svb q1 2017 economic report

Q1QuarterlyEconomicReport 2017

SVB Asset Management | Quarterly Economic Report Q1 20170117-0005GUEXP0517

Table of Contents

2

Thoughts from the desk 3

Overview 4

Domestic economy 6

Central bank monetary policy 12

Markets and performance 17

Global economy 24

Portfolio management strategy 28


Thoughts from the desk Perking up for 2017

Nap time is over. After a sleepy third quarter, financial markets woke up late in the year and vigorously reacted to a flurry of activity and data. The chief catalyst was the surprise election of a new Commander-in-Chief. After initial unease, financial markets took a liking to the prospects of President Trump and a Republican controlled Congress, seeing an opportunity for tax cuts, spending increases, and less regulation. But the anticipated fiscal stimulus, along with a more hawkish Federal Reserve, rings in the New Year with slightly elevated uncertainty.

As the U.S. economy enters the later stages of the business cycle, the Fed announced its intentions to gradually raise its benchmark interest rate three times in 2017. Policy shifts, both monetary and fiscal, could impact confidence in the U.S. economy. Although the economy is expected to continue its growth trajectory in the low-2 percent range, any added stimulus might push growth to 2.5 percent in the latter half of 2017. Should a meaningful spending package become reality, the U.S. economy will likely benefit from continued robust consumer spending, rising construction activity, and a rebound in business investment. However, there are several key risks worth monitoring. On the trade front, global markets would not react well to new U.S. protectionist policies. And should the Fed continue to remove monetary accommodations, the dollar would be expected to rise. However, a much stronger dollar could be a drag on net exports and real GDP.

Strong recent economic data, including the decline in unemployment to a nine-year low, rising wages, and a robust recovery in energy prices should help push inflation up to the Fed’s 2 percent preferred target in the medium term. This inflationary momentum would validate any anticipated rate hikes in 2017. Perhaps the bigger question is: Will the current economic momentum, coupled with fewer regulatory constraints, boost economic growth beyond the Fed’s current projections?

There are, of course, risks, and any monetary or fiscal policy missteps could stall economic growth. For example, the Fed could raise rates too quickly. Or the new administration’s trade amendments might even lead to a trade war. Given these risks, we continue to favor a conservative approach to duration and believe that an overweight position to short maturity corporate credits is a sensible way to capture income. We also believe that a tactical allocation to government securities could be prudent in an environment of fiscal uncertainty and less monetary accommodations.

3


Overview

Following a muted third quarter, volatility has re-emerged primarily due to the U.S. presidential election. Current market dynamics may prove to be somewhat temporary as fiscal policy plans are laid out. However, the Federal Reserve responded by tightening monetary policy.

At the December FOMC meeting, the Federal Reserve raised the Fed Funds target rate for the first time in 2016, attributing the action to their view of both realized and expected labor market conditions and inflation. The rate increased by 25 basis points to a range between 0.50 and 0.75 percent.

Looking ahead, Fed members’ rate projections indicate a steeper path for interest rates in 2017. Based on median rates, the Committee expects three quarter-point rate increases in 2017.

Compared to other major economies, the U.S. stands alone as being in a tightening mode. Other central banks continue to monitor the effects of earlier stimulus on the economies to judge whether additional monetary easing may be needed.

Central bank monetary policy

Economic activity has been healthy with Q3 GDP at 3.5 percent. The third revision revealed stronger spending than was originally estimated on services, intellectual property and construction by state and local governments.

The latest GDP figure supported the Federal Reserve’s case for raising the Federal Funds rate for the first time since 2015.

Consumer sentiment spiked in December following Donald Trump’s victory as consumers viewed the win as positive for their finances and the U.S. economy.

In 2016, the U.S. economy added over two million jobs, maintaining the trend over the last few years of more than two million jobs added per year.

The unemployment rate has run below five percent for the majority of the year. Minutes from the last FOMC meeting of 2016 showed that participants anticipate the unemployment rate will run below normal longer-run levels.

Wage growth jumped in December to 2.9 percent. If the trend continues, it will add to future inflationary pressures and support the case for further rate hikes by the Federal Reserve.

Domestic economy

4


Overview

Major economies firmed to end 2016. Even with numerous headwinds present –– particularly political uncertainties –– economic activitywas primarily in expansion mode, and in some areas growth was at a healthy clip.

Canada’s economy is rebounding from low oil prices, with growth accelerating into the year-end helped by consumer spending and exports. The country still faces numerous challenges, including a hot real estate market and rising household debt. Nonetheless, bank asset quality remains steady and the country may benefit from a weaker currency and supportive monetary policy.

