2016 outlook: modest global growth and market returns as u ... 2016...jpmorgan emerging market...
TRANSCRIPT
2016 Outlook:
Modest global growth and market
returns as U.S. rates normalize
Timothy Hopper, Ph.D., Chief Economist
January 20, 2016
2
2016 outlook agenda
Economic forecast
Two views on the U.S. economy
The Fed’s intentions
Slowing global growth
Investment outlook
Equities
Fixed income
3
Tumultuous times reflect slowing global growth
The two views on whether U.S. interest rates are normalizing
Global growth is shifting from Emerging Markets to Developed Markets
Real GDP growth rates
* Quarterly estimates for China’s seasonally adjusted annual rate (SAAR) do not correspond to officially published YTD figures.
Sources: Haver Analytics, TIAA-CREF Asset Management.
4
-1
0
1
2
3
4
5
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2012 2013 2014 2015
Pessimist view: The cycle is nearing an end
Since Q3 2014: Slowing growth, falling capital spending, sub-normal
consumer spending, job growth peaking and net exports are a headwind
Nominal growth is slowing, ensuring that inflation will decelerate along
with real growth and corporate profits.
* Seasonally adjusted annual rate. Source: Haver Analytics.
Real GDP growth Quarterly, SAAR*
5
Oil prices as a proxy for capital spending
Capital spending got crushed last year by collapsing oil prices
Trend to continue this year based on near-term supply/demand dynamics
Data through December 2015. Source: Haver Analytics.
Oil prices West Texas Intermediate, dollars per barrel, weekly price
0
20
40
60
80
100
120
140
160
2000 2002 2004 2006 2008 2010 2012 2014 2015
6
Optimist view: The U.S. cycle is only now emerging
Job market fully recovered to near full employment implies that wages and
inflation will soon rise.
Data through November 2015. Source: Haver Analytics.
Total U.S. job losses vs. gains Thousands per month, 2008-2015
-1000
-800
-600
-400
-200
0
200
400
600
2008 2009 2010 2011 2012 2013 2014 2015
8.7 million lost 13.2 million gained
7
Will wage pressures pick up this year?
Real wage growth has emerged, but may reflect lower inflation—not higher
wages. We will determine which theory holds water in a few months.
Data through October 2015. Source: Haver Analytics.
Real wage growth (%) 2008-2015
-3
-2
-1
0
1
2
3
4
5
2008 2009 2010 2011 2012 2013 2014 2015
8
Are the Fed’s intentions realistic?
Shift focus from wage growth to inflation as primary gauge for rate hikes
Pace depends on the economy’s path over the next several quarters—but the
path is uncertain given recent financial market action.
Sources: TIAA-CREF Asset Management forecast.
Fed funds target rate
9
We have seen the steepest yield curve
Spreads unlikely to widen further as the yield curve flattens
Data through November 2015. Source: Haver Analytics.
Yield curve
-2
0
2
4
6
8
10
12
14
16
1983 1987 1991 1995 1999 2003 2007 2011 2015
Fed funds 2-year notes 10-year notes Spread
10
Regional growing pains
China’s slowdown weighs on global growth and hurts exports
Dotted lines = forecast. Sources: Haver Analytics, TIAA-CREF Asset Management.
Major country GDP forecast Real GDP growth
-20
-10
0
10
20
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
US Europe China Japan
%
11
Primary source of weakness is emerging markets
Emerging markets are slowing
Low commodity prices hurt growth and currencies of export-driven economies
Weak regulatory infrastructure, many have current account deficits
Wages increased dramatically, making EM less attractive for U.S. producers
China’s great transition
Growth rate is slowing, regulatory environment is changing
De-emphasizing infrastructure investment and FDI in favor of environmental
issues, consumer choice and market reforms
Closed capital account and non-floating currency hinder adjustment to
changing economic conditions
What you don’t hear about
Global trade is slowing—the primary cause of the turmoil we see today.
12
Global trade slows…to what?
Global trade to GDP ratio has slowed to 1:1, after growing from 2:1 to 3:1
between 2002 and 2008.
This typically signifies a “growth recession.”
Global trade
0
1000
2000
3000
4000
5000
6000
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Source: Haver Analytics, TIAA-CREF Asset Management.
13
Emerging market currencies fall
Battered by low commodity prices and negative capital flows in 2015
* Weighted average of currencies of Turkey, Russia, Hungary, South Africa, Brazil,
Mexico, Chile, China, India, and Singapore.
Data through December 2015. Source: Bloomberg.
Sources: U.S. Federal Reserve, TIAA-CREF Asset Management.
Emerging-market currencies vs.
the U.S. dollar JPMorgan Emerging Market Currency Index*
Foreign exchange
Period ending
2015 2016 (forecast)
Euro 1.09 1.05
Yen 120.30 135.00
Renminbi (yuan) 6.49 7.00
Canadian dollar 0.72 0.90
Australian dollar 0.73 0.75
Brazilian real 4.00 3.75
60
70
80
90
100
110
2010 2011 2012 2013 2014 2015
14
Economic outlook summary
Base case: U.S. economy to remain stable in 2016 with growth in consumer
spending roughly offsetting weakness in net exports
Forecast 2.6% average GDP growth for 2016 is probably too high—depends
on near-term path of inflation.
