presented by epoch’s quarterly capital marketseconomic surprise index: u.s. economic surprise...
TRANSCRIPT
David N. Pearl
Executive Vice President and Co-CIO
William W. Priest
Chief Executive Officer and Co-CIO
PRESENTED BY
The information contained in this presentation is distributed for informational purposes only and should not be considered investment advice or a recommendation of any particular security, strategy orinvestment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. The information contained in this presentation is accurate as of the datesubmitted, but is subject to change. Any performance information referenced in this presentation represents past performance and is not indicative of future returns. Any projections, targets, orestimates in this presentation are forward looking statements and are based on Epoch’s research, analysis, and assumptions made by Epoch. There can be no assurances that such projections,targets, or estimates will occur and the actual results may be materially different. Other events which were not taken into account in formulating such projections, targets, or estimates may occur andmay significantly affect the returns or performance of any accounts and/or funds managed by Epoch. To the extent this presentation contains information about specific companies or securitiesincluding whether they are profitable or not, they are being provided as a means of illustrating our investment thesis. Past references to specific companies or securities are not a complete list ofsecurities selected for clients and not all securities selected for clients in the past year were profitable.
Epoch’s Quarterly Capital Markets Outlook
April 16, 2015 | The webinar replay will be available on our website: www.eipny.com
Michael Jin
Research Analyst
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P/E Expansion Has Driven Market Returns
P/E Expansion56.7%
Total Return72.6%
Dividends17.4%
P/E Expansion78.3%
Total Return 54.0%
EPS Growth6.3%
EPS Growth31.1%
Dividends12.3%
S&P 500 MSCI World
Numbers may not total due to roundingSource: Standard & Poor's; MSCI; Epoch Investment Partners; December 2014
Cumulative contribution to return 2012 through 2014
2
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2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
2011 Est 2012 Est 2013 Est 2014 Est 2015 Est Actual GDP
The Big Problem: Secular Stagnation
3
World real GDP growth estimates continue to be revised down
Source: IMF World Economic Outlook; January 2015
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160%
165%
170%
175%
180%
185%
190%
195%
200%
205%
210%
215%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
174%
World More Highly Levered Than Before Financial Crisis
4
Source: Geneva Reports on the World Economy, Deleveraging? What Deleveraging? Authors’ calculation based on OECD, IMF and national accounts data; October 2014
World debt ex-financials, percent of GDP
213%
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Debt Crisis Resolution In 3D
5
DefaultU.S. – Mortgage defaults
early in crisis
Europe – Disallowed (except possibly Greece)
Deflation in Demand
U.S. – Government spending curtailed through sequestration
Europe – Only lever left for Europe was austerity
To overcome a debt crisis
you need
DevaluationU.S. – Dollar devalued
early in crisis
Europe – Constraints due to shared currency
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-0.5%
0.5%
1.5%
2.5%
3.5%
4.5%
Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15
France Switzerland Germany Japan U.S. Spain Italy
Secular Stagnation Fear Reflected In Sovereign Yields/QE Policy Continuation
6
Global 10-year bond yields
Source: FactSet, Epoch Investment Partners; April 7, 2015
Japan 0.36%Germany 0.16%
France 0.47%
Spain 1.18%
Italy 1.19%
U.S. 1.89%
Switzerland -0.06%
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Deflation Fears Are Present in European Yields
-0.24%
-0.01%
1.69%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3M 1Y 3Y 5Y 7Y 10Y 30Y
Eurozone Switzerland Germany U.S. Treasuries
Source: Bloomberg; April 2, 2015
-0.015
7
U.S. and European yield curves
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60
70
80
90
100
110
120
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
U.S. Eurozone Japan U.K.
U.S. Growth Outlook Remains Better Than Rest Of World
8
Eurozone, U.S., Japan and U.K. industrial production
Source: FactSet, Epoch Investment Partners, Indexed to 100 in January 2005; February 2015
Index
U.K.
Eurozone
Japan
U.S.
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-100
-80
-60
-40
-20
0
20
40
60
80
100Economic Surprise Index: U.S. Economic Surprise Index: Eurozone
Economic Surprise Indices
Positive economic surprises in Europe, negative surprises in the U.S.
