Q2 Investm ent Update July 13, 20 17 Russ Allen, Berm an Capital CIO
Disclosures Important Disclosures: This information is for discussion purposes only and is being furnished on July 13, 2017. This information is not to be re-transmitted in whole or in part without the prior consent of Berman Capital Advisors (BCA). While all the information prepared in this presentation is believed to be accurate, BCA makes no express warranty as to its completeness or accuracy nor can it accept responsibility for errors appearing in the presentation. No information provided herein shall constitute, or be construed as, an offer to sell or a solicitation of an offer to acquire any security, investment product or service, nor shall any such security, product or service be offered or sold in any jurisdiction where such an offer or solicitation is prohibited by law or registration. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product will be profitable or be suitable for your portfolio or individual situation. Please contact BCA to discuss your individual situation. Berman Capital Advisors / 2
2 st Quarter Review Berman Capital Advisors / 3
Major Asset Class Performance Defying fears of a Chinese Index Total Return in US$ • Index Q2 2017 Q1 2017 slowdown and unrest in Latin MSCI Europe 7.7 7.6 America, emerging markets MSCI Emerging Markets 6.3 11.4 remain strong. MSCI EAFE (International) 6.3 7.4 Japan 5.0 4.8 In the U.S., large growth • Russell 1000 Growth 4.7 8.9 stocks regained performance S&P 500 3.1 6.1 as the Trump cyclical trade Russell Midcap 2.7 5.2 faded. Russell Small Cap 2.5 2.5 High Yield Bonds 2.2 2.7 Longer dated bonds were • US Aggregate Bond 1.4 0.8 helped by the perception of Russell 1000 Value 1.3 3.3 lower inflation. Crude Oil -10.9 -9.2 Source: Bloomberg, Ned Davis Research After the 2016 rebound, oil Note: International market returns reported in U.S. Dollars • again fell sharply on fears of resurgent U.S. shale oil supply. Berman Capital Advisors / 4
U.S. Equity Performance by Style Source: J.P. Morgan Guide to the Markets, Q2 2017 Large Growth stocks continued to outperform, while the cyclically-oriented Small value again underperformed. Berman Capital Advisors / 5
Relative Technology Performance Source: Wall Street Journal Aside from a recent pull-back, Technology has significantly outperformed. Berman Capital Advisors / 6
Financials and Rising Rates Source: Wall Street Journal Rising rates have benefitted financials despite growth worries Berman Capital Advisors / 7
Performance by Factor – MSCI World Reflecting fading hopes for a strong economy, value stocks have faded. Investors have returned to FAANG (momentum) stocks. Source: State Street Global Advisors Berman Capital Advisors / 8
Key Debates for 2 nd Half 2017 Berman Capital Advisors / 9
Key Debates in the Outlook Consensus BCA Response U.S. stocks are expensive and due for a Domestic stocks are expensive but • • fall, especially given the state of U.S. valuation alone is a poor timing tool. politics and geopolitical conflicts. Rising earnings, still-easy policy and lack of other options can support U.S. stocks. Growth is falling off and the Fed is making The economic outlook is fine and hikes • • a policy mistake. will be gradual. Oil (down) and safer bond prices (up) Oil price drop is about supply; we expect • • portend bad things for risky assets. growth and inflation to pick back up. Return expectations from traditional asset We agree, but believe there are • • classes are likely to be lower. This argues opportunities in international equity for participating in more niche investment markets and private investments. Also, opportunities. the credit cycle is not yet about to end. Berman Capital Advisors / 10
U.S. Economic Growth The U.S. economy is hardly • tanking. The Blue Chip consensus estimate for Q2 growth stands at 3.1%. Growth could pick up later this • year. Financial conditions have eased significantly over the past few months thanks to a weaker dollar, falling bond yields, narrower credit spreads, and higher equity prices. Lending to companies may have • dipped simply because companies preferred to issue bonds versus bank loans. Source: BCA Research Berman Capital Advisors / 11
U.S. Set to Recover Source: BCA Research Berman Capital Advisors / 12
U.S. Set to Recover (Cont.) Source: BCA Research Berman Capital Advisors / 13
Global Recovery Production & Orders Rising Source: BCA Research Developed Markets, especially, continue to enjoy a cyclical rebound. • Berman Capital Advisors / 14
Europe Set to Keep Growing Source: BCA Research Berman Capital Advisors / 15
European Recovery Accelerating Source: Markit; J.P. Morgan Asset Management Berman Capital Advisors / 16
U.S. Equity Valuation Berman Capital Advisors / 17
U.S. vs World Valuations Source: BCA Research Berman Capital Advisors / 18
Earnings Set to Increase Source: BCA Research Earnings are growing at a fast pace Berman Capital Advisors / 19
Earnings Fundamentals Positive Source: J.P. Morgan Asset Management Berman Capital Advisors / 20
Valuations and Dividend Growth Source: BCA Research Berman Capital Advisors / 21
Easier Financial Conditions Continued easing Financial conditions have eased despite rising rates Berman Capital Advisors / 22
Fixed Income Yields Unattractive Source: State Street Global Advisors Berman Capital Advisors / 23
Unemployment and Wages Berman Capital Advisors / 24
Inflation Perspective Berman Capital Advisors / 25
Where is the Inflationary Pressure? Berman Capital Advisors / 26
Yield Curve Flattening The Fed continues to raise the Federal Funds rate. Yet, unexpectedly falling inflationary pressure is driving the back end of the curve lower. Berman Capital Advisors / 27
Where are we in the Economic Cycle? A slower, but longer lasting recovery? Berman Capital Advisors / 28
Market Expectations vs. Fed Forecast Investors disagree with the Fed’s inflation forecast Berman Capital Advisors / 29
Credit Outlook Despite what many feel is • an elongated credit cycle (to go along with the elongated economic cycle), the credit outlook remains good. The retreat of banks, • especially in lending to smaller companies, continues to be a source of opportunity for niche credit investing. Source: BCA Research Berman Capital Advisors / 30
Need to Monitor Credit Standards… Berman Capital Advisors / 31
...But Corporate Health Generally Good Source: BCA Research Berman Capital Advisors / 32
Energy Related Performance MLPs continue to be tied to the price of oil. Berman Capital Advisors / 33
Midstream Valuation Perspective At a time when stocks are highly valued and investors are chasing yield, MLPs trade at significant discounts. Berman Capital Advisors / 34
Energy Near Record Low Share of S&P 500 Energy hasn’t been this small a part of the S&P 500 since the 1980s. Berman Capital Advisors / 35
Oil Sentiment When sentiment is this poor, it is typically a contrarian signal. Berman Capital Advisors / 36
Private Equity Fundraising High Private Equity “Dry Powder” Source: Pitchbook.com Private Equity may have trouble deploying record capital raises profitably. Berman Capital Advisors / 37
Complacency? Shorting volatility is now a popular trade. Berman Capital Advisors / 38
Speculation? Ethereum Price Chart through June 2017 Source: Coindesk.com ICOs (Initial Crypto-coin Offerings) are popular Berman Capital Advisors / 39
Conclusion • Despite high valuations, the near term backdrop is still positive for asset prices. • Interest rates and relative economic strength are key factors to watch for potential tactical moves. • Faster than expected growth could significantly hurt bond proxy equities and high duration bonds. • Return expectations should be muted from traditional asset classes. We will continue to recommend more niche investments. Berman Capital Advisors / 40
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