Australia continued to grow through the recent commodity bust as the economy expanded, in part, from favorable demographics. While growth slowed into year-end and the labor market is in a mild recovery, domestic demand has been supportive of a stable economy.

Stability in the Nordic region endures, with low oil price concerns alleviated. While the region is marred by elevated housing prices, asset quality at banks remains strong. In Norway, a rise in government spending is propping up the economy, while economic conditions in Sweden remain strong. Domestic demand and an improving labor market underpin Denmark’s stability, while Finland’s banking system was named the world’s safest by the World Economic Forum.

Global economy U.S. investment grade and high-yield spreads closed 2016 at their

tightest levels since April 2015 and September 2014, respectively. At the sector level, utilities/energy outperformed as spreads tightened, largely due to stable oil prices following the OPEC agreement.

U.S. equities saw solid gains in 2016, buoyed by a post-election rally that pushed the major indices close to their all-time highs.

The prospect of increased fiscal stimulus, higher inflation and a brighter assessment of U.S growth resulted in higher U.S. Treasury rates making it the worst-performing sector on a total return basis.

Corporate credit fundamentals remain solid overall, particularly among larger and higher-quality companies. Credit metrics remained little changed from the previous quarter across all sectors.

Investment-grade corporate spreads generally tightened over 2016 and fundamentals are expected to remain resilient in 2017.

Markets and performance

5

Domestic economy


-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Per

cent

Personal consumption Gross private domestic investment Net exports Government GDP

Economic activity has been healthy with Q3 GDP at 3.5 percent. The third revision revealed stronger spending than was originally estimated on services, intellectual property and construction by state and local governments.

The latest GDP figure supported the Federal Reserve’s case for raising the Federal Funds rate for the first time since 2015. The Q3 pickup in GDP was the fastest acceleration since Q3 2014. However, it is unlikely to remain sustainable given that it was driven by a jump in exports.

Despite potentially lower readings in upcoming GDP figures, growth should be strong enough to support the job market and, in turn, contribute to higher wage growth and robust consumer spending.

GDP: Picking-up speed

GDP and components

Source: Bureau of Economic Analysis (BEA), Congressional Budget Office (CBO) and SVB Asset Management. Data as of 12/31/2016. Note: GDP values shown in legend are % change vs. prior quarter, on an annualized basis.

7


Consumption: Optimism spreadsConsumption overview

Consumer sentimentRetail and food service sales

Q3 data showed a three percent increase in consumer spending quarter-over-quarter. While not as robust as the prior quarter growth, it is still a strong reading.

Personal savings continued to creep down slightly. The recent downward trend supports the view that consumers are feeling more confident in the U.S. economy.

Retail sales came in below expectations with purchases increasing only 0.1 percent in November. The lower figure shows a slight slowdown in recent consumer spending compared to prior months.

Consumer sentiment spiked in December following Donald Trump’s victory as consumers viewed the win as positive for their finances and the U.S. economy.

Source: Bloomberg and SVB Asset Management. Data as of 12/31/2016.

8

0.020.040.060.080.0100.0120.0140.0

-6.0-4.0-2.00.02.04.06.08.0

10.0

Per

cent

Per

cent

Personal consumption (LHS)Personal savings (LHS)Household debt to disposable income ratio (RHS)

40.0

50.0

60.0

70.0

80.0

90.0

100.0

110.0

120.0

Uni

vers

ity o

f Mic

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onsu

mer

Sen

timen

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Average

5.0 7.0 9.0 11.0 13.0 15.0 17.0 19.0 21.0 23.0 25.0

250.0

300.0

350.0

400.0

450.0

500.0

Veh

icle

sal

es ($

mill

ions

)

Ret

ail &

food

ser

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s sa

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($ b

illio

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Ex autos (LHS) Vehicle sales (RHS)


Employment: Solid paceLabor force participation rateEmployment landscape

Employment to population ratio The December payroll report of 156,000 was below expectations, but was

still strong for an economy that is largely considered at full employment. In 2016, the U.S. economy added over two million jobs, maintaining the

trend over the last few years of more than two million jobs added per year. The unemployment rate has run below five percent for the majority of the

year. The minutes from the last FOMC meeting of 2016 showed that participants anticipate the unemployment rate will run below normal longer-run levels.

The participation rate continues to hover at low levels due to baby boomers retiring and others still out of work and on the sidelines.

