1Q 2016 INVESTMENT OUTLOOK

Transcription

1 1Q 2016 INVESTMENT OUTLOOK George T. Cook Managing Director Institutional Consultant 760 West Main Street, Suite 200 Barrington, Illinois Ph: Carl H. Viard Senior Vice President Institutional Consultant Ph:

2 1Q 2016 Investment Outlook China... 3 Energy... 7 Capital Markets 16 Economic Outlook.. 21 Potential Opportunities. 31

3 China Source: Morgan Stanley GIC Data as of China 3

4 China Stock Market Woes China Bear Market Leads to Suspicion of Economic Weakness Source: Morgan Stanley GIC Data as of China 4 4

5 China Transition China is transitioning from Manufacturing to Consumer Oriented Economy Source: Morgan Stanley GIC China 5

6 China: Domestic Auto Sales China tax relief on cars spurs Chinese consumption Source: JPMorgan Data as of China 6

7 About the Graph: Energy Pressure on Oil Prices Brent Crude Oil Futures Source: Quandl As of Brent $28.55 WTI $29.01 Underlying Futures Contract: ICE (Intercontinental Exchange)Brent Crude Roll Date: Roll on First Day of Delivery Month Contract Size: 1,000 barrels Deliverable Good: The ICE Brent Crude futures contract is a deliverable contract based on EFP delivery with an option to cash settle

8 Crude Oil Long Term Prices Oil Prices Can Stay Lower.. Longer About the Graph: Crude Oil Price per Barrel (West Texas Intermediate, First of Month) adjusted by inflation (Consumer Price Index) Sources: Oil & Gas Journal; Energy Information Administration; Bureau of Labor Statistics Copyright 2015 Crandall, Pierce & Company All rights reserved. Copyright 2015 CRANDALL, PIERCE & COMPANY All rights reserved West Petronella Drive Libertyville, Illinois Internet: This illustration is subject to the terms & conditions at Under no circumstances may this illustration be copied, reproduced or redistributed in whole or in part including the data contained herein, without prior written permission. Graystone is a registered user of Crandall Pierce. Charts are for the exclusive use of Graystone Outlook call. Energy 8

9 Energy: Still More Supply Than Demand Source: Short Term Energy Outlook Energy 9

10 Baker Hughes Rig Count Reduction in Drilling will lead to -600,000 barrels per day vs. adding 1 Million per day Source: World Bank Energy 10

11 Energy Price Outlook Oil Rallies in 2017?? Source: Energy Information Administration Energy 11

12 Speculative Grade Default by U.S. Industry Source: Goldman Sachs ISG Energy 12

13 Personal Savings Rates and Oil Declines Consumer saving has gone up despite lower energy costs About the Graph: Traditionally consumers have spent a large portion of energy savings. The typical time delay to reduce saving and accelerate spending is 18 months. Source: World Bank months into the recent energy price decline has yet to show decreased saving/increased spending. Energy 13

14 Consumer and Corporate Free Cash Flow So far Instead of Spending Consumer is Building a Strong Balance Sheet Unlike 2007 Source: Goldman Sachs Investment Strategy Group Data as of 9/30/2015 Energy 14

15 Energy Impact on Industrial Production Contraction in Energy has Lowered Industrial Production Source: Richmond Fed Energy 15

16 Global Equity Returns 3 months 1 year 3 years 5 years 10 years S&P % 1.38% 15.13% 12.57% 7.31% (Avg. stock S&P 500 Equal Weight under-performed ) 5.04% 2.20% 15.09% 12.37% 8.52% S&P MidCap % 2.18% 12.75% 10.68% 8.18% Russell % 4.41% 11.65% 9.19% 6.80% MSCI EAFE Index 4.75% 0.39% 5.46% 4.07% 3.50% MSCI AC EUROPE 2.29% 2.73% 4.12% 3.79% 3.64% MSCI JAPAN 9.38% 9.90% 10.45% 4.61% 1.08% MSCI EM (EMERGING MARKETS) 0.73% 14.60% 6.42% 4.47% 3.95% MSCI EM LATIN AMERICA 2.61% 30.82% 19.15% 14.19% 1.41% Source: Informa Investment Solutions December 31, 2015 Capital Markets Review 16

17 S&P 500 Valuation Year End S&P 500 Valuation is Average Source: JP Morgan Asset Management But More Attractive than Bonds Capital Markets Review 17

