THINK BROADLY.
ACT DECISIVELY.
LAPERS Seminar 2015
September 14, 2015
Tom Fahey
Vice President, Portfolio Manager
This presentation is provided for informational purposes only and should not be construed as investment advice. Any opinions or forecasts contained herein reflect the
subjective judgments and assumptions of the authors only and do not necessarily reflect the views of Loomis, Sayles & Company, L.P., or any portfolio manager.
Investment recommendations may be inconsistent with these opinions. There can be no assurance that developments will transpire as forecasted and actual results will be
different. Data and analysis does not represent the actual or expected future performance of any investment product. We believe the information, including that obtained
from outside sources, to be correct, but we cannot guarantee its accuracy. The information is subject to change at any time without notice.
LS Loomis | Sayles is a trademark of Loomis, Sayles & Company, L.P. registered in the US Patent and Trademark Office.
For LAPERS Seminar use only. Not for further distribution.
major investment themes
OUR VIEWS
1.
Global Savings and Weak Demand – Who Will Borrow and Spend?
2.
Rotation of Global Credit Cycle Favors Developed Markets over Emerging Markets – how
bad will EM Get?
3.
Fed Rate Hike: Balancing Domestic vs. International Developments – can the US consumer
become a growth engine?
4.
Echoes of Late 1990s - Competitive Devaluations in Vogue
5.
The Disjointed Credit Cycle: Corporate Fundamentals Look Late Cycle, but Fed Still Easy –
Profits are Critical, Echoes of Late 1990s
6.
Europe: Finally Growing But No More Surprises
7.
Difficult Outlook for Emerging Markets: China Boom is Over; Global Trade Boom is Over;
Commodity Boom is Over
8.
Rates Can Stay Low: Can Risk Appetite Stay High?
Views as of 6/30/2015. This material is provided for informational use only and should not be considered investment advice. The views and opinions expressed reflect those of the authors and do not necessarily
reflect the views of Loomis, Sayles & Company L.P. All statements are made as of the date of the presentation and are subject to change at any time without notice.
For LAPERS Seminar use only. Not for further distribution.
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who is willing to borrow and spend?
WORLD SAVINGS HELP TRASH BALANCE SHEETS
Savings as a % of Global GDP
Deficient Demand
Deleveraging
Housing Rebound
Savings
Restoration of
Household Net
Worth
Shortage of HighQuality Assets
Pent-Up Demand
Drives Investment
Globalization &
Technology
Unemployment
Falls/Fed Tightens
Fed on
Hold/Financial
Repression
Supply Side
Impairment
Demographics
Source: OECD, Thomson Reuters Datastream, data as of June, 2015.
For LAPERS Seminar use only. Not for further distribution.
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shift in global credit cycle
EMERGING MARKETS POISED TO PASS THE BORROWING & SPENDING BATON TO
DEVELOPED MARKETS
5 Year Change in Credit/GDP as of 12/29/14
Source: BIS, national sources, as of December 29, 2014.
For LAPERS Seminar use only. Not for further distribution.
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rotation of global credit cycle
LIQUIDITY BOOM IN EMERGING MARKETS IS FADING
M2 Year-over-Year
Year Over Year %
M2 Growth
Source: National Sources; includes Brazil, Chile, China, Colombia, Czech Republic, Hungary, India, Indonesia, South Korea, Malaysia, Mexico, Philippines, Poland, Russia, South Africa, Thailand, Turkey,
US, UK, Euro Area, Japan, data as of 6/30/2015.
For LAPERS Seminar use only. Not for further distribution.
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rotation of global credit cycle
EMERGING MARKET EQUITIES UNDERPERFORMING
Emerging Market Equity vs S&P 500
Source: Thomson Reuters Datastream, data as of 8/26/2015.
All indexes are unmanaged and do not incur fees. You cannot invest directly in an index.
Past performance is no guarantee of future results.
For LAPERS Seminar use only. Not for further distribution.
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rotation of global credit cycle
EMERGING MARKET CURRENCIES UNDERPERFORMING
Source: Thomson Reuters Datastream, data as of 8/26/2015.
All indexes are unmanaged and do not incur fees. You cannot invest directly in an index.
Past performance is no guarantee of future results.
For LAPERS Seminar use only. Not for further distribution.
