Post on 12-Jan-2015
description
transcript
2
Table of Contents Thoughts from our CIO pg 3
Overview pg 4
GDP pg 5
Employment pg 7
The Housing Market pg 9
Consumption pg 11
Inflation pg 13
Monetary Policy pg 15
Fiscal Cliff pg 16
Deficit pg 17
Social Security pg 18
TARP pg 19
U.S. Debt pg 20
World Debt Guide pg 21
Yield Compression pg 22
Investment Performance pg 23
U.S. Corporate Bonds pg 24
Banking Sector pg 25
Industrial Sector pg 29
Global Trade pg 30
FX pg 31
Regulatory Environment pg 32
Thoughts from our CIO pg 3
Overview pg 4
GDP pg 5
Employment pg 7
The Housing Market pg 9
Consumption pg 11
Inflation pg13
Monetary Policy pg 15
Fiscal Cliff pg 16
Deficit pg17
Social Security pg 18
TARP pg 19
U.S. Debt pg 20
World Debt Guide pg 21
Yield Compression pg 22
Investment Performance pg 23
U.S. Corporate Bonds pg 24
Banking Sector pg 25
Industrial Sector pg 29
Global Trade pg 30
FX pg 31
Regulatory Environment pg 32
3
Thoughts from our CIO Approaching the Oasis After four years wandering the desert, it seems the economy has found an oasis. Whether from reduced uncertainty in today’s post-election world or from shear frustration associated with multiple years of disappointing activity, economic actors are moving forward once again. Viewed over a decade’s worth of data, many of the upturns are hazy and difficult to see. In fact, some would argue we are only seeing a mirage and that real activity will be restated away in future quarters. But given such broad based confirmation of positive action, this is extremely unlikely. No, the oasis we are seeing is real, as outlined in the remainder of this booklet. The question is how long will the cool, refreshing drink of consumer purchases, homebuyer activity, and manufacturing upturns last? The Fed would have you believe four years of zero interest rates and $2 trillion of balance sheet growth (with open-ended growth to come) is the cause of the current respite. Legislators would argue the tens of thousands of pages of stimulus, support, and reform packages that have been passed are the cause. More rational observers would argue for a combination of the two. In any case, it is difficult for me to believe this watering hole will last very long because the fundamental changes we’ve seen in the economy are not likely to support long-term growth. A Fed that continues to scrape the bottom of its bag of tricks and a legislature that is unable to have even civil exchanges over fiscal policy will only lead to greater uncertainty later in the quarter.
The “victory” over 2012’s fiscal cliff will be short-lived, and another kick of the can likely coming in March will only create more cause for concern. Economists are predicting 2013 growth anywhere from slightly negative to positive 3 percent. Such confusion about the size of the oasis is, in itself, a great uncertainty that works against solid, consistent growth.
Joe Morgan, Chief Investment Officer
4
Overview • GDP growth picked up considerably in the third quarter, printing at 3.1 percent, however the effects of hurricane Sandy on the final quarter’s activity remains
to be seen. • Job growth has been about the most consistent indicator over the last two years, even though it continues to run slightly sub-par. Interestingly, wage growth
picked up in the second half of 2012, perhaps an early indicator of employment strength in 2013. • The housing market emerged from the shadows in the fourth quarter as indications of both home building and home sales activity increased. Unfortunately,
there remains the overhang of millions of foreclosed (or forecloseable) home loans in the shadows as well as a difficult home financing market. • Consumption growth has been steady, along with job growth, and an elevated stock market is helping support consumer sentiment even after considering
recent setbacks over the fiscal cliff. • Inflation remains a non-event for most as Core PCE has been restrained below the Fed’s 2 percent target. Oil and food prices are much more volatile,
primarily affecting developing nations who effectively import America’s monetary policy by tying their currencies to the dollar. • The U.S. deficit has moved front and center recently, though spending cut conversations in Washington haven’t really even begun. Long and arduous
discussions are a commodity in the capital, however the coming debate – if it includes health care entitlements – will likely stand out. If it doesn’t, such discussions will be viewed as another kick of the can.
