capital markets update - 3q 2019 - solaris group llc...capital markets update - 3q 2019 3q 2019...

Capital Markets Update - 3Q 2019

3Q 2019 Market Commentary

Notable 3Q 2019 Market Performance

Source: Bloomberg, Morningstar.

Despite the weight of looming geopolitical and trade-related threats and a marked slowdown in global economic growth, US stock and bond markets continued to post gains during the third quarter and are well above trend year-to-date. The concurrent run-up in risk assets and safe havens such as US Treasuries underlines the confusion with which investors are grappling. Further, if September is any indication, stock market leadership appears to be shifting away from momentum-oriented stocks with extreme overvaluations towards more traditional value names. In a related development, a re-pricing of the private equity market is underway, at least for many so-called “unicorns” with high rates of revenue growth but little or no profits. Generally positive employment numbers continue to drive personal consumption which in turn is supporting the economic expansion that begun eleven years ago. Still, the global economy faces a myriad of challenges. Capital spending is weak, the manufacturing sector is posting recession-like numbers and political divisiveness both within and among countries is a growing threat. The specter of impeachment proceedings in the US as well as the bitter tone of the presidential campaign is exacerbating the sense of disunity in America. The same can be said for the ongoing heated debates in the UK around Brexit as well as the protests playing out on the streets of Hong Kong. While the trade war could very well trigger a recession, negative GDP growth in the next year is not preordained. Unlike previous recessions, the banking system is sound, inventories are not overextended, inflation is in check, consumers are not overly indebted and the job outlook remains moderately positive. Additionally, while one can argue the efficacy of monetary policy at this point, central bankers here and abroad are clearly in a state of vigilance and ready to intervene if and when necessary. Passage of some kind of fiscal stimulus such as a one-time tax rebate, is also a possibility in the year ahead. We continue to urge clients to maintain equity exposures within policy ranges, albeit on the lower end of their long-term operating corridor. Additionally, where equity investments are tilted meaningfully toward growth stocks, we would shift some of these assets to (theoretically) safer value-sensitive funds. Fixed income exposure should generally step up in quality, at least until credit availability becomes even more limited, leading to attractive entry points for distressed bond managers. For those clients expecting meaningful net portfolio outflows, building or adding to an existing cash and/or low risk bond reserve should be considered.

S&P 500MSCIEAFE

MSCI Emerging Markets

Barclays Aggregate

10-Year Treasury

HFRI Hedge Fund

CompositeUSD

WTICrude Oil

3Q Return 1.70% -1.00% -4.11% 2.27% 3.19% -0.49% 3.38% -6.63%

YTD Return 20.55% 13.35% 6.23% 8.52% 10.86% 6.74% 3.33% 18.09%

1


S&P 500 and VIX Performance – 3Q 2019

Source: Bloomberg, WSJ.com.

Source: Bloomberg.

Global Capital Markets Performance – 3Q 2019

Top Sectors Bottom Sectors

Global Fixed Income

Value Blend Grow th Short Term Intermediate Long Term Value Blend Grow th Intermediate

(0.67)

Cor

pora

tes

(6.27) (4.11) (1.96)

Hig

h Yi

eld

Emrg

Mkt

5.62

EAFE (1.64) (1.00)

(4.17)

Hig

h Yi

eld

N/A 1.27 2.69

2.59

Mid

Cap

1.22 0.48 (0.67)

Cor

pora

te

0.93 1.70

0.58 1.18 7.92 U.S

.1.23 1.16

1.21(0.40)

1.49

Trea

surie

s

U.S. Equity U.S. Fixed Income Global Equity

1.10

Sove

reig

n

Larg

e C

ap

1.36 1.42

Smal

l Cap

(0.57) (2.40)

5

10

15

20

25

30

2700

2800

2900

3000

3100

7/1/19 7/7/19 7/13/19 7/19/19 7/25/19 7/31/19 8/6/19 8/12/19 8/18/19 8/24/19 8/30/19 9/5/19 9/11/19 9/17/19 9/23/19 9/29/19

S&P Volatility Index (VIX)

S&P

500

Inde

x

S&P VIX

August 1st:U.S. announces 10% tarif f on

additional $300 billion of Chinese goods

July 26th:S&P 500 closes at all time high

August 14th:Stocks f all as y ield curv e inverts

August 13th:Stocks rally as U.S. delay s

some tarif f s on Chinese goods

July 31st:Federal Reserv e cuts interest

rates by 0.25%

September 24th:Speaker Pelosi announces

Trump impeachment inquiry

September 10th:National Security Adv isor John Bolton leav es White

House

2


Source: Bloomberg.

