In v estm en t Views. December 2017

Transcription

1 In v estm en t Views December 2017

2 Global strategy Stop worrying and learn to love the deficit Tax legislation is not the only thing happening in the world, but one could be forgiven for thinking that it is. It s all tax, all the time in the financial media, and markets have shown little predilection to trade off of any other news. A plea bargain over Russian contact is agreed by fired NSA adviser Michael Flynn? Not a problem. More missile tests illuminate the skies from North Korea? Also, not a problem. However, heaven forbid if Tennessee Senator Bob Corker should utter a word of dissent at the direction that tax legislation is taking. Here is our bottom line on tax reform : the tax system is not being reformed. It is not being simplified. In fact, it remains byzantine in the area of personal tax (cue high fives from the CPA lobby) and is actually becoming much more complicated on the corporate tax side. The Senate version of the legislation even allows for the expiration of personal tax decreases because it s impossible to pay for in the long-term, within their self-imposed framework. Don t take our word for it, however, the Congressional Budget Office has weighed in with their estimate of the Senate s version of the legislation and it confirms a $1.5 trillion increase in the Federal deficit over the next ten years. To put that number into perspective, US debt as a percentage of GDP is presently 77% and under a reasonable set of assumptions, should eclipse 100% of GDP within the next ten years. The Chairwoman of the Federal Reserve recently expressed her concerns in this area, noting that Medicare, Medicaid and Social Security costs are set to grow much more rapidly than tax revenues, even without adding $1.5 trillion to that deficit, simply as a result of Baby Boom demographics. In effect, what we will see over the next ten years is a large increase in entitlement spending that is set to be supercharged by this pending tax legislation. Under our economic projections (which are similar to the median of 50 other analysts), GDP should increase only marginally in 2018 and 2019 due to the tax bill; something on the order of 0.2% to 0.4% in real GDP terms. For the next two years, GDP in the US should power along quite nicely, far in excess of its sustainable trend growth rate of slightly below 2%. We believe this rate of growth is ultimately inflationary and we are positioned, particularly in bond markets, to benefit from any rise in inflation expectations and increases in longer-term interest rates.

3 Equities Tech and emerging markets take a back seat to other sectors The S&P 500 total return was 3.1% in November and has now risen for 13 consecutive months. European equity indices saw small losses in local currency terms, but the fall in the US Dollar meant that all major markets saw positive total returns in Dollar terms. Emerging market equities underperformed developed markets for only the second month this year, however the 2% underperformance still leaves emerging markets comfortably ahead over the year. As the market moved to price in lower US corporate taxes, mid-cap stocks outperformed large-caps and domestic stocks outperformed global stocks. Approximately two thirds of the market gains this year have been driven by growth in company earnings, so whilst the extent of the rally has been remarkable, the foundations of the rally have been strong. November saw a number of notable rotations within the market as high flying technology stocks lagged and out-of-favour stocks such as retailers outperformed. The Tech sector still remains the best performing sector this year, but investors attention has more recently been drawn towards stocks benefitting from the broadbased economic expansion, such as Transports and Diversified Financials. US Homebuilders continued to perform very well, driven by strong single-family housing sales. The sector faces a number of headwinds into next year though, and we are closely watching this and the other consumer sectors for signs that higher interest rates are impacting activity.

4 Fixed income Slight jitters in credit and a flatter curve November was a month of two halves in terms of performance for the credit markets. The first two weeks saw volatility rise and credit spreads widen across both investment grade and high yield credit, whilst the second two weeks reestablished the credit tightening trend. In the event, the magnitude of the initial spread weakness was not especially large in comparison to other minor corrections and it certainly did not impair new issuance. The past month saw the second-largest November, since records have been kept, in new corporate supply at $115 billion and we have seen six straight years of consecutive annual issuance records. High yield issuance is also up 57% year-overyear. In addition to the aforementioned bout of volatility in the credit markets, bond market total return was broadly negative for the month. Although the US 10-year Treasury yield only rose by 3 basis points, from 2.38% to 2.41%, the two year yield rose much more substantially, by 18 bps, from 1.60% to 1.78%. This phenomenon is what is known as a flattening of the yield curve and is representative of the market s belief that the Fed will continue to move rates higher and that inflation will be well-contained. As mentioned above, we are not as sanguine on inflation as the consensus and believe there is scope for upside surprises in the inflation data if growth remains strong and the unemployment rate continues lower.