Source: U.S. Bureau of Labor and Statistics (BLS), Bloomberg and SVB Asset Management. Data as of 1/6/2017.Note: The underemployment rate U-6 defined as persons marginally attached to the labor force are those who currently are neither working nor looking for work, but indicate they want and are available for a job and have looked for work in the past 12 months.

9

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

-1,000.0

-500.0

0.0

500.0

1,000.0

Per

cent

Thou

sand

s

Non-farm payroll (LHS) Unemployment rate (RHS) U-6 (RHS)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

62

63

64

65

66

67

68

Per

cent

Labor force participation rate (LHS) Unemployment rate (RHS)

55

56

57

58

59

60

61

62

63

64


U.S. housing: Firm footingHome prices — indexed to 100Home sales and supply

Household formationHousing affordability


10

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

Hom

e su

pply

(mon

ths)

Hom

e sa

les

(mill

ions

)

Total sales (new & existing) Existing home supply

0

50

100

150

200

250

300

Median home price FHFA purchase Case-Schiller 20 city

0.0

2.0

4.0

6.0

8.0

10.0

12.0

0.0

50.0

100.0

150.0

200.0

250.0

Per

cent

Affo

rdab

ility

inde

x

Housing affordability 30 -year fixed mortgage rates

-3000

-2000

-1000

0

1000

2000

3000

4000

Thou

sand

s


Inflation: Higher expectationsCrude oil and gasoline pricesCore PCE — % change from prior year

Wage growth Core PCE continues to trend closer to the Fed’s two percent target,

supporting the December 2016 decision to raise the Federal Funds rate. OPEC’s decision in November to reduce output by 1.2 million barrels a

day to 32.5 million for six months helped stabilize oil prices and should apply some inflationary pressure. The reduction began in January 2017.

Wage growth jumped in December to 2.9 percent. If the trend continues, it will add to future inflationary pressures and support the case for further rate hikes by the Federal Reserve.


11

1.5

2.0

2.5

3.0

3.5

4.0

Ann

ual p

erce

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ange

0.00.51.01.52.02.53.03.54.04.5

0.020.040.060.080.0

100.0120.0140.0160.0

Pric

e pe

r bar

rel (

$)

Crude oil (LHS) Daily national average of gasoline prices (RHS)

0.0

1.0

2.0

3.0

4.0

5.0

% c

hang

e fro

m p

rior y

ear

Core PCE Fed target Monetary policy threshold

Central bank monetary policy


Q1 2016 Q2 2016 Q3 2016 Q4 2016

Despite strengthening employment and inflation in the U.S., the Fed refrains from a second rate hike during the quarter as global conditions continue to pose risks.

A recovery in oil and hawkish Fedspeak earlier in the quarter drive interest rates temporarily higher. The yield on the 2-year Treasury note hits 92 basis points in May.

Following Brexit, Treasury yields experience a period of low volatility for much of the summer. We also saw a flatter yield curve as evidenced by the tighter spread.

Following a period of low volatility, interest rates break out of trading ranges and head higher on the heels of the presidential election given prospects for greater fiscal spending.

Central banks around the world implement additional easing measures, with the BOJ adopting a negative interest rate policy, China cuts reserve requirements and the ECB expands their asset purchase program into the corporate bond market.

A confluence of factors in June brings rates back down to H1 2015 levels. At centerstage is Brexit, which sent investors towards safe havens such as U.S. Treasuries. A disappointing employment report and a dovish tilt from the FOMC meeting also lowers probabilities for future rate hikes.

Solid employment reports and inflation readings drive hawkish comments from Fed members and temporarily increase probabilities for a rate hike. At the September FOMC meeting, they announce a stronger case for a rate hike, but decide to wait for further evidence of continued progress towards their objectives.

Continued strength in economic data specifically, the decline in the unemployment rate to a nine-year low, inflation hovering around the Fed’s 2 percent target and expectations for greater inflationary pressures –– prompts the Fed to raise the target range for the Federal Funds rate at year-end.

After hitting recent lows, oil prices see some stabilization towards quarter-end as world leaders discuss a production freeze.

Markets are focused on the broader implications of Brexit, while central banks such as the ECB and Fed stand ready to provide liquidity if needed.

Looking ahead, the Fed continues to stress a gradual approach to raising interest rates. The Fed’s median forecast projects one interest rate increase for the remainder of 2016.

OPEC agrees to cut production, sending oil prices higher and creating more inflationary pressure.

