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4thQuarterBPV
Accuvest Global Advisors Investment Committee Big Picture View
October 1, 2013
October 1, 2013
Accuvest Global Advisors 4th Quarter Big Picture View 2013 2
Emerging Markets have not experienced
the same kind of economic uptick seen
in Developed Markets
Equity market underperformance in
EM has been accumulating since
2010 and is not solely due to tapering talk
Stocks up, bonds crushed is the easy
headline. But within equity-land, there have been highly disparate returns
ECONOMIC OUTLOOK One of the ongoing themes in 2013 is the overall somewhat disappointing economic data for Emerging Markets (“EM”). While Developed Markets (“DM”) data have been largely uninspiring, they have been unrevised and steady for most of this year. Projections for EM countries, on the other hand, continue to get ratcheted lower, reflecting the negative effect on business confidence arising from local market developments and weaker domestic and foreign demand. Indeed, one of the more interesting and impactful developments of the post-crisis period is the underperformance of not only economic data, but market performance as well. Underperformance by EM equities began in late 2010 and has run mostly unabated to the present. The taper talk that began in May of this year brought focus to EM deterioration, but most of the cumulative EM underperformance was logged prior to the May shock, not as a result of it. These 2-1/2 years of steady, ongoing underperformance is unusual for its duration and has occurred while Developed Markets saw fairly robust recoveries. Pulling back the lens a bit further also brings into focus that, within EM markets and economies, there has been highly varied performance. BRIC countries, for instance, have been a significantly underperforming subset of the overall EM universe. Each of those four markets has their own issues and outlooks. It is becoming more and more apparent that country-by-country analysis is necessary for a clear view on economic and market forecasts.
1 Month 3 Months 6 Months 1 Year
S&P 500 3.7% 5.3% 8.8% 19.5%
MSCI EAFE 8.1% 11.2% 11.0% 23.0%
MSCI Emerging Markets 9.5% 9.7% ‐0.4% 1.5%
All Country World Index 6.2% 8.2% 8.3% 17.9%
High Yield Bonds 1.2% 2.5% 0.4% 6.0%
Investment Grade Bonds 1.0% 0.5% ‐3.2% ‐3.3%
Lont Term Treasuries 0.4% ‐3.3% ‐8.9% ‐12.4%
Emerging Market Bonds 3.2% ‐0.4% ‐5.3% ‐6.5%
US Dollar Index ‐2.9% ‐4.9% ‐4.6% ‐1.4%
Euro vs. USD 2.7% 4.6% 5.8% 4.7%
Yen vs. USD 0.7% 3.2% ‐4.3% ‐20.1%
EM Currencies vs. USD 3.3% 0.9% ‐3.3% ‐2.4%
Gold ‐5.6% 5.9% ‐16.6% ‐26.2%
Silver ‐7.2% 12.3% ‐20.4% ‐37.4%
Crude Oil ‐2.9% 7.1% 8.6% 11.1%
Commodities ‐3.0% 1.9% ‐4.9% ‐9.5%
Tuesday, October 1, 2013
October 1, 2013
Accuvest Global Advisors 4th Quarter Big Picture View 2013 3
Economic Growth in developed economies
is forecasted to improve in 2014
Consensus Forecasts - Real GDP (%Y/Y)
2012 (a) 2013 (f) 2014 (f)
Change in 2013
forecasts from June 30, 2013
Global 2.2 2.0 2.9 -1.0
G10 1.5 1.1 2.0 -0.1
US 2.8 1.6 2.7 -0.2
Euro Area -0.6 -0.4 1.0 -1.1
Germany 0.7 0.5 1.8 1.0
France 0.0 0.1 0.9 0.2
Italy -2.4 -1.7 0.5 0.0
Spain -1.6 -1.4 0.6 0.3
UK 0.2 1.3 2.0 0.4
Japan 2.0 1.9 1.6 -0.2
Emerging (brics) 5.6 5.7 5.7 0.7
Asia 6.2 6.4 6.3 1.0
China 7.7 7.6 7.4 0.2
India 5.1 4.8 5.2 -0.6
South Korea 2.0 2.6 3.5 -0.3
Latin America 2.7 2.6 3.2 0.0
Brazil 0.9 2.4 2.5 0.1
Mexico 3.9 1.9 3.8 -0.6
EMEA 2.6 2.1 3.0 -0.4
Russia 3.4 2.0 2.9 -1.0
Turkey 2.2 3.6 4.0 -0.1
Poland 1.9 1.1 2.5 0.1
South Africa 2.6 2.2 2.9 -0.1 Source: Bloomberg
The “Equities” section of this BPV will delve greater into the details of performance, outlook, and issues attendant to the highly contrasting country profiles. In the broadest view of the global economy, however, it seems as though a generally better outlook for activity in the US and Europe has emerged as a consequence of favorable financial conditions which have resulted in stronger business confidence data. This is in spite of the rise in bond yields since May. Some of the data is shown in charts below. For instance, the US unemployment rate, which has fallen significantly, in line with the historical average pace of decrease.
