Investment Landscape 1ST QUARTER 2021 - Verus
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
1ST QUARTER 2021 Investment Landscape
Recent Verus research
Visit: https://www.verusinvestments.com/insights/
Topics of interest Annual research
2021 CAPITAL MARKET ASSUMPTIONS
IS PAINLESS DIVERSIFICATION DEAD? QUANTIFYING ESG IN PORTFOLIO Learn about the 2020 market movements and how
Interest rates have collapsed in developed economies in CONSTRUCTION these shifts have affected our long‐term outlook.
past years, and more recently at home in the United Environmental, social, and governance (ESG) investing is
States, which has greatly dampened investors’ a wide‐ranging field that encompasses many different
performance outlook for diversified portfolios. These approaches. Investors are integrating ESG into the
events have led many investors to question the creation of their policies, investment beliefs, strategic Sound thinking
traditional role of fixed income. In this Topic of Interest asset allocations, manager selection decisions, and
white paper, we outline some issues that investors must much more. ESG ratings and scores allow investors to FINDING COMFORT IN AN UNCOMFORTABLE
come to terms with, and we begin to unpick ways of understand and compare the ESG profile of companies WORLD
thinking about diversification and preservation of capital and managers. ESG screens can serve as an effective tool
in the new market environment. for investors to identify exposures that may conflict with An outline of various topics that an investor might want
their institutional values. to add to their agenda for the coming year.
INTEGRATING ESG INTO ACTIVE
PORTFOLIOS
AGREEING ON ESG
This paper sheds light on the difficulty institutional
Up and coming event
In this paper, we address how environmental, social, investors face as they embark on their journey toward EMERGING & DIVERSE MANAGERS
and governance (ESG) considerations are integrated into implementing a thoughtful ESG policy that fits their DILIGENCE DAYS
our manager research process. We address Verus’ specific organization and is designed to help them cut
approach to ESG issues when advising clients and link through the clutter by providing a detailed, practical For the third consecutive year, Verus is inviting
that to what ESG due diligence looks like in researching “soup‐to‐nuts” methodology to determine the best qualified managers to participate in one‐on‐one
investment managers. Next, we consider the spectrum policy for their organization. meetings with its senior staff during its 3rd Emerging
of ESG integration as defined by the primary objective of and Diverse Manager Diligence Days.
the product. Finally, we address the challenges that ESG ― March 16‐18
considerations pose for hedge fund managers and ― March 22
― March 24
private equity general partners.
― March 26
Consulting | Outsourced CIO (OCIO) | Risk Advisory | Private Markets Investment Landscape 2
1st Quarter 2021
Table of contents
VERUSINVESTMENTS.COM
SEATTLE 206.622.3700
PITTSBURGH 412.784.6678
LOS ANGELES 310.297.1777
SAN FRANCISCO 415.362.3484
Economic environment 6
Fixed income rates & credit 21
Equity 26
Other assets 36
Appendix 38
34th quarter summary
THE ECONOMIC CLIMATE THE INVESTMENT CLIMATE
A more
— Real GDP grew at a ‐2.8% rate year‐over‐year in the third — Congress passed an omnibus spending bill, including $900
quarter (+33.4% quarterly annualized rate) as the U.S. neutral risk
billion earmarked for COVID‐19 relief. Key features of the
economy recovered much of the economic activity lost in package included a re‐up of the Paycheck Protection positioning
the second quarter. p. 11 Program, $600 stimulus checks for most individuals, and may be
— Joe Biden was elected President of the United States. The $300 per week in additional unemployment benefits over a warranted in
10‐week period. p. 11
market seemed to interpret a Biden win as a mild positive the current
for risk assets, on the expectation of larger economic — According to FactSet, S&P 500 Q4 earnings are expected to environment
stimulus. Democrats also took both seats in the Georgia be down ‐8.8%. This estimate improved from the ‐12.7%
run‐off election, completing the party’s “Blue Wave”. p. 7 drop expected on September 30th. For full year 2020, There seems
analysts are expecting a ‐13.3% earnings decline. p. 26
— Several new, more‐infectious strains of COVID‐19 emerged to be a high
and spread around the world, though experts remain
confident in the efficacy of the currently‐approved arsenal
ASSET ALLOCATION ISSUES degree of
of vaccines. p. 7 — U.S. equities delivered +12.1% during the quarter, ending uncertainty
the year at an all‐time‐high. The S&P 500 was one of the regarding the
PORTFOLIO IMPACTS strongest equity markets in 2020, up +18.4% despite an
earnings recession and considerable uncertainty. p. 28 future market
— Emerging market equities (+19.7%) outperformed U.S.
(+12.1%) and international developed equities (+16.0%)
path
— Weakness in the U.S. dollar remained a theme in Q4, and
once again in Q4. Latin American equities showed
the Bloomberg Dollar Spot Index fell to a two and a half
significant outperformance (+34.8%), after years of lagging
year low. Analysts attributed some of the weakness in the
behind other emerging markets. p. 32
US dollar to lower relative real yields in the U.S. p. 37
— The U.S. 10‐year TIPS breakeven inflation rate headed
notably higher over the quarter, from 1.6% in September to — Within the U.S. market, a sizable rotation occurred in Q4 as
2.0% in December. Although U.S. inflation is lower than certain sectors that had been beaten‐down during the
pre‐pandemic levels, market pricing for inflation is the pandemic performed strongly. Rising energy prices boosted
highest since 2018. p. 12 the Energy sector, while higher interest rates improved the
outlook for Financials. p. 28
Investment Landscape 4
1st Quarter 2021What drove the market in Q4?
“The Mass Distribution of Covid‐19 Vaccines Is Under Way. ‘Everything GLOBAL VACCINATION CAMPAIGN
Has to Come Together.’” 100.00
Israel
per 100 people (log‐
Doses administered
U.A.E.
COVID‐19 U.S. HOSPITALIZATION RATE 10.00 Bahrain
Iceland Denmark Italy U.K. U.S.
