private banking global ‘wrap up’ - bank of ireland · pdf file ·...

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.


-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.


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.


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.


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


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.


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


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.


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

private banking global ‘wrap up’ - bank of ireland · pdf file ·...

Documents