October 1, 2013
Accuvest Global Advisors 4th Quarter Big Picture View 2013 4
Higher interest rates have the ability to derail economic
improvement which is why the Fed
delayed tapering
Investment and Consumption
growing, Government
spending declining
US Industrial Production has
improved
Risks are well-known currently. Higher interest rates are a threat for the whole economy and the Fed must walk a fine line as the likelihood for policy error is potentially large. Tapering will eventually become a reality and the market has seen a preview of the effects of just talking about it. Debt ceiling and government shut-down debates in the US have the potential to negatively impact confidence and economic activity as was seen in the Fall of 2011. Overall, however, the economy seems to have entered a period where momentum can build and benefits can broaden
US GDP Components
Source: Accuvest Global Advisors
US Industrial Production YoY
Source: Accuvest Global Advisors
October 1, 2013
Accuvest Global Advisors 4th Quarter Big Picture View 2013 5
US Manufacturing is surging
US Earnings Growth should follow the expansion in US Manufacturing
US ISM Purchasing Managers Index
Source: Accuvest Global Advisors
S&P 500 Earnings Growth relative to ISM Manufacturing
Source: Accuvest Global Advisors
October 1, 2013
Accuvest Global Advisors 4th Quarter Big Picture View 2013 6
US Personal Consumption appears to be
bottoming
Velocity of Money remains in a long term downtrend,
reducing inflationary pressure
US Lending continues to tighten
US Personal Consumption Expenditures YoY
Source: Accuvest Global Advisors
Velocity of Money – M2
Source: Accuvest Global Advisors
US Loans as a % of US Deposits
Source: Accuvest Global Advisors
October 1, 2013
Accuvest Global Advisors 4th Quarter Big Picture View 2013 7
Capacity Utilization is moderate, reducing inflationary pressure
Home prices are higher, improving
consumer confidence and increasing
household wealth
Mortgage Rates have spiked with fears of
“QE Tapering”
US Capacity Utilization as a % of Total US Capacity
Source: Accuvest Global Advisors
Case Schiller 20 City Home Prices
Source: Accuvest Global Advisors
30 Year Mortgage Rate
Source: Accuvest Global Advisors
October 1, 2013
Accuvest Global Advisors 4th Quarter Big Picture View 2013 8
Employment data in the US has improved
and is helping consumer confidence
Personal Income Growth appears to be
bottoming
Not huge retail sales growth, but enough
to keep things moving and improving
Change in Non-Farm Payrolls
Source: Accuvest Global Advisors US Personal Income Growth YoY
Source: Accuvest Global Advisors
US Retail Sales YoY Change
Source: Accuvest Global Advisors
October 1, 2013
Accuvest Global Advisors 4th Quarter Big Picture View 2013 9
Tapering talk and the
government shut-down in Washington
have impacted FX markets
Those short-term gyrations will
ultimately give way to USD strength
broadly
The negative tone in the EM FX market has been reduced,
but headwinds remain in certain
countries
After sharp weakness, the Yen
has trended sideways over the last four
months
The Fed’s decision to postpone tapering has certainly impacted the currency market and continued volatility is likely in the short-term. In the medium-term, the eventual move towards tapering should be viewed as USD bullish. Uncertainty regarding the timeframe for tapering to begin is well-founded given the surprise by the Fed in September. It will eventually happen and December is a reasonable timeframe for it to begin. Diverging growth trends and the relative monetary outlook point to eventual USD strength against EUR and JPY, but also against other majors as well as many EM currencies. The drag from spending cuts/sequestration will lessen into 2014. At the same time, the wealth effects generated from higher financial assets and housing prices should continue to bolster consumer spending in a meaningful way. On the investment side, cleaner balance sheets and improved profitability in the corporate sector will spur credit growth and investment. Euro Area conditions, in contrast, are unlikely to buoy growth in a similar