• TARP is finally winding down and will end with little cost to the government overall. Of course the goal of this program was never profitability, but confidence in
the markets – which it surely achieved.
• Yields in the marketplace remain depressed. Many talk of rising yields as investors shift back into risky assets such as stocks, however it is unlikely we’ll see yield spikes in the near future – certainly so long as the Fed continues to expand its balance sheet by $85 billion per month.
• Recent year’s corporate bond issuance is could continue at near-record pace, assuming bond investors remain skeptical about higher yields in the near future.
5
GDP Modestly Recovering GDP1
Source: 1 Bureau of Economic Analysis (BEA) 2Congressional Budget Office (CBO), SVB Asset Management. Note: 1 GDP values shown in legend are % change vs. prior quarter annualized.
Components of GDP1 Gross Domestic Investment2
• The latest round of Treasury purchases is intended to replace Operation Twist which expired at the end of the year
• The additional quantitative easing aims to keep rates low in the long end and support economic growth
• Growth in 3Q 2012 was more than twice the 1.3% growth rate in 2Q 2012
• Superstorm Sandy and "fiscal cliff" uncertainty weighed heavily on consumer and business minds could likely hold back growth
• The biggest boost to 3Q expansion came from factors that may be short-lived, including upturns in private inventory investment and federal government spending
-50.0%
0.0%
50.0%
100.0%
150.0%
Consumption Government spending Investment ex-housing
Residential Net exports
-10.0%
-5.0%
0.0%
5.0%
10.0%
$0.0
$1.0
$2.0
$3.0
Trill
ions
Domestic business Households and institutions Federal State and local
6
GDP Modestly Recovering
Major factors contributing to the difference include:
• Slow growth in U.S. and strong growth in emerging markets
• Rebound from unusually weak investment during the recession
• Loss of wealth, weak confidence, a bigger decline in the share of national income going to labor
• Overbuilding during the housing boom, weak household formation
• A decline in defense purchases, slow
growth in tax revenues and federal grants
Source: Congressional Budget Office (CBO), Department of Commerce, Bureau of Economic Analysis.
Contributions to the Cyclical Variation in Real GDP, 12 Quarters Following Recession
(% difference from trough for components of real GDP as a ratio of potential GDP)
7
Employment Continuing to Heal Employment Landscape1
Source: 1, 2, 3 U.S. Bureau of Labor and Statistics (BLS), SVB AssetManagement, 3 National Bureau of Economic Research (NBER). Note: The underemployment rate U6 defined as persons marginally attached to the labor force are those who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the past 12 months.
Full-Time Employment2
Long Term Unemployment3
• The unemployment rate dropped to 7.7% in November and then climbed back to 7.8% in December
• The U.S. added 155,000 jobs in December, as the economy seemingly shrugged off storm Sandy
• The number of long-term unemployed was little changed at 4.8 million in November. These individuals accounted for 40.1% of the unemployed
• The number of people employed part time, for economic reasons, were 8.2 million in November, was little changed over the month. These individuals were working part time either due to their hours been cut or because they were unable to find a full-time job
-15.0%
-5.0%
5.0%
15.0%
-1,000.0
-500.0
0.0
500.0
1,000.0
Thou
sand
s
Non-Farm Payroll (LHS) Unemployment Rate (RHS) U-6 (RHS)
0.0
5,000.0
10,000.0
100,000.0
105,000.0
110,000.0
115,000.0
120,000.0
125,000.0
Thou
sand
s
Thou
sand
s
Full Time Employment (LHS) Part Time for Economic Reasons (RHS)
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
Recession Period Unemployed 27 Weeks and Over
8
Employment Continuing to Heal Composition of U.S. Labor Force (Goods vs. Services)
Source: U.S. Bureau of Labor Statistics (BLS).
Wage Pressure
State and Local Government Employment U.S. Labor Force Participation Rate
63.0%
64.0%
65.0%
66.0%
67.0%
68.0%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
Goods Producing Service Providing
4,400
4,600
4,800
5,000
5,200
5,400
12,000 12,500 13,000 13,500 14,000 14,500 15,000
Thou
sand
s
Thou
sand
s
Local government (LH) State government (RH)
0.0% 1.0% 2.0% 3.0% 4.0% 5.0%
3.0%
5.0%
7.0%
9.0%
11.0%
U.S. Unemployment Rate U.S. Avg Hourly Earnings Pvt Nonfarm payrolls
9
The Housing Market Key Economic Driver Home Sales & Supply
Source: National Association of Home Builders (NAHB), Census.gov, S&P, SVB Asset Management.
