private banking global ‘wrap up’ - bank of ireland · pdf file ·...
Post on 29-Mar-2018
217 Views
Preview:
TRANSCRIPT
Private Banking Global ‘Wrap Up’ Bank of Ireland Private Banking
1st Quarter 2017
Investor Overview
Tom McCabe,
Global Investment
Strategist
What a difference a year makes!
In sharp contrast to the first quarter of 2016, 2017 started well for investors
particularly those invested in stock markets (see chart 1 for performances). While the
first quarter of 2016 was dominated by headlines about economic difficulties in the
US, China and the collapse in commodity and stock prices, the first quarter of this
year has been almost serene by comparison.
-
5.7%
-1.5%
0.1%
1.7%
-2.3%
5.4%
-1.5%
0.1%
-3% -2% -1% 0% 1% 2% 3% 4% 5% 6% 7%
MSCI World (Equities)
European Government Bonds
European Corporate Bonds
HFR Global Hedge Fund (Liquid Alternatives)
Bloomberg Commodity Index (Commodities)
Chart 1: Investment Performance Q1 2017
YTD 2017 (€) YTD 2017 (Local Currency)
Source: Bloomberg, April 2017Performance to 31 March
Good start to 2017for equity investors
Warning: Past Performance is not a reliable guide to future performance
G10 economic data continue to beat expectations (see chart 2) and we think this is
the key positive takeaway for investors from the first quarter as they eye how the rest
of the year might pan out. On top of this, expectations around President Trump’s tax
plans, a solid Q4 earnings season, a market friendly Dutch election result and a fresh
dose of merger and acquisition news also prompted investors to bid up stocks.
Warning: Past Performance is not a reliable guide to future performance
-80
-60
-40
-20
0
20
40
60
Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Chart 2: Citi G10 Economic Surprise IndexEconomic 'beats'at a five year highReadings greater than zero - economic data outperforming expectations
Readings less than zero - economic data underperforming expectations
Source: Bloomberg, March 2017
From a macro perspective, little happened in the first quarter to fundamentally alter
our views on how things might play out in 2017. Although US GDP growth dipped in
Q4 much of this was down to a weaker trade performance resulting from the dollar’s
strong rally in Q4. Outside of this consumer spending continues to grow solidly and
business investment is slowly improving – the two economic markers we’re looking
for from the US this year.
The European economy again surprised to the upside in the first quarter with the
UK and Euro zone growing by 0.7% and 0.4% respectively in the quarter. The UK
result was particularly strong but we still think conditions could slow a little going
forward as rising inflation and greater caution around BREXIT slows the rapid growth
in consumer spending of late. The clock is now ticking for European governments
following the trigger of Article 50. A huge amount of work needs to be done to
ensure the UK doesn’t leave the EU in March 2019 without a satisfactory BREXIT
deal, especially given the busy election calendar in the Euro zone this year. In our
view this makes it more urgent that both parties have a transitional deal or extension
in place before this exit date, just in case!
Warning: Past Performance is not a reliable guide to future performanceWarning: These figures are estimates only, they are not a reliable guide to future performance
Survey data from the Euro zone also indicate that growth could accelerate in the first
quarter of the year, a more positive tone which was flagged in the European Central
Bank’s (ECB’s) March press conference. Indeed this led some investors to speculate
about whether a change in ECB interest rates was imminent. However on balance
this still looks very unlikely to us in 2017. Across the water in the US investors took
the March US rate hike in their stride and we’re still of the view that they should
expect two more moves this year.
On the currency side we still expect the dollar to slowly climb towards parity with the
euro this year although the improving environment in the Euro zone suggests that
the inflection point for the exchange rate may not be far away. One thing to watch on
the dollar though is whether President Trump implements a Border Tax Adjustment
as part of his tax overhaul. If he does then there could be another sizeable leg up for
the dollar in the next couple of years.
In our 2017 investment outlook we felt that the first half of the year could be an
uncomfortable one for government bond investors and the asset class endured
a tough first quarter. The environment will remain tricky for bonds over the next
couple of quarters as headline inflation rates stay elevated thanks to the recovery
in oil prices and as the Fed looks on target to continue increasing US interest rates.
However the climb in yields looks set to be gradual so sharp falls in government
bonds appear unlikely.
In terms of the short term outlook for risk assets (equities, commercial property,
credit) our overriding view is that as long as the macro data stay on course, equity
and property fundamentals can drive these markets to solid gains in 2017. Political
issues clearly retain the potential to upset markets in the short term. Specifically the
French Presidential Election will be very closely watched.