manner. JPY will continue to weaken as consumption taxes are initiated making relative growth rates tip noticeably in USD’s direction. Relative monetary policy also favors USD; at least in the longer-term which could see JPY much lower. EM currencies should start to move laterally on average. With tapering on hold, there is as much as $250B more coming into the market from Fed asset purchases. These inflows still may not offset the exodus of funds from EM. Policy makers will have some breathing room, however, and can try to offset some of the headwinds affecting decision making such as funding pressures, dwindling global and domestic growth, inflationary pressures, declining reserves, and political instability. With muted risk aversion and relatively attractive valuations, currencies that are benefiting from Developed Market improvement and China stabilization can do best. Japanese Yen
Source: Accuvest Global Advisors
October 1, 2013
Accuvest Global Advisors 4th Quarter Big Picture View 2013 10
EUR has improved, but will ultimately give way to weaker
levels vs USD
The weaker Peso is surprising given
strong fundamentals in Mexico, but
indicative of how EM currencies have been
hit generally
CHF continues strong
Euro - EURUSD
Source: Accuvest Global Advisors
Mexican Peso - USDMXN
Source: Accuvest Global Advisors
Swiss Franc - USDCHF
Source: Accuvest Global Advisors
October 1, 2013
Accuvest Global Advisors 4th Quarter Big Picture View 2013 11
Emerging Market and Commodity Currencies have
depreciated against the US Dollar in
2013
EM equity market underperformance is
due to exceptional strength in the US
and shocking underperformance by
BRIC markets
This differential has been building since 2010 and is not just
an unfortunate point-to-point
measurement issue
The methodology for creating the FX Forecast table below takes into account fair value evaluations that do not fully account for momentum and other supply and demand technicals that cause overshoots. The broad call for near-term FX moves is for JPY to continue its weakening trend and for USD to gain ground against other majors, notably EUR. FX Returns vs. USD - YTD
Source: Accuvest Global Advisors
EQUITIES
As mentioned in the opening, a deeper dive into Emerging Market equity underperformance is necessary in order to have a clear view on likely paths going forward. EM underperformance can be decomposed into 1) the exceptionally strong performance of US equities, and 2) a particularly pronounced underperformance by the BRIC countries. Remember that Brazil, Russia, India, and China comprise around half of the EM equity market capitalization. EM markets other than the BRICs have performed comparably to Developed Markets x-US. A closer look at developments in the BRICs suggests that the underperformance was driven by disappointing fundamentals, rather than positioning, sentiment, or other non-fundamental drivers of asset prices. Those fundamentals are unlikely to return to the levels that created the rapid growth in earnings, almost across the board in the EM universe. EM equities may be a ‘buy’ at current levels, but analysis needs to have a different investment thesis than expectations of strong growth which underpinned the case for EM equities for an extended period.
October 1, 2013
Accuvest Global Advisors 4th Quarter Big Picture View 2013 12
EM has
underperformed DM equities since 2010
Economic Data has been weaker than
expected in Emerging Markets
Between late 2010 and the current period, the total return on EM equities was about two-thirds of the return on advanced markets, which amounts to over 10 percentage points of underperformance per year. Emerging Markets Relative Strength
Source: Accuvest Global Advisors
Why EM has underperformed is not clear-cut. For instance, although EM GDP growth has decelerated in the past years, advanced economies have underperformed as well. Additionally, mutual fund and ETF fund flows were supportive of EM equities over the underperformance period. Growth and flows would be two reasons to expect EM returns to continue to outperform DM, but they haven’t in the past few years.
