AGRiP Fall Educational Forum October 2016 George Vitta Senior Consultant

Transcription

1 AGRiP Fall Educational Forum October 2016 George Vitta Senior Consultant

2 Outline I. What did we expect from the capital markets in 2016? II. Where are the markets winners and losers thus far? III. Investors challenges for 2016 and beyond INDEPENDENT OBJECTIVE ACCOUNTABLE 2

3 I. What did we expect for 2016 U.S. Economy Tale of two economies: domestic final consumers vs. global final consumers Sectors related to domestic economy are likely to outperform sectors related to global economy Consensus 2016 U.S. real GDP Growth: 2.4% INDEPENDENT OBJECTIVE ACCOUNTABLE 3

4 I. What did we expect for 2016 U.S. Monetary Policy Federal Reserve pulled forward appreciation of assets subsequent to the 2008/2009 recession via extreme monetary policy measures. This could lead to lower returns in many asset classes for the next several years. Fed (via dot plot ) says it will increase the federal funds rate by 100 bps in The market (via Federal Funds futures) is only expecting an increase of 50 bps. How does this play out? Fed will focus more heavily on inflation in 2016 as the labor market is getting close to full employment. Even as the Fed begins its tightening cycle, remember that short term interest rates are still at unprecedented levels. A bps increase will still leave interest rates at a level considered easy/loose Consensus 2016 U.S. inflation: 1.9% INDEPENDENT OBJECTIVE ACCOUNTABLE 4

5 I. What did we expect for 2016 Equities Earnings growth will be key to price appreciation for U.S. equities in Multiple (P/E) expansion is not expected to be a significant driver of equity prices as in recent years. Greater stock and bond price volatility in Developed Countries equities are favored for the most part in Emerging Market equities should become more attractive towards the end of the year and into Eurozone equities are more attractive now than in many years. This is due to monetary policy easing and stabilization of economic growth. Consensus U.S. stocks (S&P 500 Index) 2016 Total Return: 7.3% Consensus Developed-Market stocks (MSCI EAFE Index) 2016 Total Return: 7.8% Consensus Emerging-Markets stocks (MSCI Emerging Markets Index) 2016 Total Return: 6.1% INDEPENDENT OBJECTIVE ACCOUNTABLE 5

6 I. What did we expect for 2016 Fixed Income Yield curve may flatten further as short term rates increase and long term rates (which are more closely related to inflation) remain the same. Overall, bond yields are set to rise as monetary policy and inflation normalize. Credit spreads (A-rated bonds versus B-rated bonds) are attractive assuming U.S. economic growth continues its steady (if slow) positive advance. Consensus U.S. Bond Market (Investment Grade) 2016 Total Return: 1.1% INDEPENDENT OBJECTIVE ACCOUNTABLE 6

7 I. What did we expect for 2016 Real Estate Core real estate is starting to show elevated prices which should support value-add and opportunistic strategies. Shorter investment time horizons are expected to be a tailwind to performance for private real estate investments. Income from investments should be stable to growing, while price appreciation should be stronger in value-add and opportunistic strategies. Consensus U.S. Real Estate Market (very broad): classes barring a recession in the U.S. Should easily outperform other asset INDEPENDENT OBJECTIVE ACCOUNTABLE 7

8 II. Where are the markets winners and losers thus far? August 31, 2016 INDEPENDENT OBJECTIVE ACCOUNTABLE 8

9 II. S&P 500 Index at Inflection Points INDEPENDENT OBJECTIVE ACCOUNTABLE 9

10 II. 500 Valuation Measures INDEPENDENT OBJECTIVE ACCOUNTABLE 10

11 II. P/E Ratios & Equity Returns INDEPENDENT OBJECTIVE ACCOUNTABLE 11

12 II. Equity Earnings & Valuations INDEPENDENT OBJECTIVE ACCOUNTABLE 12

13 III. Investors challenges for 2016 and beyond

14 III. The Length & Strength of Expansions INDEPENDENT OBJECTIVE ACCOUNTABLE 14

15 III. Long-Term Drivers of Economic Growth INDEPENDENT OBJECTIVE ACCOUNTABLE 15

16 III. Hidden Inflation Inflation, as measured by the personal consumption expenditure index, (PCE) the Fed's preferred measure, was just 0.9% for the year ending June Core inflation (which removes food and energy) was 1.6%, both below the Fed's 2% target. However, manufactured goods inflation was -1.8%, while services inflation, which faces little overseas competition, was 2.2%. Since services account for 80% of U.S. GDP and employment, inflation may well rise despite manufactured goods becoming cheaper. INDEPENDENT OBJECTIVE ACCOUNTABLE 16

17 III. Emerging Market Headwinds INDEPENDENT OBJECTIVE ACCOUNTABLE 17

18 Micro Trend #1 U.S. Fiscal Priorities The FY 2016 budget deficit, (ended 9/30/16) is expected to rise to $590 billion, or 3.2% of GDP, up from $438 billion or 2.5% of GDP in FY2015, the lowest level since The budget deficit increased because revenues will rise by just $26 billion while spending will increase by $178 billion due to Social Security, Medicare and Medicaid. The deficit/gdp ratio gets worse, looking ahead. The budget deficit increased because revenues will rise by just $26 billion while spending will increase by $178 billion due to Social Security, Medicare and Medicaid. INDEPENDENT OBJECTIVE ACCOUNTABLE 18

19 Micro Trend #2 Life Expectancy & Pension Shortfall INDEPENDENT OBJECTIVE ACCOUNTABLE 19