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Economic and Capital Markets Update

Economic and Capital Markets Update. November 16, 2017.

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Economic and Capital Markets Update

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  1. Economic and Capital Markets Update November 16, 2017 • The material contained in this presentation has been prepared solely for informational purposes by New England Asset Management Limited (NEAM Limited) and New England Asset Management, Inc. (“NEAM, Inc.”) and is not to be distributed outside of the organization to which it is presented. The material is based on sources believed to be reliable and/or from proprietary data developed by NEAM, but we do not represent as to its accuracy or its completeness. This is not an offer to buy or sell any security or financial instrument. Certain assumptions, including tax assumptions, may have been made which have resulted in any returns detailed herein. Past performance results are not necessarily indicative of future performance. Changes to the assumptions, including valuations or cash flows of any instrument, may have a material impact on any results. Please consult with your tax experts before relying on this material. Additional information is available upon request. This document and its contents are proprietary to NEAM. They were prepared for the exclusive use of your company. Neither this document nor its contents are to be given or discussed with anyone other than employees, directors, trustees or auditors of your company without our prior written consent. Any reference in this presentation to “NEAM” is defined as NEAM Limited and New England Asset Management, Inc. NEAM Limited is a subsidiary of NEAM, Inc. NEAM Limited is regulated by the Central Bank of Ireland. NEAM Limited is authorized by the Central Bank of Ireland and subject to limited regulation by the Financial Conduct Authority. Details about the extent of our regulation by the Financial Conduct Authority are available from us on request. NEAM Limited is not registered with the SEC. Because this is intended to be an overview please note that some services described in this presentation may not be available to all clients in certain jurisdictions.

  2. Topics • Asset Returns Around The World • U.S. Economic Conditions • The Trump Initiatives • Federal Reserve Policy & U.S. Interest Rates • Capital Market Conclusions • Food For Thought

  3. Positive Asset Returns Throughout The Globe Fixed Income Returns Equity Returns

  4. U.S. Economic Conditions

  5. U.S. GDP Growth Nominal and Real GDP Growth (YoY%) Source: BEA/ Haver/ NEAM

  6. Labor Market - Change in Nonfarm Payrolls Source: BEA/ Haver/ NEAM

  7. Average Hourly Earnings Source: S&P, Haver, NEAM

  8. Household Debt Service Ratio Source: Haver, NEAM

  9. Case Schiller 20 City Composite – Percentage Change Source: Haver, NEAM

  10. Consumer Confidence Source: FRB, Haver, NEAM

  11. The Trump Initiatives

  12. Trump - Priorities Year One

  13. A House Divided…. 54.5%

  14. Federal Reserve Policy & U.S. Interest Rates

  15. What is the Fed Thinking? Source: Board of Governors of the Federal Reserve

  16. US Treasury Yield Movement Year to Date Yield (%) Change (bps)

  17. NEAM Interest Rate Forecast Base Case Interest Rate Forecast Source: NEAM

  18. Capital Market Conclusions

  19. Corporate Bonds

  20. Corporate Leverage on the Rise

  21. Issuance Continues at a Record Breaking Pace Historical New Issue Volumes: USD Investment Grade 5 consecutive years of record breaking supply Source: Deutsche Bank, NEAM

  22. Yet Spreads are at the Tightest Levels Since 2007

  23. Strong Foreign Demand Amid Low/Negative Yields Source: FRB, Haver Analytics, DB Global Markets Research

  24. Municipal Bonds

  25. State & Local Government Credit Benefitting from Macro Strength Source: Census, Haver Analytics, Treasury, DB Global Markets Research

  26. Muni Issuance Remains Anemic Source: BAML, Moody’s

  27. Infrastructure Spending to Pick Up the Slack? In 2015, the federal, state, and local governments spent $612.5 billion on the nation's public infrastructure. Average Age of Infrastructure Spending as a % of GDP SOURCES: U.S. BUREAU OF ECONOMIC ANALYSIS; AMERICAN SOCIETY OF CIVIL ENGINEERS

  28. Municipal Bonds & Tax Reform Risk – Individuals • Individual investors will continue to drive muni market • Own 2/3rds of marketand not overly tax sensitive • Investing in municipals because they are tax-free at the Federal level and in most states • Historically little correlation exists between income tax rates & muni relative valuations Source: BofA Merrill Lynch Global Research, Brookings.edu

  29. Municipal Bonds & Tax Reform Risk – Institutional • Institutional investors are more tax sensitive • Corporate income tax cuts will result in less favorable tax-adjusted muni yields • Demand could moderate, but widespread selling unlikely • Municipals remain attractive in lower tax scenarios - especially longer maturities • Tax risk already embedded in muni yields & tax cuts will reduce this premium Insurance Companies: AA Muni TEY Spreads (bps) at Lower Corporate Tax Rates (observed yields as of 10/5/2017) Source: NEAM

  30. Structured Securities

  31. Commercial & Residential Real Estate Values on the Rise

  32. U.S. is “Over-Malled” Retail Square Footage and Sales Per Capita Source: General Growth Properties

  33. The “Amazon Effect” on Bricks & Mortars CMBX Series 6 Index Source: Bloomberg, NEAM

  34. The Fed’s Balance Sheet & Mortgages Sources: Cornerstone Macro and Bloomberg

  35. What Does “Taper” Really Mean? Expected Evolution of the Fed’s Balance Sheet Sources: Cornerstone Macro and Bloomberg

  36. Capital Market Conclusions

  37. Fixed Income Spreads A Rated Corporate Bonds BBB Rated Corporate Bonds High Yield 10 Yr. AAA Rated CMBS Source: BoAML, Bloomberg, NEAM

  38. Complacency Toward Risk VIX Index Source: Bloomberg, NEAM

  39. Investment Strategy Implications • Our base case is for modestly higher interest rates in 2017 and 2018. However, with meaningful policy change on the table, we also expect volatility around the baseline. • Our current fixed income portfolio strategy given today’s environment: • Manage interest rate risk (duration) through defensive positioning on the yield curve • Stay overweight the spread sectors (i.e. non-Treasuries) • Heightened focus on individual security selection • Selectively pare risk positions on strength • Floating rate securities • Be prepared to take advantage of volatility • Value in select incremental risk assets that offer attractive risk adjusted income returns

  40. Food For Thought

  41. Exchange Traded Funds (ETF’s) – Tread Carefully Source: Real Vision Television

  42. Cyber Currencies

  43. The Cyber Currency & Initial Coin Offering (ICO) Craze

  44. Conclusions • ETF’s are a great way to diversify your holdings but be aware of capitalization weighted vehicles that often end up with large company bias • ETF’s are easy to get into on the way up but investors could be surprised when a market downturn occurs and liquidity dries up • Cyber currencies represent the wild west where few will survive • One might consider cyber currencies as a hedge - could go to zero, but could also be a 1,000x return if currency/financial crisis occurs • ICO’s are a true tulip mania - buyer beware, expect 100% loses on most offerings

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