Solutions Conference Year End Global Economy & World Political Outlook Leon C. LaBrecque, JD, CPA, CFP, CFA RAIN IN EUROPE?

Transcription

1 Solutions Conference Year End 2014 Global Economy & World Political Outlook Leon C. LaBrecque, JD, CPA, CFP, CFA RAIN IN EUROPE?

2 Global Equity Markets: Returns EAFE Return to Reach 2007 peak* EME Return to Reach 2007 peak* 5 yrs 4.2% 5 yrs 3.9% 4 yrs 5.3% 4 yrs 4.9% 3 yrs 7.1% 3 yrs 6.6% 2 yrs 10.8% 2 yrs 10.1% 1 yr 22.8% 1 yr 21.2% *As of 10/23/2014 Global Markets Composition Pacific, 4% CAN, JPN, 4% 7% JPN, 5% Other Dev, 5% CAN, 2% US, 19% UK, 8% EM, 11% Europe (-UK), 16% US, 50% Market Cap EM, 51% UK, 3% Global GDP Share Europe (-UK), 16%

3 Global Growth Emerging Markets Overall EM GDP growth ~ 4.5% China ~ 7-8% slowing Forecast accelerating growth: Russia South Africa Brazil India Flat: Korea Mexico China Developed Markets Overall DM GDP growth ~ 1-2% US (2.1)%Q1; 4.6% Q2 Japan mixed Germany improving, 4Q promising Italy and France flat to negative UK flat Sovereign Debt 10.0% 8.0% 6.0% China Indonesia India GDP Growth 4.0% Russia Brazil 2.0% USA SA Japan 0.0% EU 0% 50% 100% Italy150% 200% 250% 300% -2.0% Spain -4.0% Portugal -6.0% -8.0% Greece -10.0% Debt to GDP Ratio

4 China: Growing but Slowing Base China Inflation Headline avg. 3.4% * current 1.6% Non-food avg. 1.0%^ current 1.5% RMB is falling against the dollar Real estate boom may be waning * Historical average from 10/31/94-9/30/14 ^ Historical average from 1/31/06 9/30/14

5 China GDP Contribution Investment Consumption Net Exports 0.80% 4.60% 0.40% 4.30% 4.50% 8.10% 4.50% 5.50% 5.30% 4.40% 4.20% 3.60% 3.90% 5.70% 4.20% 3.10% -3.40% -0.40% -0.20% -0.30% -1.40% Q1 Japan: Coming back? Real GDP at (0.05)% YoY current Inflation is 3.3% headline, 3.1% core PE 21.1 (US 19.1) Yield 0.5% (US 2.3%) 10-year PE 30.1 (US 25.3)

6 Solutions Conference Year End 2014 US Economy: Growing Slowly US Economy: Growing Slowly Real GDP growth 2.6% YoY % change Housing still only 3.2% of GDP Vehicle Sales 16.4M, slightly above average of 15.3M Housing starts 1.02M, still below the average of 1.35M Cap goods above average

7 Sentiment as an Indicator PE and consumer sentiment 0.52 correlated 10 pt. rise in sentiment equates to +2.0 multiple points Real Yield and CS 0.68 correlated 10 pt rise in sentiment = +54 bps RY 10% YoY rise in S&P =+2.9 sentiment 10% YoY rise in gas prices = -0.8 sentiment 1% YoY rise in unemployment = -5.2 Average 84.8; current 86.0 Correlations on Interest Rates Yield (10-year) under 5%, positive correlation stock movement to yield Lower the yield, higher the correlation Above 5% on 10-year, correlation shift to negative Higher the yield, the greater the negative correlation

8 Fiscal Battles December 11, 2014: Short-term spending authority expires Risk: Government shutdown Risk Probability: Low Momentum: Stable What to Watch: Senate control after November elections March 15, 2015: Debt limit suspension expires Risk: Default on U.S. government debt Risk Probability: Low Momentum: Stable What to Watch: Senate control after November elections Consumer: Getting out of Debt Total consumer assets $95.4T At peak: 3Q07 $72.3T At low: 1Q09 $62.6T Debt service ratio is 9.9% Way below 13.2% in 2007 Lower than 10.6% in 1980 Household net worth is $82.11T, all time high Current Peak Low