Housing Starts Home Prices - Indexed to 100
• The U.S. housing market continues to show expansion with rising home values, lower inventory overhang, and increased home sales nationwide
• As shown by the S&P/Case-Shiller national home price index, home values rose 4.3% in October, partially due to the home-buyer tax credit. This was the largest YoY increase in over two years
• Existing home supply fell in November to 4.8 months, the lowest level in more than seven years
• The improvement in housing has been additive to economic growth and growth is expected to continue in 2013
0.0
5.0
10.0
15.0
3.0
5.0
7.0
9.0
Hom
e S
uppl
y (m
onth
s)
Hom
e S
ales
(Mill
ions
)
Total Sales (new & existing) Existing Home Supply
0.0
0.5
1.0
1.5
2.0
2.5
Mill
ions
90
140
190
240
Case Schiller 20-City FHFA Purchase Median Home Price
10
The Housing Market Key Economic Driver Homeownership Rate
Source: Census.gov, National Association of Realtors, SVB Asset Management.
Housing Affordability Composite Index
Home Foreclosures - % of Total Loans
• Homeownership resumed its decline after remaining at 65.6% for two quarters of 2012. The homeownership rate fell to 65.3% in 3Q 2012
• U.S. home foreclosures fell to 4.07%, the lowest level since before the 2008-2009 mortgage meltdown
• Historically low mortgage rates have been driving record-high housing affordability numbers. Housing affordability is now coming off its high as asking prices have begun to rise faster than rents
62.0%
64.0%
66.0%
68.0%
70.0%
0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0%
0.0%
5.0%
10.0%
15.0%
0.0
50.0
100.0
150.0
200.0
250.0
Affo
rdab
ility
Inde
x
Housing Affordability 30 Year Fixed Mortgage Rates
11
Consumption Too Many Uncertainties Consumer Sentiment - University of Michigan
Source: U.S. Bureau of Economic Analysis (BEA), Census.gov, University of Michigan / Thomson Reuters - Survey of Consumers, SVB Asset Management.
Retail & Food Services Sales Personal Consumption - % Change
• The University of Michigan indicator closed the year at 72.9, a five-month low. The index had risen to as high as 82.7 in November, but this was still below the 30-year average
• The drop in confidence heading into year-end was likely attributed to concerns over the fiscal cliff
• Auto sales rose 9% in December, capping off the best year for the industry since before the recession
• Personal consumption slowed to 1.5% and 1.6% in 2Q and 3Q 2012, respectively. This compares to growth of 2.4% in the first quarter
40.0
60.0
80.0
100.0
120.0
Average
-6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0%
$5.0
$10.0
$15.0
$20.0
$25.0
$250.0
$300.0
$350.0
$400.0
$450.0
Vehi
cle
Sal
es (M
illio
ns)
Ret
ail &
Foo
d S
ervi
ces
Sal
es (B
illio
ns)
Ex Autos Vehicle Sales
12
Consumption Too Many Uncertainties Personal Savings as a % of Disposable Income
Source: U.S. Bureau of Economic Analysis (BEA), Federal Reserve, SVB Asset Management.
Personal Income
Household Debt Payments vs. Debt Outstanding
• Savings rates as a percentage of disposable income fluctuated between 3.3%-4.1% during the year. Consumers are being more responsible with their finances post-recession, however we are off of the highs seen in 2008
• We are still not seeing any meaningful improvement in personal incomes. The largest gain in the second half of the year was a 0.6% MoM increase in November
• Overall U.S. consumer credit outstanding grew to an all-time record in October, primarily on the strength of student loans, auto loans and credit cards
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
-1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5%
Mon
thly
Per
cent
age
Cha
nge
-5.0%
0.0%
5.0%
10.0%
15.0%
8.0%
10.0%
12.0%
14.0%
Deb
t Out
stan
ding
(% c
hang
e Yo
Y)
Deb
t Pay
men
ts (%
of
disp
osab
le p
erso
nal i
ncom
e)
Debt Payments Debt Outstanding
13
Inflation In the Comfort Zone Component Distribution 2012
Source: U.S. Bureau of Economic Analysis (BEA), U.S. Bureau of Labor Statistics (BLS), SVB Asset Management.