Global Capital Markets and Sector Performance – 3Q 2019 and YTD

Global Currency Performance – 3Q 2019 and YTD

Source: Bloomberg.

2.6%

-0.2%-1.1%

-2.6%-3.2%

-3.8% -3.9% -4.2%

-7.4%

7.5%

1.4%

3.0%

-0.5%

-3.6%-4.2% -3.8%

-5.0%

-6.6%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Israeli Shekel Japanese Yen Canadian $ Mexican Peso British Pound Australian $ Chinese Renminbi Euro Brazilian Real

3Q19 YTD

-6.6

-4.1

-2.5

-2.4

-1.0

0.6

1.3

1.3

1.6

1.7

3.2

3.3

3.3

7.7

18.1

6.2

10.2

14.2

13.3

1.8

10.8

11.4

6.7

20.6

10.9

12.3

11.5

28.5

-10% -5% 0% 5% 10% 15% 20% 25% 30% 35%

WTI Crude Oil

Emerging Mkt Stocks

UK Stocks

US Small Cap Stocks

Int'l Stocks (Devlpd Mkts)

90 Day Treasury

Emerging Mkt Bonds

US High Yield Bonds

Muni Bonds

US Large Cap Stocks

10 Year Treasury

Gold

Japanese Stocks

Equity REIT Stocks

Global Capital Markets Performance

YTD 3Q19

-6.3

-2.2

-0.1

0.5

1.0

2.0

2.2

3.3

6.1

7.7

9.3

6.0

5.6

17.1

22.5

22.6

19.6

21.7

31.4

23.3

29.7

25.4

-10% -5% 0% 5% 10% 15% 20% 25% 30% 35%

Energy

Healthcare

Materials

Consumer Discr.

Industrials

Financials

Telecom

Technology

Consumer Staples

Real Estate

Utilities

S&P Sector Performance

YTD 3Q19

3


Global Hedge Fund Performance By Strategy – 3Q19 and YTD

Source: HFRI Hedge Fund Indices.

Global Current Price / Earnings Ratio vs. 10 Year Average

Source: Bloomberg. Price to earnings is price divided by Bloomberg consensus forward 12 month earnings estimate

2x

4x

6x

8x

10x

12x

14x

16x

18x

20x

22x

MSCI ACWorld

MSCIEAFE

MSCI EM US Canada UK Germany France Japan Russia China Brazil India Korea

Current P/E 10 Yr Avg

MSCI AC World = 16.2

1.5%

0.1%

-0.5% -0.7%-1.1% -1.1%

-1.6%

6.5%

1.5%

6.7%

4.7% 5.0%

8.0%

3.1%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Global Macro Market Neutral Weighted Composite Event Driven Fund of Funds Equity Hedge Distressed

3Q 2019 YTD

4


S&P Sector Returns: Capital Appreciation vs. Dividends (Annualized Since 1989)

Source: S&P Dow Jones Indices.

Cumulative Return: R1000G vs. R1000V (August 2019 – September 2019)

Source: Bloomberg.

1.1%2.1% 2.7%

1.6% 2.3% 2.3% 2.5%

4.7%3.0% 2.5%

4.0%

10.9% 9.4% 8.1%9.1% 7.6% 7.4%

6.3%

3.9%

5.4%5.3% 1.7%

0%

2%

4%

6%

8%

10%

12%

14%

Technology Health Care Cons.Staples

Cons. Disc. Industrials S&P 500 Financials Utilities Energy Materials Comm.Services

Capital Appreciation

Dividends12.0%

11.4%10.8% 10.7%

9.9% 9.7%

8.8% 8.6% 8.3%7.8%

5.7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%Russell 1000 Growth

Russell 1000 Value

5


S&P 500 Operating Earnings Growth (YoY Percentage Change)

Source: S&P Dow Jones Indices.

S&P 500 Return Decomposition: Mar. 2009 – Aug. 2019 (Annualized)

Source: Touchstone Investments, Bloomberg, S&P Down Jones Indices.

S&P 500 Profit Margin

Source: Bloomberg.

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%Estimates

8.8%

2.3%

2.8%

2.4%

16.3%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Profit Margin Expansion Sales/SharesMultiple Expansion DividendTotal Return

15%

17%

14%

54%

6


Household Debt Payments as % of Personal Disposable Income

S&P 500 Balance Sheet

Source: Bloomberg.

Source: Federal Reserve Bank of St. Louis, JP Morgan.