7/25 8/29 9/26 10/31 11/28 12/26
scale)
1.00 E.U. China
Russia*
7.6% 4.4% 4.1% 8.7% 16.6% 10.4% 0.10 Luxembourg
Mexico
Article Source: Wall Street Journal, December 13th, 2020 Kuwait Chile
0.01
1,000 10,000 100,000 1,000,000 10,000,000 100,000,000
Doses administered (log‐scale)
“Congress agrees to $900 billion Covid stimulus deal after months of
Source: Bloomberg, as of 1/13/21, or most recent release
failed negotiations”
U.S. TOTAL PUBLIC DEBT OUTSTANDING (TRILLIONS) MOST RECENT FISCAL STIMULUS PACKAGE ALLOCATIONS (BILLIONS)
Jul Aug Sep Oct Nov Dec
$26.5 $26.7 $26.9 $27.1 $27.4 $27.7
Article Source: CNBC, December 20th, 2020
“Powell says stock prices are not necessarily high considering the low
level of interest rates”
TEN‐YEAR U.S. REAL YIELD (NOMINAL YIELD MINUS BREAKEVEN INFLATION)
Jul Aug Sep Oct Nov Dec Source: U.S. House of Representatives, as of 12/21/20
‐1.03% ‐1.10% ‐0.95% ‐0.83% ‐0.95% ‐1.07%
S&P 500 INDEX
Article Source: CNBC, December 16th, 2020
3,900
3,600
“Dollar’s Slump Propels Global Peers Toward Multi‐Year Peaks” 3,300
3,000
BLOOMBERG DOLLAR SPOT INDEX 2,700
Jul Aug Sep Oct Nov Dec 2,400
1179 1161 1177 1172 1145 1120 2,100
Dec‐19 Jan‐20 Feb‐20 Mar‐20 Apr‐20 May‐20 Jun‐20 Jul‐20 Aug‐20 Sep‐20 Oct‐20 Nov‐20 Dec‐20
Article Source: Bloomberg, November 29th, 2020
Source: Standard & Poor’s, Bloomberg, as of 12/31/20
Investment Landscape 5
1st Quarter 2021Economic environment
Investment Landscape 6
1st Quarter 2021U.S. economics summary
— Real GDP grew at a ‐2.8% rate year‐ — After impressive employment gains Most Recent 12 Months Prior
over‐year in the third quarter in Q3, the recovery appeared to be
(+33.4% quarterly annualized rate) stalling in recent months. GDP (YoY) (2.8%) 2.1%
9/30/20 9/30/19
as the U.S. economy recovered Unemployment fell from 7.8% in
much of the economic activity lost September to 6.7% in December.
in the second quarter. Inflation 1.6% 2.3%
— Consumer sentiment remained (CPI YoY, Core) 12/31/20 12/31/19
— The Atlanta Fed’s forecast for stubbornly low, despite broad
fourth quarter growth was 7.4% recoveries in consumer spending,
Expected Inflation 2.0% 1.8%
quarter‐over‐quarter, as of January auto sales, and the housing
(5yr‐5yr forward) 12/31/20 12/31/19
15th, suggesting further economy market.
expansion.
— Home sales activity continued to Fed Funds Target 0% – 0.25% 1.50% – 1.75%
— Joe Biden was elected President of grow at an extremely fast pace in Range 12/31/20 12/31/19
the United States in November. Jon the fourth quarter, as record‐low
Ossoff and Raphael Warnock both interest rates and the work‐from‐
10‐Year Rate 0.9% 1.9%
won in the Georgia Senate runoff home environment fueled demand. 12/31/20 12/31/19
elections in January, which ensured Existing home sales were 25.8%
democratic control of both the higher than one‐year prior.
U‐3 Unemployment 6.7% 3.5%
White House and the Senate with 12/31/20 12/31/19
V.P.‐elect Kamala Harris as the — Several new, more‐infectious
swing vote. The wins completed strains of COVID‐19 emerged and
the democratic “Blue Wave” many spread around the world, though U‐6 Unemployment 11.7% 6.7%
12/31/20 12/31/19
have associated with extensive experts remain confident in the
fiscal support. Slim democratic efficacy of the currently‐approved
majorities in both chambers of arsenal of vaccines. The global
Congress, however, may constrain vaccination campaign began in
Biden’s policy scope. December, and 44 million doses
have been distributed so far.
Investment Landscape 7
1st Quarter 2021COVID-19 update
SEVEN‐DAY AVERAGE DAILY CASE GROWTH – EUROPE AND THE U.K. COVID‐19 INPATIENTS BY U.S. STATE (%)
250,000 U.K. Health Secretary reports a new 50%
strain of COVID‐19, “VUI‐202012/01” is Hospitals across the country are
45%
“out of control” growing strained due to the recent
200,000 40% influx of COVID‐19 afflicted inpatients
35%
U.K.
150,000 30%
25%
100,000 20%
15%
50,000 10%
5%
‐ 0%
8/31 9/12 9/24 10/6 10/18 10/30 11/11 11/23 12/5 12/17 12/29 1/10 Jan‐20 Feb‐20 Mar‐20 Apr‐20 May‐20 Jun‐20 Jul‐20 Aug‐20 Sep‐20 Oct‐20 Nov‐20 Dec‐20 Jan‐21
Source: Bloomberg, as of 1/14/21 Source: Bloomberg, as of 1/9/21
SEVEN‐DAY AVERAGE DAILY DEATHS PER 100,000 IN POPULATION VACCINE COVERAGE BY COUNTRY
Higher‐income countries have secured requisite doses to vaccinate their
1.2
After dipping briefly at the end of Q4, populations several times over. Lower‐income countries have not.
1.0 deaths in the United States and Europe 2000 500%
Possible population coverage
have returned to record levels 400%
Millions of doses
0.8 1500
300%
0.6 1000
200%
0.4 500
100%
0.2 0 0%
0.0 E.U. India U.S. U.K Japan
Jan‐20 Feb‐20 Mar‐20 Apr‐20 May‐20 Jun‐20 Jul‐20 Aug‐20 Sep‐20 Oct‐20 Nov‐20 Dec‐20 Astrazeneca/Oxford (AZD1222) Novavax (NVX‐CoV2373)
Pfizer/BioNTech (BNT162) Moderna (mRNA‐1273)
U.S. EU27 + U.K. Other Possible population coverage [R]
Source: Bloomberg, as of 1/14/21 Source: Duke Global Health Innovation Center, as of 1/8/21; possible population coverage
includes confirmed and potential doses committed to – it is possible not all vaccines will be approved.
Investment Landscape 8
1st Quarter 2021Global vaccination campaign
CUMULATIVE COVID‐19 VACCINE DOSES ADMINISTERED PER 100 PEOPLE
100
Israel has led
Cumulative COVID‐19 vaccination doses administered per 100
the way so far,
but it is a
10
country with a
size and
population
comparable to
1 New Jersey
people
0.1
0.01
12/15 12/17 12/19 12/21 12/23 12/25 12/27 12/29 12/31 1/2 1/4 1/6 1/8 1/10 1/12 1/14
United Kingdom Israel United States Russia
Bahrain Mexico Germany Italy
China France United Arab Emirates
Source: Our World in Data, as of 1/15/21
Investment Landscape 9
1st Quarter 2021Administration issues in the U.S.