Core PCE
Consumer Price Index Producer Price Index
-5.0%
0.0%
5.0%
10.0%
15.0%
% c
hang
e fro
m p
rior y
ear
CPI Ex Food & Energy CPI
-10.0% -5.0% 0.0% 5.0%
10.0% 15.0%
% c
hang
e fro
m p
rior y
ear
PPI Ex Food & Energy PPI
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
% c
hang
e fro
m p
rior y
ear
Core PCE Fed Target
CPI Components 12-month ChangeFood & Bev. 1.8%Housing 1.7%Apparel 1.2%Transportation 1.5%Medical Care 3.4%Recreation 1.4%Educ. & Comm. 1.5%Other 1.5%Headline CPI 1.8%Less:
Energy -4.1%Food 0.2%
Core CPI 1.9%
40.7%
17.4%
15.1%
7.1%
6.7%
6.0%
3.0% 4.0% Housing
Transportation
Food & Bev.
Medical Care
Educ. & Comm.
Recreation
Apparel less footwear
Other
14
Inflation In the Comfort Zone Wage Growth: Average Hourly Earnings
Source: U.S. Bureau of Labor Statistics (BLS), U.S. Energy Information Administration (EIA), University of Michigan / Thomson Reuters - Survey of Consumers, SVB Asset Management.
Crude Oil - Spot & Futures
Univ. of Michigan Survey of Inflation Expectations
• Inflation continues to take a back seat as measures point to a stable inflationary environment. Furthermore, both short-term and longer-term inflation expectations remain fairly steady
• Falling energy prices along with a stagnant labor market have been the main drivers of low inflation. The consumer price index saw its first decline in six months in November as energy prices dropped
• Facing little threat of inflation, the Fed continues its easy monetary policy through low interest rates and additional quantitative easing measures
1.5%
2.5%
3.5%
4.5%
5.5%
1 Year Ahead 5-10 Year Ahead
$0.0
$50.0
$100.0
$150.0
Pric
e pe
r Bar
rel
Crude Oil Crude Oil Futures
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
Ann
ual P
erce
ntag
e C
hang
e
15
U.S. Generic Government Yields Total Assets of Federal Reserve
Source: Federal Reserve, SVB Asset Management.
Monetary Policy How Far Can You Go?
$-
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
Bill
ions
Pre-QE1 QE1 Pre-QE2 QE2 OT Pre-OT
16
Fiscal Cliff On the Edge
The Agreement
• Permanent extension of Bush-era tax rates for individuals with income up to $400k and $450k for couples
o Permanent maximum 15% tax rate for dividend income and LT capital gains for same income levels
o Higher incomes will be taxed at 20%
• Estate tax rates for estates worth up to $5mil
• Permanent fix to AMT
• Two-month delay of sequester
• One-year extension of unemployment benefits
Outlook
• Further debate on debt ceiling, entitlement reform, scheduled spending cuts, tax code reforms, etc.
• The Fiscal Cliff agreement temporary removed economic growth headwinds but does not completely remove them.
• Financial markets will remain volatile
Debt Ceiling vs. Debt Outstanding
Source: Bloomberg and SVB Asset Management
$6.0
$8.0
$10.0
$12.0
$14.0
$16.0
$18.0
Trill
ions
Debt Ceiling Debt Outstanding
17
-$8.0
-$6.0
-$4.0
-$2.0
$0.0
$2.0
$4.0
$6.0
$8.0
Trill
ions
2001 Baseline Projections 2011 Status
35.0%
9.0%
8.0%
48.0% Events between 2007 and 2009
Nondefense spending since 2009
Defense spending since 2009
Revenue loss since 2009
Deficit Bill Coming Due
Since 1969, the U.S. government has recorded a surplus in only five years with four of those from 1998-2001. Up until the global financial crisis, the annual deficits were much smaller in comparison to GDP. That ratio, however, has climbed significantly since 2009 when the deficit reached $1.4 trillion. The combination of two wars (Afghanistan and Iraq) and substantial revenue loss have considerably altered CBO projections. The CBO in 2001 had predicted a steady yearly surplus for the next decade, but that never materialized. Together, events that occurred before January 2009 and the precipitous decline in tax revenues account for about 83% of the difference between what the 2012 deficit actually is and what it was expected to be five years ago.