Historical interest rates: Upward trajectory

Source: Bloomberg and SVB Asset Management. Data as of December 30, 2016.

13

0.0

0.2

0.4

0.6

0.8

1.0

1.2

Per

cent

2-year Treasury yield 1-year Treasury yield


Central bank economic projections: Brighter outlook

14

2015 2016 2017 2018

Economic projections: United States

Change in real GDP 2.6% 1.9% 2.1% 2.0%

Unemployment rate 5.3% 4.7% 4.5% 4.5%

Core PCE inflation 1.4% 1.7% 1.8% 2.0%

Economic projections: Eurozone


CPI inflation 0.0% 0.2% 1.3% 1.5%

Unemployment rate 10.9% 10.1% 9.9% 9.6%

Economic projections: China

Change in real GDP 6.9%

CPI inflation 1.4%

Unemployment rate 4.1%

Economic projects: Japan


CPI inflation 0.8% 0.1% 1.7% 1.9%

Source: Federal Reserve, European Central Bank, National People’s Congress of China, Bank of Japan. Data as of December 20, 2016.Forecasts are not available for all periods.


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0.0

1.0

2.0

3.0

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5.0

Per

cent

Federal Reserve rate projections: Expectations accelerate

Source: Bloomberg and Federal Reserve.Data as of December 14, 2016. Percentages below the chart reference the median forecasted rate at the end of each period.

September 2016 median 0.375% 0.625% 1.125% 1.875% 2.625% 2.875%

June 2016 median 0.375% 0.875% 1.625% 2.375% – 3.00%

March 2016 median 0.375% 0.875% 1.875% 3.000% – 3.25%

15


Japan Eurozone United Kingdom China United States

Central bank Bank of Japan European Central Bank Bank of England People's Bank of China Federal Reserve

Benchmark rate -0.10 percent 0.0 percent 0.25 percent 4.35 percent 0.50-0.75 percent

Current policyMaintaining current easing program, which includes,10-year rates near zero and commitment to push inflation above 2 percent

Maintaining previous cuts on refinancing rate and deposit rate with no change to its expandedQE program

• August rate cut in responseto EU referendum outcome

• No action taken in September

• No additional action since February’s 50 basis points reserve ratio cut

• Lending and deposit rateshold steady

Considering additional rate hikes after increasing rates by 25 basis points in December

Inflation

Unemployment 3.1% 9.6% 4.8% 4.0% 4.7%

Analysis

No material policy changes expected for 2017 given recent Yen weakness

No additional action projected, but skewed towards more easing or refinement of current QE program

No additional action likely near term, with direction of inflation and economic activity uncertain

Recent economic improvements reduce the need for further rate and reserve ratio cuts in 2017

Anticipating additional interest rate increases in 2017

EasingEasing Stable Tightening

Central banks: Wait and see

Source: Federal Reserve, European Central Bank, Bank of England, The People’s Bank of China, Bank of Japan, Bloomberg, SVB Asset Management