Economic Surprise Index
Source: Accuvest, Citi
October 1, 2013
Accuvest Global Advisors 4th Quarter Big Picture View 2013 13
EM GDP has decelerated but so has growth in DM
There has been wide dispersion in
Emerging Market Retail Sales
Emerging vs Developed Economic Growth
Source: Accuvest Global Advisors
Emerging Market Retail Sales
Source: Accuvest Global Advisors
October 1, 2013
Accuvest Global Advisors 4th Quarter Big Picture View 2013 14
Fund flows were actually supportive of
EM over the underperformance
period
Declining EM equity P/E ratios has been pronounced. This
derating is the main cause of
underperformance since 2010
Overly aggressive initial valuations
does not seem to have been the case
The outperformance of the US equity market is out of proportion and unlikely to be
repeated
Emerging Market Equities & Bonds
Source: Accuvest Global Advisors
Valuations would also be a reasonable place to look for anomalies in recent performance. Had EM equities been very aggressively priced relative to DM or other asset classes in 2010, their subsequent underperformance would have had an easy explanation. This does not seem to be the case. On a PE basis, EM were more conservatively valued than DM in 2010. The massive underperformance since then has been associated with a growing gap between EM and DM equities valuations. The derating over those 2-1/2 years needs to be explained. Emerging and Developed Market Valuation
One reason for the EM underperformance has been the outperformance by the US market. That performance is out of proportion to its own historical norm and to the magnitude of its economic recovery. Such outperformance is highly unlikely to be seen in the years to come. The US market has been driven predominantly by a double-digit surge in earnings that far exceeded earnings growth in other advanced markets and in EM as a group.
October 1, 2013
Accuvest Global Advisors 4th Quarter Big Picture View 2013 15
In addition to a strong US market,
BRIC markets have done very poorly and remember that BRIC markets are half of
EM market cap
EM x-BRIC has done as well as DM x-US. So, in general terms,
US up big, BRIC down big, all other
countries clustered in the middle
EM underperformance is concentrated in the
BRICs
Equity Returns
Source: Accuvest Global Advisors
The second driver of EM underperformance is the return on BRIC equities which accounts for about half of the EM total market capitalization. Those countries have been as weak as the US returns were strong. BRICs have seen an annual return of negative 12.5%. Interestingly, EM equities excluding the four BRIC markets earned roughly 4.5% during that time. Emerging Market (ex-BRIC economies) Relative Performance
Source: Accuvest Global Advisors
October 1, 2013
Accuvest Global Advisors 4th Quarter Big Picture View 2013 16
BRIC underperformance is due to weak earnings growth and a big de-
rating of BRIC equities
Getting the country right has been a significant issue,
almost to the point where it may not
even make sense to view EM as an asset
class at all
Performance varies widely across EM
markets, but BRICs are the weakest
performers
Investment opportunities may
have arisen from this tremendous
dispersion, but unique developments have created unique markets requiring a country-by-country
view
Total Returns
Source: Accuvest Global Advisors
A key distinction between BRIC and other EM markets is that earnings fell sharply in the BRICs but rose strongly in other EM markets. In the charts above, it can be noted that there is not a point-to-point comparison that creates the underperformance. Rather, it is an ongoing issue than has been consistently concentrated in the BRICs. The message from this data is that equity market investing requires a close look at a wide disparity of drivers across national markets. Even in the BRICs, the returns are highly generalized. There are important differences in the fundamental drivers of those four countries with important implications for the investment outlook. This highlights the importance of getting the national market contexts right and raises the question whether it even makes sense to view EM as an asset class at all. Dispersion of Country Returns
Source: Accuvest Global Advisors
With the underperformance as large as the recent period, it raises the question whether an investment opportunity has been created. BRIC underperformance specifically seems worthy of close analysis. Market developments and macro views are different in each case and create unique implications for each market.