Source: Congressional Budget Office (CBO), Center for American Progress. 1 Congressional Budget Office (CBO), 2 This material was created and published by the Center for American Progress (www.americanprogress.org).
Changes in Deficit Projections Since January 20011
Factors Responsible for Fiscal Deterioration2
Cum
ulat
ive
Sur
plus
Cum
ulat
ive
Def
icit
In January 2001, CBO projected cumulative surpluses through 2011
However in 2011, the U.S. had a cumulative deficit of $6 trillion
Total impact on surplus through total legislative changes
Total impact on surplus through economic
and technical changes
18
Social Security How to Sustain it?
Total Social Security outlays in 2012 were $773 billion - one-fifth of federal spending.
Over the next decade, spending will exceed dedicated tax revenues, on average, by about 10 percent.
Spending relative to income will continue to increase to the point that outlays will shift from scheduled to payable benefits around 2040.
The drop in benefits paid at that time will be a little more than 1 percent of GDP.
These estimates change from time to time, but the underlying problem remains: today’s entitlements are unsupportable in the medium term future.
Source: Congressional Budget Office (CBO). 1,2 Of the 56 million people who currently receive Social Security benefits, about 70% are retired workers or their spouses and children, and another 11% are survivors of deceased workers - all of those beneficiaries receive payments through Old-Age and Survivors Insurance (OASI). The other 19% of beneficiaries are disabled workers or their spouses and children and they receive Disability Insurance (DI) benefits.
The 2012 Long-Term Projections for Social Security As a % of GDP
4.0%
4.5%
5.0%
5.5%
6.0%
6.5%
7.0%
Outlays (with Scheduled Benefits) Tax Revenues Outlays (with Payable Benefits)
Actual
Projected
19
TARP Breaking Even…
TARP (Troubled Asset Relief Program) helped to stabilize the financial system from collapse and restart the markets that provided mortgage, auto, student, and business loans. The government program that began in 2009 has been winding down, with many of the beneficiaries paying back much of the original loan. As of November 30, 2012, American taxpayers have recovered nearly 91% of the TARP funds disbursed. Overall, the government is now expected to at least break even on its financial aid from principal and interest payments. A substantial part of the program came with a competitive rate of return.
Source: U.S.Treasury, as of January 4, 2013.
TARP Tracker
Total Authorized Funds ($ billions)
$68
$80
$245 $27 $46
$235
AIG Investments
Auto Inductry Investments
Bank Investment Programs
Credit Market Programs
Housing Programs
Cancelled
$68 $80
$245
$19
$50 $41
$268
$16
$0
$50
$100
$150
$200
$250
$300
AIG Investments
Auto Industry Investments
Bank Investment Programs
Credit Market Programs
Bill
ions
Funds Disbursed Funds Recovered
91% of funds disbursed have been recovered as of December 2012
Bank Investment Programs have added surplus to the result
To strengthen the Housing markets, TARP introduced the two central programs, Making Home Affordable (MHA) and the Hardest Hit Fund (HHF). MHA permanently reduces mortgage payments to affordable levels for qualifying borrowers, while HHF helps those states hardest hit by home price declines and high unemployment to develop locally-tailored foreclosure prevention solutions
The deadline for MHA has been extended by a year through December 2013, also conforming the extended deadline for the Home Affordable Refinance Program (HARP)
In the surplus zone
20
U.S. Debt Demand Remains Broad Despite Debt Ceiling
U.S. Treasuries continue to be a deep source of liquidity and has retained its safe-haven status despite the political theatrics surrounding the debt limit that lead a downgrade by S&P of U.S. Treasuries to AA+ from AAA in 2011. About 45 percent of Treasuries are held by public entities. While China remains the largest investor of U.S. Treasuries, its holdings have declined since peaking in July 2011. The widening of the U.S.-China trade deficit through 2012 indicates China may have diversified its foreign reserves away Treasuries. Meanwhile, Japan and OPEC countries steadily increased their Treasury investments. The difficult political process in reaching a tax policy comprise at the end of 2012 indicates upcoming debt limit discussions will be just as tenuous, and may compel other rating agencies to downgrade U.S. credit ratings. Any downgrade will have de minimal impact on Treasury demand. Note: 1 Includes Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, UAE, Algeria, Gabon, Libya and Nigeria