Unemployment Rate


30%

35%

40%

45%

50%

55%

$600

$700

$800

$900

$1,000

$1,100

$1,200

3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 1Q19 3Q19

Total Debt (billion $) (LHS) Cash as % of Debt (RHS)

3.5%

0%

2%

4%

6%

8%

10%

12%

9%

10%

11%

12%

13%

14%

'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18

4Q07: 13.2%

2Q19: 9.7%

7


Global Manufacturing PMI

Capital Expenditures (YoY Percentage Change)

Source: Bloomberg, JP Morgan, Markit. Colors are based on PMI relative to the 50 level, which indicates acceleration or deceleration in the geographic regions shown.

Note: Capital expenditures are non-residential fixed domestic investment.


-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

Jul-0

6

Nov

-06

Mar

-07

Jul-0

7

Nov

-07

Mar

-08

Jul-0

8

Nov

-08

Mar

-09

Jul-0

9

Nov

-09

Mar

-10

Jul-1

0

Nov

-10

Mar

-11

Jul-1

1

Nov

-11

Mar

-12

Jul-1

2

Nov

-12

Mar

-13

Jul-1

3

Nov

-13

Mar

-14

Jul-1

4

Nov

-14

Mar

-15

Jul-1

5

Nov

-15

Mar

-16

Jul-1

6

Nov

-16

Mar

-17

Jul-1

7

Nov

-17

Mar

-18

Jul-1

8

Nov

-18

Mar

-19

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3Global 50.5 50.2 51.0 52.3 52.9 52.6 53.1 54.0 53.8 53.1 52.4 51.8 50.6 49.9 49.5Developed 51.3 50.7 51.4 53.1 54.1 54.0 54.3 55.8 55.6 54.7 53.8 52.8 50.7 49.4 48.7Emerging 49.5 49.4 50.2 50.9 51.2 50.8 51.4 51.7 51.7 51.2 50.7 50.5 50.4 50.3 50.5US 51.7 50.9 52.1 53.9 54.2 52.5 53.1 54.5 55.5 56.1 55.2 54.9 53.4 51.2 50.6Canada 50.1 52.0 51.1 51.5 54.6 55.2 55.0 54.5 55.7 56.3 56.2 54.1 52.0 49.3 50.1Japan 50.5 48.0 49.7 51.7 52.8 52.7 52.4 53.5 54.0 53.2 52.4 52.6 49.5 49.8 49.2UK 51.5 51.0 52.4 54.3 54.8 55.9 56.1 56.9 55.1 54.0 53.5 52.9 53.3 50.2 47.9Euro Area 51.7 52.0 52.1 54.0 55.6 57.0 57.4 59.7 58.3 55.5 54.3 51.7 49.1 47.7 46.4Germany 51.2 52.8 53.9 55.0 57.2 59.1 59.3 62.1 60.0 57.0 55.5 51.8 47.1 44.6 42.8France 49.9 48.2 48.9 52.3 53.0 54.6 55.6 57.5 56.0 53.6 53.1 50.6 50.8 50.8 50.3Italy 53.0 53.3 50.7 52.1 54.6 55.5 55.9 57.8 57.0 53.2 50.5 49.0 47.6 49.1 48.3Spain 54.3 52.5 51.4 54.4 54.8 54.9 53.6 55.9 55.3 53.7 52.4 51.8 51.1 49.9 48.2Greece 49.1 49.5 49.4 48.7 47.0 49.4 51.8 52.5 55.4 53.5 53.7 53.6 54.2 54.4 54.4China 48.7 49.1 50.2 51.3 51.3 50.1 51.2 51.1 51.4 51.1 50.5 50.0 49.7 49.9 50.6Indonesia 49.4 51.1 49.9 49.1 50.1 50.4 49.9 49.9 50.7 51.2 51.0 50.7 50.4 50.9 49.2Korea 49.2 50.2 48.8 48.5 48.9 49.6 49.9 50.4 50.0 49.0 49.8 49.8 48.1 48.7 48.1Taiwan 50.4 49.6 51.7 54.5 55.4 53.6 54.0 55.5 56.1 54.2 52.3 48.3 47.6 47.4 48.7India 51.5 51.0 52.2 52.1 51.2 51.7 50.1 52.5 51.8 52.0 52.1 53.4 53.6 52.2 51.8Brazil 46.0 42.5 45.9 45.9 46.8 50.9 50.6 52.4 52.6 50.9 50.8 52.1 53.0 50.9 51.9Mexico 52.8 52.4 51.1 51.0 51.0 51.4 52.1 51.1 52.2 51.6 51.5 50.0 51.1 49.8 49.3Russia 49.1 49.7 50.5 53.2 53.2 51.2 52.1 51.5 51.0 50.2 49.0 51.9 51.3 50.1 48.2

2019

Dev

elop

edEm

ergi

ng

2016 2017 2018

8


The Fed and Interest Rates

*Long-run projections are the rates of growth, unemployment and inflation to which a policymaker expects the economy to converge over the next five to six years in the absence of further shocks and under appropriate monetary policy.

