Market Themes CACTTC Southern Area Conference market update - verus.pdf · Mar-13. Nov-13. Jul-14. Mar-15. Nov-15. Jul-16. Mar-17. Nov-17. Real GDP Growth (YoY) ... BofA-ML US HY

MARCH 2018

Market Themes

CACTTC Southern Area Conference

HighlightsEconomic and equity environment

― How long can the expansion and equity bull market last?

Rising interest rates

― Are the fears over higher interest rates overblown?

The end of the central bank stimulus era

― How will central bank tightening impact fixed income markets?

Historically tight credit spreads

― Is there a sufficient premium for credit risk?

Opportunities in emerging market debt

― Are higher yields in emerging markets attractive?

March 2018CACTTC Southern Area Conference 2

Economic and equity environment

March 2018CACTTC Southern Area Conference

3

Global GDP growth

March 2018

CACTTC Southern Area Conference

Source: Bloomberg, as of 12/31/17

4

-6%

-3%

0%

3%

6%

Jan-05 Nov-08 Sep-12 Jul-16

U.S.

-6%

-3%

0%

3%

6%

Jan-05 Nov-08 Sep-12 Jul-16

Eurozone

-6%

-3%

0%

3%

6%

Jan-05 Nov-08 Sep-12 Jul-16

Japan

0%

4%

8%

12%

Jan-05 Nov-08 Sep-12 Jul-16

BRICS

How long can expansions continue?

March 2018CACTTC Southern Area Conference

Source: Australia Trade and Investment Commission

5

0 5 10 15 20 25 30

Switzerland (1983 to 1990)

Germany (1981 to 1991)

U.S. (2009 to current)

Italy (1983 to 1992)

Sweden (1993 to 2008)

France (1993 to 2008)

Spain (1993 to 2008)

U.K. (1992 to 2008)

Japan (1975 to 1993)

U.S. (1991 to 2008)

Canada (1991 to 2008)

South Korea (since 1998)

Netherlands (1981 to 2003)

Poland (since 1995)

Ireland (1986 to 2007)

Australia (since 1991)

# Years without recession

Equity performance

March 2018CACTTC Southern Area Conference

Source: Bloomberg, as of 2/28/18

6

90

100

110

120

130

140

150

Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18

S&P 500 MSCI EAFE MSCI Emerging Markets

Global earnings momentum

March 2018CACTTC Southern Area Conference

Source: MSCI, as of 2/28/18, year-over-year growth in forward earnings

7

-60%

-40%

-20%

0%

20%

40%

60%

Mar-08 Sep-09 Mar-11 Sep-12 Mar-14 Sep-15 Mar-17

US International Developed Emerging Markets

Forward P/E ratios

March 2018CACTTC Southern Area Conference

Source: Bloomberg, as of 2/28/18

8

0

2

4

6

8

10

12

14

16

18

20

Mar-08 Sep-09 Mar-11 Sep-12 Mar-14 Sep-15 Mar-17

U.S. EAFE Emerging Markets

The return of volatility

March 2018CACTTC Southern Area Conference

Source: Bloomberg, as of 2/28/18

9

0

5

10

15

20

25

30

35

40

45

Feb-13 May-14 Aug-15 Nov-16 Feb-18

CBOE VIX Index

Rising rates?

March 2018CACTTC Southern Area Conference

10

Long-term sovereign rates

March 2018CACTTC Southern Area Conference

Source: Bloomberg, as of 2/28/18

11

-1%

0%

1%

2%

3%

4%

5%

6%

Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Feb-16 Feb-17 Feb-18

U.S. Germany Japan U.K.

Interest rate increases in perspective

March 2018CACTTC Southern Area Conference

Source: Verus, Bloomberg, as of 2/28/18

Increases in long-term interest rates over the past six months have been modest

12

0.74

0.53

0.300.27

0.47

0.30

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

6-Month Net Change in 10-Year Yields Z-Score

U.S. Germany U.K.

Duration concerns

March 2018CACTTC Southern Area Conference

Source: Bloomberg, as of 2/28/18

13

4.0

4.5

5.0

5.5

6.0

6.5

7.0

Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17

Mod

ified

Adj

uste

d Du

ratio

n

BBgBarc U.S. Agg Treasury Index Duration

What is driving U.S. rates higher?