Source: Citigroup Global Markets; April 2015
9
Index
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95
100
105
110
115
120
125
130
Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15
Euro/USD Yen/USD GBP/USD AUD/USD CAD/USD
Dollar Strengthened Against Major Currencies
10
Index
Source: Federal Reserve, Epoch Investment Partners; Indexed to 100 July 1, 2014; April 10, 2015
Exchange rates in USD terms
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-35%
-25%
-15%
-5%
5%
15%
25%
35%Local Return USD Return
Local currency and USD
Global Returns, First Quarter 2015
Source: MSCI, Epoch Investment Partners
11
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10,159
5,115
2,674
1,994
$0
$2,000
$4,000
$6,000
$8,000
$10,000
WisdomTreeEuropeHedgedEquity
Deutsche X-trackers
MSCI EAFEHedged
Equity ETF
VanguardTotal Stock
Market
VanguardS&P 500
iSharesiBoxx $
InvestmentGrade
CorporateBond
WisdomTreeJapan
HedgedEquity
iSharesiBoxx $ High
YieldCorporate
Bond
iSharesCore MSCI
EAFE
iSharesCurrencyHedged
MSCI EAFE
UnitedStates Oil
Millions
Source: ETF.com
12
Top 10 ETF Net Flows
First Quarter 2015
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-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
Jan-
92Ja
n-93
Jan-
94Ja
n-95
Jan-
96Ja
n-97
Jan-
98Ja
n-99
Jan-
00Ja
n-01
Jan-
02Ja
n-03
Jan-
04Ja
n-05
Jan-
06Ja
n-07
Jan-
08Ja
n-09
Jan-
10Ja
n-11
Jan-
12Ja
n-13
Jan-
14Ja
n-15
Base wages Total wages (inc. overtime/bonus)(Y/Y Change)
Source: Pavilion Global Markets (Bank of Japan Data via Bloomberg); February 2015
Abenomics Boosted Income Growth, But Consumers Are Skeptical
Cash earnings year-over-year
28
33
38
43
48
Income growth Value of assets
Japan consumer confidence survey –income growth, asset growth
(Index)
Source: Pavilion Global Markets (Cabinet Office via Datastream); February 2015
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Pressure Building For Corporate Reforms
Japanese Government Pension Investment Fund
60%
12% 11%
5%
35%
25%
15%
0%0%
10%
20%
30%
40%
50%
60%
70%
Domestic Bonds Domestic Equities International Equities Short-term Assets
Old Target Allocation New Target Allocation
Source: BoJ, Japanese GPIF, Exane BNP Paribas
14
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Chinese Growth Continues To Weaken
6%
7%
8%
9%
10%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
Electricity: Total Consumption (Left) Railways: Cargo Delivery (Left) GDP Constant Price (Right)
Source: Pavilion Global Markets (National Bureau of Statistics of China Data via Datastream); February 2015
Y/Y Change Y/Y Change
15
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Chinese Home Prices Declining Amidst a Glut of Inventory
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
2011 2012 2013 2014 2015
Month / Month Year / Year
China home prices: 70 medium and large cities
Change
Source: Pavilion Global Markets (National Bureau of Statistics of China Data via Datastream); February 2015
16
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Chinese Investors Moving From Housing To Stock Market
17
1,800
2,300
2,800
3,300
3,800
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
New Accounts (Left Scale) Shanghai Composite (Right Scale)
Source: Pavilion Global Markets; April 2015
Thousands Index
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-2%
-1%
0%
1%
2%
3%
4%
5%
6%
Jan-
00M
ay-0
0Se
p-00
Jan-
01M
ay-0
1Se
p-01
Jan-
02M
ay-0
2Se
p-02
Jan-
03M
ay-0
3Se
p-03
Jan-
04M
ay-0
4Se
p-04
Jan-
05M
ay-0
5Se
p-05
Jan-
06M
ay-0
6Se
p-06
Jan-
07M
ay-0
7Se
p-07
Jan-
08M
ay-0
8Se
p-08
Jan-
09M
ay-0
9Se
p-09
Jan-
10M
ay-1
0Se
p-10
Jan-
11M
ay-1
1Se
p-11
Jan-
12M
ay-1
2Se
p-12
Jan-
13M
ay-1
3Se
p-13
Jan-
14M
ay-1
4Se
p-14
Jan-
15
CPI Core CPI
All Eyes Are On Inflation
U.S. inflation: headline and core
Source: FRED; Consumer Price Index for All Urban Consumers: All Items, Percent Change from Year Ago, Monthly, Seasonally Adjusted, Consumer Price Index for All Urban Consumers: All Items Less Food & Energy, Percent Change from Year Ago, Monthly, Seasonally Adjusted; February 2015
18
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Employment Rising Steadily at Around 200k a Month
19
Change in employment, all private employees
Source: Bureau of Labor Statistics; March 2015
All Employees: Total Private Industries (Left Scale)Change In Total Private Employment (Right Scale)
-1000
-800
-600
-400
-200
0
200
400
600
106,000
108,000
110,000
112,000
114,000
116,000
118,000
120,000
122,000
If you wish to ask a question, please click on the question mark icon located on the top of the screen.
1.5
2.0
2.5
3.0
3.5
4.0
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
Jan-
05A
pr-0
5Ju
l-05
Oct
-05
Jan-
06A
pr-0
6Ju
l-06
Oct
-06
Jan-
07A
pr-0
7Ju
l-07
Oct
-07
Jan-
08A
pr-0
8Ju
l-08
Oct
-08
Jan-
09A
pr-0
9Ju
l-09
Oct
-09
Jan-
10A
pr-1
0Ju
l-10
Oct
-10
Jan-
11A
pr-1
1Ju
l-11
Oct
-11
Jan-
12A
pr-1
2Ju
l-12
Oct
-12
Jan-
13A
pr-1
3Ju
l-13
Oct
-13
Jan-
14A
pr-1
4Ju
l-14
Oct
-14
Jan-
15A
pr-1
5
Openings (Left Scale) Quits (Right Scale)
Job Openings and Labor Turnover
Source: Bureau of Labor Statistics; Total U.S. Nonfarm Job Openings and Total U.S. Nonfarm Quits Seasonally Adjusted; January 2015
Precursor to wage growth?