Monthly employment growth has probably peaked, but we need to see
progress in real wages.
Falling commodity prices, global trade and inflation will completely offset
strengthening developed market growth, leaving the world in a weaker spot
this year.
Number of Fed rate hikes depends largely on inflation.
Housing activity is a stable growth platform for the economy, but will not be a
primary driver this year.
15
Equity market uncertainty continues in 2016
Market correction, skeptical investors, and heightened volatility
5
15
25
35
45
55
65
75
85
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
VIX (or “fear index”) daily levels, 2006-2016 Index measures market expectation of near-term volatility on the S&P 500 Index,
conveyed by stock index option prices
Source: Chicago Board Options Exchange.
16
-500
0
500
1000
1500
2000
2500
3000
3500
4000
-500
0
500
1000
1500
2000
2500
3000
3500
4000
Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15
ThousandsThousands
Manufacturing sector
Service sector
Mining and logging
Positive indicators can support future growth
Job growth, housing improvement, record auto sales, bank lending
Source: BLS, Haver Analytics, Deutsche Bank Research.
Energy and manufacturing
sectors are small relative
to the service sector
Jobs created since July 2014
17
Housing sector continues to improve
New households, low interest rates, and rising home prices are drivers
200
400
600
800
1,000
1,200
1,400
2009 2010 2011 2012 2013 2014 2015
Num
be
r o
f u
nits (
tho
usa
nd
s)
Housing starts Building permits Homes under construction
Signs of strength in the housing market Housing starts, building permits, and homes under construction
Source: U.S. Census Bureau.
18
Some positive indicators in U.S. equity sectors
Growth trends across sectors reflect underlying U.S. economic strength
– UnitedHealth Group (UNH): “Initial growth trends are very encouraging
and service performance for January business is strong.”
– Delta Air Lines (DAL): “We are poised to continue outperforming as low
fuel prices will allow us to produce further earnings and margin expansion
in 2016.”
– JPMorgan Chase (JPM): “We saw growth in consumer drivers on the
back of improvement in the U.S. economy…core loan growth rose 16%
year-over-year.”
– Alcoa (AA): “Aerospace is expected to grow 8%-9% in 2016, driven by
6.9% passenger growth and 2.8% cargo demand.”
“Auto is expected to grow 1%-5% in U.S., 1%-4% in Europe and 3.1%
in China.”
“Building and construction is forecasted to grow 4%-6% in North
America, driven by 8.6% growth in nonresidential construction and 11%
in housing starts.”
19
Non-U.S. markets have lower valuations and margins
U.S., Europe and India are more attractive
0.69
-2.84
9.57
-14.92
-7.82 -6.12
16.6114.97 14.14
11.19.91
17.2
2.771.78 1.36 1.22 1.41
3.22
9.0
1.0
16.0
-9.0
-24.0
4.0
U.S. Europe Japan Emerging Markets China India
2015 return % (USD) Forward P/E P/B Margins vs. long-term average (% difference)
* Current trailing 12 months’ EBIDTA margins for MSCI indexes relative to long-term averages. Long-term average calculated for MSCI USA, MSCI Europe, and MSCI
Japan from January 1997-December 2015; and for MSCI EM, MSCI China, MSCI India from January 1998-December 2015. Sources: FactSet, MSCI, TIAA-CREF.
It is not possible to invest in an index. Performance for indices does not reflect investment fees or transactions costs.
Equity returns, valuations and margins* in key markets U.S., Europe, Japan, Emerging Markets, China and India as of 12/31/2015
20
2015 fixed income year in review
Risk assets retreat as flight to quality takes off.
Global growth weighs on liquidity and sectors most linked to commodities.
3.31.5 1.2 1.2 1.0 0.9 0.8 0.5
-0.7-1.4
-4.5
-18.0
Muni MBS ABS EM($US
Denom)
Agency CMBS Treasury U.S. Agg Corp Inf Linked HighYield
EM(Local
currency)
Fixed-income market total returns (%) 12 months ended 12/31/2015
Sources: Developed-market bond segments are represented by their respective Barclays indexes and related subsets: U.S. Aggregate, Treasury, Agencies,
Mortgage-Backed Securities (MBS), Commercial Mortgage-Backed Securities (CMBS), Asset-Backed Securities (ABS), Investment-Grade Corporate, High-Yield,
and Treasury Inflation-Protected Securities (TIPS). For emerging markets, USD-denominated and local currency segments are represented by the JPMorgan
Emerging Market Bond Index (EMBI)-Global Diversified and the JPMorgan Government Bond Index (GBI)-EM Global Diversified Composite, respectively.
It is not possible to invest in an index. Performance for indices does not reflect investment fees or transactions costs.
21
Spread sectors highly correlated to oil prices
The fixed-income landscape will remain volatile in 2016.