18 Fixed Income Returns Energy High Yield Deteriorates 3 Mo 1 Yr 3 Yr 5 Yr 10 Yr Barclays Capital U.S. Aggregate 0.57% 0.55% 1.44% 3.25% 4.51% Barclays Capital U.S. Corporate High Yield 2.07% 4.47% 1.69% 5.04% 6.96% Barclays Capital U.S. Treasury: Long 1.38% 1.21% 2.57% 7.74% 6.73% BofA Merrill Lynch 10+ Year US Corporate 1.11% 4.87% 1.38% 6.33% 6.24% The BofA Merrill Lynch 1 3 Year US Corporate Index 0.13% 1.01% 1.32% 2.04% 3.66% Barclays Capital U.S. Municipal Bond 1.50% 3.30% 3.16% 5.35% 4.72% Source: Informa Investment Solutions; December 31, 2015 While Muni balance sheets improve Capital Markets Review 18

19 Hedge Fund Returns 3 months 1 year 3 years 5 years 10 years HFRI Equity Hedge 2.27% 0.45% 5.02% 2.65% 3.57% HFRI Distressed/Restructuring 3.58% 8.35% 1.01% 2.20% 3.85% HFRI Market Neutral Index 1.86% 4.98% 4.83% 3.03% 2.56% HFRI ED: Merger Arbitrage 2.18% 3.41% 3.27% 2.81% 4.50% HFRI Convertible Arbitrage 0.29% 1.95% 3.80% 2.86% 5.05% HFRI Macro 0.16% 1.28% 1.24% 0.12% 3.51% S&P % 1.38% 15.13% 12.57% 7.31% Source: Informa Investment Solutions December 31, 2015 Capital Markets Review 19

20 Other Alternatives 3 months 1 year 3 years 5 years 10 years Alerian MLP 2.76% 32.59% 3.40% 1.47% 8.74% FTSE Nareit Equity REITs 7.26% 3.20% 11.23% 11.96% 7.41% HFRX Macro/CTA Index 0.41% 1.96% 0.44% 0.94% 0.16% Bloomberg Commodity 10.52% 24.66% 17.29% 13.47% 6.43% Merrill Lynch Convertibles 0.59% 3.24% 9.78% 7.60% 6.65% Source: Informa Investment Solutions September 30, 2015 Capital Markets Review 20

21 ISM Manufacturing Index PMI Manufacturing now forecasts slight contraction Source: Richmond Fed Economic Outlook 21

22 2015 S&P Revenue by Sector Industrial Sectors: Contracting Revenue 0 5 Consumer Sectors: Increasing Revenue Telecom HealthCare Consumer Disc Utilities Financials Staples Info Tech Industrials Materials Energy Source: Factset Estimates for Year End Economic Outlook 22

23 Trade Weighted Dollar Richmond Fed Economic Outlook 23

24 ISM Non Manufacturing (Services) Index PMI Non - Manufacturing forecasts growth Source: Richmond Fed Economic Outlook 24

25 Employment Source: Bureau of Labor Statistics Economic Outlook 25

26 Personal Disposable Income and Expenditures The consumer can and likely will spend more Spending Less Making more Source: Richmond Fed Economic Outlook 26

27 Housing Demand has pushed Home Prices up 5% Year over Year Household Formation Source: Morgan Stanley Global Investment Committee Economic Outlook 27

28 Housing Freddie Mac Expects 1.7 Million Starts by 2018? Graystone is a registered user Crandall Pierce. Charts are for the exclusive use of Graystone Outlook call. Economic Outlook 28

29 Cars and Light Trucks Millions, seasonally adjusted annual rate Lower gas prices means more profitable trucks and SUVs Source: Richmond Fed Economic Outlook 29

30 Global Winners and Losers Source: JP Morgan, Developed is Healthy EM is Weak Economic Outlook 30

31 Potential Opportunities 1. Senior Loans 2. Municipal Bonds 3. Mortgage Backed Bonds 4. Dividend Yield: Energy Infrastructure 5. Low Volatility Equity 6. Currency Hedged International Potential Opportunities 31

32 1. Senior Loans Source: KKR June 2015 Potential Opportunities 32

33 2. Muni Bonds About the Graph: Municipal Balance Sheets have improved with higher tax revenue. Meanwhile Municipal Issuance, on balance, is negative. Technical Strength on Municipal Bonds: both High Yield and High Quality have recently out performed Corporate Bonds. Source: Alliance Bernstein Potential Opportunities 33

34 2. Muni Bonds Graystone is a registered user of Crandall Pierce. Charts are for the exclusive use of Graystone Outlook call. Potential Opportunities 34

35 3. Mortgage Backed Bonds US Home Price Index Current to 30-Day Default Rate Default Rates US Home Price Index Source: Alliance Bernstein Potential Opportunities 35

36 3. Mortgage Backed Bonds vs. High Yield Option Adjusted Spreads: September 2012 September 2015 HY ex Energy Interesting High Yields with Improving Fundamentals Risky Source Alliance Bernstein CRT: Credit Risk Transfer = Structured RMBS Potential Opportunities 36