THE GAP BETWEEN DISTRIBUTED AND ADMINISTERED VACCINE DOSES
4,000,000 100% As of January
90%
15th, roughly 13
3,500,000
million doses
Proportion of distributed doses administered
80% had been
3,000,000
70%
administered
nationwide,
2,500,000
60% accounting for
roughly 42% of
Doses
2,000,000 50%
all doses
1,500,000
40% distributed
30%
1,000,000
20%
President Biden
500,000
10% is aiming to
achieve 100
‐ 0%
million vaccine
Nebraska
New York
West Virginia
Nevada
Georgia
Louisiana
New Hampshire
New Jersey
Tennessee
Virginia
Hawaii
South Carolina
Maryland
Missouri
Texas
Mississippi
Ohio
Arkansas
Kansas
Utah
New Mexico
Michigan
Maine
Vermont
South Dakota
Colorado
Oregon
Montana
Wisconsin
Pennsylvania
Washington
Idaho
Wyoming
Arizona
Alabama
Connecticut
Indiana
Oklahoma
Rhode Island
Iowa
Illinois
Florida
North Dakota
District of Columbia
Massachusetts
Alaska
Kentucky
Minnesota
North Carolina
Delaware
California
dose
administrations
in his first 100
Distributed but not administered [L] Administered [L] Percentage of shots used [R] days in office
Source: Bloomberg, as of 1/15/21
Investment Landscape 10
1st Quarter 2021GDP growth
Real GDP grew at a ‐2.8% rate year‐over‐year in the third government. After the Federal Reserve took interest rates to
quarter (+33.4% quarterly annualized rate) as the U.S. zero and flooded the markets with liquidity, Congress passed
economy recovered much of the economic activity lost an omnibus spending bill, including $900 billion earmarked
during the depths of the pandemic. Personal consumption for COVID‐19 relief. Key features of the package included a
expenditures expanded at a quarterly annualized pace of re‐up of the Paycheck Protection Program, $600 stimulus
‐25.4%. Growth was broad‐based, and included strong checks for most individuals, and $300 per week in additional
private investment, exports, and inventory builds. unemployment benefits over a 10‐week period.
Not only was this bounce‐back a product of pent‐up demand The Atlanta Fed’s forecast for Q4 growth was 7.4% on a
released by the economic reopening, it was also the result of quarter‐over‐quarter annualized basis (‐1.7% year‐over‐year)
a coordinated and historic stimulus effort by the U.S. as of January 15th, suggesting further economic recovery.
U.S. REAL GDP GROWTH (YOY) U.S. GDP GROWTH ATTRIBUTION
10% 50
8% 40
U.S. Real GDP Growth (QoQ)
6% 30 33.4
4% 20
2% 10 2.1
1.3 2.9 1.5 2.4
0% 0 2.6
‐5.0
‐2% ‐10
‐4% ‐20
‐6% ‐30 ‐31.4
‐8% ‐40
‐10% ‐50
Mar‐55 Jul‐64 Nov‐73 Feb‐83 Jun‐92 Oct‐01 Jan‐11 May‐20 Q3 18 Q4 18 Q1 19 Q2 19 Q3 19 Q4 19 Q1 20 Q2 20 Q3 20
Consumption Investment Government Exports Imports Inventories
Real GDP % Change YoY
Source: Bloomberg, as of 9/30/20 Source: BEA, annualized quarterly rate, as of 9/30/20
Investment Landscape 11
1st Quarter 2021Inflation
Headline inflation stayed relatively stable during Q4, at 1.4% 2.0% in December. Although U.S. inflation is lower than pre‐
year‐over‐year in December. Energy prices have acted as a pandemic levels, market pricing for inflation is the highest
drag on inflation, with gasoline (‐15.2%) and fuel oil (‐20.0%) since 2018.
showing the largest moves. Food (+3.9%), as well as used
cars & trucks (+10.0%), had a lifting effect on inflation during
Consumer inflation expectations, as indicated by the
the year. Inflation excluding volatile food and energy prices
University of Michigan survey, proved volatile throughout the
increased 1.6%.
year. After starting 2020 at an expected 2.3% rate of
inflation, expectations fell to 2.1% in April before spiking to
The U.S. 10‐year TIPS breakeven inflation rate headed 3.2% in May. Expectations fell in the fourth quarter and
notably higher over the quarter, from 1.6% in September to settled at 2.5% in December.
U.S. CPI (YOY) CONSUMER INFLATION EXPECTATIONS BREAKEVEN INFLATION RATES
3% 4% 6% 2.4%
16%
2% 5% 2.0% 2.0%
2%
1.8%
12% 1%
1.8% 1.7%
4%
0% 0%
Dec‐19
Dec‐19
Jun‐20
Jun‐20
Dec‐20 3% 1.3%
8% 1.2%
2% 1.7% 1.2%
4%
1% 0.9%
0% 0.6%
0%
‐1%
‐4%
0.0%
Dec‐70 Sep‐84 May‐98 Jan‐12 ‐2%
Apr‐01 Apr‐04 Mar‐07 Mar‐10 Feb‐13 Jan‐16 Jan‐19 12 Months Prior 6 Months Prior Dec‐20
US CPI Ex Food & Energy US CPI 5‐Year Breakeven 10‐Year Breakeven
UMich Expected Change in Price
Source: Bloomberg, as of 12/31/20 Source: University of Michigan, as of 12/31/20 Source: Bloomberg, as of 12/31/20
Investment Landscape 12
1st Quarter 2021Labor market
After impressive employment gains in Q3, the recovery During an economic recession, it is important to understand The U.S.
appeared to be stalling in recent months. Unemployment fell the portion of newly unemployed workers who seek to
from 7.8% in September to 6.7% in December—a small quickly rejoin the workforce (cyclical unemployment),
employment
improvement compared to previous months. Additionally, relative to the portion of workers who lose their jobs and recovery appears
while the current unemployment rate does not seem end up more permanently out of work due to lack of to be stalling
exceptionally weak from a historical perspective, this metric opportunities or discouragement (structural unemployment).
masks the fact that the U.S. labor force participation rate also As shown in the chart below, a growing share of unemployed
fell during COVID‐19. In simpler terms, since the pandemic, workers have remained out of work since the onset of the
roughly 3% of workers are now unemployed and seeking economic recession.
work, and an additional 2% of workers are now unemployed
and not seeking work.