Source: Bloomberg, JP Morgan. Source: Bloomberg, JP Morgan.

Duration of Barclays U.S. Aggregate

Inflation Since 1960

Source: Bloomberg, WSJ.com.

0

2

4

6

8

10

12

PCE

Core

Infla

tion

%

Last 20 YearsAverage: 1.72%Std Dev: 0.35%

2.3%

1.0%

1960 - 1998Average: 4.03%Std Dev: 2.27%

1.0%

3.0%

5.0%

7.0%

9.0%

11.0%

3.5

4.0

4.5

5.0

5.5

6.0

6.5

Duration (LHS)

Yield (RHS)

Average Sep 30Duration 4.8 years 5.8 yearsYield 5.0% 2.3%

1.88%2.13%

2.38%

1.70%

1.25% 1.17%

2.50%

0%

1%

2%

3%

4%

5%

6%

7%

'99 '01 '03 '05 '07 '09 '11 '13 '15 '17 '19 '21 Longrun

FOMC year-end estimatesMarket expectations on 9/19/19FOMC long-run projection*

Federal funds rate

9


Source: Bloomberg, JP Morgan.

US Treasury Spreads

-300

-200

-100

0

100

200

300

400

500

Spre

ad (B

Ps)

10Y-2Y Spread

10Y-3M Spread-100

-50

0

50

100

150

200

250

Dec

-16

Apr-

17

Aug-

17

Dec

-17

Apr-

18

Aug-

18

Dec

-18

Apr-

19

Aug-

19

Source: Bloomberg. Data as of September 30, 2019.

G7 Yield Matrix

3-Month 1-Year 3-Year 5-Year 7-Year 10-Year 30-Year

Canada 1.65% 1.71% 1.51% 1.40% 1.36% 1.36% 1.53%

France -0.59% -0.63% -0.73% -0.64% -0.50% -0.28% 0.54%

Germany -0.60% -0.70% -0.82% -0.78% -0.74% -0.57% -0.07%

Italy -0.30% -0.25% -0.12% 0.21% 0.49% 0.82% 1.91%

Japan -0.38% -0.30% -0.35% -0.36% -0.36% -0.22% 0.36%

United Kingdom 0.68% 0.46% 0.29% 0.28% 0.26% 0.48% 0.97%

United States 1.82% 1.76% 1.56% 1.55% 1.61% 1.67% 2.11%

10


GDP in Europe

Source: Bloomberg.

Trade War: Average Tariff Rate Between US and China

0%

5%

10%

15%

20%

25%

30%

Jan-

18

Jan-

18

Mar

-18

Apr-1

8

May

-18

May

-18

Jun-

18

Jul-1

8

Aug-

18

Sep-

18

Oct

-18

Nov

-18

Dec

-18

Jan-

19

Feb-

19

Mar

-19

Apr-1

9

May

-19

Jun-

19

Jul-1

9

Aug-

19

Sep-

19

Oct

-19

Nov

-19

China's tariff on US exports

US tariff on Chinese exports

Source: Peterson Institute for International Economics. Data as of September 20, 2019.

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Sep-08 May-09 Jan-10 Sep-10 May-11 Jan-12 Sep-12 May-13 Jan-14 Sep-14 May-15 Jan-16 Sep-16 May-17 Jan-18 Sep-18 May-19

France Germany Euro Area

11


Lack of Profitability of US IPOs

Source: WSJ.com.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

% of US-listed IPOs that lost money in 12 months leading up to offerings

Source: WSJ.com.

Time to Profitability Pre IPO Post IPO

Google

2 1 0 18 years 7 6 5 4 3 4 5 6

Apple

Facebook

2 3

Cisco

Qualcomm

Twitter

Groupon

Amazon.com

1

1

1

1

Founded

Profitable

IPOProfitable before IPO

12


Geopolitical Sell-Offs are Short-Lived

Notes: Not shown in the above charts, but included in the averages, are returns after the following events: the Suez crisis (1956), construction of the Berlin Wall (1961), assassination of President Kennedy (1963), authorization of military operations in Vietnam (1964), Israeli-Arab Six-Day War (1967), Israeli-Arab War/oil embargo (1973), Shah of Iran’s exile (1979), invasion of Grenada (1983), U.S. bombing of Libya (1986), First Gulf War (1991), President Clinton impeachment proceedings (1998), Kosovo bombings (1999), multi-force intervention in Libya (2011), and the U.S. anti-ISIS intervention in Syria (2014). Source: Vanguard. S&P 500 Total Return Index extracted from Bloomberg for all dates through December 31, 1987. Starting January 1, 1988, S&P 500 Total Return Index extracted from FactSet.