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conflicting currents driving interest rates
INTEREST RATES WILL PROBABLY RISE BUT KEEP YOUR EXPECTATIONS IN CHECK
Deficient Demand
Deleveraging
Housing Rebound
Savings
Restoration of
Household Net
Worth
Shortage of HighQuality Assets
Pent-Up Demand
Drives Investment
Globalization &
Technology
Unemployment
Falls/Fed Tightens
Fed on
Hold/Financial
Repression
Supply Side
Impairment
Demographics
Source: Loomis Sayles illustration, as of 9/30/2014.
This depiction shown above is for illustrative purposes only. There can be no assurance that developments will transpire as shown and actual results may likely be different.
For LAPERS Seminar use only. Not for further distribution.
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fed rate hike: is it time?
DOMESTIC SALES ACCELERATING
Year Over Year %
Final Sales to Domestic Purchasers
Source: Datastream, data as of Q2 2015.
For LAPERS Seminar use only. Not for further distribution.
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fed rate hike: is it time?
LABOR MARKET STRENGTH SAYS YES
Nonfarm Payroll vs. Fed Funds Target Rate
Source: Datastream, data as of July 2015. Shaded areas represent US recessions.
For LAPERS Seminar use only. Not for further distribution.
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fed rate hike: is it time?
POTENTIAL PATH OF THE POLICY RATE
Loomis Sayles vs. Market & Fed
Case
Case
Source: Federal Reserve, Bloomberg, Loomis Sayles, data as of 6/17/2015.
This material is provided for informational use only and should not be considered investment advice. The views and opinions expressed reflect those of the authors and do not necessarily reflect
the views of Loomis, Sayles & Company L.P. All statements are made as of the date of the presentation and are subject to change at any time without notice.
For LAPERS Seminar use only. Not for further distribution.
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changing climates for yields
US 10-YEAR SCENARIOS
Ice Age (1-3%)
Global Warming (3-5%)
Overheating(6%+) ?
8
OVERHEATING
7
Percent %
6
5
4
GLOBAL
WARMING
3
2
ICE AGE
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1
Source: US Treasury, 1/1/2000 through 12/31/2013. Historic data represents yearly averages. Projections: Loomis Sayles. This information is provided for informational purposes
only and should not be construed as investment advice. Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the authors only and do not necessarily
reflect the views of Loomis, Sayles & Company, L.P., or any portfolio manager. Views are subject to change at any time without notice.
For LAPERS Seminar use only. Not for further distribution.
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echoes of the late 1990s
U.S. STILL LEADING G10 GROWTH
Deleveraging and highly accommodative policies early on have helped enable the US
economy to outperform
Real GDP Levels
Source: Thomson Reuters Datastream, data as of Q2 2015.
For LAPERS Seminar use only. Not for further distribution.
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echoes of late 1990s
US ACCELERATING FASTER THAN THE REST OF THE WORLD
As US economy outperforms rest of world, so does its currency
This happened in 1997-98 & wreaked havoc on EM & commodities
Source: Thomson Reuters Datastream, CPB, Federal Reserve, data as of June 30, 2015.
For LAPERS Seminar use only. Not for further distribution.
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echoes of the late 1990s
STRONGER DOLLAR KEEPS DOWNWARD PRESSURE ON COMMODITIES
Source: Thomson Reuters Datastream, data as of July 30, 2015.
For LAPERS Seminar use only. Not for further distribution.
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disjointed credit cycle
US COMPANIES FURTHER ALONG IN THE CREDIT CYCLE
Ratio: Nonfinancial Domestic Corporate Debt to Corporate Profits
Source: Barclays, Moody’s Federal Reserve, Bureau of Labor Statistics, Bureau of Economic Analysis. Data as of June 30, 2015.
Quarterly data, shaded areas denote NBER-designated recessions.
For LAPERS Seminar use only. Not for further distribution.
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profitability appears steady
A PROFIT RECESSION IS A MAJOR RISK TO CREDIT SPREADS
S&P Earnings Per Share vs NIPA Profits
Source: Thomson Reuters Datastream, as of 8/27/2015.
Any opinions contained herein reflect the subjective judgments and assumptions of the authors only and do not reflect the views of Loomis, Sayles & Company, L.P., or any portfolio manager.
*NIPA stands for National Income and Product Accounts.
For LAPERS Seminar use only. Not for further distribution.