20
Million Million
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0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
Jul-8
5
Jul-8
6
Jul-8
7
Jul-8
8
Jul-8
9
Jul-9
0
Jul-9
1
Jul-9
2
Jul-9
3
Jul-9
4
Jul-9
5
Jul-9
6
Jul-9
7
Jul-9
8
Jul-9
9
Jul-0
0
Jul-0
1
Jul-0
2
Jul-0
3
Jul-0
4
Jul-0
5
Jul-0
6
Jul-0
7
Jul-0
8
Jul-0
9
Jul-1
0
Jul-1
1
Jul-1
2
Jul-1
3
Jul-1
4
Jul-1
5
Wage Inflation Has Yet To Materialize
1. Production and Non-Supervisory: Total Private IndustrySource: Federal Reserve Economic Data; March 2015
Average Hourly Earnings1Y/Y Change
21
Earnings growth elusive
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Corporations Continue To Be Main Beneficiaries Of The Recovery
22
52%
53%
54%
55%
56%
57%
58%
59%
60%
3%
5%
7%
9%
11%
13%
15%
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Recession Corporate Profits (Left Scale) Labor Compensation (Right Scale)
Source: Bureau of Economic Analysis, Epoch Investment Partners; Fourth Quarter 2014
Corporate profits vs. labor compensation, percent of GDP
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Earnings Estimates Have Followed Oil
$30
$40
$50
$60
$70
$80
$90
$100
$110
$120
$110
$115
$120
$125
$130
$135
$140
$145
$150FY 2014 (Left) FY 2015 (Left) FY 2016 (Left) WTI (Right)
Source: Standard & Poor's, Epoch Investment Partners; April 2015
S&P 500 earnings estimates and WTI oil price
23
Per Barrel
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1,250
1,350
1,450
1,550
1,650
1,750
1,850
1,950
2,050
2,150
2,250
Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15
The Market Is Looking Through Current Earnings Pressure
S&P 500 next twelve months earnings multiples
Index
S&P 500
17x
16x
15x
14x
13x
12x
Source: Standard & Poor's, Yardeni Research, Epoch Investment Partners; April 2015
P/E
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12
14
16
18
20
22
24
26
28
30
Energy Cons.Staples
Cons. Disc Health Care Materials S&P 500 Utilities Technology Industrials Telecom Financials
Last 12-months P/E Next 12-months P/E
S&P 500 Sector Valuations
Source: Standard & Poor's, FactSet, Epoch Investment Partners; April 2015
25
S&P 500 earnings multiples
Multiple
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Utilities: Interest Rate Impact
Impact on Interest Expense: New debt will be a small fraction of overall debt; impact is limited
Companies took advantage of the low rate environment
Impact on Discount Rate: Stocks that have high dividends are shorter-duration than those that do not
V = Div / (r – g) Growth can overcome headwind of rising rates
26
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Utilities for Shareholder Yield
0%
1%
2%
3%
4%
5%
6%
2006 2007 2008 2009 2010 2011 2012 2013 2014
MSCI World Utility Dividend MSCI World Dividend
Source: MSCI, Epoch Investment Partners; 2014
12-month dividend yield
27
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Global M&A Activity Continues to Accelerate
Monthly global M&A deal value and number
$0
$50
$100
$150
$200
$250
0
50
100
150
200
250
30012-Month Average Number (Left) 12-Month Average Value (Right)
Source: Strategas; March 2015
#
28
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$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
$1,000
'98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
Dividends Buybacks
Buybacks And Dividends Continue To Be A Favored Use Of Cash
Billions
S&P 500 annual buybacks and dividends
Source: Strategas, Standard & Poor's; December 2014
29
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Equities Offer Better Income Than Sovereign Bonds
3.81%
1.99%
3.13%
1.68%1.54%
1.87%
0.14%0.32%
0%
1%
2%
3%
4%
GBP USD EUR JPY
Dividend Yield 10-Year Government Bond Yield
Source: MSCI, Epoch Investment Partners; April 14, 2015
MSCI country and regional dividend yields vs. 10-year government bond yields
30
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1. World is growing . . . slowly and unevenly 2. Diverging monetary policies reflected in currency movements3. Currency changes can reallocate growth but have little effect on aggregate
demand4. Currency changes more effective at reallocating inflation/disinflation 5. Dollar strength tightens financial conditions in a U.S. dollar-denominated
global financial system6. Regional attractiveness based on QE expectations:
Europe, Japan, U.S. & U.K.7. Emerging markets unattractive for the most part8. Free cash flow growth rates aided by technology as we move increasingly
toward a "capital light" world9. Companies generating free cash flow will continue to distribute a rising
proportion of that total to shareholders10. Ideal company to own – global champions with goods/services priced in
dollars and costs in local currency
Summary
31
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Question & Answer Section
32