Economic and Capital Market Outlook Dominic Nolan, CFA Senior - PowerPoint PPT Presentation

Economic and Capital Market Outlook Dominic Nolan, CFA Senior Managing Director

4Q16 Risk asset outperformance • The 4 th quarter saw the exceptional returns for credit assets • The market response to the election of Donald Trump, which had been viewed by many as uncertain and disruptive, turned overnight into a strong equity rally and Treasury yields surged • Measures of consumer sentiment and business confidence moved to 10 year highs as economic optimism greets the U.S. economy into 2017 2

Credit risk outperforms Asset class performance 2016 Return Index 4Q16 Return (%) Duration Yield (%) (%) Barclays US Corporate High Yield Index 17.13 1.75 3.99 6.12 Credit Suisse Leveraged Loan Index 9.88 2.25 0.25 5.45 Barclays US Corporate Index 6.11 -2.83 7.21 3.37 Barclays US Intermediate Corporate 4.04 -1.84 4.31 2.85 Barclays Aggregate Index 2.65 -2.98 5.80 2.61 Barclays US Treasury Index 1.04 -3.84 6.00 1.89 Barclays Agency MBS Index 1.67 -1.97 4.49 2.85 Source: Barclays, Credit Suisse, as of December 31, 2016 Yield is as of December 31, 2016 CSLLI yield is quoted on a 4 year effective yield; all other yields are quoted on a yield to worst basis 3

The Trump Effect Economic optimism drives reflationary market response 0.8 3.5 Monthly Change (bps) (LS) 10 Year Treasury Yield (RS) 0.6 3.0 0.53 Taper Tantrum 0.48 0.4 2.5 0.2 2.0 0.0 1.5 -0.2 1.0 -0.4 0.5 -0.6 0.0 Nov-12 May-13 Nov-13 May-14 Nov-14 May-15 Nov-15 May-16 Nov-16 Source: Barclays, as of December 31, 2016 4

The Trump Effect High expectations for growth? NFIB: % of firms expecting economy to improve NFIB: % expecting higher real sales in 6 months 60 50 40 40 30 20 20 10 0 0 -20 -10 -20 -40 -30 -60 -40 '86 '89 '92 '95 '98 '01 '04 '07 '10 '13 '16 '86 '89 '92 '95 '98 '01 '04 '07 '10 '13 '16 Source: NFIB, Strategas Research Partners. As of December 1, 2016 5

The Trump Effect Will sentiment turn into hiring, spending, and capex? NFIB: % reporting now is a good time to expand JOLTS Survey: Voluntary Quits 35 4,000 30 3,500 3,000 25 2,500 20 2,000 15 1,500 10 1,000 5 500 0 0 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '00 '02 '04 '06 '08 '10 '12 '14 Source: NFIB, Strategas Research Partners. As of December 1, 2016 6

U.S. GDP Can economic sentiment turn into growth? 10 Real GDP Growth (%) 8 6 4 2 0 -2 -4 -6 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 Source: St. Louis Federal Reserve, as of October 1, 2016 7

Inflation Will 2% be reached? 7.5 US CPI Urban Consumers Less Food & Energy Headline CPI 6.5 US Personal Consumption Expenditure Core Price Index 5.5 4.5 Percent (%) 3.5 2.5 1.5 0.5 -0.5 -1.5 -2.5 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Source: St. Louis Federal Reserve, as of October 1, 2016 8

Economic Data Supportive U.S. Manufacturing PMI highest in two years 60 58 U.S. ISM Manufacturing PMI 56 Expansion 54 52 50 48 Contraction 46 44 42 40 Jan-14 Jun-14 Nov-14 Apr-15 Sep-15 Feb-16 Jul-16 Dec-16 Source: Institute for Supply Management, as of December 2016 9

Economic Data Supportive Broad based improvement given negative 2015 sentiment 100 Citi Economic Surprise Index 80 60 Above expectations 40 20 0 -20 -40 -60 Below expectations -80 -100 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16 Source: Bloomberg, as of December 21, 2016 10

Foreign demand for U.S. Corporate debt As investors grapple with negative interest rate policies (ZIRP) 14 Amount of negative yielding Sovereign debt ($trn) 12 10 8 6 4 2 0 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Source: Bloomberg, as of November 21, 2016 11

Federal Funds Rate Uncertain through wide dispersion in forecasts 2.25 The Dot Plots 2 1.75 Federal Funds Rate (%) 1.5 1.25 1 December 2016 Projections 0.75 December 2017 Projections 0.5 0.25 0 2015 2016 2017 Source: Federal Reserve, as of December 2016 FOMC Meeting 12

Relative value of U.S. credit Favorable valuations coupled with better U.S. growth outlook 7 U.S. High Yield 6 Bank loans 5 Yield-to-Worst (%) 4 U.S. Corporate U.S. Int Corporate 3 U.S. Aggregate Agency MBS 2 1 Euro Corporate Euro-Aggregate 0 0 1 2 3 4 5 6 7 8 Duration Source: Barclays, Credit Suisse, as of December 31, 2016 13

Market Outlook What to watch for • Market evaluation of new administration’s policies are that of increased GDP with increased inflationary pressures • Details regarding major policy changes will be of utmost importance • Market is anticipating new administration will govern differently than he campaigned • Things to monitor closely: • How much can the new administration get through Congress? • How much of an effect will it have on GDP growth? • What are the long-term impacts? 14