The Year Ahead: Looking for Surprises
January 2014
Rebecca H. Patterson
Chief Investment Officer
Bessemer Trust
Agenda
1.
What The CFA Thinks
2.
Where You Might Be Surprised
3.
Macro and Market Views For the Year Ahead
4.
Key Takeaways
3
What CFA Members Think: Getting More Upbeat
Percent of Members Expecting
Global Economy to Expand in Coming
Year
Percent of Members Expecting a
Global Financial Bubble to Burst
in 2014
63%
47%
40%
34%
26%
13%
10%
4%
2012
2013
2014
Asset Class of Potential Bubble
As of October 17, 2013.
Source: CFA Institute
4
Room For At Least Three Surprises
1.
Emerging-Market Growth
2.
Geopolitics
3.
Shift in Federal Reserve Policy
5
Emerging Markets: Not Enough Focus?
Biggest Risk to Global Capital Markets in 2014
35%
30%
25%
20%
15%
10%
5%
0%
Weak
Economic
Conditions
Political
Systemic
Growth Rates
Excess
Instability Disruptions
Among
Regulation
Emerging
Economies
Weak
Regulation
Other
As of October 17, 2013.
Source: CFA Institute
6
U.S. Dollar and Yields: Headwinds for Emerging Markets
Rising Dollar Suggests Emerging-Market
Underperformance1
1.8
130
Emerging Markets
Outperform
1.6
Trade-Weighted
U.S. Dollar
Index (R)
1.4
120
Current Account Balance2
% GDP
6
Emerging
Markets
5
4
110
1.2
3
2
1
100
1
Developed Markets
Outperform
Surplus
0
0.8
90
0.6
-2
EM Index/DM Index
(L)
0.4
0.2
1995
-1
80
70
2000
2005
-3
-4
1980
Developed
Deficit
1985
1990
1995
2000
2005
2010
2010
1As
of December 31, 2013. EM/DM reflects MSCI Emerging Markets Index divided by MSCI World Index, with both indices in U.S. dollars and
indexed at 1 on January 4, 1995. The Trade-Weighted U.S. Dollar Index is a weighted average of the foreign exchange value of the U.S.
dollar against the currencies of a broad group of major U.S. trading partners.
2Reflects IMF estimates for 2013.
Source: FactSet, Federal Reserve, International Monetary Fund
7
2014 Elections Create Policy Uncertainty, Especially in
Emerging Markets
Country
E.U.
U.S.
Brazil
2014 Election
May
November
October
India
Indonesia
Turkey
Sweden
May/June
April/July
August
September
1,758
868
822
552
Belgium
South Africa
May
April/July
507
354
World
% of World GDP
GDP ($B)
17,267
16,724
2,190
73,454
56%
As of November 30, 2013. European Union includes 28 member states. GDP is based on IMF estimates for 2013.
Source: International Monetary Fund
8
Geopolitical Risks: Could History Repeat?
Percent Change in Price of Oil During Periods of
Conflict
205%
163%
132%
Yom Kippur War/Oil Embargo
1973-1974
Iranian Revolution
1979-1980
Invasion of Kuwait
1990
Source: Bloomberg
#twitter-hashtag
9
U.S. Economy To Positively Surprise this Year?
NetNet
Federal
Stimulus/Drag
FederalFiscal
Fiscal Stimulus/Drag
Jobs and Housing
% GDP
1.5%
Thousands
1,100
Building Permits (L)
550,000
1,000
500,000
900
450,000
800
400,000
700
350,000
Actual Estimate
d
Stimulus
Stimulus
1.0%
0.5%
600
500
Jan 10
Jobless Claims (R)
Jan 11
Jan 12
2009
Billions
(5)
(10)
(15)
(20)
2010
2011
-0.5%
300,000
-1.0%
250,000
-1.5%
Jan 13
2012
Drag
Drag
2003
U.S. Energy Trade Balance
0
0.0%
2013
2005
2007
2009
2011
2013
2015
2017
Oil and Inflation
$/bbl
YoY % Chg
130
3.0
125
Crude Oil Price (L)
120
115
105
1.5
100
95
85
Feb 12
2.5
2.0
110
1.0
90
(25)
2019
CPI (R)
0.5
Aug 12
Feb 13
Aug 13
As of December 31, 2013, except for Building Permits and CPI (as of November 30, 2013). Crude oil price represents Brent.