U.S. UNEMPLOYMENT LABOR PARTICIPATION RATE UNEMPLOYMENT DECOMPOSITION BY DURATION
28% 69 15%
24% 13%
67
11%
20%
65 9%
16%
7%
12% 63
5%
64
8% 3%
61
4% 62
1%
0% 59 60 ‐1%
Jun‐05 May‐08 Apr‐11 Mar‐14 Feb‐17 Jan‐20 Dec‐19 Jun‐20 Dec‐20 Dec‐19 Mar‐20 Jun‐20 Sep‐20 Dec‐20
57
U3 U6 Mar‐48 Nov‐61 Jul‐75 Apr‐89 Dec‐02 Aug‐16 Less than 5 weeks 5‐14 weeks 15‐26 weeks 27 weeks and over
Source: FRED, as of 12/31/20 Source: FRED, as of 12/31/20 Source: BLS, as of 12/31/20
Investment Landscape 13
1st Quarter 2021U-3 unemployment rates relative to peaks
0%
The Covid-19
recession
Unemployment rate less peak employment rate
‐2% features a
historically-
abrupt loss and
‐4% subsequent
rebound in
broad
‐6%
unemployment
‐8%
‐10%
‐12%
0 10 20 30 40 50 60 70 80 90 100 110
Months after peak employment
1948 1953 1957 1960 1969 1974 1980 1990 2001 2007 2020
Source: Bloomberg, BLS, as of 12/31/20
Investment Landscape 14
1st Quarter 2021Employment conditions
Q4 2020 NONFARM PAYROLLS CHANGES NONFARM PAYROLL GROWTH BY SECTOR
While
Professional and business services 494,000
10% Financial activities employment in
Transportation and warehousing 240,400 Utilities Construction
Transportation and many sectors
12‐month % change
Retail trade
Construction
199,600
152,000
0% Education and
health services
warehousing bounced back in
Manufacturing 116,000 Retail trade Q4, jobs in the
Education and health services 78,000 ‐10% Government Professional and leisure and
Financial activities 58,000 business services
Wholesale trade 45,600
Other services
Wholesale trade
hospitality
Other services 30,000 ‐20% Leisure and Information Mining and sector dipped as
Manufacturing
Mining and logging
Utilities (2,200)
9,000
hospitality logging the impact of
Information (15,000) ‐30% state lockdowns
Leisure and hospitality (158,000) ‐4% ‐2% 0% 2% 4% began to show
Government
up in the
(397,000)
3‐month % change
payrolls data
U‐3 UNEMPLOYMENT (12/31/2019) U‐3 UNEMPLOYMENT (12/31/2020)
Despite the
broad gains in
the 4th quarter,
nonfarm
payrolls shrunk
in every sector
over the full
calendar year
Source: BLS, as of 12/31/20 – or most recent release
Investment Landscape 15
1st Quarter 2021The consumer
U.S. retail sales have shown a surprising recovery after falling ‐20% According to anonymized cellular phone data collected by Google
year‐over‐year in April. Retail sales, after adjusting for inflation, for COVID‐19 public health research, Americans began returning to
increased 1.6% in December. Spending patterns have shown their daily routines through late spring and summer, as activity
resiliency despite the economic slowdown. Automobile and home began moving back to normalcy. However, these improvements
sale activity, for example, has recovered to previous levels. plateaued across certain types of activities such as workplace
travel, retail & recreation, and transit station usage, and this
However, recent spending patterns have been vastly affected by activity has slowed down once again. Continued weak activity, or
unprecedented government stimulus. Because this expansion was even a further slowdown due to renewed government restrictions,
far from a “natural” recovery, it will be worth watching how could cast doubt on the U.S. economic recovery.
consumption trends change as the various economic stimulus
programs end. This effect may already be apparent as retail sales
growth slowed from 4.6% in September to 1.6% in December.
REAL RETAIL SALES GROWTH (YOY) AUTO SALES GOOGLE U.S. ACTIVITY TRACKER
10 100
22
80
5
Real Retail Sales (%YoY)
60
18
0 40
Millions (annual)
20
‐5 14 0
‐10 ‐20
10 ‐40 14%
‐15 ‐60
‐20 ‐80
6
Feb‐20 May‐20 Aug‐20 Nov‐20
Feb‐82 Oct‐95 Jul‐09
‐25 Retail & Recreation Grocery & Pharmacy
Jan‐99 Jan‐04 Jan‐09 Jan‐14 Jan‐19 US Light Truck & Car Sales Parks Transit Stations
Workplace Residential
Source: FRED, as of 12/31/20 Source: Federal Reserve, as of 11/30/20 Source: Google anonymized U.S. citizen mobility, as of 12/31/20
Investment Landscape 16
1st Quarter 2021Sentiment
Consumer sentiment remained stubbornly low during the cycle high of 101.0 in February.
fourth quarter, despite broad recoveries in consumer
spending, auto sales, and the housing market. The NFIB Small Business Optimism Index exhibited a sharp
decline to 95.9 in Q4, bringing the index back towards
The Bloomberg Consumer Comfort Index attempts to gauge pandemic lows. The survey suggested that most business
Americans’ views on the economy, their personal financial owners expect deteriorating conditions over the next six
situation, and buying conditions. The index fell from 49.3 to months. The survey also showed that concerns exist
44.6 during the quarter. The University of Michigan regarding government‐mandated business closures due to
Consumer Sentiment Survey attempts to gauge attitudes COVID‐19, and that the new U.S. administration may be less
about the business climate, personal finances, and spending friendly toward the business community.
conditions. The index was flat at 80.7 in Q4—down from a
CONSUMER COMFORT CONSUMER SENTIMENT SMALL BUSINESS OPTIMISM
70 120 110
60 105
100
100
50
44.6 80 80.7 95
40
90
30 60
85
20
40
Dec‐90 Dec‐95 Dec‐00 Dec‐05 Dec‐10 Dec‐15 Dec‐20 80
Jun‐85 Jun‐90 Jun‐95 Jun‐00 Jun‐05 Jun‐10 Jun‐15 Jun‐20
Jun‐00 Jun‐04 Jun‐08 Jun‐12 Jun‐16 Jun‐20
Bloomberg US Weekly Consumer Comfort Index U of Michigan Consumer Sentiment Survey
Source: Bloomberg, as of 12/31/20 Source: University of Michigan, as of 12/31/20 Source: NFIB, as of 12/31/20
Investment Landscape 17
1st Quarter 2021Housing
Home sales activity continued to grow at an extremely fast the 30‐year U.S. Fixed Mortgage Rate has continued to move
pace in the fourth quarter, as record‐low interest rates and the lower. The direction of mortgage rates from here will likely
work‐from‐home environment fueled demand. It remains to be have a material impact on home prices.
