investing in this late cycle economydocuments.efgroup.co.za/documents/boutique collective...

May 2018

Caroline MillerGlobal StrategistBCA Research

Investing In This Late Cycle Economy

1

Global Growth: Momentum Peaking, Leadership Shifting Stateside

© BCA Research 2018 © BCA Research 2018

Still positive

Down in negative territory

60

58

56

54

52

50

48

2013 2014 2015 2016 2017

60

58

56

54

52

50

48

MANUFACTURING PMI*:U.S.EURO AREAU.K.JAPANWORLD

* SOURCE:MARKIT AND INSTITUTE FOR SUPPLY MANAGEMENT.

80

40

0

-40

-80

80

40

0

-40

-80

JAN APR JUL OCT JAN APR

ECONOMIC SURPRISE INDEX*:U.S.EURO AREAU.K.JAPANG10

* ROLLING 3-MONTH STANDARD DEVIATION OF DATA SURPRISES;SOURCE: CITIGROUP GLOBAL MARKETS INC.

2017 2018

2

Global Regime Shift: Monetary Policy Ebbing, Fiscal Flowing


5

4

3

2

12000 2004 2008 2012 2016

5

4

3

2

1

.6

.3

0

-.3

-.6

2012 2013 2014 2015 2016 2017

.6

.3

0

-.3

-.6

J.P. MORGAN GLOBALGOVERNMENT BOND YIELD

% %

MAJOR COUNTRIES*:CENTRAL BANK MONITOR**

* GDP-WEIGHTED AVERAGE OF U.S., U.K., EURO AREA, JAPAN, CANADA, AND AUSTRALIA.** BCA PROPRIETARY MODEL; BELOW ZERO INDICATES EASIER POLICY NEEDED, AND ABOVE ZERO INDICATES TIGHTER POLICY NEEDED.

Tighter policy needed

Easierpolicy needed

1

0

-1

2010 2012 2014 2016 2018 2020

1

0

-1

0

-.4

-.8

0

-.4

-.8

U.S.% OfGDP

% OfGDP

DEVELOPED MARKETS EX. U.S.

FOR BOTH PANELS:FISCAL THRUST*

FORECAST

% OfGDP

% OfGDP

* CHANGE IN GENERAL GOVERNMENT CYCLICALLY ADJUSTED PRIMARYBALANCE(% OF POT. GDP). INCLUDES THE IMPACT OF TAX CUTSSENATE SPENDING DEAL AND DISASTER RELIEF; SOURCE: IMFFISCAL MONITOR TABLE A-3, APRIL 2018.

5

4

3

2

1

0

-1

-2

1950 1960 1970 1980 1990 2000 2010

5

4

3

2

1

0

-1

-2

UNEMPLOYMENT GAP* BASEDON ESTIMATES FROM:

FEDERAL RESERVECBO**

% %

* DIFFERENCE B/W UNEMPLOYMENT RATE AND LONG-TERM NAIRU.** CONGRESSIONAL BUDGET OFFICE.NOTE: SHADED REGIONS DENOTE NBER-DESIGNATED PERIODS OF RECESSION.SOURCE: BLS, FED RES, AND CBO.3

Labor Market Utilization: Reemergence of Global Divergence


24

22

20

18

16

14

12

10

2008 2010 2012 2014 2016 2018

24

22

20

18

16

14

12

10

ECB'S BROAD MEASURE OFLABOR UNDERUTILIZATION*

EURO AREA EX. GERMANYEURO AREAGERMANY

% %

* DEFINED AS ACTIVE LABOR FORCE PLUS THOSE AVAILABLE BUT NOT SEEKINGWORK AND THOSE SEEKING WORK BUT NOT AVAILABLE.SHOWN AS A 4-QTRMOVAVG AND BASED ON EUROSTAT AND ECB CALCULATIONS.SOURCE:ECB,"FOCUS: ASSESSING LABOUR MARKET SLACK," ECONOMIC BULLETINISSUE3,2017.BCA CALCULATIONS;INCLUDES ESTIMATE FOR 2018 Q1.

19.8%

17.0%

9.0%

16.3%14.8%

14.3%

4

U.S. Economy: Running at High Pressure, with Less Slack


4

3

2

119821988 1994 2000 20062012 2018 2024

4

3

2

1

420

-2-4

2008 2010 2012 2014 2016 2018

420

-2-4

U.S. REAL POTENTIAL GDP GROWTH**% %

REAL GDPHOURS WORKED PLUS PRODUCTIVITY*

Ann%Chg

* SUM OF YOY GROWTH IN AGG HRS WORKED AND YOY GROWTH INLAB PRODUCTIVITY.