5 Global asset allocation The chart below details our 6-12 month tactical investment strategy Underweight + Overweight Inflation protection US mid-caps Non-traditional asset classes High yield debt Emerging markets Healthcare Investment grade corporate debt Asset allocation Fixed interest Equities Regional Equities Sector Fixed interest US$ interest rate risk Sterling interest rate risk Telecommunications Utilities Government debt

6 Disclaimer This document and the information contained herein has been prepared and issued by Butterfield Asset Management Limited, Butterfield Bank (Cayman) Limited and Butterfield Bank (Guernsey) Limited and is for illustrative purposes only. It neither constitutes investment advice nor is it an offer or an invitation to acquire or dispose of any securities and should not be relied upon as such. Prior to making any investment decision a financial adviser should be consulted. Products and services are available in the respective home jurisdictions and only in those other jurisdictions where they may be legally offered or obtained. The data source for this document is Bloomberg unless explicitly stated otherwise and is believed to be accurate as at the date of publication and may be subject to change without notice. Whilst every care has been taken in producing this commentary, neither the author nor Butterfield Asset Management Limited, Butterfield Bank (Cayman) Limited, nor Butterfield Bank (Guernsey) Limited shall be liable for any errors, misprints or misinterpretation of any of the matters set out in it. Past performance is not necessarily a guide to future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down. In the case of some investments, you should be aware that there is no recognised market for them and that it may therefore be difficult for you to deal in them or to obtain reliable information about their value or the extent of the risks to which they are exposed. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors. Before contemplating any transaction, you should consider whether you require financial advice. Any copying, duplication or reproduction of part or all of this commentary and/or its content in any form without the express written consent of the copyright owner is prohibited and will constitute an infringement of copyright unless expressly agreed to by Butterfield Asset Management Limited, Butterfield Bank (Cayman) Limited, or Butterfield Bank (Guernsey) Limited, or as otherwise permitted by the Copyright (Bailiwick of Guernsey) Ordinance You may not, without our express written permission, distribute or commercially exploit this work. This commentary and/or its content is copyright of Butterfield Asset Management, Butterfield Bank (Cayman) Limited and Butterfield Bank (Guernsey) Limited. All rights reserved. Butterfield Asset Management Limited is licensed to conduct investment business by the Bermuda Monetary Authority. Registered Office Address: 65 Front Street, Hamilton HM12, Bermuda. Telephone: +(441) Website: Butterfield Bank (Cayman) Limited is licensed to conduct securities investment business by the Cayman Islands Monetary Authority. Registered Office Address: Butterfield Place, 12 Albert Panton Street, George Town, Grand Cayman KY1-1107, Cayman Islands. Telephone: +(345) Website: Butterfield Bank (Guernsey) Limited is licensed by the Guernsey Financial Services Commission under the Banking Supervision (Bailiwick of Guernsey) Law, 1994, The Protection of Investors (Bailiwick of Guernsey) Law, 1987 and the Regulation of Fiduciaries, Administration Businesses and Company Directors, etc. (Bailiwick of Guernsey) Law, 2000, each as amended from time to time. Registered Office Address: Regency Court, Glategny Esplanade, St Peter Port, Guernsey, GY1 3AP. Company registered in Guernsey No Telephone: +44 (0) Fax: +44 (0) Website: Telephone calls are recorded for training, regulatory and security purposes. December 2017