Average total return 6 months later: 5.3% Average total return 1 year later: 9.8%

-6%

21%27%

CUBAN MISSILE CRISIS: 1962

-4%

-15%-16%

PRESIDENT NIXON IMPEACHMENT

PROCEEDINGS:1974

-3%

3%

26%

IRANIAN HOSTAGE CRISIS: 1979

-5%

6%

26%

SOVIET INVASION OF AFGHANISTAN: 1976

-3%

19%

29%IRAQ WAR:2003

-2%

5% 5%

ARAB SPRING (EGYPT):2011

-1%

9%

14%UKRAINECONFLICT: 2014

-5%

9%

18%BREXIT VOTE:2016

KEY

Initial sell-off(length varies)

6 months later

1 year later

13

Important Disclosures

14

KF Group, LP, doing business as Solaris Advisors, is an SEC registered investment adviser located in New York, New York. This report and the proprietary work product of Solaris is being provided on a confidential basis for informational purposes only, solely for those persons to whom it is transmitted. Solaris believes that the information contained in this report is accurate and complete, but it makes no representation as to its accuracy or completeness, and it should not be relied on as such. This information is provided 'as is' and the user assumes the entire risk of any use it may make or permit to be made of this information. Neither Solaris nor any of its affiliates or any other person or entity involved in compiling, computing, creating, reporting or providing this information makes any express or implied warranties or representations, and they expressly disclaim all warranties including, without limitation, all warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose. Without limiting any of the foregoing, in no event shall Solaris have any liability for any direct, indirect, special, incidental, punitive, consequential or any other damages (including, without limitation, lost profits) even if notified of, or if it might otherwise have anticipated the possibility of such damages. The views expressed in this report represent the opinions of Solaris Advisors, are based on information the firm considers to be reliable, and are subject to change without notice. There is no guarantee that the forecasts and opinions expressed in this report will be realized. Statistical data is obtained from a variety of sources each of which is set forth below its respective chart, graph, exhibit, etc. While these sources are believed to be trustworthy, their accuracy, timeliness, completeness, relevance or reliability cannot be assured. Global Capital Markets Performance is represented by index returns. These sources include Standard & Poor’s (U.S. equity markets); Russell (U.S. equity markets); Barclays Aggregate (fixed income bond markets); Morgan Stanley (EAFE and Emerging Markets); HFRI (Hedge Funds); and Credit Suisse (Hedge Funds). The performance of the global capital markets does not represent the current or future performance of The Solaris Group entities which can substantially differ from the performance of those markets. The types of securities and investment strategies mentioned are not be suitable for everyone. Each investor needs to consider his, her or its investment strategies in light of their own particular facts and circumstances. Index returns are derived principally from market indices on Bloomberg and other third party proprietary databases such as Morningstar, HFRI and CS Tremont. The following four broad-based indices are examples of indices used in reports for comparative purposes only and have been selected as they are well known and may be easily recognizable by investors. The S&P 500 Index includes 70% of all U.S equities and is weighted by market value, and its performance is thought to be representative of the U.S. stock market as a whole. The Barclays Aggregate Bond Index comprises government securities, mortgage-backed securities, asset-backed securities and corporate securities, and is a broad measure of the taxable, investment grade U.S. bond market. The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the U.S. and Canada. It comprises 21 MSCI country indexes. The HFRI Monthly Indices are equal fund weighted and comprised of hedge funds that voluntarily report their performance to HFR. Each HFR broad strategy index consists of funds that allocate capital among several hedge fund strategies. Each strategic index consists of funds that allocate capital within a specific strategy. With respect to these and other indices used in this report, more detailed information is available upon request. Please note that these indices or performance benchmarks are comprised of securities which for the most part are dissimilar to the positions held directly or indirectly by the managers or funds in the portfolios represented in this report, and these indices or benchmarks do not have similar risk/return profiles to them. Additionally, indices are unmanaged; do not incur management fees, costs or expenses; and cannot be invested in directly. Benchmarks are provided for illustrative purposes only and should not be relied upon as an accurate measure of comparison. Past Performance is No Guarantee of Future Results

14

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