16

0.20%

0.0% 1.0% 2.0%

0.60%

0.0% 1.0% 2.0%

1.2%

0.0% 1.0% 2.0%

2.3%

0.0% 1.0% 2.0% 3.0%

1.4%

0.0% 1.0% 2.0%

Markets and performance


Basic statistics Spread change Total return % Excess return %

Spread Yield Duration QTD YTD QTD YTD QTD YTD

1-3yr Treasuries 0.00 1.18 1.89 0.00 0.00 -0.43 0.89 0.00 0.00

1-3yr agencies 12.00 1.31 1.88 -1.00 3.00 -0.35 0.95 0.07 0.09

0-3yr MBS 38.00 2.06 2.10 9.00 20.00 -1.05 0.19 -0.59 -0.92

1-3yr ABS 68.00 1.67 1.27 -5.00 -16.00 -0.02 1.83 0.20 1.02

1-3yr IG corporates 88.00 2.06 1.86 1.00 -20.00 -0.21 2.38 0.25 1.41

3-5yr IG corporates 104.00 2.76 3.68 0.00 -32.00 -1.56 3.60 0.31 2.32

5-10yr IG corporates 132.00 3.57 6.40 -14.00 -53.00 -3.18 5.84 1.19 4.33

1-5yr high yield 510.00 6.65 2.39 -75.00 -340.00 2.59 16.09 3.56 14.95

1-3yr corporates by rating

AAA 34.00 1.57 2.08 -2.00 12.00 -0.38 1.19 0.18 0.15

AA 62.00 1.79 1.89 3.00 6.00 -0.34 1.56 0.15 0.58

A 78.00 1.94 1.83 2.00 -3.00 -0.26 1.90 0.19 0.91

BBB 115.00 2.33 1.86 -1.00 -57.00 -0.09 3.44 0.37 2.52

1-3yr corporates by sector

Financial 93.00 2.10 1.83 0.00 -3.00 -0.19 2.02 0.27 1.08

Industrials 84.00 2.02 1.87 2.00 -32.00 -0.22 2.62 0.24 1.63

Utility/energy 93.00 2.10 1.86 5.00 -25.00 -0.30 2.55 0.17 1.59

Fixed income returns: Overview

Spread is based on Govt Option Adjusted Spread. Duration is based on Macaulay duration. Data as of December 31, 2016.Source: Bloomberg, BofA Merrill Lynch and SVB Asset Management.

18


Total return comparisons: Fixed income lags

All returns above are on total return basis. 2016 returns are on an annualized basis up to December 30, 2016.FI Credit refers to BofA/ML US Corporate Bonds 1-3 year Index; Treasury refers to BofA/ML US Treasuries 1-3 year Index; Gold refers to S&P GSCI Gold Spot; WTI refers to Spot West Texas Intermediate Crude Oil; Wilshire refers to Wilshire 5000 Total Market Index; REIT refers to MSCI US REIT Index; S&P 500 refers to S&P 500 Index.Source: Thomson Reuters, Barclays Live and SVB Asset Management

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

WTI 57.68%

US Treasury 6.67%

WTI 78.00%

Gold 29.67%

Gold 10.23%

REIT 16.47%

Wilshire 33.06%

REIT 28.24%

S&P 500 1.40%

WTI 44.80%

Gold 31.35%

Gold 5.53%

Wilshire 28.29%

REIT26.97%

WTI 8.15%

Wilshire 16.05%

S&P 500 32.39%

S&P 500 13.69%

REIT 1.30%

Wilshire13.40%

US Treasury 7.31%

FI Credit 0.30%

S&P 500 26.46%

Wilshire 17.18%

REIT 7.48%

S&P 500 16.00%

WTI 7.32%

Wilshire 12.70%

FI Credit0.85%

S&P 500 12.00%

FI Credit 5.96%

S&P 500 -37.00%

REIT 26.27%

WTI 15.10%

S&P 500 2.11%

Gold 6.96%

FI Credit 1.45%

FI Credit 1.12%

Wilshire0.70%

Gold8.60%

Wilshire 5.61%

Wilshire -37.23%

Gold 23.96%

S&P 500 15.06%

FI Credit 1.75%

FI Credit 3.69%

REIT 1.26%

US Treasury 0.63%

US Treasury 0.56%

REIT7.10%

S&P 500 5.49%

REIT -39.05%

FI Credit 11.59%

FI Credit 4.15%

US Treasury 1.55%

US Treasury 0.43%

US Treasury 0.36%

Gold -1.51%

US Gold -10.50%

FI Credit2.38%

REIT -17.84%

WTI -53.52%

US Treasury 0.80%

US Treasury 2.40%

Wilshire 0.98%

WTI -7.08%

Gold -28.26%

WTI -45.76%

WTI -30.50%

US Treasury 0.89%

Ass

et c

lass

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19


Credit cycle: Fundamentals remains resilient While leverage remains near historic lows, operating margin across the corporate sector has been declining since peaking in late 2014. For larger and higher-quality companies, however, operating margin has stabilized and is even ticking up slightly.

20

S&P 100 universeS&P 500 universe

Source: Bloomberg.

20.0

25.0

30.0

35.0

40.0

45.0

7.08.09.0

10.011.012.013.014.015.0

Per

cent

Per

cent

Operating margin (LHS) Total debt to total asset (RHS)

20.0

25.0

30.0

35.0

40.0

45.0

7.08.09.0

10.011.012.013.014.015.016.017.0

Per

cent

Per

cent

Operating margin (LHS) Total debt to total asset (RHS)


Credit cycle: Sector breakdown Across all corporate sectors, credit metrics showed little change sequentially from the previous quarter.

S&P 500 debt to assets by sector

S&P 500 operating margin by sector

Source: Bloomberg, operating margin trailing 12 months data.