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the disjointed credit cycle
STEADY SPENDING ON DIVIDENDS & SHARE BUYBACKS
Shareholder friendly activity hints at late stage of credit cycle
Domestic Nonfinancial Corporate: Dividends
Nonfinancial Corporate Business:
Net Equity Issuance
Source: Federal Reserve Board, Haver Analytics, data as of 5/29/2015.
Shaded areas represent US recessions.
We believe the information, including that obtained from outside sources, to be correct, but we cannot guarantee its accuracy.
For LAPERS Seminar use only. Not for further distribution.
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the financing gap
CAPEX TYPICALLY RUNS GREATER THAN CASH FLOW BUT THIS COULD BE
ANOTHER INDICATOR TO WATCH FOR LATE CYCLE BEHAVIOR IN THE US
Financing Gap*
Source: Federal Reserve, BEA, data as of June 30, 2014.
Shaded areas represent US recessions..
We believe the information, including that obtained from outside sources, to be correct, but we cannot guarantee its accuracy.
For LAPERS Seminar use only. Not for further distribution.
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the disjointed credit cycle: corporate
fundamentals leaning late, but fed still easy
REAL FED FUNDS RATE NEGATIVE INTO 2017
A long time until we are likely to see tight policy; may keep US credit cycle “earlier” than corporate
fundamentals suggest
Source: Haver Analytics, data as of May 29, 2015.
Shaded areas represent US recessions.
We believe the information, including that obtained from outside sources, to be correct, but we cannot guarantee its accuracy.
For LAPERS Seminar use only. Not for further distribution.
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disjointed credit cycle
Earnings per Share
Earnings per Share
UNUSUAL DIVERGENCE IN GLOBAL CYCLE
Source: Thomson Reuters Datastream, Bloomberg, as of August, 2015.
All indexes are unmanaged and do not incur fees. You cannot invest directly in an index.
Past performance is no guarantee of future results.
For LAPERS Seminar use only. Not for further distribution.
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disjointed credit cycle
COUNTRY WINNERS AND LOSERS FROM COMMODITY COLLAPSE
Terms of Trade
Source: Thomson Reuters Datastream, National Sources, data as of June 15, 2015.
For LAPERS Seminar use only. Not for further distribution.
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europe: currently growing
EUROZONE GROWTH LOOKING BETTER
Euro-Coin Monthly GDP Indicator & Euroland GDP
Source: Datastream, data as of Q2 2015.
For LAPERS Seminar use only. Not for further distribution.
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europe: currently growing
RESURRECTION: EURO AREA LENDING
Euro Area Private Loans
Source: Thomson Reuters Datastream, data as of August 2015.
For LAPERS Seminar use only. Not for further distribution.
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europe: currently growing
FADING RISK PREMIUM ON PERIPHERY BOND MARKETS
Percent %
European 10-Year Bond Yields
Source: Thomson Reuters Datastream, as of August 27, 2015.
Indexes are unmanaged and do not incur fees. It is not possible to invest directly in an index. Past performance is no guarantee of future results.
For LAPERS Seminar use only. Not for further distribution.
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europe: currently growing
BUT EUROPEAN EQUITIES UNDERPERFORMING US AND JAPAN
Relative Regional Equity Performance vs Europe
Source: Thomson Reuters Datastream, as of August 27, 2015.
Indexes are unmanaged and do not incur fees. It is not possible to invest directly in an index. Past performance is no guarantee of future results.
For LAPERS Seminar use only. Not for further distribution.
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difficult outlook for emerging markets
CHINA HAS MAJOR STRUCUTURAL SHIFTS TO WORK THROUGH
The investment-led growth model may be coming to an end
China needs consumers to borrow and spend, but rebalancing won’t be easy
Consumption vs Fixed Investment as of 12/31/14
Source: Thomson Reuters Datastream, Oxford Economics, data as of December 31, 2014 for GDP comparison.
For LAPERS Seminar use only. Not for further distribution.
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difficult outlook for emerging markets :
china deleveraging & weak global trade
SLOWER CHINESE IMPORTS IS HAVING RIPPLE EFFECTS ACROSS THE GLOBE
Year Over Year %
Year Over Year %
Growth in world trade volumes has declined significantly and creates an unfriendly environment
for emerging markets
Source: Datastream, data as of June 22, 2015.