Issuer selection will continue to drive returns.
Proper diversification will help buffer short-term volatility.
Data through December 2015. Source: Haver Analytics, Morningstar, TIAA-CREF.
It is not possible to invest in an index. Performance for indices does not reflect investment fees or transactions costs.
High-yield performance tracked decline in oil prices during 2015 Barclays U.S. High Yield Index vs. WTI crude oil spot price
35
40
45
50
55
60
65
94
95
96
97
98
99
100
101
102
103
104
105
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
High-yield index (left scale)
Oil price, $/barrel (right scale)
22
2016 outlook hinges on central bank policy
Ten-year bond yields
* 5-year, 5-year forward inflation expectations, percent, daily, not seasonally adjusted.
Data as of 12/31/15. Source: FactSet, Federal Reserve Bank of St. Louis, TIAA-CREF Asset Management.
Central banks will continue to drive interest rate volatility.
Until global growth stabilizes, the long-term trajectory remains in place.
The prospect for additional action by ECB and BoJ hangs over the market.
0
1
2
3
4
5
0
1
2
3
4
5
Dec-07 Dec-09 Dec-11 Dec-13 Dec-15
Fed funds target = 0.25%
US
UK
Germany
Inflation Expectations*
%%
Inflation expectations*
23
Dollar IndexDXY—last price
The case for a sustained low rate environment
Dollar strength backstops any U.S. rate rise and influences pace of
Fed actions.
Reduced net exports combined with growing U.S. inventories and waning
residential construction dampen consumer impact on GDP.
Source: Bloomberg.
60
70
80
90
100
110
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
24
It’s not all doom and gloom…
Opportunities exist across the globe to benefit from the recent volatility.
Not all Emerging Markets are the same.
Default outlook for U.S. credit sectors ex-energy remains attractive relative
to yield/spread compensation.
24
(85)
(5) (6)
111 84
150 160 133
408
(4)%(20)%
(10)%(27)%
(64)%
0 %
(20)%(34)%
(138)%
(93)%
(150)
(130)
(110)
(90)
(70)
(50)
(30)
(10)
10
30(100)
0
100
200
300
400
Ch
ina
India
South
Kore
a
Pola
nd
Turk
ey
Un
ited A
rab E
mira
tes
Indon
esia
Me
xic
o
Ru
ssia
Bra
zil
Commodity Importer Commodity Exporter
3 Year % Change in spreads (12/31/2012 - 12/31/2015)
FX Changes (12/31/2012 - 12/31/2015)
3 Y
ear
Change in S
pre
ads (
BP
S)
3 Y
ear
% d
epre
cia
tion a
gain
st U
SD
Emerging markets FX and spreads have had a healthy correction since 2012—
commodity importers fared better than exporters.
Data source: JP Morgan, 12/31/12 – 12/31/15. Data based on JP Morgan Corporate Emerging Market Bond Index (CEMBI) and JP Morgan Emerging Market Bond Index (EMBI).
%
Commodity Importer Commodity Exporter
25
7th, 8th or 9th inning? Where are we…?
The cycle has room to run, but we are in late innings.
Low to modest growth and low inflation typically supportive of FI assets
Massive central bank intervention has changed bond market composition.
Range-bound credit spreads and interest rates will offer opportunities to trade
tactically and expose benefits of diversification.
25.1%
17.7%43.7%
13.5%
36.4%
24.3%
30.7%
8.2%
Treasury
Corporate
Securitized (MBS,CMBS, ABS, other)
Other
Source: Barclays Bank PLC
as of 12/31/2008 as of 12/31/2015
26
Important information
This material is prepared by TIAA-CREF Asset Management and represents the views of Timothy Hopper as
of January 20, 2016. These views may change in response to changing economic and market conditions. Any
projections included in this material are for asset classes only, and do not reflect the experience of any
product or service offered by TIAA-CREF. The material is for informational purposes only and should not be
regarded as a recommendation or an offer to buy or sell any product or service to which this information may
relate. Certain products and services may not be available to all entities or persons.
Past performance is not an indicator of future results.
Please note that investments in equity and fixed-income securities are not guaranteed and are subject to
market, interest rate, inflation, and credit risks. Some fixed-income sectors may be subject to liquidity risk.
High-yield investments are subject to higher credit risk, and investments in foreign securities are subject to
special risks, including currency fluctuation and political and economic instability. Investments in asset-backed
securities may be subject to prepayment or extension risks.
TIAA-CREF Asset Management provides investment advice and portfolio management services to the
TIAA-CREF group of companies through the following entities: Teachers Advisors, Inc., TIAA-CREF
Investment Management, LLC, and Teachers Insurance and Annuity Association® (TIAA®). Teachers
Advisors, Inc., is a registered investment advisor and wholly owned subsidiary of Teachers Insurance
and Annuity Association (TIAA).
©2016 Teachers Insurance and Annuity Association of America-College Retirement Equities Fund,
(TIAA-CREF), 730 Third Ave., New York, NY 10017
C29086
141013550
486620_624002
(01/16)