RenMac 2016 Outlook Call Neil Dutta Economics Kim Wallace Washington & Global Policy Jeff degraaf Market Technicals & Strategy Rob Ginsberg Sector Deep Dives & Small Cap For a copy of the slides please email: Sales@RenMac.com
Economics Neil Dutta
Inventories: Crush H2 2015 GDP Inventory corrections hurt industrials (year over year % change) How much will inventories drop? Real change in private inventories (billions $) 20 15 10 5 0 5 10 15 20 25 90 92 94 96 98 00 02 04 06 08 10 12 14 Railcar Loadings Private Inventories 120.0 100.0 80.0 60.0 40.0 20.0 0.0 20.0 10 11 12 13 14 15 Real Change in Private Inventories Change Consistent With GDP Growth Source: Renaissance Macro Research, Bureau of Economic Analysis, Haver Analytics 3
Trade: Global growth stabilizing? Global manufacturing activity looks better Structural problems to global trade (year over year % change) 57 56 55 54 53 52 51 50 49 48 47 2010 2011 2012 2013 2014 2015 2016 4.0 3.5 3.0 2.5 2.0 1.5 1.0 20% 15% 10% 5% 0% 5% 10% 15% 20% 25% 92 94 96 98 00 02 04 06 08 10 12 14 Global ex US PMI (LHS) 10 year Treasury yield (RHS) World Trade World Industrial Production Source: Renaissance Macro Research, Haver Analytics 4
Payrolls: Good enough Confidence leads employment Small businesses signaling strong wage gains 400 50 30 5.0% 200 0 200 400 600 800 93 95 97 99 01 03 05 07 09 11 13 15 Nonfarm Payrolls (12 Month Average, LHS) Confidence: Present Situation (YoY, RHS) 25 0 25 50 75 100 25 20 15 10 5 0 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 NFIB: Compensation Plans (LHS) ECI: Wages & Salaries (RHS) Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Conference Board, NFIB 5
Inflation: Sticky vs. flexible Services sector inflation picks up (year over year % change) USD: small impact on imported consumer goods (Index: 2010 = 100) 4% 140 3% 130 120 2% 110 100 1% 90 0% 80 70 1% 05 06 07 08 09 10 11 12 13 14 15 60 05 06 07 08 09 10 11 12 13 14 15 Core services Core goods Consumer Goods USD (inverted) Industrial Supplies Source: Haver Analytics, Renaissance Macro Research 6
Fed: Data dependent? Pinning down NAIRU and neutral (percent) Will the Fed ease their response function again? (percentage points) 6.4 6 0.00 6.2 6.0 5 4 0.25 0.50 0.75 5.8 5.6 3 2 1.00 1.25 1.50 5.4 5.2 5.0 65 70 75 80 85 90 95 00 05 10 15 1 0 1 1.75 2.00 Apr 12 Jun 12 Sep 12 Dec 12 Mar 13 Jun 13 Sep 13 Due to decline in NAIRU Dec 13 Mar 14 Jun 14 Sep 14 Dec 14 Mar 15 Due to change in neutral rate Jun 15 Sep 15 Dec 15 NAIRU (LHS) Natural Rate of Interest (RHS) Source: Renaissance Macro Research, Haver Analytics 7
Fed: Balance of Risks Balanced inflation risks in December (number of participants) Balanced risks around unemployment (number of participants) Source: Renaissance Macro Research, Federal Reserve, Haver Analytics 8
Washington & Global Policy Kim Wallace
Overview Effective policymaking relies on capable, resilient institutions consensual action, which often determines whether uncertainty becomes risk 2016 marks 7 th consecutive post crisis year of intensifying macroeconomic and geopolitical uncertainties Monetary and fiscal authorities in open economy countries/regions struggle to break from short horizon policies Geopolitical risks test development and implementation of coordinated response but geostrategic actions contain macroeconomic spillover U.S. elections cap DC risks to markets and also truncate non defense policy based market opportunities 10
Trade: Open and shut cases Source: UNCTAD 11
Trade: No time like the past Source: UNCTAD 12
Emerging Markets: Double edged herd Source: IMF 13
China: Addition by subtraction Source: IMF, RenMac 14
Europe: Closer to closure Source: Bloomberg 15
Europe: Redemption song Source: Wall Street Journal (official sources), RenMac 16
Europe: Clouded future Source: Eurobarometer 17
Tax: Expat tax experts Source: Bloomberg 18
Fiscal: Let s lay it out Source: CBO 19
Campaign 2016: Smarter than your average poll Source: HuffPost Pollster 20
Campaign 2016: Not so standard error Source: FiveThirtyEight 21
Campaign 2016: Learn how to delegate Source: RenMac 22
Campaign 2016: Voters have issues Source: Bloomberg Politics (September 18 21, 2015) 23
Campaign 2016: Significant shrinkage Source: Pew Research Center 24
Technical & Strategy Jeff degraaf
Stock returns have been historic 26
Average stock weaker than market 27
Net 20 day lows are expanding 28
20 day highs hit 55% in bull market 29
IG default premiums are rising 30
10 year yields & fed rate hikes 31
Bond exodus is bullish for bonds 32
Utility ETF flows also bullish 33
Central bank assets growth is slow 34
China FX reserves contracting 35
On shore vs. off shore Yuan 36
EM Fx weak w/ exception of China 37
China Fx reserves impact on assets 38
Quality works when credit stressed 3 2.8 2.6 2.4 2.2 2 1.8 1.6 1.4 1.2 1 BBB Spread to Treasuries 11 12 13 14 15 16 7.35 7.3 7.25 Quality Q1 Q5 7.2 7.15 7.1 7.05 7 11 12 13 14 15 16 39
Energy premature/h.c. vulnerable 40
Energy credit still widening 41
INTC: One of the few mega bases 42
Small Cap & Sector Deep Dives Rob Ginsberg
Small Cap: History favorable after 2 underperforming years 44
Yet, the technical backdrop remains our main concern Russell 2000 Equal Weight Relative to Russell 1000 Equal Weight 45
Industrials: Valuation continues to intrigue us S&P Composite 1500 / Industrials Sec Price Relative to S&P Composite 1500 S&P Composite 1500 / Industrials SEC PE NTM Relative to S&P Composite 1500 46
But we have not seen confirmation from key market signals Large vs. small cap industrials Industrials relative performance and the yield curve RSquare: 0.51 RSquare: 0.55 47
Health Care: End of multi year outperformance? S&P Composite 1500 / Health Care SEC Relative to S&P Composite 1500 48
Health Care: Sustained improvement In industrials would signal improving global growth prospects and an end to health care leadership, in our view RSquare: 0.77 49
RenMac 2016 Outlook Call Thank you for joining us! If you are using Webex, please complete a brief survey upon exiting the program For a copy of the slides please email: Sales@RenMac.com 50
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