21

0

10

20

30

40

50

Energy Materials Industrials Consumerdiscretionary

Consumer staples Health care Financials Informationtechnology

Telecom services Utilities

September 2016 December 2016

-15

-5

5

15

25

Energy Materials Industrials Consumerdiscretionary

Consumer staples Health care Financials Informationtechnology

Telecom services Utilities

September 2016 December 2016


Continued cost-cutting efforts have increased the likelihood of cash flow neutrality in 2017 if oil prices further stabilize. Shareholder value remains a priority for most ––however, capping potential credit upside. Maintaining current production levels and following through on targeted levels of asset sales will be key.

Margin expansion in developed markets is supplementing slower growth in emerging markets as free cash flow generation remains steady. Excessive shareholder spending remains a credit challenge, as does the change in consumer sentiment to established brands. Consolidation has helped profitability. Credit will remain largely stable.

YTD sector performance and outlook: Tightening spreadsMaterials sector

22

Fundamentals improve in the metal/mining sector due to the recovery in commodity prices, ongoing defensive balance sheet repair and China stimulus efforts. In the chemical sector, portfolio optimization, bolt-on acquisitions and cost-cutting efforts continue amid low organic growth prospects and low interest rates.

Solid employment levels will continue to drive consumption growth, especially for travel and leisure services. Home improvement sales benefit from housing market gains, while general retail is exposed to a shift in consumer preference, which has shrunk growth.

Energy sector

Consumer discretionary sector Consumer staples sector

050

100150200250300350400

Investment grade CDS

IG materials OAS

0

100

200

300

400

500


IG energy OAS

0

50

100

150

200

250


IG cons. disc. OAS

020406080

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IG cons. staples OAS


Cloud computing –– which the industry is increasingly betting its future on –– shows robust growth, but overall revenue growth remains challenging with global economic growth lukewarm at best. Though many maintain net cash positions, continued shareholder spending is driving up leverage and remains a key risk –– as does M&A.

Profitability is improving, albeit at a measured pace, as net interest margin benefits from rising interest rates and cost-cutting. Fundamentals are stable as capital levels, liquidity and asset quality remain solid. Regulatory and compliance costs are likely to remain high in the near term as the future of the regulatory environment remains uncertain.

YTD sector performance and outlook: Tightening spreadsHealthcare sector

23

Industry consolidation will continue, though the pace of large, transformative transactions will slow compared to recent years. Relatively smaller transactions, particularly in biotech, will continue to grow. International markets remain growth avenues, though developed economies remain the focus of core profitability.

The outlook is for modest global demand with divergence in key end markets. Defense, healthcare and aerospace continue expanding, while agriculture, construction and energy may stabilize. Event risk remains elevated with M&A and shareholder spending amid the backdrop of lackluster growth since many have balance sheet capacity to finance deals.

Technology sector

Industrials sector Financials sector

0

50

100

150

200


IG healthCare OAS

0

50

100

150

200


IG technology OAS

020406080

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IG industrial OAS

0

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100

150

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Global economy


Canada: Handling riskHousehold debt risingInflating home prices

Banks adequately fortified Housing is booming. Vulnerabilities from rising home prices were

cushioned by down payment requirements, strong underwriting and the recourse nature of many mortgages.

Steady growth in auto loans and credit card debt along with larger mortgages has increased the debt load of a typical Canadian household. However, low interest rates have softened the increased burden of debt servicing.

Canada’s banking system remains sound as many banks have the capacity to internally generate ample capital, which has generally been rising. Losses remain relatively low.

Sources: Terranet and National Bank, Statistics Canada, bank annual reports, Bloomberg, SVB Asset Management.

25

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Debt to disposable income Debt service ratio

22

24

26

28

30

32

34

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8.5

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9.5

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Basel III Tier 1 Common Equity Ratio (SVB Canada bank index)

Charge-off ratio (SVB Canada bank index)

95

115

135

155

175

195

June

200

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100

Teranet-National Bank Home Price Index Composite 11


Australia: Expansion intactJob market OKSteady growth

Retail sales still growing

26

Source: Australia Bureau of Statistics, Dow Jones VentureSource, National Bureau of Statistics of China, Bloomberg, SVB Asset Management.

Australia maintained growth in commodity prices through the downturn, with GDP growth within the 2-3 percent range. Though the currency has nominally weakened, falling inflation may provide the Reserve Bank of Australia with scope to ease, which would provide macroeconomic expansion support.

The labor market improved through the course of year, with unemployment at the lowest levels since 2013. Even though part-time jobs underpinned the improvement, and wages and hours worked remain weak, the higher employment levels have contributed to domestic demand.

Retail sales have drifted lower recently, but still remain economically supportive. Consumer spending may be stronger than indicated, since weak sales at department stores, as well as of clothing and shoes, may be due to shifting preferences for leisure services and digital spending.