October 1, 2013
Accuvest Global Advisors 4th Quarter Big Picture View 2013 17
The Chinese market has de-rated significantly.
Earnings growth has stalled. Economy
seems to be reconfigured for a
more balanced trajectory going
forward
Earnings in Brazil have collapsed.
Economic policies have created
environment where the rate of investment
is too low
Earnings in India have grown, but PEs have dropped as the market participants have run away from policy reforms that
are not working
EM equity markets
lack common drivers, perhaps making the
asset class an unwise investment as a
whole
China prospects, for instance, are not bad given unchallenging earnings expectations
Growth, on the other
hand, is what will eventually drive
India
China, for instance, has seen the least disappointing returns amongst the BRICs although the numbers are striking compared to DM. As the largest EM economy and equity market, Chinese results are the most consequential. The economic backdrop in China has been dominated by a) a deceleration to a slower rate of growth as authorities engineer a transition to a more balanced development trajectory, and b) anxiety that a sharp cyclical event may result from risks and tensions created by that transition. The two points have created a substantial de-rating of Chinese markets. The biggest issue going forward is a third point; earnings have barely budged in USD or CNY terms, even with near double-digit rates of growth in GDP. The combination of policy, development, and demographics has created a rapid increase in labor costs that could continue. Corporate costs structures will be affected and earnings may not grow as much as in the past. Brazil, unfortunately, has been impacted negatively on a number of fronts. Weak growth and a faltering economic strategy have undermined a seemingly promising market outlook. Since 2010, Brazil’s equity market is down 16% p.a. and that is with the PE relatively static. The market decline has been entirely attributable to a collapse in earnings of listed shares which a weak BRL has compounded. Policies have failed to create an environment conducive to high rates of investment and economic growth. Policies have promoted domestic consumption and income distribution with some positive social results, but the rate of investment is below 20% of GDP which is too low to generate strong growth. This problem is more longstanding than it will be in China. A weak economic outlook for growth and doubts about policy framework creates a set of complications that are difficult to evaluate. India’s equity market performance has been closer to Brazil than China, but the underlying story is different from both. The weak market performance is due predominantly to a de-rating of Indian equities, rather than very weak growth in corporate earnings. Looking through the recent currency shock, earnings are seen to be growing in local currency terms. The public sector has been unable to make the investments and enact the policy reforms required to sustain rapid growth and investors have lost confidence as evidenced by the declining PE ratios. EM equities do not seem to currently possess powerful enough common drivers to create an asset class worthy of specific analysis and portfolio management; at least not as it was in the past. Growth has been the common factor amongst EM markets, but that is a less powerful driver currently. Each market must be viewed and analyzed independently. Using the same BRIC countries, not only have they seen different paths over since 2010, their outlooks are unique as well. In China, earnings may stay somewhat stagnant even as GDP reaccelerates. Value is a more plausible investment thesis than growth, and, for now, Chinese equities seem interesting in that light. Unchallenging valuations and the cash the investments distribute will be the theme, and not unabated growth. India is the market where the traditional EM driver, growth, looks most relevant. The key question is whether policy status quo is compatible with robust future growth and whether that growth can filter through to corporate earnings. Tactical issues regarding currency and bond levels are also more important here.
