Q3 Investm ent Update October 25, 20 17 Russ Allen, CIO
Disclosures Important Disclosures: This information is for discussion purposes only and is being furnished on October 25, 2017. This information is not to be re-transmitted in whole or in part without the prior consent of Berman Capital Advisors. While all the information prepared in this presentation is believed to be accurate, Berman Capital Advisors 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 Berman Capital Advisors to discuss your individual situation. Berman Capital Advisors / 2
Major Asset Class Performance Markets continue to be strong • Index Total Return and volatility remains very Index Q3 2017 YTD 2017 low. The rally broadened this MSCI Emerging Markets 7.9% 27.8% quarter. Russell 1000 Growth 5.8% 20.7% MSCI Europe 6.5% 22.8% Emerging Markets continue to MSCI EAFE (International) 5.4% 20.0% • S&P 500 4.5% 14.2% outperform. Russell Midcap 3.5% 11.7% Japan 4.5% 14.8% There was some rotation in the • Russell 1000 Value 3.1% 7.9% final weeks of the quarter High Yield Bonds 2.0% 7.0% toward cyclical stocks. Russell Small Cap 5.7% 10.9% US Aggregate Bond 0.9% 3.1% Oil prices rebounded, • Crude Oil 12.0% -6.3% primarily due to signs of Source: Bloomberg, Ned Davis Research slowing shale productivity. Note: International market returns reported in U.S. Dollars, not local currency Berman Capital Advisors / 3
Broad Based Stock Market Returns Source: Ned Davis Research Berman Capital Advisors / 4
International Stocks’ Comeback Source: Bloomberg Berman Capital Advisors / 5
Fixed Income Performance Continued strength in high yield as credit conditions remain strong. Source: Ned Davis Research Berman Capital Advisors / 6
Investment Themes Asset prices continued to march higher in the third quarter despite worry • over high valuations and the current political environment. Investors are right to worry about valuations, but they could be resolved by a sideways market, rather than a sharp drop. Fundamentals for “risk-on” assets (stocks, corporate credit, structured • finance) remain positive. Rising earnings, still-low interest rates and recovering optimism in international markets. The Fed’s reversal of quantitative easing (quantitative tightening!) has been • well telegraphed and has not disturbed investors. As the Fed’s easing was unprecedentedly large, the unwind bears close watching, as well. Faster than expected inflation could be a negative catalyst. The global economy appears to be gathering more strength, which has • supported international stocks and large cap multi-national companies. We think we are in the early innings of international outperformance versus U.S. stocks. Berman Capital Advisors / 7
Global Economy & Investment Implications Berman Capital Advisors / 8
Synchronized Global Upturn Berman Capital Advisors / 9
Synchronized Global Upturn Global Purchasing Managers’ Index upswing illustrated in chart. Berman Capital Advisors / 10
Synchronized Global Upturn Leading economic indicators and industrial production still strengthening. Source: BCA Research Berman Capital Advisors / 11
Synchronized Global Upturn Consumer and business confidence are both back to pre-crisis levels… Source: BCA Research Berman Capital Advisors / 12
Synchronized Global Upturn … and Capex is responding. Berman Capital Advisors / 13
GDP Expectations Now Being Exceeded Berman Capital Advisors / 14
Real Rates are Still Very Low Source: Ned Davis Research The policy backdrop is still easy, as interest rates adjusted for inflation are close to zero. Rising confidence is creating even looser financial conditions in the near term. Berman Capital Advisors / 15
Profit Outlook Remains Strong Berman Capital Advisors / 16
The Cycle Could Continue Even Longer Berman Capital Advisors / 17
Earnings and Price Appreciation Berman Capital Advisors / 18
Recessions Drive Larger Market Corrections Berman Capital Advisors / 19
Currently Not Lined Up for Recession Berman Capital Advisors / 20
Future Upside Limited, but Tough to Time Berman Capital Advisors / 21
Implications of Possible Inflation Berman Capital Advisors / 22
Tightening Labor Market = Inflation? Berman Capital Advisors / 23
Why No Taper-Tantrum Repeat? • Fed has telegraphed its balance sheet plans. • Stronger growth may be offsetting concerns about tighter policy, keeping volatility contained. • The stock of central bank assets is likely to remain high for a long time. • Euro Crisis appears to be over, unlike 2011. Berman Capital Advisors / 24
Fed Chair Odds Source: Predictit.com Market Berman Capital Advisors / 25
Implications for Bonds: Duration Risk Berman Capital Advisors / 26
Implications for Bonds: Credit Risk Berman Capital Advisors / 27
Weakening Loan Standards? Berman Capital Advisors / 28
Focus on International Markets Berman Capital Advisors / 29
Europe - Deleveraging Source: Eurostat, WSJ.com Berman Capital Advisors / 30
Relative Stock Market Valuation • No matter how you slice it, the U.S. markets are more expensive than others’. • This is true even if you adjust for Source: BCA Research sector weights. Berman Capital Advisors / 31
Chinese Economy Official (and unofficial) measures show Chinese output increasing. Source: BCA Research Improving profitability helps indebted companies more easily repay loans. Berman Capital Advisors / 32
Who Will Grow in the Long Term? Source: OECD Berman Capital Advisors / 33
Focus on Midstream Energy (MLPs) Berman Capital Advisors / 34
What is Energy Infrastructure? Source: Kayne Anderson, October 2017 Energy infrastructure are the physical assets to gather, transport and store • energy products. These assets are critical to move oil, gas and natural gas liquids (NGLs) • from production to end-user. MLPs are a tax-advantaged (but K-1 producing) partnerships that trade • like stocks. MLPs typically have high cash distribution and are held for income and • growth.
Oil prices and Energy Stocks Berman Capital Advisors / 36
Oil prices and Midstream Stocks The recent correlation between MLPs and Crude has also broken down. Source: Bloomberg Berman Capital Advisors / 37
The Energy Downturn and Oil Correlation MLPs were • presented as little correlated to oil prices, but rather as a toll road paid on volumes. MLPs indeed traded that way from 2000 – 2014. During the huge oil • plunge of 2015, fear Source: Kayne Anderson, October 2017 of customer bankruptcy and too much MLP debt greatly increased fear and correlation to the price of oil. This is despite the fact that MLPs get the majority of their revenue from • natural gas, and that actual MLP cash flow production MLPs held up as advertised.
MLP Valuation MLPs and Midstream Corporations Are Trading Below Historic • Cash Flow Multiples New expansion projects with long-term commitments are coming online in • late 2017 and 2018. These will increase cash flows. Increasing utilization of existing assets are driving cash flows higher with • less need for capex. Many midstream companies are trading below replacement cost on a • trailing and/ or forward multiple basis . Multiple expansion possible as the volume story unfolds. • Source: Bloomberg, as of June 16, 2017
MLP Valuation Dislocation has created very attractive • relative yield spreads. We believe fundamentals are fine and distribution cuts are largely behind us. Source: Bloom berg, Alerian, and NAREIT. Utilities yields based on the S&P 500 Utilities index, REIT yields based on the FTSE NAREIT Real Estate 50 Index (FNR5), and BBB Bonds based on the BAML BBB US Corporate Index MLPs are represented by AMZX Index
MLP Valuation MLP Yields are now much higher • than competing investments. Source: Bloomberg, Alerian, and NAREIT. Utilities yields based on the S&P 500 Utilities index, REIT yields based on the FTSE NAREIT Real Estate 50 Index (FNR5), and BBB Bonds based on the BAML BBB US Corporate Index MLPs are represented by AMZX Index
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