2q 2016 investment outlook€¦ · 2q 2016 investment outlook. 1 | p a g e skiing on theeast coast...
TRANSCRIPT
2016
2Q 2016 Investment Outlook
1 | P a g e
Skiing on the East Coast can be a hit-or-miss affair. In the worst of times, East Coast skiers have to contend with crowds,
ice, rocky trails and generally awful weather. Once in a while, though, the stars align and there’s ample powder on the
trails, the crowds abate and a day of thrilling trail riding awaits the patient skier. Those persevering skiers who honed
their skills when the going was rough get to enjoy these idyllic periods all the more.
Investing has recently been like East Coast skiing at its worst. Markets have delivered rocky performances – great
volatility since 2014 with very little in returns. Good investors know that times like this are a time to learn to interpret
new conditions and obstacles.
It has been a volatile start to the year 2016. Stock prices, as measured by the S& P 500 in the United States and the MSCI
All Country World Index for global markets, took dives exceeding 10% in the first few weeks of the year. Then, starting in
mid-February, major worries began to abate and these markets fully recovered their losses. As of April, the markets have
gains to show for the year.
The market’s seesaw was driven by a number of factors this year. Concerns about China’s economy and over the Federal
Reserve’s actions in the United States entered headlines in January and February. But one of the biggest market drivers
recently has been the sharp swing in the price of oil. Oil’s peaks and valleys correspond very closely to the market’s ups
and downs so far this year.
Oil & the Stock Market
As of February of this year, the market for oil was not clearing. Production had gone up much more quickly than
demand, and because oil is expensive to store, the excess caused prices to fall very rapidly in 2015. These same
pressures drove oil prices down another 30% at the start of 2016.
Investors were very focused on the short-term drawbacks from low oil prices, and there was good reason for them to be
concerned. The near-term effect of cheap oil is an immediate reduction in the profitability of energy companies, which
represent about 10% of investible businesses in the stock market. More important, investors may be seeing the falling
price of oil as a risk to the broader economy. Investors found themselves asking, “What if it’s not just a supply
mismatch? What if the falling price of oil suggests an impending global recession?”
60
70
80
90
100
110
120
Dec-2015 Jan-2016 Feb-2016 Mar-2016
Growth of $100
Crude Oil
S& P 500
MSCI All Country
World
2 | P a g e
Viewed through that lens, it makes sense that the market’s peaks and valleys have followed the price of oil this year.
There is still hope that stability will gradually return to energy prices. Oil supply exceeded demand by only about 1.6% as
of the end of last year. World production would need to fall only slightly to bring the market back into balance. At the
current pace of slowing oil production, we may be in balance as soon as this summer.
Value Investing Returns
Savvy investors look for opportunities to improve their returns based on scientific strategies that have long track records
of success. One strategy that has worked well in the long history of financial markets is value investing in stocks. Value
investing means buying companies that are quantifiably less expensive than their peers. One way to approach value is to
ask yourself: “If I have $100 to invest, how do I get as much earnings as possible for that $100? How do I buy as much as
possible in net assets or in annual revenue?”
Value investing is powerful and has earned a long-term return premium of about 2% across a wide range of asset classes
source: Ken French). However, value investing goes through periods of being in favor and out of favor, just like any
other investment strategy. Unfortunately, the three years ending in 2015 did not deliver the generous returns to which
value investors are accustomed.
RegentAtlantic believes that the year 2016 is shaping up to be very different for value investors – not just because value
investments have outperformed, but because of how broadly they have outperformed. In a broad range of asset classes
we track – including large-cap stocks, small-cap stocks, international markets and emerging markets, value is
experiencing a resurgence in 2016.
Whether it’s less expensive companies beating the FANG (Facebook, Amazon, Netflix and Google) stocks in the United
States, or better valuations making a difference in Emerging Markets, value is on a roll so far this year. The breadth of
the values resurgence, and the fact that it applies to so many different markets, gives us confidence that value as a
factor is making a comeback.
2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
S& P 500
Value
Large Cap
US)
S& P 500
Growth
Large Cap
US)
Russell
2000
Value
Small Cap
US)
Russell
2000
Growth
Small Cap
US)
MSCI
EAFE
Value
Large Cap
Int'l)
MSCI
EAFE
Growth
Large Cap
Int'l)
MSCI
EAFE SC
Value
Small Cap
Int'l)
MSCI
EAFE SC
Growth
Small Cap
Int'l)
MSCI EM
Value
Emerging
Markets)
MSCI EM
Growth
Emerging
Markets)
Total Return 12/ 31/ 2015 to 4/ 22/ 2016
3 | P a g e
A Cautiously Promising Year Ahead
Oil prices have, of late, driven much of the volatility in stock markets both in the United States and abroad. Oil prices
pulled investors’ returns down in the first few weeks of the year and then pushed them back up. Fundamentals may turn
positive this year for oil, as production cuts help supplies to get closer in line with demand.
Meanwhile, value investors are again enjoying the fruits of investing in less expensive companies in 2016, after facing
strong headwinds in recent years.