seen the degree to which business work‐from‐home policies
become permanent, post‐pandemic. The direction of these It is important to note that the overall cost of owning a home is
trends may have a far‐reaching impact on home sales as a combination of home prices and borrowing rates (among
workers seek more space for home offices, and perhaps also many other variables, of course). While the price of a new
feel greater freedom to move outside of major urban areas. home in the U.S. is, on average, higher than ever before,
Existing home sales were 25.8% higher than one‐year prior, an record‐low interest rates have compensated for higher prices.
overall rate of growth not experienced in over a decade. As suggested by the Housing Affordability Index, the overall
cost of owning a home today is below‐average, historically
Despite a gradual bounce‐back of U.S. Treasury interest rates, speaking.
U.S. HOME SALES (YOY) 30‐YEAR FIXED MORTGAGE RATE (AVERAGE) HOUSING AFFORDABILITY INDEX
50 4 230
20 More affordable
40 210 4.0
3
30
30yr Fixed Mortgage Rate
20 15 190
2
Growth (%)
May‐19 May‐20
10 170 3.0
Jul‐19 Dec‐19 May‐20
‐ 150
(10) 10
(20) 130
(30) 110
5
(40) 90
2.67% Less affordable
(50)
1999 2004 2009 2014 2019 70
0 Sep‐90 Sep‐95 Sep‐00 Sep‐05 Sep‐10 Oct‐15 Sep‐20
US New One Family Houses Sold 1980 1990 2000 2010 2020
US Existing Homes Sales YoY SA Housing Affordability Composite Index
Source: FRED, as of 11/30/20 Source: FRED, as of 12/31/20 Source: National Association of Realtors, as of 9/30/20
Investment Landscape 18
1st Quarter 2021International economics summary
— Economic growth in Q3, although agreement marked the beginning GDP Inflation
negative on a year‐over‐year basis, of a new chapter in the history of Area (Real, YoY) (CPI, YoY) Unemployment
painted an optimistic picture of the British relations with Europe.
recovery. Consumers and United States (2.8%) 1.4% 6.7%
businesses around the world have — Governments have taken different 9/30/20 12/31/20 12/31/20
attempted to continue on, despite approaches to supporting workers,
recent lockdowns, restrictions, and and while many approaches have Eurozone (4.3%) (0.3%) 8.3%
safety concerns. GDP growth had similar economic effects, they 9/30/20 12/31/20 11/30/20
figures have improved markedly have often had drastically different
from the depths of Q2. Most impacts on official unemployment Japan (5.7%) (1.3%) 2.8%
9/30/20 12/31/20 11/30/20
economies have recovered more figures. We believe official
than half of lost activity unemployment figures are of BRICS 1.9% 1.5% 5.1%
experienced during the prior limited value in this environment— Nations 9/30/20 12/31/20 12/31/20
quarter. more in‐depth analysis is likely
required. Brazil (3.9%) 4.5% 14.3%
— European Union leaders agreed on 9/30/20 12/31/20 10/31/20
a historic €1.8 trillion budget‐and‐ — The pandemic placed downward
pressure on inflation. Since then, Russia (3.4%) 4.9% 6.1%
recovery plan for 2021‐2027, 9/30/20 12/31/20 11/30/20
paving the way for a €750‐billion inflation levels have generally
pandemic relief package which will remained muted in developed (7.5%) 4.6% 9.1%
markets while recovering India
be financed by joint debt issuance. 9/30/20 12/31/20 12/31/20
moderately in emerging
— U.K. and E.U. officials reached an economies. China appears to be an China 2.3% 0.2% 4.2%
12/31/20 12/31/20 12/31/20
official trade deal at the 11th hour outlier, as inflation has recently
before the December 31st, 2020 dipped below zero. This move was
conclusion of the transition period fueled by falling pork prices, which
following Britain’s official cutting of had been moving higher in recent
ties with the E.U. last January. The years and pushing up inflation. NOTE: India lacks reliable government unemployment data. Unemployment rate shown
above is estimated from the Centre for Monitoring Indian Economy
Investment Landscape 19
1st Quarter 2021International economics
Economic growth in Q3, although negative on a year‐over‐ from a high of 8.7% in July. Governments around the world
year basis, painted an optimistic picture of the recovery. have taken different approaches to supporting workers. One
Consumers and businesses around the world have attempted approach, as taken by the U.S., was to provide greater
to continue on, despite recent lockdowns, restrictions, and financial support to workers who had lost their jobs. Another
safety concerns. GDP growth figures have improved markedly approach, such as that taken by the UK, was for government
from the depths of Q2. Most economies have recovered to effectively pay workers’ wages to keep them on payroll.
more than half of lost activity seen during the prior quarter. These approaches, which may be very similar in overall
The direction of recovery was similar across the emerging economic effect, can appear drastically different in the
markets, and these economies have maintained their growth official rate of unemployment statistics (shown below). In
“premium” over developed markets throughout the crisis. short, official unemployment figures may be of limited value
in this environment—more in‐depth analysis is required.
Unemployment in the Eurozone has fallen slightly to 8.3%
REAL GDP GROWTH (YOY) INFLATION (CPI YOY) UNEMPLOYMENT
12% 9% 14%
6%
9% 3%
12%
0%
6%
6% ‐3%
3% Nov‐19 May‐20 Nov‐20
10%
0% 8%
‐3% 3%
‐6% 6%
‐9% 4%
0%
‐12%
2%
‐15%
‐18% ‐3% 0%
Sep‐03 Sep‐06 Sep‐09 Sep‐12 Sep‐15 Sep‐18 Nov‐05 Nov‐08 Nov‐11 Nov‐14 Nov‐17 Nov‐20 Dec‐03 Jan‐06 Feb‐08 Feb‐10Mar‐12Apr‐14 Apr‐16May‐18Jun‐20
U.S. Japan China U.S. Eurozone Japan BRICS
U.S. Japan Eurozone BRICS U.K. Eurozone
Source: Bloomberg, as of 9/30/20 Source: Bloomberg, as of 12/31/20 – or most recent release Source: Bloomberg, as of 12/31/20 – or most recent release
Investment Landscape 20
1st Quarter 2021Fixed income
rates & credit
Investment Landscape 21
1st Quarter 2021Interest rate environment
— Longer‐dated U.S. Treasury yields inflation objectives. Fed Chair Area Short Term (3M) 10‐Year
moved upward in the fourth quarter, Powell left the door open to
with the U.S. 10‐year rising above adjusting the pace of those United States 0.06% 0.91%
1.0% to begin 2021. Higher interest purchases as necessary, and stated
rates may place pressure on equity that the Fed would “let the world Germany (0.83%) (0.57%)
valuations if this trend continues. know…well in advance of active
The yield of shorter‐dated bonds consideration of beginning a gradual France (0.77%) (0.34%)
and cash has not moved and is taper of asset purchases.”