2 Includes Bahamas, Bermuda, Cayman Islands, Netherlands Antilles, British Virgin Islands and Panama.
Source: Treasury.gov. Data as of 31st October 2012.
Major Foreign Holders of Treasury Securities
$622 $52 $58 $59 $59 $64 $65 $75 $76 $93 $94
$117 $133 $137 $139
$165 $194 $202
$255 $259 $266
$1,135 $1,162
0 200 400 600 800 1,000 1,200 1,400
Others Turkey
Thailand India
Mexico Germany
Canada France
Norway Ireland
Singapore U.K.
Belgium Hong Kong
Luxembourg Russia
Switzerland Taiwan
Brazil Caribbean Banking Centers
Oil Exporters Japan China
Billions
1
2
21
World Debt Guide Rising Debt Levels Prompting Action
A combination of contracting economic output, increasing demand for government support, and escalating sovereign borrowing have contributed to rising debt levels as a percentage of GDP in many developed countries. The impact of rising debt levels have been inconsistent. In Japan, evolving demographic trends have lead to structural deflation, while rising commodity prices have supported a strengthening Canadian dollar despite higher debt levels. Investors have tagged some countries with higher interest rates to express worries over future debt servicing capabilities. This has pushed many developed countries to confront their own balance sheets and may lead to additional contractions in spending to reduce leverage.
Source: Bloomberg, SVB Asset Management.
Debt as a % of GDP
OVERALL DEBT % of GDP, latest • Over 100 • 75 – 99 • 50 – 74 • 0 - 49
8% 34%
44% 51%
54% 68% 69%
81% 85% 86% 87%
121% 206%
0% 50% 100% 150% 200% 250%
Russia South Korea
China India Brazil U.S.
Spain Germany
Britain France
Canada Italy
Japan
22
Yield Compression Financials Tighten
Source: SVB Asset Management, Bloomberg
Government Credit
-0.2%
0.0%
0.2%
0.4%
0.6%
0.8%
U.S. Treasury Bill /Notes (Q3) U.S. Agency DN/Bonds (Q3)
U.S. Treasury Bill /Notes (Q4) U.S. Agency DN/Bonds (Q4)
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
A-1/P-1 CP (Q3) Ind Bonds - A Rated (Q3)
Fin Bonds - A Rated (Q3) A-1/P-1 CP (Q4)
Ind Bonds - A Rated (Q4) Fin Bonds - A Rated (Q4)
23
Investment Performance Reward for Risk
Source: Bloomberg, BoAML, Morgan Stanley
Benchmark Performance
Ticker 2012 2011 2010 2009 2008 2007Short Benchmarks 3-Month Treasury Bill G0O1 0.111 0.103 0.126 0.207 2.057 5.004 3-Month Citi/Salomon CD SBMMCD3 0.307 0.289 0.310 0.822 3.442 5.448 6-Month Treasury Bill G0O2 0.171 0.268 0.365 0.579 3.582 5.607 6-Month Cit/Salomon CD SBMMCD6 0.488 0.389 0.437 1.611 3.756 5.459 1-yr Treasury Bill G0O3 0.204 0.496 0.792 0.813 4.746 5.948 Treasury 1-3 yr Treasury G1O2 0.434 1.554 2.348 0.785 6.609 7.317 3-5 yr Treasury G2O2 1.577 6.229 5.695 -0.672 12.153 9.836
Corporate/Govt (A Rated and Above)