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5.2

5.4

5.6

5.8

6

6.2

6.4

% u

nem

ploy

men

t

Last price

01234567

% c

hang

e, y

ear o

ver y

ear

Retail sales


Nordics: Stability enduresSweden: Powering aheadNorway: More fiscal stimulus on the way

Denmark: Rebounding domestic consumption Norway is utilizing its sovereign wealth fund to aid the economy, which has

been dragged by low oil prices over the past two years. While GDP showed recent contraction, the economy is expected to post positive, albeit low, growth overall for 2016 and 2017, helped by government spending and a stable unemployment rate.

Economic activity remains solidly positive in Sweden, with manufacturing experiencing a recent uptick. Employment conditions remain good and consumer confidence is solid. This favorable environment is underpinned by the loose monetary policy of the central bank.

Denmark’s domestic demand remains in growth mode despite a recent softening. Household consumption helped drive an economic rebound over the past year, with spending on autos, housing and services increasing at a good pace.

Source: China Federation of Logistics and Purchasing, Dow Jones VentureSource, National Bureau of Statistics of China, Bloomberg, SVB Asset Management.

27

00.5

11.5

22.5

33.5

44.5

% c

hang

e, y

ear o

ver y

ear

GDP central government spending

444648505254565860

PM

I ind

ex: >

50 =

exp

ansi

on

Swedbank manufacturing PMI

-1.5-1.0-0.50.00.51.01.52.02.53.0

Fina

l con

sum

ptio

n ex

pend

iture

,%

cha

nge

year

ove

r yea

r

Portfolio management strategy


Portfolio strategy: Macro overview

Source: SVB Asset Management and Bloomberg. Data as of 12/30/16.Past performance is not a guarantee of future results. The above is not to be construed as a recommendation for your particular portfolio.

Economy

Rates

Duration

Sector

Stable data

• Q3 2016 GDP: +3.5% (two-year high)• Unemployment rate: +4.6% (nine-year low)• Weekly jobless claims 2016 average: 263,000 –– below 300,000 since March

2015• Inflation rising towards Fed targeted level

Moderate steepening in yield curve

• 18-month Treasuries yielding 1.03%• 24-month Treasuries yielding 1.19%• The two-year yield pickup over 18 months has averaged 0 to +9 basis points for

most of 2016• Post U.S. presidential election, the yield pickup has risen above +15 basis points

Defensive

• Short and intermediate benchmarks: long duration versus benchmark as coupon income should offset price volatility

• Intermediate plus benchmarks: stay neutral to benchmark• Long benchmarks: shorter to manage price fluctuations and maximize

reinvestment opportunities

Overweight spread product

• Favor corporate bond, commercial paper and asset-backed securities• Diversify by security type, sector and issuer concentration• As rates rise, spread product will help protect bond prices due to higher

income accruals

29


Portfolio strategy: Credit risk management

Key criteria forapproved issuers

1. Strong franchise value

2. Diversified business lines

3. Strong balance sheet

4. Healthy cash flow generation

5. Strong liquidity profile

6. Robust capital to absorb downturns

7. Management with solidtrack record

8. Prudent financial policy

9. Quality and timeliness ofthe disclosure

10. Strong collateral performance and sponsor’s interest alignment for asset backed securities

We are highly selective in our security selection process and look to diversify by sector, sub-sector and issuer concentration.

Our dedicated credit research team performs a rigorous examination of every issuer and ongoing credit monitoring of all investments.

Our credit analysis incorporates a proprietary scoring system to analyze issuers, and takes into account trading factors such as market liquidity, market depth and headline risk.

30

S&P Moody's Fitch Rating description

AAA Aaa AAA Highest credit quality

AA+ Aa1 AA+

High credit qualityAA Aa2 AA

AA– Aa3 AA–

A+ A1 A+

Upper-medium gradeA A2 A

A– A3 A–

BBB+ Baa1 BBB+

Medium gradeBBB Baa2 BBB

BBB- Baa3 BBB-

Investment grade

Source: SVB Asset Management and Bloomberg.Past performance is not a guarantee of future results. The above is not to be construed as a recommendation for your particular portfolio.