March 2018CACTTC Southern Area Conference

Source: Bloomberg, as of 2/28/18

14

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18

Nominal Real Breakeven

Economic backdrop

March 2018CACTTC Southern Area Conference

Source: Bloomberg, GDP and PCE data as of 12/31/17, consensus forecasts as of 2/28/18

15

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

Mar-11 Nov-11 Jul-12 Mar-13 Nov-13 Jul-14 Mar-15 Nov-15 Jul-16 Mar-17 Nov-17

Real GDP Growth (YoY) Core PCE Inflation (YoY)

2018 YE Bloomberg Consensus Forecasts

U.S. Treasury curve

March 2018CACTTC Southern Area Conference

Source: Bloomberg

16

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 30Y

U.S. Treasury Curve as of 2/28/18 U.S. Treasury Curve as of 2/28/17

+107 bps

+48 bps

Interest rates versus earnings yield

March 2018CACTTC Southern Area Conference

Source: Bloomberg, as of 2/28/18

17

-10%

-5%

0%

5%

10%

15%

20%

Apr-68 Apr-71 Apr-74 Apr-77 Apr-80 Apr-83 Apr-86 Apr-89 Apr-92 Apr-95 Apr-98 Apr-01 Apr-04 Apr-07 Apr-10 Apr-13 Apr-16

Earnings Yield Spread U.S. 10-Year Treasury Yield S&P 500 Earnings Yield

Global central banks

March 2018CACTTC Southern Area Conference

18

Central bank policy rates

March 2018CACTTC Southern Area Conference

Source: Bloomberg, as of 2/28/18

19

-1%

0%

1%

2%

3%

4%

5%

6%

Mar-03 Jun-04 Sep-05 Dec-06 Mar-08 Jun-09 Sep-10 Dec-11 Mar-13 Jun-14 Sep-15 Dec-16

U.S. Eurozone Japan

Short-term sovereign yields

March 2018CACTTC Southern Area Conference

Source: Bloomberg, as of 2/28/18

20

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17

U.S. Germany Japan U.K.

U.S. monetary policy expectations

March 2018CACTTC Southern Area Conference

Source: Bloomberg, as of 2/28/18

21

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Mar-12 Jan-13 Nov-13 Sep-14 Jul-15 May-16 Mar-17 Jan-18 Nov-18 Sep-19

Effective Fed Funds Rate Market Pricing Fed Dot Plot

Fed balance sheet expectations

March 2018CACTTC Southern Area Conference

Source: Bloomberg, Federal Reserve, as of 1/31/18

22

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

$4.5

$5.0

Jan-07 Apr-08 Jul-09 Oct-10 Jan-12 Apr-13 Jul-14 Oct-15 Jan-17 Apr-18 Jul-19 Oct-20

Trill

ions

Treasuries MBS Other

Treasuries

MBS

Other

Central bank balance sheets

March 2018CACTTC Southern Area Conference

Source: Federal Reserve, ECB, BOJ, as of 1/31/18

23

$0

$2

$4

$6

$8

$10

$12

$14

$16

Jan-08 Jul-09 Jan-11 Jul-12 Jan-14 Jul-15 Jan-17

Trill

ions

Fed ECB BOJ

Credit markets

March 2018CACTTC Southern Area Conference

24

Credit spreads

March 2018CACTTC Southern Area Conference

Source: Bloomberg, as of 2/28/18

25

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17

High Yield Investment Grade

Default rates

March 2018CACTTC Southern Area Conference

Source: BofA Merrill Lynch, as of 12/31/17

26

0%

5%

10%

15%

20%

25%

Jan-98 Sep-99 May-01 Jan-03 Sep-04 May-06 Jan-08 Sep-09 May-11 Jan-13 Sep-14 May-16

BofA-ML US HY par weighted default rate Energy

Opportunities in emerging markets

March 2018CACTTC Southern Area Conference

27

Fixed income opportunity set

March 2018CACTTC Southern Area Conference

Source: JPMorgan, as of 12/31/17

28

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

$110

Mar-90 Mar-92 Mar-94 Mar-96 Mar-98 Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16

Asse

ts ($

) in

trill

ions

U.S. Developed ex-US EM

Dev ex-US: $44 Trillion

US: $39 Trillion

EM: $21 Trillion

EMD local currency yields

March 2018CACTTC Southern Area Conference

Source: Bloomberg, as of 2/28/18

29

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18

EMD Local Yield Average

EMD hard currency spreads

March 2018CACTTC Southern Area Conference

Source: Bloomberg, as of 2/28/18

30

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17

Emerging market currency

March 2018CACTTC Southern Area Conference

Source: JPMorgan, as of 2/28/18

31

60

70

80

90

100

110

120

Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18

35% drawdown

HighlightsEconomic and equity environment

― How long can the expansion and equity bull market last?

Rising interest rates

― Are the fears over higher interest rates overblown?

The end of the central bank stimulus era

― How will central bank tightening impact fixed income markets?

Historically tight credit spreads

― Is there a sufficient premium for credit risk?

Opportunities in emerging market debt

― Are higher yields in emerging markets attractive?

March 2018CACTTC Southern Area Conference 32

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Verus – also known as Verus Advisory™.

March 2018CACTTC Southern Area Conference 33