1-3 yr Corp/Govt B110 1.188 1.527 2.641 2.766 5.184 6.981 3-5 yr Corp/Govt B210 3.077 5.479 5.925 2.958 6.174 8.324 Agencies 1-3 yr Agencies G1P0 0.847 1.536 2.338 2.189 7.034 6.735 3-5 yr Agencies G2P0 2.588 5.290 4.900 3.223 8.971 8.261 Municipals - Tax Exempt 1-3 yr Prere U1AF 0.520 1.800 0.923 3.189 5.875 4.710 3-7 yr Prere U2AF 1.539 4.951 2.087 5.345 7.992 5.390 Auto Asset Backed Securities ABS, Autos, Fixed Rate, (1.45yrs) R0U0 2.291 1.689 3.077 14.845 -0.682 5.723 Dow Jones Industrial Average INDU 7.257 5.544 11.023 3.116 -33.762 6.432 S&P 500 SPX 13.405 2.110 12.783 23.454 -38.486 3.530 NASD CCMP 15.906 -1.799 16.910 43.888 -40.541 9.812 MSCI World Index MXWO 13.184 -7.615 9.262 27.283 -42.081 7.093 CRB Index (Commodities) CRY -3.372 -8.264 15.430 23.563 -39.450 16.679
24
Corporate-Bond Issuance
Corporate bond sales surpassed 2009’s all-time high of $3.89 trillion to reach $3.9 trillion in 2012. Corporate Treasurers are rushing to lock-in historically low interest rates.
U.S. Corporate-Bond Yields, %
Corporate borrowing costs continue to trend lower due to factors such as easy monetary policy and strong investor demand.
Source: Bloomberg, SVB Asset Management.
U.S. Corporate Bonds Insatiable Demand
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Investment grade High Yield
$166
$94
$162
$98
$166
$64 $72
$59
$80 $74
$119
$133
$151
$175
$77
$112
$88
$111 $101
$183
$142
$179
$0.0
$30.0
$60.0
$90.0
$120.0
$150.0
$180.0
$210.0
Bill
ions
2011 2012
25
Banking Sector Climbing Out of Abyss
Benign markets and strong economies resulted in commercial banks’ ROAE exceeding 15 percent prior to the crisis. Crisis took a toll on the returns, leaving commercial banks with negative ROAE.
With easy money and relatively calmer markets, commercial banks are reporting healthier ROAE. The U.S. Banks ROAE reached to over 7.5 percent in first three quarters of 2012.
Uncertain times ahead and continued low interest rate environment may result in stagnated ROAE growth.
It is unlikely that the U.S. commercial banks will return to ROAE exceeding 15 percent any time soon.
Source: Federal Reserve and SNL Financial.
Effect of Federal Funds Rate on Commercial Banks’ Return on Average Equity
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
U.S. Banks ROAE (%) Federal Funds Rate (%)
26
Banking Sector Climbing Out of Abyss
Source: Federal Deposit Insurance Corporation (FDIC).
FDIC Quarterly Bank Net Income/(Loss)
U.S. banks’ performance continues to stabilize and is supported by a decline in loss provisions, albeit in a persistently low interest rate environment.
-$40,000.0
-$30,000.0
-$20,000.0
-$10,000.0
$0.0
$10,000.0
$20,000.0
$30,000.0
$40,000.0
Mill
ions
27
Banking Sector Climbing Out of Abyss Delinquency Rates
Source: Federal Reserve.
Lending Standards
Source: Federal Reserve, SVB Asset Management.
Net percent of banks reporting tighter lending standards
-40.0%
-20.0%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
Rel
axed
Con
serv
ativ
e
Commercial & Industrial loans Commercial Real Estate Loans
Residential Mortgage Loans Prime
Sub-Prime Non Traditional
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
All
bank
s, s
easo
nally
adj
uste
d
Residential Consumer Loans
Commercial and Industrial Loans Commercial
28
Banking Sector Climbing Out of Abyss
Source: S&P, Moody’s, Fitch & Bloomberg, January 4, 2013.