October 1, 2013
Accuvest Global Advisors 4th Quarter Big Picture View 2013 18
But, Brazil is a value trap. An EM-only, or BRIC-only analysis would not pick this
up
Countries most reliant on capital
flows, measured by the current account
deficit, are where the most intense
currency and interest rate adjustments have taken place
China, South Korea, and Russia appear to
be least exposed to the risk of increasing
US interest rates
The Brazilian market has proven to be a value trap. Equity investments have appeared fairly valued since the 2002 election-related crisis. Fundamentals have deteriorated and brought the market down with them; declining PEs and declining earnings. Brazil should be viewed as a turnaround or restructuring candidate which is a different proposition than other EM markets. Current Account Impact on Currencies
Current Account Impact on Interest Rates
Source: Accuvest Global Advisors, Lyxor
October 1, 2013
Accuvest Global Advisors 4th Quarter Big Picture View 2013 19
Country Ranking Data – As of 9/30/2013
Source: Accuvest Global Advisors, MSCI
October 1, 2013
Accuvest Global Advisors 4th Quarter Big Picture View 2013 20
Range of Returns among Countries – 3rd Quarter QTD
Spain 25.7%Italy 19.6%
Austria 18.9%France 15.4%Sweden 15.2%Korea 14.9%
Netherlands 14.8%Belgium 13.6%Russia 13.6%
Germany 12.7%China 12.2%
United Kingdom 12.0%Australia 11.9%
Switzerland 9.5%Norway 9.1%
Hong Kong 8.9%Canada 8.8%
South Africa 8.8%Brazil 8.4%Japan 6.7%Usa 5.6%
Singapore 4.6%Taiwan 3.1%Israel 2.2%
Mexico -1.7%Malaysia -3.0%Thailand -5.2%
India -5.3%Chile -5.6%
Turkey -6.7%
Max 25.65%Min (6.73%)
Range 8.29%Average 8.19%Stdev 8.19%
Source: Accuvest Global Advisors
October 1, 2013
Accuvest Global Advisors 4th Quarter Big Picture View 2013 21
The earnings yield gap still points to relative value in
stocks
On January 1 of this year, the average S&P forecast for
year-end was 1,531 and the highest
forecast was 1,615
Of course, strategists have moved up their targets now as the market rallied, but the move in stocks this year was very much unexpected
Recommended asset allocations are varied
Earnings yield vs. Junk Bond yield
Source: Accuvest Global Advisors
S&P 500 Year End Forecast Table
2013 Close 2013 EPS
Bank of America 1750 $109.00 Bank of Montreal 1800 $110.00 Barclays 1800 $108.00 Citigroup 1650 $109.50 Credit Suisse 1730 $107.70 Deutsche Bank 1750 $111.00 Goldman Sachs 1750 $108.00 HSBC 1680 JP Morgan 1775 $110.00 Morgan Stanley $105.50 Oppenheimer 1730 $109.00 Wells Fargo 1440 $105.00 Mean 1715 $108.76 Median 1750 $108.50 High 1800 $111.00 Low 1440 $105.00
Source: Accuvest Global Advisors
Asset Allocation Table
Firm Stocks Bonds Cash Alts
Bank of America 68% 30% 2% 0%
HSBC 24% 59% 7% 5%
JPMorgan 60% 25% 15% 0%
UBS 47.6% 39% 3.2% 5% Source: Accuvest Global Advisors
October 1, 2013
Accuvest Global Advisors 4th Quarter Big Picture View 2013 22
A highly accommodative
central bank and a modestly growing
economy that shows no signs of inflation are the reasons why rates probably only trend slowly higher
in a stair-step fashion
Reducing rate risk and taking more
credit risk is a way bond portfolios can still add value in the
rising-rate environment
Interest Rate forecasts are being
ratcheted higher with the 10-yr expected to end the year with a
yield of 2.85%
This is 65 basis points higher than the median forecast at the beginning of
the year. The magnitude of the increase we have seen in 2013 was
unexpected.