** SOURCE: CBO, INCLUDES PROJECTIONS FOR 2018 - 2018.

3%

Average 1980-2007 = 3.05%

Average 2018-2028 = 1.92%

54321

1985 1990 1995 2000 2005 2010 2015 2020

54321

20

0

-20

60

50

40

30

NONRES. CAPITAL STOCK***(ADV 3-YRS)LABOR PRODUCTIVITY GROWTH****

Ann%Chg

Ann%Chg

CORE DURABLE GOODS ORDERS*(LS)BCA COMPOSITE NEW ORDERSINDICATOR**(RS)

Ann%Chg

%

* NON-DEFENSE CAPITAL GOODS EXCLUDING AIRCRAFT.** WEIGHTED COMBINATION OF ISM NEW ORDERS AND NFIB CAPITAL

SPENDING PLANS.*** SHOWN AS A 3-YEAR MOVING AVERAGE.**** OUTPUT-PER-HOUR. SHOWN AS A 3-YEAR MOVING AVERAGE.

5

U.S. Inflation: Recovering, At Long Last

© BCA Research 2018

6

5

4

3

2

1998 2002 2006 2010 2014 2018

6

5

4

3

2

ATLANTA FED WAGE GROWTH TRACKERMEDIAN WAGE GROWTH(3-MTH MOVAVG):

OVERALLJOB STAYER

JOB SWITCHER

Ann%Chg

Ann%Chg

NOTE: DASHED HORIZONTAL LINES DENOTE FOMC RANGE FOR OF 3% TO4% FOR WAGE GROWTH CONSISTENT WITH AN ECONOMY CLOSER TO2% INFLATION; SHADING DENOTES THE NBER-DESIGNATED RECESSION.

4

3

2

1

0

-1

2002 2006 2010 2014 2018

4

3

2

1

0

-1

NY FED UNDERLYING INFLATIONGAUGE* (ADV 18-MTH)CORE** CPI

Ann%Chg

Ann%Chg

* TREND INFLATION MEASURE BASED ON BROAD PRICE VARIABLES,MACROECONOMIC VARIABLES, AND FINANCIAL VARIABLES.SOURCE: FEDERAL RESERVE BANK OF NEW YORK.

** EXCLUDING FOOD AND ENERGY.


6

U.S. Monetary Policy: Approaching a Critical Inflection Point


2.5

2.0

1.5

1.0

.5

02004 2006 2008 2010 2012 2014 2016

2.5

2.0

1.5

1.0

.5

0

U.S. 10-YR TIPS BREAKEVEN INFLATION*% %

* DASHED HORIZONTAL LINES DENOTE 2.4%-TO-2.5%, RANGECONSISTENT WITH THE FED'S 2% TARGET.

25-35 bps of upside

1.5

1.0

.5

0

-.5

2012 2014 2016 2018

1.5

1.0

.5

0

-.5

4.0

3.6

3.2

2.8

4.0

3.6

3.2

2.8

10-YEARPAR COUPONTERM PREMIUM**

% %

FOMC MEDIAN LONGER-RUNPROJECTION:FED FUNDS RATE*

% %

* SOURCE: FEDERAL RESERVE SUMMARY OF ECONOMIC PROJECTIONS.** BASED ON ADRIAN, CRUMP AND MOENCH, FEDERAL RESERVE BANK

OF NEW YORK STAFF REPORT No. 340 (AUGUST 2008).

7

U.S. Dollar: A Binding Constraint for Emerging Markets


-15

-10

-5

0

5

10

15

1998 2002 2006 2010 2014 2018

15

10

5

0

-5

-10

BROAD NOMINAL TRADE-WEIGHTEDDOLLAR* (LS, INVERTED)GLOBAL INDUSTRIALPRODUCTION** (RS)

Ann%Chg

Ann%Chg

* SOURCE: FEDERAL RESERVE.** BASED ON BCA CALCULATIONS.

60

50

40

30

20

10

0

-10

-20

-30

2006 2008 2010 2012 2014 2016 2018

35

30

25

20

15

10

5

0

-5

EM VS. DM STOCK PRICES IN US$* (LS)CHINESE RELATIVE TO DM**IMPORT VOLUMES (RS)

Ann%Chg

Ann%Chg

* SOURCE: MSCI Inc. (SEE COPYRIGHT DECLARATION).** SOURCE: NETHERLANDS BUREAU FOR ECONOMIC POLICY ANALYSIS

SHOWN AS A 12-MONTH MOVING AVERAGE.