Source: Commodity Research Bureau, FactSet, Federal Reserve, Strategas Research Partners, U.S. Census Bureau, U.S. Department of Labor
10
European, Japanese Economies Also Showing Relative
Improvement
%
EMU Borrowing Costs Lower, Confidence
10-YearHigher
Bond Yields
Bank of Japan Adding Liquidity
BoJ Balance Sheet
8.0
7.5
200
Spain
7.0
6.5
180
6.0
5.5
5.0
4.5
4.0
3.5
Jul 12
Low
Italy
Risk
Oct 12
160
Jan 13
Apr 13
Jul 13
Oct 13
High
Risk
140
Euro Area Consumer Confidence
2010
0
2011
2012
2013
120
(5)
(10)
(15)
100
(20)
(25)
(30)
80
2006 2007
2008 2009 2010 2011
2012 2013
As of December 31, 2013. Consumer confidence is measured on a scale of -100 to 100, where -100 indicates extreme lack of confidence about
the economy, 0 indicates a neutral view, and 100 indicates extreme confidence. Bank of Japan’s balance sheet assets are indexed at 100 on
December 31, 2006.
Source: Bank of Japan, European Commission, FactSet, Strategas Research Partners
11
China: Longer-term Challenges Remain but Near-term
Looks Stable
Exports by Region: Looking Up
%
Change,
50YoY
Domestic Rebalancing Still Needed
% GDP
50
48
40
Investment
46
30
44
20
42
Asia, exU.S.
HK
EU
10
40
38
0
36
-10
34
-20
-30
2008
Household
Consumption
32
30
2009
2010
2011
2012
2013
1992
1996
2000
2004
2008
2012
As of December 31, 2013, except for right chart, which is as of December 31, 2012. Exports shown represent a 5-month moving
average.
Source: Bloomberg, The World Bank
12
Cyclical Assets Helped by Global Liquidity, Not Just
Fed
%
% of GDP
5.2
30
G-4 Central Bank
Balance sheets (R)
4.2
25
3.2
20
2.2
15
Global Policy Rate
1.2
2007
10
2008
2009
2010
2011
2012
2013
2014
Actual as of October 31, 2013 with J.P. Morgan estimates thereafter.
Source: Bank of England, Bank of Japan, European Central Bank, Federal Reserve, J.P. Morgan
13
Bottom-Up: U.S. Equity Valuations
Not at Highs
The S&P 500 Index
2000
1800
1600
+106%
Mar 24,
2000
Level =
1527
P/E =
25.2x
+101%
1400
1200
Oct 9,
2007
Level =
1565
P/E =
15.2x
Dec 31,
2013
Level =
1848
P/E =
15.4x
-57%
+173%
-49%
1000
800
600
1997
Dec 31,
1996
Level =
741
P/E =
1999
15.9x
2001
2003
Oct 9,
2002
Level =
777
P/E =
2005
13.8x
2007
2009
Mar 9,
2009
Level =
677
P/E =
2011
10.2x
2013
As of December 31, 2013. P/E ratio represents price-to-earnings ratio for next 12 months, based on FactSet aggregated consensus estimates.
Source: FactSet, Standard & Poor’s
14
Market Positioning Not Even Close to Stretched
Cumulative Net Fund Flows
Four Most Recent Bull Markets
Billion
Total
Percent
Return
Start
End
Duration
(Months)
8/12/82
8/25/87
60
229%
$1,200
12/04/87
7/16/90
31
65%
$1,000
10/11/90
3/24/00
113
417%
$800
10/09/02
10/09/07
60
101%
---
57
203%
$1,600
Bonds
$1,400
1,346
$600
$400
Equitie 496
s
3/09/09
$200
$0
2007 2008 2009 2010 2011 2012 2013
Left chart as of November 30, 2013. Right table as of December 31, 2013. Fund flows reflect cumulative net flows into mutual funds and
ETFs from January 1, 2007 through November 30, 2013.
Source: FactSet, Strategas Research Partners
15
Key Taper Transmission Channels
Taper Begins
Higher LongerDated U.S.
Treasury yields
Stronger U.S.
Dollar
Pressure on
Commodity
Prices
•
Pressure on
Emerging
Markets
•
•
•
•
•
Low inflation
Moderate EM demand
Greater supplies
EM debt positioning
Focus on deficit
countries with
inflation
2014 political risk
16
Positioning Going into 2014
Asset Class
Outlook
Traditional Government Bonds
Credit
Commodities
Developed Market Equities
Emerging Market Equities and
Debt
U.S. Dollar
#twitter-hashtag
17