37 4. Dividend Yield: Energy Infrastructure 25 4 th Quarter 2015 Energy Sector Earnings Forecast E&P Coal Integrated Equip Drilling Refining Storage & Trans Source: FACTSET Potential Opportunities 37

38 4. Energy Infrastructure Record Spread to BBB Near Record Spread to T-Note MLP Yield 9.1% BBB Yield 4.4% 10 Yr. Tr. 2.1% BBB Spread 4.7% Tr. Spread: 7.1% Source: Goldman Sachs Data as of Potential Opportunities 38

39 5. Low Volatility Stock Risk / Return July December 2015 (Single Computation) 14% Return 12% 10% 8% 6% 4% 2% CBOE 2% CBOE OTM BW INDEX Index CBOE INDEX S&P 500 1/3 Less Volatility S&P 500 INDEX 0% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% Standard Deviation Calendar Year Return As of December Month T-bill Source: Informa Investment Solutions Potential Opportunities 39

40 5. Low Volatility Stock 50% OTM Index vs. S&P % 30% 20% Excess Return S&P Below 10%: +4.22% 10% 0% 10% 20% 30% Excess Return S&P Above 10%: 3.73% 40% 50% CBOE S&P 500 2% OTM BuyWrite S&P 500 Source: CBOE, Goldman Sachs; Data through Potential Opportunities 40

41 5. Low Volatility Stock Risk / Return June December 2015 (Single Computation) ep y S y e SO G ays o e Co su g 14% 12% 10% Return 8% 6% MSCI World Low Volatility Index MSCI World 4% 2% 20% Less Volatility 0% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% Standard Deviation Calendar Year Return As of December % 10% 0% -10% -20% % % Source: Informa Investment Solutions Potential Opportunities 41

42 6. Currency Hedged EAFE Risk / Return July December 2015 (Single Computation) 12% 10% 8% Currency Hedged EAFE Return 6% 4% 2% EAFE 0% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% Standard Deviation Manager Performance July December 2015 (Single Computation) % 5% 0% -5% Q Q Q Q Q Q Q Q Q Q Source: Informa Investment Solutions Potential Opportunities 42

43 Recap Potential Opportunities 1. Senior Loans 2. Municipal Bonds 3. Mortgage Backed Bonds 4. Dividend Yield: Energy Infrastructure 5. Low Volatility Equity 6. Currency Hedged International Potential Opportunities 43

44 Important Information The views expressed herein are those of the author and do not necessarily reflect the views of Graystone or Morgan Stanley or its affiliates. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results. This material does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who review it. The strategies and/or investments discussed in this material may not be suitable for al investors. Morgan Stanley Smith Barney LLC recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a Financial Advisor. The appropriateness of a particular investment or strategy will depend on an investor s individual circumstances and objectives. Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Smith Barney s Financial Advisors do not provide tax or legal advice and are not fiduciaries (under ERISA, the Internal Revenue Code or otherwise) with respect to the services or activities described herein except as otherwise agreed to in writing by Morgan Stanley Smith Barney. This material was not intended or written to be used for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Individuals are urged to consult their tax or legal advisors before establishing a retirement plan and to understand the tax, ERISA and related consequences of any investments made under such plan. The information set forth was obtained from sources believed to be reliable, but we do not guarantee its accuracy or completeness. Past performance is no guarantee of future results. Actual results may vary and past performance is no guarantee of future results. Investing in commodities entails significant risks. Commodity prices ay be affected by a variety of factors at any time, including but not limited to, (i)changes in supply and demand relationships, (ii) governmental programs and policies, (iii) national and international political and economic events, war and terrorist events, (iv) changes in interest and exchange rates, (v) trading activities I commodities and related contracts, (vi) pestilence, technological change an weather, and (vii) the price volatility of a commodity. In addition, the commodities markets are subject to temporary distortions or other disruptions due to various factors, including lack of liquidity, participation of speculators and government intervention. 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Real estate valuations may be subject to factors such as changing general and local economic, financial, competitive, and environmental conditions. REITs may not be suitable for every investor. Dividend income from REITs will generally not be treated as qualified dividend income and therefore will not be eligible for reduced rates of taxation. Interest in municipal bonds is generally exempt from federal income tax. However, some bonds may be subject to the alternative minimum tax (AMT). Typically, state tax-exemption applies if securities are issued within one s state of residence and, local tax-exemption typically applies if securities are issued within one s city of residence. International investing may not be suitable for every investor and is subject to additional risks, including currency fluctuations, political factors, withholding, lack of liquidity, the absence of adequate financial information, and exchange control restrictions impacting foreign issuers. These risks may be magnified in emerging markets. S&P 500 Index is an unmanaged, market value-weighted index of 500 stocks generally representative of the broad stock market. An investment cannot be made directly in a market index. Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index. An investment cannot be made directly in a market index. Investing in smaller companies involves greater risks than those associated with investing in more established companies, including significant stock price fluctuations and illiquidity.