8

Profit Picture: Margins Maxed Out, Leverage Looming


32

30

28

26

1965 1975 1985 1995 2005 2015

1.05

1.00

.95

.90

U.S. NONFINANCIAL CORPORATE SECTOR:EBITD MARGINS* (LS)RATIO OF SELLING PRICES-TO-UNIT LABOR COSTS (RS)

% OfGDP

* NONFINANCIAL CORPORATE BUSINESS EARNINGS BEFORE INTEREST,TAXES, AND DEPRECIATION AS A PERCENT OF GROSS VALUE ADDED.BUREAU OF ECONOMIC ANALYSIS DATA.

25

20

15

10

5

0

-5

-10

1975 1985 1995 2005 2015

25

20

15

10

5

0

-5

-10

NONFINANCIAL CORPORATE SECTOR:EBITD*TOTAL DEBT

Ann%Chg

Ann%Chg

* EARNINGS BEFORE INTEREST, TAXES AND DEPRECIATION.

9

Equity Outlook: High Valuations Mute Long Term Prospects


* BASED ON DATA SINCE 1881.

-10

-5

0

5

10

LESS THAN 10 10 TO 20 20 TO 30 30 TO 40 MORE THAN 40

CONTRIBUTION FROM CHANGE IN P/E RATIOCONTRIBUTION FROM REAL EARNINGS GROWTHCONTRIBUTION FROM DIVIDEND YIELDTOTAL REAL RETURNAN

NU

ALIZ

ED 1

0-YE

AR T

OTA

L R

ETU

RN

%

FORWARD ANNUALIZED 10-YEAR TOTAL REAL RETURN BASED ON INITIAL SHILLER P/E RATIO*:

INITIAL SHILLER P/E RATIO

10

An Inconvenient Truth: Too Soon To Sell

ANNUALIZED REAL RETURNS (%) PRIOR TO RECESSIONS MONTHS PRIOR TO RECESSION

13-TO-24 MONTHS

1-TO-24 MONTHS

7-TO-12 MONTHS

1-TO-12 MONTHS

1-TO-6 MONTHS

NON-RECESSION MONTHS

S&P 500AVERAGE RETURNS POST-1950s 14.2 6.8 8 0.1 -7.8 10.1JUL 1953 - MAY 1954 21.9 12 17.8 2 -13.8 14.7AUG 1957 - APR 1958 15.8 7.1 -17 -1.6 13.9 19.3APR 1960 - FEB 1961 31.3 16.8 6.6 2.2 -2.2 15.8DEC 1969 - NOV 1970 13.4 -1.3 -11 -15.9 -20.7 5.8NOV 1973 - MAR 1975 16.9 4.9 -11.3 -7 -2.7 6.2JAN 1980 - JUL 1980 0.5 2.2 6.8 5.4 4 3.1JUL 1981 - NOV 1982* … … 32.2 10.5 -11.2 4JUL 1990 - MAR 1991 14.3 13.1 22.2 11.9 1.6 14MAR 2001 - NOV 2001 8.9 -0.7 20 -10.3 -40.6 12.5DEC 2007 - JUN 2009 11.6 7.6 13.6 3.6 -6.3 4

* FIRST 2 COLUMNS OMITTED DUE TO OVERLAP WITH PREVIOUS RECESSION PERIOD. NOTE: MONTHLY RETURNS ARE ANNUALIZED AND DEFLATED BY THE CONSUMER PRICE INDEX; CALCULATIONS ARE BASED ON TOTAL RETURN INDEX.

In more recent business cycles, investors have reaped strong returns in the 7-to-12 months prior to the recession

Returns tend to be strong in the late stage of the business cycle... ...but don’t overstay your welcome

11

Global Equity Sector Allocation: Mind The Gaps!

SECTOR WEIGHTS* (%) U.S. EURO AREA JAPAN EMERGING

MARKETS

ACWI VALUE INDEX

ACWI GROWTH

INDEX

INFORMATION TECHNOLOGY 25.5 8.5 13 27.4 8.4 29FINANCIALS 14.9 21.1 12.4 24.3 30 8.6HEALTH CARE 13.4 7.5 7.4 2.8 9.3 11.9CONSUMER DISCRETIONARY 13.2 14.1 20.5 9.9 7.6 16.9INDUSTRIALS 10 15.1 21.4 5.2 7.9 13.7CONSUMER STAPLES 7.4 9.7 7.6 6.3 7.8 8.7ENERGY 5.5 5.2 1 7.2 9.8 2.4MATERIALS 3 8.8 6.4 7.5 5.6 5.3REAL ESTATE 2.7 1.7 3.9 2.7 3.8 2UTILITIES 2.7 4.8 1.6 2.3 5 0.5TELECOMMUNICATION SERVICES 1.9 3.7 4.9 4.6 4.9 1

SOURCE: MSCI INC.

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