The improving recent poll readings for Emmanuel Macron pose the greatest risk
to a Le Pen victory in our view. A Le Pen victory could cause volatility in European
markets to rise sharply but it is far from certain that we would see a FREXIT vote
even in the unlikely event she were to win.
And of course investors will continue to analyse every move from the Trump
administration. Overall we don’t think the failure to repeal and replace Obamacare
represents a referendum on the whole reform agenda. However the tax reform plan
is a key issue for stock market investors in particular given how it could move the
needle for the US economy. So excessive delays in reforming the tax code has the
potential to erase some of equities’ strong start to 2017.
Equity Market Outlook
Leona Nicholson,
Head of Investment
Management
Why the BAT could be BAD for some companies
As we saw in chart 1 global equities enjoyed a strong first quarter gaining 5% despite
headwinds from a weaker USD. The technology and healthcare sectors were
amongst the strongest performing groups with energy the only sector to produce a
negative return. The market optimism for President Trump was tested in the quarter
as the attempt to repeal Obamacare failed. More broadly the tripartite agenda of tax
reform, deregulation and infrastructure spend is positive for equity markets however
the proposed Border adjustment tax (BAT), rumoured to be 20% on imports has
worried companies with global supply bases. Chart 3 below gives an indication of
particular companies that could be adversely affected by the border tax.
0 200 400 600 800 1000
Wal-Mart StoresTarget
Home DepotLowe's
Dole FoodSamsung America
Family Dollar/Dollar TreeLG Group
Chiquita Brands InternationalIKEA International
Philips Electronics North AmericaNike
Costco WholesaleSears Holdings
JC PenneyGeneral Electric
Chart 3: Top US importers by company*
Source: FT.com/Journal of Commerce/IHS Markit, April 2017*Imports via ocean container transport in 2015 (20 ft equivalent units, 000s)- no account taken of imports from other modes
A border tax does not suit companies where components are made overseas and
have low profit margins. Walmart*, Target*, Nike* and many others are busy lobbying
the new administration calling it a ‘consumer tax’ as ultimately prices would rise to
offset the higher costs of domestic manufacturing. Even net exporters from the US
like agricultural equipment company Deere* is not a fan of the tax as it raises the
longer term prospect of farmers buying tractors and other equipment from China and
other lower cost countries.
Warning: Past Performance is not a reliable guide to future performance
Elsewhere, the consumer sector was dominated by Kraft Heinz’s* surprise $143bn
offer for Unilever*. The offer was withdrawn three days later as Unilever rejected the
bid outright and promised their shareholders further upside through restructuring and
increased buybacks. Reckitt Benckiser* confirmed the purchase of US infant formula
company Mead Johnson for $18bn in cash.
In technology, Apple’s* quarterly earnings beat expectations as investors await the
iPhone 8 in the third quarter. Part of the US tax reform agenda may allow Apple to
repatriate its offshore cash pile of $200bn which could be used to increase dividends
and buy back shares rather than pursue large acquisitions. Google’s* Android
operating system has now overtaken Windows as the world’s largest operating
platform accounting for nearly 40% of all internet usage reflecting the dominance of
mobile devices. Windows still dominates the desktop market in 90% of all Personal
computers.
CRH*, a bell weather cyclical stock, sounded an optimistic note during its full year
results presentation. While acknowledging that the industry is cyclical, CRH CEO
Albert Manifold saw “quite a few years ahead in the cycle”. Excluding the potential for
a Trump infrastructure plan, the US (52% of 2016 sales/61% of EBITDA) will continue
to grow; in Europe (46% of 2016 sales/35% of EBITDA) he noted that “the cycle
hasn’t even started yet”.
Overall we retain our view that global equities should form a part of a long term
portfolio. Currently looking at the forward price earnings ratio, global stocks are
reasonably valued relative to history. We continue to favour global dividend paying
companies with strong balance sheets that sell on attractive valuations with a long
track record in delivering returns.
*Reference to specific securities should not be construed as a recommendation to buy or sell these
individual securities. The information provided is intended only for your information purposes and should
not be passed to any third persons. The information may not be reproduced or circulated without prior
permission from BOIPB.
Warning: Past Performance is not a reliable guide to future performanceWarning: These figures are estimates only, they are not a reliable guide to future performance
Bond market outlook
Tom Baragry,
Head of Multi-Manager
Funds
Flat first quarter for bonds
The first quarter of 2017 saw flat returns from global bonds (see table 1) as the US
Federal reserve again raised interest rates, core inflation rates remained relatively
unchanged and stock markets moved higher. Bond yields in the US, UK, Switzerland
and Japan were unchanged but Eurozone yields increased with peripheral countries
seeing the biggest increases. Corporate bonds, emerging market debt and high yield
bonds all posted positive returns as investors again chased yield in this low interest
rate environment.