down massively. Neither the overly-strong economy or inflationary scare are base cases currently, but they must be watched vigilantly. As noted in the table below, the forecasts for year-end are still under 3% on the 10-year Treasury note and twelve months later it is projected to be less than 50 basis points higher than that. This kind of scenario, while not great for bonds, is certainly not terrible. That outlook is the most reasonable and will drive strategy for the near term. Exposure to credit should be rewarded. Extending out the curve somewhat (say, in the 3-5 year range) should also be a winning strategy. With the yield curve steep and a dramatic rise in rates unlikely in the medium-term, move out the curve to that maturity range will create better returns than owning maturities that are very short, continually reinvesting and hoping for higher rates to kick in. Other strategies can minimize much of the interest rate risk of holding bonds. High yield bond portfolios can be built with durations near 3 and yields high enough, that rates would have to rise dramatically to not have positive returns when measured in 12-month holding periods. Of course, this brings into play risks associated with credit, but with the improving economy continuing to improve corporate balance sheets, metrics should improve. Floating rate senior loans are another way to mitigate interest rate risk. Floaters in general do not provide much return with a small margin over Libor, but once again, by accepting credit risk much higher returns are possible. 10-Yr Treasury Yield Forecasts (77 forecasts) Q4 13 Q1 14 Q2 14 Q3 14 Q4 14
Median Forecast 2.85 3.00 3.10 3.22 3.36
Average Forecast 2.84 2.96 3.10 3.24 3.36
High Forecast 3.76 3.93 4.21 4.36 4.52
Low Forecast 2.10 2.20 2.30 2.74 2.71 Source: Accuvest Global Advisors
Change in Forecasts since January 2013 Q4 13 Q1 14
Median Forecast +0.65 +0.60 Average Forecast +0.67 +0.62 High Forecast +0.76 +0.68
Low Forecast +0.60 +0.54 Source: Accuvest Global Advisors
October 1, 2013
Accuvest Global Advisors 4th Quarter Big Picture View 2013 23
Interest Rates are increasing…
But have reached their long term trend
The US Yield Curve is steepening, short term interest rates
remain low
10 Year Treasury Yield
Source: Accuvest Global Advisors
10 Year Treasury Yield - Long Term Trend
Source: Accuvest Global Advisors, Lyxor
2 Year - 10 Year Treasury Yield Spread (Steepness)
Source: Accuvest Global Advisors
October 1, 2013
Accuvest Global Advisors 4th Quarter Big Picture View 2013 24
US Yield Curve has steepened further over the last three
months
Investment Grade credit spreads have
widened
Yield Curve Shifts
3‐Mo 2‐Yr 5‐Yr 10‐Yr 30‐Yr
12/31/2008 0.08 0.77 1.55 2.21 2.68
12/31/2010 0.13 0.60 2.01 3.30 4.34
12/31/2012 0.04 0.25 0.72 1.76 2.95
6/30/2013 0.03 0.36 1.40 2.49 3.50
9/30/2013 0.01 0.32 1.38 2.61 3.69 Source: Accuvest Global Advisors
BBB Corporate Bond Spreads
Source: Accuvest Global Advisors
October 1, 2013
Accuvest Global Advisors 4th Quarter Big Picture View 2013 25
High yield spreads can perhaps stay
tight if the economy stays on track, allowing credit
metrics to continue improving
Emerging Market Sovereign Bond
spreads have widened, and are
approaching resistance
Rotation from Bonds to Equities still in the
early stages
High Yield Bonds - Spread to Worst
Source: Accuvest Global Advisors
Emerging Market Bond Spreads
Source: Accuvest Global Advisors
U.S. Fund Flows
Source: Accuvest Global Advisors, Lyxor
October 1, 2013
Accuvest Global Advisors 4th Quarter Big Picture View 2013 26
Strategy The breakdown in US Treasury bonds has been dramatic. While tactical
opportunities for trading could be present given the historic rise in rates, a more moderate strategy is warranted.
Investment grade exposure in the 2-5 year range will be built to take advantage, at least modestly, of the steep yield curve at a time when rates may move sideways for an extended period. Still, negative impacts will be avoided if rates were to rise significantly again.
Greater exposures to lower quality credit are being built to fill some of the gray area between stocks and bonds. Risk associated with an improving economy and favorable credit metrics of corporate bond issuers is preferable to taking straight-up interest rate risk. High yield and floating rate loans will do fine if rates tick up gradually.