expected to stay near zero. Spain (0.83%) 0.04%
— The European Central Bank
— Ten‐year breakeven inflation rates expanded the size of its Pandemic Italy (0.65%) 0.54%
rallied from 1.6% to 2.0% in Q4, Emergency Purchase Program
likely propelled higher by (PEPP) by €500 billion, bringing the Greece (0.38%) 0.62%
expectations that Biden’s fiscal new total to €1.85 trillion. The ECB
approach paired with vaccine also extended the horizon for U.K. (0.06%) 0.20%
rollouts will result in higher longer‐ purchases under PEPP to March
term growth and inflation. The rise 2022, and the timeline for Japan (0.12%) 0.02%
in priced inflation outpaced the rise reinvestment of maturing PEPP
in nominal Treasury yields, leading assets to the end of 2023. Australia 0.02% 0.97%
the 10‐year U.S. real yield to decline
from ‐0.95% to ‐1.07%, near record — Joe Biden nominated Janet Yellen, China 2.28% 3.14%
lows. Jerome Powell’s predecessor, as U.S.
Treasury Secretary. Throughout the Brazil 2.00% 6.91%
— Officials at the Federal Reserve pandemic, central bankers have
remained committed to a $120 been calling for further coordination Russia 3.54% 6.01%
billion monthly pace of bond of fiscal and monetary action, and
purchases until there is “substantial Yellen’s nomination could represent
progress” toward employment and the next step down that path.
Source: Bloomberg, as of 12/31/20
Investment Landscape 22
1st Quarter 2021Yield environment
U.S. YIELD CURVE GLOBAL GOVERNMENT YIELD CURVES
5% 2%
4%
1%
3%
2%
0%
1%
0%
‐1%
1M3M6M 1Y 2Y 3Y 4Y 5Y 7Y 9Y 10Y 12Y 15Y 20Y 30Y
‐1%
United States Curve 12/31/2020 Japan Curve 12/31/2020
1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20y 30Y Canada Curve 12/31/2020 Germany Curve 12/31/2020
US Treasury Curve 12/31/20 US Treasury Curve 12/31/19 US Treasury Curve 12/31/18 UK Curve 12/31/2020 France Curve 12/31/2020
US Treasury Curve 12/31/17 US Treasury Curve 12/31/10 Italy Curve 12/31/2020 Australia Curve 12/31/2020
YIELD CURVE CHANGES OVER LAST FIVE YEARS IMPLIED CHANGES OVER NEXT YEAR
1% 0.4%
0.3%
0%
0.2%
Yield Change
‐1% 0.1%
0.0%
‐2%
‐0.1%
‐3% ‐0.2%
1M3M6M 1Y 2Y 3Y 4Y 5Y 7Y 9Y 10Y 12Y 15Y 20Y 30Y 1M 3M 6M 1Y 2Y 3Y 4Y 5Y 7Y 9Y 10Y 12Y 15Y 20Y 30Y
US Treasury Japan Treasury Canada Treasury US Treasury UK Treasury Japan Treasury
Germany Treasury UK Treasury France Treasury Germany Treasury Canada Treasury France Treasury
Italy Treasury Australia Treasury Italy Treasury Australia Treasury
Source: Bloomberg, as of 12/31/20
Investment Landscape 23
1st Quarter 2021Credit environment
After four quarters of exceptional volatility, credit market In the fourth quarter, high yield bonds returned 6.5%,
spreads ended 2020 roughly in line with where they started. outperforming bank loans (+3.6%) and investment grade
Both investment grade and below investment grade assets credit (+2.8%). Positive vaccine news and conclusion of the
experienced positive performance, driven in part by presidential election led to strong risk‐on sentiment during
increased investor demand for yield but mainly by the the quarter, driving longer duration and lower quality bonds
unprecedented Fed action in March which led rates to all‐ to outperform within U.S. credit. In addition, credit spreads
time lows. For the calendar year, investment grade credit continued to tighten, with high yield spreads tightening 157
returned 9.4%, outperforming high yield (+7.1%), and banks bps to 360 bps and investment grade spreads falling 40 bps
loans (+2.8%). The effects of COVID market disruptions to finish the year at 92 bps.
created wide dispersion among sectors as metals/mining,
freight, and food/drug retail outperformed while energy and
domestic telecom underperformed.
SPREADS HIGH YIELD SECTOR SPREADS (BPS)
25% 2300
Credit Spread (OAS)
2000
20%
1700
Market 12/31/20 12/31/19
1400
15%
1100 Long U.S. Corp 1.4% 1.4%
U.S. HY
10% Energy 5.6% 800
500
U.S. Inv Grade
5%
U.S. HY 1.0% 0.9%
3.6% Corp
200
U.S. Agg Dec‐14 May‐16 Sep‐17 Feb‐19 Jun‐20
0% 1.3%
U.S. High Yield 3.6% 3.7%
Dec‐01 Dec‐05 Dec‐09 Dec‐13 Dec‐17 Bloomberg US HY Energy USD HY ConsDisc. OAS
USD HY Financials Snr OAS USD HY Comm. OAS
Barclays Long US Corp. Barclays US Agg. USD HY Comm. OAS USD HY Materials OAS
Barclays US HY Bloomberg US HY Energy USD HY Technology OAS USD HY Industrial OAS U.S. Bank Loans* 4.6% 4.4%
IG Energy USD HY HealthCare OAS USD HY ConsStaple OAS
Source: Barclays, Bloomberg, as of 12/31/20 Source: Bloomberg, as of 12/31/20 Source: Barclays, Credit Suisse, Bloomberg, as of 12/31/20
*Discount margin (4‐year life)
Investment Landscape 24
1st Quarter 2021Default & issuance
A total of 88 companies defaulted in 2020, representing $130 High yield bond issuance fell from the record levels posted in
billion. This activity was led by the energy, telecom, and retail Q2 and Q3 but remained elevated in Q4. Total issuance for
sectors. The $130 billion in defaults in 2020 ranked second 2020 was the highest on record at $511 billion, outpacing
only to the $185 billion experienced in 2009. 2013’s historical peak of $378 billion.