Table 1: Bond Market Performance
Index Local Currency
Q1 2017
Citi WorldBIG Index (Euro hedged) -0.1%
Citi EuroBig Index -1.0%
Citi EuroBIG Sovereign Index -1.5%
Citi EuroBIG Corporate Index 0.1%
Citi USBig Treasury Index 0.7%
Citi USBig Mortgage Index 0.4%
Citi US Corporate Index 1.3%
Citi US High Yield Index 2.4%
Citi Global Emerging Sovereign Index 3.2%
Source: Bloomberg, April 2017
The US Federal Reserve raised interest rates by 0.25% in March. Guidance from
the Federal Reserve on future rate increases was left unchanged though with a total
of three increases predicted for 2017 and a further three in 2018. In contrast the
European Central Bank made no change to interest rates and stated that it expects
rates will stay at current levels or lower for an extended period as they saw no
convincing upward trend in underlying inflation.
Warning: Past Performance is not a reliable guide to future performanceWarning: These figures are estimates only, they are not a reliable guide to future performance
Headline inflation rates across the globe continued to increase driven by increasing
energy prices. CPI rose to 2.7% in the US, 2.0% in the Eurozone, 2.3% in the UK,
2.5% in China. However excluding energy core inflation remains more subdued
at 0.9% in the Eurozone, 2.2% in the US and 2.0% in the UK. Despite the general
improvement in the global economy lately, broad based inflation still doesn’t seem
prevalent across the major developed economies.
Our view has not significantly changed despite the general increase on bond yields
since last summer. While sovereign bond yields have risen, in our view they still do not
offer good long term value, particularly long dated bonds. We continue to find better
value in other areas of global bond markets such as credit, which includes investment
grade corporate debt, non-agency mortgage backed securities, high yield debt and
emerging market debt. Consequently we have about half our bond portfolios in these
areas.
Table 2: Government Bond Yields (31 March 2017)
Country 2Yr Yield 5Yr Yield 10Yr Yield 30Yr Yield
US 1.25% 1.92% 2.39% 3.01%
UK 0.13% 0.56% 1.14% 1.73%
Japan -0.19% -0.12% 0.07% 0.85%
Switzerland -0.86% -0.54% -0.09% 0.32%
Germany -0.74% -0.38% 0.33% 1.11%
Ireland -0.35% 0.04% 1.00% 2.09%
Source: Bloomberg, April 2017
Warning: Past Performance is not a reliable guide to future performanceWarning: These figures are estimates only, they are not a reliable guide to future performance
Alternative market outlook
John Byrne,
Senior Investment
Manager
Decent first quarter performance led by equity strategies
European liquid alternatives generated a positive return in the first quarter of 2017.
The European liquid alternatives average returned 1.7% in the 1st quarter and with a
1 year gain of 4.2% (See chart 4 below).
The biggest driver of return from the broad hedge fund index came from the strong
returns from equity related strategies. This style benefited from good returns in
equities but particularly in Europe where the market returned 6%. These strategies
have also been the standout performers over the past 12 months. Although the
net exposure (long minus short positions) of these funds began 2016 at low levels,
managers took a far more positive view of equities following the US election result.
This has resulted in a much stronger recent performance.
Another element that has helped active equity managers in recent months is that
intra stock correlations (how stocks move in relation to each other) have fallen. This
provides active stock pickers with a better opportunity to generate returns through
stock selection. It also provides evidence that stocks are not being affected by macro
factors as much and that stock fundamentals are becoming more important drivers
of returns.
Warning: Past Performance is not a reliable guide to future performance
1.7%
3.2%
0.0% 0.3% 0.5%
4.2%
6.8%
-0.4%
3.5%2.7%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
HFRU HedgeFund Composite
Index
HFRU EquityHedge Index
HFRU MacroIndes
HFRU RelativeValue Arbitrage
Index
HFRU EventDriven Index
Chart 4: Liquid Alternative Strategy Performances
Q1 2017 1 yearSource: Bloomberg, April 2017
Warning: Past Performance is not a reliable guide to future performance
In contrast to equity related funds, global macroeconomic (thematic) strategies
struggled in the first quarter, producing flat returns in the period and being impacted
by some reversals in ‘Trump trades’. For example, the US dollar weakened in trade
weighted terms in the quarter which hurt many managers in the space. Event
driven funds generated a positive return in what was a mixed market for merger and
acquisitions - while the number of deals fell in the quarter the overall value of those
deals increased.