Rating Agencies’ U.S. Financials Upgrades and Downgrades
2012 Financial sector downgrades have outpaced upgrades, but number of rating actions from S&P, Moody’s and Fitch is moderate compared to 2009. Hazy outlook in 2013 with economic and regulatory uncertain.
0
500
1,000
1,500
2,000
2,500
3,000
Upgrades Downgrades
29
Industrial Sector Cautiously Optimistic
Source: S&P, Moody’s, Fitch & Bloomberg, January 4, 2013.
Rating Agencies’ U.S. Industrials Upgrades and Downgrades
2013 should see minimal rating actions in the industrial sector subject to shareholder and financial policies as well as the recovering U.S. economy.
0
50
100
150
200
250
300
350
400
Upgrades Downgrades
30
Exports vs. World GDP
Export levels are normalizing towards its long-term trend. Global trade remains a fundamental growth story.
Exports as % of GDP, 2011
While exports grew in 2011, long-run imbalances in export levels remain, perpetuating trade imbalances.
Source: The World Bank, SVB Asset Management.
Global Trade Fundamental Growth Intact
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
Exports of Goods & Services (YoY %) World GDP (YoY %)
31
FX Central Bank Policies Debasing Volatility in the Euro Persists
European financial policies have proved insufficient to generate growth and squelch debt worries. Euro underperformance to reflect unresolved economic weakness.
The U.S. Dollar Index Measures the General Value of the USD
The dollar retains safe-haven status despite debasement from easing monetary policy. Economic outperformance may prove supportive for dollar firming.
Source: Bloomberg, SVB Asset Management.
50
60
70
80
90
100
110
120
130
€0.75
€0.85
€0.95
€1.05
€1.15
€1.25
€1.35
€1.45
€1.55
€1.65
€1.75
32
Regulatory Environment Rocky Road Ahead
Source: SVB Asset Management
Amendments to SEC 2a-7 rule have been in place for more than two years now. Key changes included more restrictive maturity limits, higher credit quality standards and establishment of new daily and weekly liquidity requirements.
The SEC failed to push through a second round of reforms in August 2012.
In November 2012, FSOC submitted request for public comments on additional money funds reform. FSOC highlighted that if SEC doesn’t take actions for further reform, FSOC may step in by designating certain funds as SIFI.
Floating NAV by SEC
• Real-time mark to market level valuation • Most of the money fund industry is not in favor
OR
Capital Buffer and Redemption Restriction by SEC
• Cushion against liquidity and credit risk • Goal: to minimize the risk or disorderly run • Uncertain about the form or amount of buffer • Could drive further consolidation and work against the investor
objective of liquidity
OR
SIFI’s Designation by FSOC
• Inclusion of certain money funds as SIFI* • Could be subject to heightened regulation by Federal Reserve
*SIFI: Systemically Important Financial Institutions FSOC: Financial Stability Oversight Council
Potential MMF Reform Proposals as of 4Q2012
Potential Reforms can be a combination of above measures.
33
Our Team
Portfolio Managers Minh Trang, CFA mtrang@svb.com Paula Solanes psolanes@svb.com Renuka Kumar rkumar@svb.com Jose Sevilla jsevilla@svb.com Head of Credit Research Melina Hadiwono, CFA mhadiwono@svb.com
Credit and Risk Sook Kuan Loh, CFA sloh@svb.com Tim Lee, CFA tlee@svb.com Kyle Balough kbalough@svb.com Silicon Valley Bank Partners Priyanka Raju Kelly Caviglia Girish Mallya
Managing Director Jeff Schnitz jschnitz@svb.com Chief Investment Officer Joe Morgan, CFA jmorgan@svb.com Head of Portfolio Management Ninh Chung nchung@svb.com
Our Team
SVB Asset Management 555 Mission Street, Suite 900 San Francisco, CA 94105
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 we believe 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 investment decision. 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 its content, 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.
©2013 SVB Financial Group. All rights reserved. Silicon Valley Bank is a member of FDIC and Federal Reserve System. SVB>, SVB>Find a way, SVB Financial Group, and Silicon Valley Bank are registered trademarks. 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 FDIC insured, are not deposits or other obligations of Silicon Valley Bank, and may lose value. B_SAM-12-12609 Rev. 01-18-2013 1012-0177