The par weighted U.S. high yield default rate increased 0.4% Investment grade issuance for 2020 totaled $1.8 trillion,
during the quarter to 6.2%—well above the long‐term which was 40% higher than the prior record achieved in
average of 3.0‐3.5%. If the energy sector is excluded (which 2017. The fourth quarter was the slowest of the year with
showed an annual default rate of 20.5%), the high yield $215 billion in new issues—a level that was in line with the
default rate came in at a more modest 4.5%. During the four‐year average
fourth quarter, the leveraged loan default rate came in at
4.0%—moderately above the long‐term average of 3.0%.
HY DEFAULT RATE (ROLLING 1‐YEAR) U.S. HY SECTOR DEFAULTS (LAST 12 MONTHS) U.S. ISSUANCE ($ BILLIONS)
25% 600
Energy
Telecoms
Retail 500
20% Autos
Transportation
Metals 400
Default (%)
Travel
15%
$ Billion
Media
Healthcare 300
Real Estate
10% Financials
Capital Goods 200
Food Producers
5% Technology
100
Chemicals
Services
Utilities 0
0% Packaging/Paper
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Jan‐06 Jan‐09 Jan‐12 Jan‐15 Jan‐18 Gaming
Cable
U.S. High Yield U.S. High Yield ex‐Energy U.S. Bank Loan Issuance U.S. HY Issuance
0% 5% 10% 15% 20% 25%
Source: BofA Merrill Lynch, as of 12/31/20 Source: BofA Merrill Lynch, as of 12/31/20 – par weighted Source: BofA Merrill Lynch, as of 12/31/20
Investment Landscape 25
1st Quarter 2021Equity
Investment Landscape 26
1st Quarter 2021Equity environment
— U.S. equities delivered +12.1% — The Cboe VIX Index remained
QTD TOTAL RETURN 1 YEAR TOTAL RETURN
during the quarter, ending the year rangebound in the fourth quarter,
(unhedged) (hedged) (unhedged) (hedged)
at an all‐time‐high. The S&P 500 ending the year at 22.8. Priced
was one of the strongest equity volatility is moderately elevated US Large Cap
markets in 2020, up +18.4% relative to the longer‐term average 12.1% 18.4%
(S&P 500)
despite an earnings recession and of 19.
considerable economic US Small Cap
31.4% 20.0%
— Weakness in the U.S. dollar relative (Russell 2000)
uncertainty.
to both emerging market and US Large Value
— Emerging market equities (MSCI developed market currencies 16.3% 2.8%
(Russell 1000 Value)
EM +19.7%) once again remained a theme during the
outperformed U.S. (S&P 500 fourth quarter, as the Bloomberg US Large Growth
11.4% 38.5%
+12.1%) and international Dollar Spot Index fell to a two and (Russell 1000 Growth)
developed equities (MSCI EAFE a half year low. Analysts attributed
+16.0%) in Q4. Latin American some of the weakness in the International Large
16.0% 11.9% 7.8% 2.5%
(MSCI EAFE)
equities showed significant greenback to lower relative real
outperformance during the quarter yields in the United States, as Eurozone
16.2% 12.2% 5.5% (1.2%)
(MSCI Latin America +34.8%), after nominal Treasury yields picked up. (Euro Stoxx 50)
years of lagging behind other U.K.
emerging markets. — Within the index, a sizable rotation (FTSE 100)
17.2% 11.4% (8.9%) (10.2%)
occurred in Q4 as certain sectors
— According to FactSet, S&P 500 Q4 that had been beaten‐down during Japan
21.1% 18.8% 24.2% 19.4%
(NIKKEI 225)
earnings are expected to be down the pandemic performed strongly.
‐8.8%. This estimate improved Rising energy prices boosted the
Emerging Markets
materially from the ‐12.7% drop Energy sector, while higher interest (MSCI Emerging Markets)
19.7% 16.0% 18.3% 19.6%
expected on September 30th. rates on the longer end of the yield
Analysts are expecting a ‐13.3% curve improved the outlook for
earnings decline for full‐year 2020. Financials.
Source: Russell Investments, MSCI, STOXX, FTSE, Nikkei, as of 12/31/20
Investment Landscape 27
1st Quarter 2021Domestic equity
U.S. equities delivered +12.1% during the quarter, ending the instead, these new habits become more permanent in nature.
year at an all‐time‐high. The S&P 500 was one of the strongest The answer to this question has important implications for
equity markets in 2020, up +18.4% despite an earnings future intra‐sector performance.
recession and considerable economic uncertainty.
As equities move higher, it is difficult not to notice a disconnect
Within the index, a sizable rotation occurred in Q4 as certain between the US. market and the economy. We believe this rally
sectors that had been beaten‐down during the pandemic is the result of a confluence of forces. Ultra‐low interest rates,
performed strongly. Rising energy prices boosted the Energy extremely accommodative monetary and fiscal policy, plus the
sector, while higher interest rates improved the outlook for implicit guarantee that further economic weakness will be met
Financials. It remains to be seen whether certain consumer with more support and stimulus, seems to be creating a new
habits displayed during the pandemic (online shopping and type of “Goldilocks market” that harkens back to the post‐
heightened social media usage, for example) begin reverting to Global Financial Crisis market expansion.