45 Important Information, continued The Barclays Capital U.S. Aggregate Index covers the U.S. Dollar-denominated, investment-grade, fixed-rate, taxable bond market segment of SEC-registered securities. The inde3x includes bonds from the U.S. Treasury, Government-Related Corporate, Mortgage-Backed, Asset-Backed, and Commercial Mortgage-Backed Securities sectors. An investment cannot be made directly in a market index. Bonds are affected by a number of risks, including fluctuations in interest rates, credit risk and prepayment risk. In general, as prevailing interest rates rise, fixed income securities prices will fall. Bonds face credit risk if a decline in an issuer's credit rating, or creditworthiness, causes a bond's price to decline. Finally, bonds can be subject to prepayment risk. When interest rates fall, an issuer may choose to borrow money at a lower interest rate, while paying off its previously issued bonds. As a consequence, underlying bonds will lose the interest payments from the investment and will be forced to reinvest in a market where prevailing interest rates are lower than when the initial investment was made. NOTE: High yield bonds are subject to additional risks such as increased risk of default and greater volatility because of the lower credit quality of the issues. Barclays Capital U.S. Credit Bond Index is composed of all publicly issued, fixed-rate, non-convertible, investment-grade, domestic corporate debt (collateralized mortgage obligations are not included). Total return comprises price appreciation/deprecation and income as a percentage of the original investment. This index is rebalanced monthly by market capitalization. An investment cannot be made directly in a market index. Barclays Capital Municipal Bond Index is a broad measure of the municipal bond market with maturities of at least one year. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds. An investment cannot be made directly in a market index. The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the US & Canada. As of May 2005 the MSCI EAFE Index consisted of the following 21 developed market county indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom. An investment cannot be made directly in a market index. The MSCI World Index is a free float-adjusted market capitalization weighted index designed to measure the equity market performance of 23 developed-country markets. An investment cannot be made directly in a market index. HFR Indices are compiled by Hedge Fund Research, Inc. ("HFR"), an industry service provider. They are based on the performance of hedge funds in various strategies as reported by the hedge fund managers to HFR. While the HFRI Indices are frequently used, they have limitations (some of which are typical of other widely used indices). These limitations include survivorship bias (the returns of the indices may not be representative of all the hedge funds in the universe because of the tendency of lower performing funds to leave the index); heterogeneity (not all hedge funds are alike or comparable to one another, and the index may not accurately reflect the performance of a described style); and limited data (many hedge funds do not report to indices, and the index may omit funds, the inclusion of which might significantly affect the performance shown. The HFRI Indices are based on information self-reported by hedge fund managers that decide on their own, at any time, whether or not they want to provide, or continue to provide, information to HFR Asset Management, L.L.C. Results for funds that go out of business are included in the index until the date that they cease operations. Therefore, these indices may not be complete or accurate representations of the hedge fund universe, and may be biased in several ways. All data is net of all fees, denominated in U.S. dollar and equal-weighted. The information underlying the indices and the classification of the underlying funds have not been independently verified by either HFR or Morgan Stanley Smith Barney, and neither HFR nor Morgan Stanley Smith Barney make any representation as to their accuracy. Past performance does not guarantee future results. Real results may vary. The Alerian MLP Index is a composite of the 50 most prominent energy Master Limited Partnerships (MLP)s that provides investors with an unbiased, comprehensive benchmark for this emerging asset class. The index, which is calculated using a float-adjusted, capitalization-weighted methodology, is disseminated real-time on a price-return bases. An investment cannot be made directly in a market index Investments and services offered through Morgan Stanley Smith Barney LLC. Member SIPC. Graystone Consulting, a business of Morgan Stanley.

46 Important Information This material does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The strategies and/or investments discussed in this material may not be suitable for all investors. Morgan Stanley Wealth Management recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a Financial Advisor. The appropriateness of a particular investment or strategy will depend on an investor s individual circumstances and objectives. Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC ( Morgan Stanley ), its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice and are not fiduciaries (under ERISA, the Internal Revenue Code or otherwise) with respect to the services or activities described herein except as otherwise agreed to in writing by Morgan Stanley. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a retirement plan or account, and (b) regarding any potential tax, ERISA and related consequences of any investments made under such plan or account. The views expressed herein are those of the author and do not necessarily reflect the views of Morgan Stanley Wealth Management or its affiliates. All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results. Morgan Stanley Smith Barney LLC, member SIPC