Economic and Capital Market Outlook Dominic Nolan, CFA Senior - - PowerPoint PPT Presentation

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Economic and Capital Market Outlook Dominic Nolan, CFA Senior - - PowerPoint PPT Presentation

Mar 13, 2023 368 likes •520 views

Economic and Capital Market Outlook Dominic Nolan, CFA Senior Managing Director 4Q16 Risk asset outperformance The 4 th quarter saw the exceptional returns for credit assets The market response to the election of Donald Trump, which

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SLIDE 1

Economic and Capital Market Outlook

Dominic Nolan, CFA Senior Managing Director

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SLIDE 2

4Q16

2

Risk asset outperformance

  • The 4th quarter saw the exceptional returns for credit

assets

  • The market response to the election of Donald Trump,

which had been viewed by many as uncertain and disruptive, turned overnight into a strong equity rally and Treasury yields surged

  • Measures of consumer sentiment and business

confidence moved to 10 year highs as economic optimism greets the U.S. economy into 2017

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SLIDE 3

Credit risk outperforms

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Asset class performance

Index 2016 Return (%) 4Q16 Return (%) Duration Yield (%) Barclays US Corporate High Yield Index 17.13 1.75 3.99 6.12 Credit Suisse Leveraged Loan Index 9.88 2.25 0.25 5.45 Barclays US Corporate Index 6.11

  • 2.83

7.21 3.37 Barclays US Intermediate Corporate 4.04

  • 1.84

4.31 2.85 Barclays Aggregate Index 2.65

  • 2.98

5.80 2.61 Barclays US Treasury Index 1.04

  • 3.84

6.00 1.89 Barclays Agency MBS Index 1.67

  • 1.97

4.49 2.85

Source: Barclays, Credit Suisse, as of December 31, 2016 Yield is as of December 31, 2016 CSLLI yield is quoted on a 4 year effective yield; all other yields are quoted on a yield to worst basis

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The Trump Effect

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Economic optimism drives reflationary market response

0.48

0.53

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5

  • 0.6
  • 0.4
  • 0.2

0.0 0.2 0.4 0.6 0.8 Nov-12 May-13 Nov-13 May-14 Nov-14 May-15 Nov-15 May-16 Nov-16

Monthly Change (bps) (LS) 10 Year Treasury Yield (RS)

Taper Tantrum

Source: Barclays, as of December 31, 2016

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The Trump Effect

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High expectations for growth?

Source: NFIB, Strategas Research Partners. As of December 1, 2016

  • 60
  • 40
  • 20

20 40 60 '86 '89 '92 '95 '98 '01 '04 '07 '10 '13 '16

NFIB: % of firms expecting economy to improve

  • 40
  • 30
  • 20
  • 10

10 20 30 40 50 '86 '89 '92 '95 '98 '01 '04 '07 '10 '13 '16

NFIB: % expecting higher real sales in 6 months

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The Trump Effect

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Will sentiment turn into hiring, spending, and capex?

Source: NFIB, Strategas Research Partners. As of December 1, 2016

5 10 15 20 25 30 35 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 '00 '02 '04 '06 '08 '10 '12 '14

NFIB: % reporting now is a good time to expand JOLTS Survey: Voluntary Quits

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U.S. GDP

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Can economic sentiment turn into growth?

Source: St. Louis Federal Reserve, as of October 1, 2016

  • 6
  • 4
  • 2

2 4 6 8 10 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 Real GDP Growth (%)

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  • 2.5
  • 1.5
  • 0.5

0.5 1.5 2.5 3.5 4.5 5.5 6.5 7.5 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 US CPI Urban Consumers Less Food & Energy Headline CPI US Personal Consumption Expenditure Core Price Index

Percent (%)

Inflation

Will 2% be reached?

Source: St. Louis Federal Reserve, as of October 1, 2016

8

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SLIDE 9

Economic Data Supportive

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U.S. Manufacturing PMI highest in two years

40 42 44 46 48 50 52 54 56 58 60 Jan-14 Jun-14 Nov-14 Apr-15 Sep-15 Feb-16 Jul-16 Dec-16

Expansion Contraction

U.S. ISM Manufacturing PMI

Source: Institute for Supply Management, as of December 2016

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Economic Data Supportive

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Broad based improvement given negative 2015 sentiment

  • 100
  • 80
  • 60
  • 40
  • 20

20 40 60 80 100 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16

Citi Economic Surprise Index Above expectations Below expectations

Source: Bloomberg, as of December 21, 2016

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Foreign demand for U.S. Corporate debt

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As investors grapple with negative interest rate policies (ZIRP)

2 4 6 8 10 12 14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16

Amount of negative yielding Sovereign debt ($trn)

Source: Bloomberg, as of November 21, 2016

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0.25 0.5 0.75 1 1.25 1.5 1.75 2 2.25 2015 2016 2017

Federal Funds Rate

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Uncertain through wide dispersion in forecasts

December 2017 Projections Source: Federal Reserve, as of December 2016 FOMC Meeting

Federal Funds Rate (%)

December 2016 Projections

The Dot Plots

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SLIDE 13

Relative value of U.S. credit

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Favorable valuations coupled with better U.S. growth outlook

Source: Barclays, Credit Suisse, as of December 31, 2016

1 2 3 4 5 6 7 1 2 3 4 5 6 7 8

Bank loans U.S. High Yield U.S. Int Corporate Agency MBS Euro Corporate Euro-Aggregate U.S. Aggregate U.S. Corporate

Duration Yield-to-Worst (%)

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Market Outlook

  • Market evaluation of new administration’s policies are that of increased GDP with

increased inflationary pressures

  • Details regarding major policy changes will be of utmost importance
  • Market is anticipating new administration will govern differently than he

campaigned

  • Things to monitor closely:
  • How much can the new administration get through Congress?
  • How much of an effect will it have on GDP growth?
  • What are the long-term impacts?

What to watch for

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