Property market outlook
Paul McKee,
Senior Property Asset
Manager
Signs that the cycle is maturing
European real estate has provided investors with exceptionally high levels of return
over the past few years. However, we are now seeing signs that the market as a
whole is starting to moderate. While yields may not yet have reached a trough, and
further rental growth is certainly likely, countries such as Germany look to be entering
a more mature stage of this cycle. Commercial real estate in core Europe still looks
attractive relative to other asset classes, but further falls in initial yields during the
second half of 2016 are adding to the likelihood of lower absolute returns over the
next five years. In the short term, there is still the potential for further real estate yield
compression, driven in part by the current large spread over bonds, as well as the
expectation of further rent growth.
In the US, 2016 was a strong year for commercial real estate. For the most part,
demand continued to outstrip supply, pushing vacancy rates lower and rents higher.
Prices generally ended the year above where they started, delivering total returns
to core real estate in line with historical norms. In more subtle ways, however, the
landscape began to shift. While fundamentals were strong, financial-market volatility
curbed the decline of cap rates that had powered capital gains since 2010 (see chart
5 for the change in US yields since Q4 2015). Total returns slipped into the single
digits for the first time since the financial crisis. The outlook for commercial real estate
remains positive, however the economic, structural, and supply-side factors that drive
real-estate performance are clearly shifting.
-80 -60 -40 -20 0 20 40 60
ChicagoNew York
San FranciscoWashington
BostonLos Angeles
London CityParis
StockholmMilan
MadridFrankfurt
Brussels
Chart 5: Change in Prime Office Yields, Q4 2015-Present
Source: Jones Lang Lasalle, April 2017
In Asia Pacific, macroeconomic conditions moderated in 2016, as headwinds
remain in light of tapering growth in China and fragile trade activities in the region.
The direction of trade policies under new U.S. President Trump will particularly be a
key concern for the Asia Pacific region given anxieties over potential shifts towards
protectionism policies. Job growth in the region continues to hover above the
historical ten year average particularly in Japan and Australia, and to some extent in
China. Asia Pacific commercial real estate markets are expected to deliver healthy
core unlevered total returns ranging between 5.8% - 8.1% per annum over the next
five years with industrial returns outperforming office and retail returns.
Warning: Past Performance is not a reliable guide to future performanceWarning: These figures are estimates only, they are not a reliable guide to future performance
Table 3: Updated Investment View*
Asset Class Scale (1-5) Comment
Public Equities 4Long term global public equity valuations reasonable relative to history
Government Bonds 2Yields are extremely low compared to historical norms
Corporate Bonds 3More attractive than government bonds, selective opportunities in investment grade and Emerging market credit
Liquid Alternatives 4Absolute return strategies producing cash plus type returns are a good substitute for government bonds
Illiquid Alternatives (Private Markets) 4Offer potential for strong long term inflation adjusted returns
Property 4Low interest rate environment favours real assets such as property
Cash 2Negative rates on Euro zone deposits make cash look unattractive
*Note: Scale (1: Very unfavourable, 2: Unfavourable, 3:Neutral, 4: Favourable, 5 Very Favourable). This is meant to beillustrative only and reflects our broad asset class views over the medium to long term. Any changes to a fund’sallocations will also take into account other factors including the fund’s investment objective and its particularinvestment guidelines.
Source: Bank of IrelandPrivate Banking
Warnings & Disclaimers
This document has been prepared by Bank of Ireland Private Banking Limited (BOIPBL) on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst all reasonable care has been taken in the preparation of this document, we do not guarantee the accuracy or completeness of the information contained herein and accept no responsibility whatsoever for any loss or damage caused by any act or omission made as a result of the information contained in this document.
Any investment, trading or hedging decision of a party will be based on their own judgement and not upon any view expressed by BOIPBL. The content of this document is for information pur-poses only and does not constitute an offer or recommendation to buy or sell any investment or to subscribe to any investment management or advisory service. You should obtain independent professional advice before making any investment decision.
For private circulation only. Not to be reproduced in whole or in part without prior permission. If there is any conflict between this document and the product terms and conditions, the terms and conditions will apply.
Any expression of opinion reflects current opinions of BOIPBL as at April 2017 and is subject to change without notice.
Bank of Ireland Private banking Limited is regulated by the Central Bank of Ireland. Bank of Ire-land Private Banking Limited is a member of the Bank of Ireland Group.
RC070-17
Warnings
• Past Performance is not a reliable guide to future performance• These figures are estimates only, they are not a reliable guide to future
performance• The value of your investment may go down as well as up• If you invest in these products you may lose some or all of the money
you invest• Investments may be impacted by changes in currency rates
top related