For LAPERS Seminar use only. Not for further distribution.
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triple threat for emerging markets
END OF COMMODITY BOOM BRINGS MANY NEW CHALLENGES
% Percent
% Percent
Brazil is a major exporter of iron ore; as terms of trade deteriorate so do prospects for growth
Source: Bloomberg, as of March 27, 2015.
For LAPERS Seminar use only. Not for further distribution.
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emerging markets risk premiums rising
THE RISE IN YIELDS CAN PROVIDE SOME INVESTMENT OPPORTUNITIES IN A
YIELD STARVED WORLD. BUT WATCH OUT FOR CURRENCY RISK
Source, Thomson Reuters Datastream, data as of August 27, 2015.
Past performance is no guarantee of future results.
For LAPERS Seminar use only. Not for further distribution.
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emerging markets risk premiums rising
BALANCING VALUE AND RISK IN EMERGING MARKETS
EM credit generally offers a significant pick-up over its DM peers
But the risk premium is justified given negative macro headwinds to this asset class
Source: Thomson Reuters Datastream, JPM, Federal Reserve as of March 18, 2015. Red circle indicates ratings-equivalent spreads between US and EM.
Indexes are unmanaged and do not incur fees. It is not possible to invest directly in an index.
Past performance is no guarantee of future results.
For LAPERS Seminar use only. Not for further distribution.
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low rates keep risk appetite strong?
EQUITY RISK PREMIUMS ARE HIGH
The global average is 6.2% - equities may tolerate some increase in the risk free rate
14%
EQUITY
RISK PREMIUM
Equity Risk Premium
ERP
12%
Average
10%
8%
6%
4%
2%
0%
ROE x (1- Div Payout Ratio) + Div. Yield - risk free rate
Source: Loomis Sayles & Co., data as of 6/15/2015.
For LAPERS Seminar use only. Not for further distribution.
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low rates keep risk appetite strong?
ON AVERAGE, STOCKS PERFORMED WELL IN THE QUARTERS BEFORE AND AFTER AN
INITIAL HIKE
Index Total Return
(incl. dividends and reinvestment)
Performance of S&P500 Around
1st Fed Funds Rate Hike
Months Prior
Date of first
rate hike in
cycle
S&P 500
12-mo
prior
S&P 500
6-mo
prior
S&P 500
3-mo
prior
S&P 500
1-mo
prior
Hike
Date
S&P 500
1-mo
after
S&P 500
3-mo
after
S&P 500
6-mo
after
S&P 500
12-mo
after
3/1/1972
14.20%
8.25%
12.84%
3.53%
3/1/1972
0.37%
3.52%
4.14%
6.34%
12/1/1976
17.31%
5.25%
-0.49%
-0.29%
12/1/1976
5.17%
-0.85%
-4.33%
-3.56%
8/7/1980
22.92%
7.27%
19.22%
5.08%
8/7/1980
0.41%
7.75%
6.56%
11.98%
5/2/1983
46.30%
20.68%
14.66%
6.31%
5/2/1983
1.52%
1.00%
3.03%
4.26%
12/16/1986
22.06%
4.17%
8.84%
2.55%
12/16/1986
6.45%
16.13%
23.01%
2.21%
2/4/1994
7.43%
6.14%
2.91%
1.19%
2/4/1994
-0.41%
-3.28%
-0.44%
4.75%
6/30/1999
22.73%
12.37%
6.43%
5.56%
6/30/1999
-3.11%
-6.31%
6.79%
7.25%
6/30/2004
18.94%
3.71%
1.16%
1.93%
6/30/2004
-3.29%
-2.29%
6.49%
6.19%
21.49%
8.48%
8.20%
3.23%
0.89%
1.96%
5.66%
4.93%
Months Post
Source: Bloomberg, Ned Davis, Loomis Sayles & Co., 6/15/2015.
Indexes are unmanaged and do not incur fees. It is not possible to invest directly in an index.
Past performance is no guarantee of future results.
For LAPERS Seminar use only. Not for further distribution.
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low rates keep risk appetite strong?
PORTFOLIO REBALANCING IN EUROPE
European Central Bank policy is pushing investors out of bonds and into higher risk assets
Source: Thomson Reuters Datastream, ECB, as of July 2015.
For LAPERS Seminar use only. Not for further distribution.
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