Overall, the past 18 months have been a rocky, icy and crowded environment for investors. Like East Coast skiers,
investors have faced a tough environment, but one that may actually help them hone their skills for times when
opportunities are better. The positive news: There’s still a good chance we actually may see the fruits of these
opportunities in 2016.
Important Disclosure Information
Please remember that different types of investments involve varying degrees of risk, including the loss of money
invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future
performance of any specific investment or investment strategy, including the investments or investment strategies
recommended or undertaken by RegentAtlantic Capital, LLC (“ RegentAtlantic”) will be profitable. Please remember to
contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the
purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any
reasonable restrictions to our investment management services. A copy of our current written disclosure statement
discussing our advisory services and fees is available for your review upon request. This article is not a substitute for
personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements
and opinions expressed are, however, subject to change without notice based on market and other conditions and may
differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s
process and strategies are based on general practice and we may make exceptions in specific cases.
The index returns shown above show the total return for various investment indices and include the impact of the
reinvestment of dividends. A comparison to indices may not be a meaningful comparison. Comparisons to benchmarks
have limitations because benchmarks have volatility and other material characteristics that may differ from the
performance of a client's portfolio. The investments in a client's portfolio may differ substantially from the securities
that comprise each index and are not intended to track the returns of any index. One cannot invest directly in an index,
nor is any index representative of any client's portfolio. Actual client accounts will hold different securities than the
ones included in each index. The index returns are gross of applicable account transaction, custodial, and investment
management fees. The actual investment results would be reduced by such fees and any other expenses incurred as an
investor. Please below for definitions of the indexes used.
S& P 500 - The S& P 500 is an index consisting of 500 stocks chosen for market size, liquidity and industry grouping,
among other factors. The S& P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the
risk/ return characteristics of the large-cap universe. Each constituent in an index is weighted by its market-capitalization,
as determined by multiplying its price by the number of shares outstanding after float adjustment.
MSCI All Country World Index - The MSCI All Country World Index (ACWI) is a free float-adjusted market capitalization
weighted index that is designed to measure the equity market performance of developed and emerging markets. The
MSCI ACWI consists of 45 country indices comprising 24 developed and 21 emerging market country indices.
S& P 500 Value - A market-capitalization-weighted index developed by Standard and Poor's consisting of those stocks
within the S& P 500 Index that exhibit strong value characteristics. The S& P 500/Citigroup Value Index uses a numerical
ranking system based on four value factors and three growth factors to determine the constituents and their weightings.
Value factors include book value to price, cash flow to price, sales to price and dividend yield.
4 | P a g e
S& P 500 Growth - A market-capitalization-weighted index developed by Standard and Poor's consisting of those stocks
within the S& P 500 Index that exhibit strong growth characteristics. The S& P 500/Citigroup Value Index uses a numerical
ranking system based on four value factors and three growth factors to determine the constituents and their weightings.
Growth factors include five year growth rates for earnings per share, sales per share, and the five year internal growth
rate.
Russell 2000 Value - The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell
3000 Index. The index represents approximately 8% of the total market capitalization of the Russell 3000 Index, and
represents the performance of smaller capitalization companies that exhibit value characteristics.
Russell 2000 Growth - The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell
3000 Index. The index represents approximately 8% of the total market capitalization of the Russell 3000 Index, and
represents the performance of smaller capitalization companies that exhibit growth characteristics.
MSCI EAFE Value - The MSCI Europe, Australia and Far East (EAFE) Value Index is a free float-adjusted market
capitalization weighted that is designed to measure equity market performance in foreign developed markets for stocks
that exhibit value characteristics.
MSCI EAFE Growth - The MSCI Europe, Australia and Far East (EAFE) Value Index is a free float-adjusted market
capitalization weighted that is designed to measure equity market performance in foreign developed markets for stocks
that exhibit growth characteristics.
MSCI EAFE Small Cap Value - The MSCI EAFE Small Cap Index Fund targets 40% of the eligible small cap universe in each
industry group of each country represented by the MSCI EAFE Index. MSCI defines the small cap universe as all listed
securities that have a market capitalization in the range of $200 - $1500 million USD and targets stocks that exhibit value
characteristics.
MSCI EAFE Small Cap Growth - The MSCI EAFE Small Cap Index Fund targets 40% of the eligible small cap universe in
each industry group of each country represented by the MSCI EAFE Index. MSCI defines the small cap universe as all
listed securities that have a market capitalization in the range of $200 - $1500 million USD and targets stocks that exhibit
growth characteristics.
MSCI EM Value - The MSCI Emerging Markets Index is a free float-adjusted market capitalization weighted index that is
designed to measure equity market performance in the global emerging markets. The MSCI Emerging Markets Index
consists of the following 23 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt,
Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Qatar, Russia, South Africa,
Taiwan, Thailand, Turkey, and UAE. It targets stocks that exhibit value characteristics.
MSCI EM Growth - The MSCI Emerging Markets Index is a free float-adjusted market capitalization weighted index that is
designed to measure equity market performance in the global emerging markets. The MSCI Emerging Markets Index
consists of the following 23 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt,
Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Qatar, Russia, South Africa,
Taiwan, Thailand, Turkey, and UAE. It targets stocks that exhibit growth characteristics.