent (%) Non-Financial Corporates Government Households China Turkey Russia India Brazil Poland Saudi Arabia South Africa Mexico Indonesia Source: Institute of International Finance.

9 Can earnings continue to grow if currencies stabilize? Effects of Yen and Euro Depreciation on EPS Growth 18 Europe June 3, 212 December 31, 215 June 3, 212 = 1 18 Japan November 3, 21 December 31, 215 November 3, 21 = 1 16 Earnings Growth 16 Earnings Growth 14 EUR/USD Spot 14 JPY/USD Spot Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 6 Nov-1 Nov-11 Nov-12 Nov-13 Nov-14 Sources: Eurostat, Government of Japan Cabinet Office, MSCI Inc., and Thomson Reuters Datastream. MSCI data provided "as is" without any express or implied warranties. Notes: Europe earnings and GDP represent the 19 members of the Eurozone. GDP data are quarterly and through September 215. Spot rate and earnings growth data are monthly.

10 Japanese small caps stand out Small-Cap Equity Trailing P/E Ratios As of December 31, 215 Local Currency Small-Cap Equity P/B Ratios As of December 31, 215 Local Currency Current Median Current Median United States United Kingdom Japan Europe ex UK. United States United Kingdom Japan Europe ex UK Sources: MSCI Inc. and Thomson Reuters Datastream. MSCI data provided "as is" without any express or implied warranties. Notes: Total returns are net of dividend taxes. Median data calculated from January 31, 23, to present.

11 Japanese Yen tends to appreciate in down markets Performance of Japanese Yen and Global Equity Markets in Up/Down Markets First Quarter 1996 Fourth Quarter 215 Percent (%) 8 6 Up Equity Markets Down Equity Markets Average Quarterly Returns Yen/USD -4-6 MSCI World Sources: MSCI Inc. and Thomson Reuters Datastream. MSCI data provided "as is" without any express or implied warranties. Notes: Up and down markets are defined by the quarterly total return of the MSCI World Index in local currency. Performance of yen is in US$ terms. Average return is based on arithmetic mean.

12 MLP fundamentals are holding up Historical Distribution Growth of Wells Fargo MLP Index As of December 11, 215 Percent (%) Median Distribution Growth (2 214) E 216E Quarterly Trailing 12-Month Revenue of Alerian MLP Index Fourth Quarter 2 Fourth Quarter 216 US$ millions 275, 2, 125, 5, Sources: Alerian, Bloomberg L.P., FactSet Research Systems, Tudor, Pickering, Holt & Co., and Wells Fargo Securities Inc. Notes: Orange bars are estimates. Distribution growth is based on year-over-year change in median distribution.

13 Year-Over-Year Change as of December 31, 215 Percent (%) US Dollar Annual S&P 5 Energy Earnings and Average Crude WTI Price S&P 5 Energy Earnings ($bn) Avg Crude WTI ($/bbl) Energy stocks suffer from weak earnings Brent Crude Prices Energy Equity Prices Energy Company Valuations 91 Price Levels Valuations Brent MSCI World Energy Index MSCI US Energy Index US Energy Forward P/E MSCI US Energy Normalized P/E Est. Sources: Bloomberg L.P., FactSet Research Systems, MSCI Inc., Standard & Poor's, and Thomson Reuters Datastream. MSCI data provided "as is" without any express or implied warranties. Note: Percent change in forward P/E is calculated using FactSet Research Systems estimates. Percent change in forward P/E for US energy is based on November 214 to November 215. Estimates for 216 earnings are calculated by Factset and are as of December 31,

14 Emerging markets sector valuations are widely dispersed Wide Dispersion of Emerging Markets Economic Sector Valuations December 31, 1995 December 31, 215 US Dollar 4 35 Standard Deviation of Valuation Percentiles Sources: MSCI Inc. and Thomson Reuters Datastream. MSCI data provided "as is" without any express or implied warranties. Note: Data are monthly.

15 Summary Portfolio Recommendations Overweights High-Quality US Equities Underweights US Small-Cap Growth Equities Diversified Growth Eurozone Equities* Japanese Equities* Asia ex Japan Equities US Equities Diversifiers Macro Protection Deflation Hedge Cash Sovereign Bonds Inflation Resistant Natural Resources Equities Energy MLPs Cash Commodities Inflation-Linked Bonds and Commodities Currency Hedge World ex US (currency hedged) World ex US (US$) * Currency hedged

16 MODERATED BY: 216 Investment Outlook: Crosscurrents January 216 Celia Dallas Chief Investment Strategist Wade O Brien Managing Director, Global Investment Research Christopher Hunter Managing Director, Head of Cambridge Associates Beijing Office Thank you for joining us. Q&A