Q2 Investm ent Update July 13, 20 17 Russ Allen, Berm an Capital - - PowerPoint PPT Presentation

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Q2 Investm ent Update July 13, 20 17 Russ Allen, Berm an Capital - - PowerPoint PPT Presentation

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Q2 Investm ent Update July 13, 20 17 Russ Allen, Berm an Capital CIO Disclosures Important Disclosures: This information is for discussion purposes only and is being furnished on July 13, 2017. This information is not to be re-transmitted in

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Q2 Investm ent Update

July 13, 20 17 Russ Allen, Berm an Capital CIO

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Disclosures

Important Disclosures: This information is for discussion purposes only and is being furnished on July 13, 2017. This information is not to be re-transmitted in whole or in part without the prior consent of Berman Capital Advisors (BCA). While all the information prepared in this presentation is believed to be accurate, BCA makes no express warranty as to its completeness or accuracy nor can it accept responsibility for errors appearing in the presentation. No information provided herein shall constitute, or be construed as, an offer to sell or a solicitation of an offer to acquire any security, investment product or service, nor shall any such security, product or service be offered or sold in any jurisdiction where such an offer or solicitation is prohibited by law or registration. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product will be profitable

  • r be suitable for your portfolio or individual situation. Please contact BCA to discuss your

individual situation.

Berman Capital Advisors / 2

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2st Quarter Review

Berman Capital Advisors / 3

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Major Asset Class Performance

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Index Q2 2017 Q1 2017 MSCI Europe 7.7 7.6 MSCI Emerging Markets 6.3 11.4 MSCI EAFE (International) 6.3 7.4 Japan 5.0 4.8 Russell 1000 Growth 4.7 8.9 S&P 500 3.1 6.1 Russell Midcap 2.7 5.2 Russell Small Cap 2.5 2.5 High Yield Bonds 2.2 2.7 US Aggregate Bond 1.4 0.8 Russell 1000 Value 1.3 3.3 Crude Oil

  • 10.9
  • 9.2

Source: Bloomberg, Ned Davis Research Note: International market returns reported in U.S. Dollars

Index Total Return in US$

  • Defying fears of a Chinese

slowdown and unrest in Latin America, emerging markets remain strong.

  • In the U.S., large growth

stocks regained performance as the Trump cyclical trade faded.

  • Longer dated bonds were

helped by the perception of lower inflation.

  • After the 2016 rebound, oil

again fell sharply on fears of resurgent U.S. shale oil supply.

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U.S. Equity Performance by Style

Berman Capital Advisors / 5

Large Growth stocks continued to outperform, while the cyclically-oriented Small value again underperformed.

Source: J.P. Morgan Guide to the Markets, Q2 2017

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Relative Technology Performance

Berman Capital Advisors / 6

Aside from a recent pull-back, Technology has significantly outperformed.

Source: Wall Street Journal

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Financials and Rising Rates

Berman Capital Advisors / 7

Source: Wall Street Journal

Rising rates have benefitted financials despite growth worries

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Performance by Factor – MSCI World

Berman Capital Advisors / 8

Source: State Street Global Advisors

Reflecting fading hopes for a strong economy, value stocks have faded. Investors have returned to FAANG (momentum) stocks.

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Key Debates for 2nd Half 2017

Berman Capital Advisors / 9

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Consensus

Berman Capital Advisors / 10

  • U.S. stocks are expensive and due for a

fall, especially given the state of U.S. politics and geopolitical conflicts.

  • Growth is falling off and the Fed is making

a policy mistake.

  • Oil (down) and safer bond prices (up)

portend bad things for risky assets.

  • Return expectations from traditional asset

classes are likely to be lower. This argues for participating in more niche investment

  • pportunities.

BCA Response

Key Debates in the Outlook

  • Domestic stocks are expensive but

valuation alone is a poor timing tool. Rising earnings, still-easy policy and lack

  • f other options can support U.S. stocks.
  • The economic outlook is fine and hikes

will be gradual.

  • Oil price drop is about supply; we expect

growth and inflation to pick back up.

  • We agree, but believe there are
  • pportunities in international equity

markets and private investments. Also, the credit cycle is not yet about to end.

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U.S. Economic Growth

  • The U.S. economy is hardly
  • tanking. The Blue Chip

consensus estimate for Q2 growth stands at 3.1%.

  • Growth could pick up later this
  • year. Financial conditions have

eased significantly over the past few months thanks to a weaker dollar, falling bond yields, narrower credit spreads, and higher equity prices.

  • Lending to companies may have

dipped simply because companies preferred to issue bonds versus bank loans.

Berman Capital Advisors / 11

Source: BCA Research

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U.S. Set to Recover

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Source: BCA Research

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U.S. Set to Recover (Cont.)

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Source: BCA Research

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Global Recovery

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Source: BCA Research

Production & Orders Rising

  • Developed Markets, especially, continue to enjoy a cyclical rebound.
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Europe Set to Keep Growing

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Source: BCA Research

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European Recovery Accelerating

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Source: Markit; J.P. Morgan Asset Management

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U.S. Equity Valuation

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U.S. vs World Valuations

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Source: BCA Research

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Earnings Set to Increase

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Earnings are growing at a fast pace

Source: BCA Research

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Earnings Fundamentals Positive

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Source: J.P. Morgan Asset Management

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Valuations and Dividend Growth

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Source: BCA Research

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Easier Financial Conditions

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Continued easing

Financial conditions have eased despite rising rates

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Fixed Income Yields Unattractive

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Source: State Street Global Advisors

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Unemployment and Wages

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Inflation Perspective

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Where is the Inflationary Pressure?

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Yield Curve Flattening

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The Fed continues to raise the Federal Funds rate. Yet, unexpectedly falling inflationary pressure is driving the back end of the curve lower.

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Where are we in the Economic Cycle?

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A slower, but longer lasting recovery?

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Market Expectations vs. Fed Forecast

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Investors disagree with the Fed’s inflation forecast

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Credit Outlook

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  • Despite what many feel is

an elongated credit cycle (to go along with the elongated economic cycle), the credit outlook remains good.

  • The retreat of banks,

especially in lending to smaller companies, continues to be a source of

  • pportunity for niche

credit investing.

Source: BCA Research

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Need to Monitor Credit Standards…

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...But Corporate Health Generally Good

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Source: BCA Research

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Energy Related Performance

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MLPs continue to be tied to the price of oil.

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Midstream Valuation Perspective

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At a time when stocks are highly valued and investors are chasing yield, MLPs trade at significant discounts.

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Energy Near Record Low Share of S&P 500

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Energy hasn’t been this small a part of the S&P 500 since the 1980s.

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Oil Sentiment

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When sentiment is this poor, it is typically a contrarian signal.

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Private Equity Fundraising High

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Private Equity “Dry Powder”

Source: Pitchbook.com

Private Equity may have trouble deploying record capital raises profitably.

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Complacency?

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Shorting volatility is now a popular trade.

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Speculation?

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Ethereum Price Chart through June 2017 ICOs (Initial Crypto-coin Offerings) are popular

Source: Coindesk.com

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Conclusion

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  • Despite high valuations, the near term backdrop is still

positive for asset prices.

  • Interest rates and relative economic strength are key

factors to watch for potential tactical moves.

  • Faster than expected growth could significantly hurt

bond proxy equities and high duration bonds.

  • Return expectations should be muted from traditional

asset classes. We will continue to recommend more niche investments.

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Thank You