Asset Allocation Outlook Victoria, BC February 4, 216 Bob Boyda Head of Capital Markets & Strategy Manulife Asset Management 1
The Search for Yield (you think this is bad ) 1yr Bond Yields: Globally low % 5. 4.5 4. 3.5 U.S. Germany UK Canada 3. 2.5 2. 1.5 1..5. 21 211 212 213 214 215 216 Source: Bloomberg, Manulife Asset Management. As of Oct '15. PRS.237742 2
Multi-generational, multi-century low yields! 18 US 1 Year Yield (%) 18 France 1 Year Yield (%) 16 16 14 14 12 12 1 1 8 8 6 6 4 4 2 2 181 1827 1852 1878 193 1928 1953 1978 23 1756 1781 186 1886 1913 1938 1963 1988 213 18 16 14 12 Japan 1 Year Yield (%) 18 16 14 12 Germany 1 Year Yield (%) 1 1 8 8 6 6 4 4 2 2 1881 196 1931 1956 1981 26 1832 1857 1883 198 1933 196 1985 21 Source: Global Financial Data, 5/1/215 PRS.25929 3
Fixed Income Forecasting What you see is what you get 4
198 1981 1982 1983 1985 1986 1987 1988 199 1991 1992 1993 1995 1996 1997 1998 2 21 22 23 25 26 27 28 21 211 212 213 215 Real Interest Rates (Percent) Where is the Fed going and Why it won t matter 12. 1. Recessions Real Fed Funds Rate Average 1 8. 6. 4.7% 4. 2.8% 2. 1.%. -2. -4. Source: John Hancock Asset Management as of January 1, 215 5
'8 '81 '82 '83 '84 '85 '86 '87 '88 '89 '9 '91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 '9 '1 '11 '12 '13 '14 (%) Bond Market Framework Where the 1 year Treasury is going and what it means 1 Year Real Treasury Yield vs. Long-Term Average and Average of Each Fed Chair Era 12. Volker Era Greenspan (1) Era Greenspan (2) Era Bernanke Era 1. Yellen Era 8. 6. Avg Yield: 4.88 Avg Yield: 3.76 4. 2. Long-Term (5 Year) Average Real Yield: 3.1 Avg Yield: 2.4 Avg Yield: 1.4. -2. Avg Yield: 1.26-4. -6. Source: FactSet, Bloomberg, June 5, 215. Some of the most heavily traded securities in the world, 1-year U.S. Treasuries are the de facto proxy for intermediate-term interest rates. Past performance is no guarantee of future results. PRS.242991 6
Return (%) 5-Year Expected Return Forecasts Developed Markets Similar; EM Expected to outpace but not without risk Asset Class Expected Return Components Third Quarter 215 1 8 6.36 7.72 6 4 4.77 4.47 3.59 2-2 -4 US Large Cap US Mid Cap US Small Cap EAFE Large Cap Emerging Markets Asset Class Income Return Growth Valuation Currency Return Total Return (USD) Source: Portfolio Solutions Group, September 215. Note: The above represents 5-year, forward looking predictions for specific asset classes using a proprietary model and are not meant as a recommendation to buy or sell any particular asset class, mutual fund or investment vehicle. Components not represented in the chart are zero or negligible values. Past performance is no guarantee of future results. MSTR.26936 7
US Equities: Valuations at Risk No room for misses US Equities at 9th p tile expensive no room for mistakes rising $ is an issue, as it strains margins. so far so good but another $ rise of 15% tips the scale. Prepare for a profits recession at some point over the next 3-5 years. Favors large over small at these prices Risks: US$ rally. A savings-oriented consumer Technology PRS.242991 Source: Leuthold Group, June 5, 215. 8
2 2 21 22 22 23 24 24 25 26 26 27 28 28 29 21 21 211 212 212 213 214 214 215 216 US$ winding up for another run DXY Dollar Index: Broad USD strength 13 Index 12 11 1 9 8 7 6 Source: Bloomberg, Manulife Asset Management. as of Jan '16 PRS.237742 9
12/1/1995 3/1/1997 6/1/1998 9/1/1999 12/1/2 3/1/22 6/1/23 9/1/24 12/1/25 3/1/27 6/1/28 9/1/29 12/1/21 3/1/212 6/1/213 9/1/214 Price Per Barrel of Crude (USD) CAD/USD Exchange Rate US$ (up) vs GCSI Commodity Prices (down) same trade right now $15 Oil vs the Loonie $1.1 $125 $1. $1 $.9 $75 $.8 $5 $.7 $25 $.6 $ $.5 WTI CADUSD 1
Canadian equities more global than domestic Canadian equities trading more like EM equities 18 16 S&P/TSX Index MSCI EM Index 14 12 14 12 1 1 8 8 S&P/TSX MSCI EM 6 6 4 4 2 2 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 215 216 Source: Bloomberg, Manulife Asset Management. As of Jan'16. 11
The Supply-Cost Curve Demand growth at 2% annually requires 2mm bbl./day of new production each year (US shale added 4.5 mm bb/s over 7 years) Conclusion: no new projects at these prices 12
198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 212 214 China is a manufacturing vs. services story now ( with a lot resting on services) 6 5 4 3 Contribution to Chinese GDP, by sector YoY 9.5% 9.% 8.5% 8.% 7.5% Chinese GDP: supported by services, dragged down by manufacturing GDP, YoY% Aggregate GDP Manufacturing Services Manufacturing 2 Services 1 7.% 6.5% 6.% 5.5% 5.% 212 213 214 215 Source: Bloomberg, Manulife Asset Management. As of 214. Source: Bloomberg, Manulife Asset Management. As of Q3 '15. PRS.237742 13
China: Debt vs Restructuring 14
Conclusions and Risks Overall investment and macro thesis. There are few if any cheap assets out there. Emphasis on beta tracking is in final innings Need to rebalance to more alpha, less emphasis on beta strategies. Allocators ceding more control of aa decisions to expert PMs to find alpha. Across all mandates, next 3-5 years will focus on alpha generation -- hedged equity, long short, TAA, DAA, absolute return-- not beta ( things are too expensive) Major Risks over the secular horizon US$ produces a repeat of 1997-8 upturn. EM craters. EM debt craters. U S consumer does not come to the rescue as in 2-2. [probability <2%.] Cyclical uptick in inflation turns virulent, fed is perceived to be behind the curve and makes a mistake. [Probability <1%] Market interest Rates react too strongly to Fed and rates climb too fast putting us into recession <5% Euro zone disintegrates. [probability <5% within 3-5 years] China's rebalancing fails. Another major RMB Devaluation. Debt spirals out of control. Govt is perceived to be ineffective [probability <2%] Cyber-terror attack dislocates the financial clearing system [probability <5%] 15