0.500.38

0.250.13

0.00

-0.13-0.25

-0.38-0.50-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

Per

cent

-100 -75 -50 -25 Base case +25 +50 +75 +100

% in market value

Short duration3 month T-bill

Short duration3-6 month T-bill

Intermediate duration6 month T-bill

Intermediate plus duration

9 month T-bill

Long duration1 year Treasury

Benchmark duration 0.25 0.375 0.50 0.75 1.0

Portfolio duration target

Portfolio strategy: Interest rate risk management

Source: SVB Asset Management and Bloomberg.Past performance is not a guarantee of future results. The above is not to be construed as a recommendation for your particular portfolio as individual portfolio durations will vary.

Duration (price sensitivity) analysis

We exercise a disciplined benchmarking approach to manage portfolio duration –– positioning duration in a +/- 30% band around the appropriate benchmark.

In a rising-rate environment, where a portfolio is more susceptible to unrealized losses, we mitigate this risk by managing average duration relative to the benchmark and limiting exposure to longer-dated investments. This allows for greater reinvestment opportunity to take advantage of higher anticipated rates.

*Example of portfolio with duration of 0.5 years

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-30% Neutral +30% -30% Neutral +30% -30% Neutral +30% -30% Neutral +30% Neutral-30% +30%


Portfolio Strategy Relative value curve analysis

In Q4, Treasury yields backed up across the curve

Attractive opportunities in the front end with 9th month Treasury yields offering 18 basis points of yield pickup for an additional three months

Front-end Treasury yield curve

32

Source: SVB Asset Management and Bloomberg. Data as of 12/30/2016. Past performance is not a guarantee of future results. The above is not to be construed as a recommendation for your particular portfolio.

Treasury CP ABS AA Ind A- Ind AA Fin A- Fin

90D 0.50 0.80 1.00 0.77 1.05 0.94 1.17

180D 0.62 1.10 1.08 0.91 1.18 1.04 1.36

270D 0.80 1.25 1.17 1.03 1.24 1.23 1.46

1Y 0.91 1.28 1.06 1.31 1.29 1.60

1.5Y 1.03 1.47 1.29 1.56 1.58 1.76

2Y 1.19 1.65 1.39 1.77 1.72 1.91

2.5Y 1.30 1.81 1.65 1.88 1.98 2.12

3Y 1.45 1.97 1.74 2.06 2.08 2.22

Commercial paper

180 day CP yield is between 1.5 and 2 year Treasury

Asset-backedsecurities

ABS provide high credit quality and price stability

AA finance AA finance yields offer over 25 basis points yield pickup over AA industrials

0.270.45 0.58

0.65 0.73 0.760.84 0.87

0.500.62

0.800.91 1.03

1.191.30

1.45

0.00.20.40.60.81.01.21.41.6

Per

cent

9/30/2016 12/30/2016

+18bp yield pickup


Our teamPortfolio Management Team

Eric [email protected]

Paula [email protected]

Renuka Kumar, [email protected]

Jose [email protected]

Hiroshi [email protected]

Jason [email protected]

President, SVB Asset Management

Lauri [email protected]

Head of Investment Strategyand Portfolio Management

Ninh [email protected]

Head of Credit Research

Melina Hadiwono, [email protected]

Credit and Risk

Tim Lee, [email protected]

Daeyoung Choi, [email protected]

Nilani [email protected]

Silicon Valley Bank Partners

Teresa [email protected]

33

mailto:[email protected]














This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that webelieve to be reliable but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax,investment, legal or other advice, nor is it to be relied on in making an investment or other decision. You should obtain relevant and specific professional advice before making any investmentdecision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.

All material presented, unless specifically indicated otherwise, is under copyright to SVB Asset Management and its affiliates and is for informational purposes only. None of the material, nor itscontent, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party without the prior express written permission of SVB Asset Management. All trademarks,service marks and logos used in this material are trademarks or service marks or registered trademarks of SVB Financial Group or one of its affiliates or other entities.

©2017 SVB Financial Group. All rights reserved. Silicon Valley Bank is a member of the FDIC and the Federal Reserve System. Silicon Valley Bank is the California bank subsidiary of SVB FinancialGroup (Nasdaq: SIVB). SVB, SVB FINANCIAL GROUP, SILICON VALLEY BANK, MAKE NEXT HAPPEN NOW and the chevron device are trademarks of SVB Financial Group, used under license.B_SAM-16-15210 Rev 01-24-17.

SVB Asset Management, a registered investment advisor, is a non-bank affiliate of Silicon Valley Bank and member of SVB Financial Group. Products offered by SVB Asset Management:

Are not insured by the FDIC or any other federal government

agency

Are not deposits of or guaranteed by a bank May lose value

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svb q1 2017 economic report

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