Allocations
Bonds (35%)
Core
Overweight Neutral Underweight
Mid‐term Credit Short‐term Credit Mid‐term Treasuries
Satellite
Overweight
High Yield Bonds Floating Rate Senior Bank Loans Global Bonds
October 1, 2013
Accuvest Global Advisors 4th Quarter Big Picture View 2013 27
Exposure to Duration and Credit
has increased moderately over the
last 3 months
Alternative strategies can be helpful given
the economic panorama
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Credit Risk
Duration Risk
Accuvest Bond Model
AGA Bond ‐ October AGA Bond ‐ July Benchmark
Source: Accuvest Global Advisors
ALTERNATIVES The post-crisis backdrop of moderate global growth, mild inflation, and high liquidity will likely continue to prevail over the next few quarters. This investing backdrop and the ongoing process of monetary normalization are powerful drivers of performance, and should present opportunities for alternative strategies to generate alpha. Cumulative Returns
‐20%
‐10%
0%
10%
20%
30%
40%
50%
60%
Alternative Strategies Global Equities Aggregate Bonds Long Term Treasuries
1 Year 3 year 5 year
Source: Accuvest Global Advisors
October 1, 2013
Accuvest Global Advisors 4th Quarter Big Picture View 2013 28
Higher oil prices are a possibility, but
other commodities are likely to be under
some pressure
Commodities remain in a well-established
5 year downtrend
Global manufacturing may be showing signs of improvement and Chinese business confidence is getting stronger, but the global growth outlook is not yet good enough to prompt a sustained pick-up in commodity prices. Growth-sensitive commodities such as base metals may get a short-term price lift, but fundamentals are just not firm enough to sustain a rally. Upside risks in oil are high, despite an easing in the Syrian situation and prospect of a thaw in US relations with Iran. Commodities trailing equities
Source: Accuvest Global Advisors
Broad Commodities
Source: Accuvest Global Advisors
October 1, 2013
Accuvest Global Advisors 4th Quarter Big Picture View 2013 29
Best/Worst Commodities YTD
Source: Accuvest Global Advisors
Oil Prices (WTI)
Source: Accuvest Global Advisors
October 1, 2013
Accuvest Global Advisors 4th Quarter Big Picture View 2013 30
Gold decline continues with hardly
even a modest correction seen
Directional, Equity-focused Alternative
Strategies have outperformed in 2013
Gold Prices
Source: Accuvest Global Advisors
Alternative Strategies Year to date, the Lyxor Hedge Fund Index, a portfolio of alternative strategies, has returned approximately 3.0% with low volatility (5%) and modest correlations to stocks (0.80) and bonds (-0.12). Directional strategies with a focus on equities remain a strategic core exposure given our positive view on the asset class. With rates entering a bottoming process, investments in fixed income strategies present a less attractive risk-return profile.
Alternative Strategy Returns - Year-to-Date
10.4%
7.4%
5.5%4.7%
3.6% 3.4%
0.4%
‐0.9%
‐4.1%
‐6.0%‐8%
‐6%
‐4%
‐2%
0%
2%
4%
6%
8%
10%
12%
Source: Accuvest Global Advisors, Hedgefundresearch.com, Lyxor
October 1, 2013
Accuvest Global Advisors 4th Quarter Big Picture View 2013 31
SECULAR THEMES
Correlations amongst risk assets will drift lower
Gradual weakening trend in USD
Energy Revolution creates investment opportunities
Global economic growth will run below trend
Chinese turn to consumerism and urbanization
Correlations amongst risk assets will drift lower
Maintain commitment to broad diversification of portfolios through multiple asset classes
Prefer top-down country-by-country approach in building equity exposures
Alternative assets have place in portfolio if lower cost, transparent, and liquid
Gradual weakening trend in USD
Non-USD exposure via international equities
Tactical exposures to emerging market currencies
Satellite exposures to resource equities
Energy Revolution creates investment opportunities
Gas-on-gas arbitrage expands margins and market share
Gas-on-oil arbitrage see U.S. truck fleets and shipping switching
Tactical exposures to emerging market currencies
Global economic growth will run below trend
Rates will stay lower
Inflation will stay in the background
Trending risk markets will be elusive
Chinese turn to consumerism and urbanization
Consumption and services create sustained income and weal effects
Better social services generate marginal demand for healthcare, financials, IT, transportation, etc.
Currently less applicable
Current focus warranted
Cyclical Status ‐ Sept 2013
Secular Themes
October 1, 2013
Accuvest Global Advisors 4th Quarter Big Picture View 2013 32
General Disclosures
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