9 Corporate Sector: Robust Corporations have huge cash (30% of current assets) Cash is over 8% of GDP (WWII record) M&A activity trending up Capital expenditures exceed 2007 high Dividend payout ratio for S&P 500 companies above 30% Federal Government: In the Red Federal budget deficit is 3.3% of GDP All revenues (taxes) insufficient to pay Medicare/Social Security, Defense and non-defense discretionary Budget improved dramatically in 2013, thanks to Sequester CBO projecting deficits through 2023 Total Spending $3.5T Borrowing $537 Billion

10 Housing is Improving Case-Shiller trending up since 2012 (slight pull back recently) +11.6% FHFA up Avg. existing home up Affordability index favorable at 13.5%* with the longterm average at 20.4% * Average mortgage payment as a % of household income Unemployment: Improving Sort of Unemployment rate is 5.9% and falling Vast stimulus 8.8M jobs lost, 10.0M jobs gained MI unemployment dropping (currently 7.2%) Detroit unemployment exceeds 14.6% (down from 17.3%!)

11 Disparate Employment Numbers $28K gap and $29K gap respectively High School to College College to Grad Unemployment rates by education (seasonally adjusted) <HS 8.4% HS 5.3% Some college 5.4% College or better 2.9% Source: Bureau of Labor Statistics More on Employment Percent of labor force employed part-time for economic reasons: 4.7% Labor force participation rate: Percent of population aged 16+ working or looking for work: 62.8% Average hourly employee growth rate: 2.5% Net job creation since Feb millions of jobs Info., Fin & Bus Svcs.- 2.9M Mfg. Trade & Trans. 2.6M Leisure, Hospt & Other Svcs. 1.9M Educ. & Health Svcs. 1.8M Mining & Construction 800k Government (600k)

12 Renaissance in America? Manufacturing Energy US Labor costs restrained EM labor costs increasing Low abundant NG prices Low dollar Labor market stable Lots of capital Legal system Eurozone uncertainty Japan energy Export cost advantage Bakken/ND huge US can become oil exporter Each Petro job creates 11.9 more jobs One mfg. job creates 2.92 more jobs One retail job creates.88

13 Natural Gas Prices Price per 10,000 mm BTU FRA $8.40 CAN $3.63 US $3.20 UK $7.40 SP $10.50 CH $13.95 JPN $17.50 GER $9.00 Rising Cost Advantage US will gain 2-3 million jobs and $100B in annual output for higher exports and production work shifting from China in the next decade. By ~2015, US will have export advantage of 5-25% over Germany, Italy, France, UK & Japan in a range of industries. US manufacturing index expands to 59 Highest level since Source: US Manufacturing Nears the Tipping Point, Boston Consulting Group, 03/22/12

14 Job Multiples: Energy and Autos For Every 100 Jobs created in: Additional Jobs Created Petroleum Refining 1190 Utilities 514 Chemicals 495 Automobiles 464 Electrical Machinery 353 Paper 325 Manufacturing 291 Investment Banks 192 Construction 190 Hotels & Lodging 94 Retail 88 Source: Josh Bevens, Updated Employment Multipliers for the US Economy (2003) Inflation: Not Now, But Look Out? Current headline CPI is 1.7% Food & Bev. and Housing is high, Trans. is negative High & rising inflation: cash & commodities Low & rising inflation: Equities and commodities

15 Inflation a Possible Threat QE3 coming to an end Low mortgage rates (refi?) Multiplier determined by the velocity of money As unemployment decreases, multiplier increases Multiplier increases, inflation increases Annual Returns and Intra-year Declines

16 Investment Outlook Barring geopolitical issues, remainder of year looks like reasonable corporate earnings, decreasing unemployment Double check asset allocation Check weighting on large caps Consider international exposure, less Europe, more Asia Remain vigilant on inflation The Political Lead

17 Midterm Results Domestic News US Ebola cases Quicken has a new measurement for the housing markets Widening gap in wage disparity Canadian Parliament shootings

18 Middle East conflicts ECB cuts interest rate to record low Rate at record low of 0.05% Inflation falls below the EBC target of 2% Threat of deflation in Eurozone What options does Mario Draghi have

19 Disruptive Tech 3D Printing Commercial drone use Stem cell research BIG DATA Fusion How does the economic and political outlook affect your business and how you use technology?

20 How does the economic and political outlook affect your need for better reporting, budgeting, and forecasting tools? How does positioning your company for cloud computing help you in today s environment?

21 Where are all the orange cars? Thank you!