previous levels as the world moves back to normalcy or if
S&P 500 INDEX DIVIDEND YIELD VS BOND YIELD Q4 SECTOR PERFORMANCE
3,800 18 27.8% Energy
4
16 23.2% Financials
2
3,600
14 15.7% Industrials
0
3,400 14.5% Materials
12 2017 2018 2019
13.8% Telecom
3,200 10
12.1% S&P 500
3,000 8
11.8% Information Technology
6
2,800 8.0% Consumer Discretionary
4
8.0% Health Care
2,600 2 6.5% Utilities
2,400 0 6.4% Consumer Staples
1984 1989 1994 1999 2004 2009 2014 2019
2,200 4.9% Real Estate
Dec‐17 Dec‐18 Dec‐19 Dec‐20 US 10 Yr Yield S&P 500 Dividend Yield 0% 5% 10% 15% 20% 25% 30% 35%
Source: Standard & Poor’s, as of 12/31/20 Source: Standard & Poor’s, as of 12/31/20 Source: Standard & Poor’s, as of 12/31/20
Investment Landscape 28
1st Quarter 2021Domestic equity size & style
U.S. value stocks beat growth stocks during the fourth quarter these businesses play, along with their growth rather than Sector
(Russell 1000 Value +16.3%, Russell 1000 Growth +11.4%), value characteristics, this regulatory risk could have
reversing an extended run of value underperformance. The implications for 2021. First, it is easy to argue that firms such as performance has
moderate bounce in value stock performance appeared to be Google, Amazon, and Facebook have exercised some degree of fueled dramatic
partly driven by sector movements. Energy, Financials, and monopoly power (the FTC recently sued Facebook for alleged negative
Materials sectors tend to contain an outsized number of value illegal monopolistic conduct, and numerous other
stocks. These sectors were among the top performers in Q4. investigations abound). Further anti‐trust actions are likely to
performance of
Small cap stocks delivered sizable outperformance over large come. Second, in recent years there has been a degree of the value
cap stocks (Russell 2000 +31.4%, Russell 1000 +13.7%). bipartisan consensus that social media companies are doing a premium
poor job of moderating content (though each political party has
A variety of risks seem to be boiling up around large U.S. very different ideas as to the appropriate solution). These risks,
technology companies. Given the significant market role that which rest perhaps solely on the shoulders of “growth stocks”,
will be worth watching in 2021.
SMALL CAP VS LARGE CAP (YOY) VALUE VS GROWTH (YOY) Q4 SECTOR PERFORMANCE
20% 20 27.8% Energy
45%20
15 23.2% Financials
15% 35%15
15.7% Industrials
Return Difference (%)
10% 25%10
10 14.5% Materials
5% 15% 5
13.8% Telecom
0% 5% 5
0 12.1% S&P 500
‐5% ‐5% 0
‐5 11.8% Information Technology
‐10% ‐15%‐5 Consumer Discretionary
8.0%
‐15% ‐25%‐10 8.0% Health Care
‐10
‐20% ‐35%‐15 6.5% Utilities
‐25% ‐15
‐45%‐20 6.4% Consumer Staples
Dec‐10 Dec‐12 Dec‐14 Dec‐16 Dec‐18 Dec‐20 Dec‐01 Dec‐04Jan‐12
Dec‐07 Dec‐10
Jan‐14 Dec‐13 Dec‐16 Jan‐18
Dec‐19
‐20Jan‐10 Jan‐16 4.9% Real Estate
Russell 2000 minus Russell 1000 Jan‐01 Jan‐04 Jan‐07
R3000
R1000 Value Jan‐10
Value minus
minus Jan‐13
R3000
R1000 Growth Jan‐16
Growth 0% 5% 10% 15% 20% 25% 30% 35%
Source: FTSE, as of 12/31/20 Source: FTSE, as of 12/31/20 Source: Standard & Poor’s, as of 12/31/20
Investment Landscape 29
1st Quarter 2021Factor portfolios in 2020
After a quiet October, factor results significantly diverged in Equity factors had a very difficult year in 2020 and
November as investors strongly reacted to positive COVID‐19 subsequently trailed the equity market by a very wide
vaccine news. Anticipating a path toward post‐pandemic margin. Quality factors provided some protection during the
normalcy, investors rotated into stocks with higher betas and periods of market turmoil. However other market neutral
higher volatility (long/short, sector‐neutral, S&P 500 Index risk premia strategies did not enjoy consistent recoveries,
quintiles). Small‐cap stocks also performed well while the particularly as market preferences quickly reversed back and
value factor modestly gained ground, mostly due to strong forth during the pandemic.
results from stocks with attractive price‐to‐book ratios.
Investors funded this rotation by selling large‐cap and high‐
quality positions. Poor price momentum results were further
evidence of the strength of the move.
Q4 2020 PERFORMANCE CUMULATIVE RETURN (INDEXED 12/31/19=100%)
130 120%
120 110%
110 100%
100 90%
90 80%
80 70%
70 60%
Sep‐20 Oct‐20 Nov‐20 Dec‐20 Dec‐19 Jan‐20 Feb‐20 Mar‐20 Apr‐20 May‐20 Jun‐20 Jul‐20 Aug‐20 Sep‐20 Oct‐20 Nov‐20 Dec‐20
Beta Market Cap
Value Growth Equity Factor Composite S&P 500
Quality Price Momentum
Source: J.P. Morgan, as of 12/31/20; Equity Factor Composite represents the performance of a 10‐factor model designed as a simple proxy
Source: J.P. Morgan, as of 12/31/20 for quant performance. The factors are combined so that the long and short portfolios contain the most‐ and least‐attractive quant stocks.
Investment Landscape 30
1st Quarter 2021International developed equity
International equities delivered exceptional performance in to 11.9% if currency had been hedged. The three largest
the fourth quarter, as most global markets have now fully currency exposures embedded in the MSCI EAFE Index—the
recovered from the March drawdown. The MSCI EAFE Index euro (32%), the yen (26%), and the pound sterling (13%)—
(+16.0%) outperformed the S&P 500 Index (+12.1%) while appreciated +4.3%, +2.2%, and +5.7% relative to the U.S.
lagging the MSCI Emerging Markets Index (+19.7). Continuing dollar during the quarter, respectively.
U.S. dollar weakness was a notable theme, boosting
international equity performance by 5% over the past year. European equities (+17.2%) outperformed Hong Kong
(+15.5%) and Japanese (+15.3%) equities in Q4, supported by
The recent depreciation of the U.S. dollar has acted as a strong performance in Austria (+47.3%) and Spain (+27.7%).
tailwind to many unhedged international investments. The In Oceania, Australia posted solid returns (+22.9%), which
MSCI EAFE Index unhedged returned 16.0% in Q4, compared were bolstered by a firmer Australian dollar.
INTERNATIONAL DEVELOPED EQUITIES EFFECT OF CURRENCY (1‐YEAR ROLLING) Q4 2020 PERFORMANCE (ALL IN USD)
2500 30% 50% Dollar funding
pressures
25%
easing
20% 40%
15%
30%
Log Scale
10%
1250 5% 20%
0% Tighter U.S.
dollar
‐5% 10%
liquidity
‐10%
0%
‐15%
U.K.
U.S.
Switzerland
Spain
New Zealand
Austria
Australia
France
Hong Kong
Sweden
Denmark
Finland
Italy
Norway
Germany
Portugal
Israel
Singapore
Netherlands
Canada
Belgium
Japan
Ireland
625 ‐20%
Apr‐93 Apr‐00 Apr‐07 Apr‐14 Jun‐09 Jun‐11 Jun‐13 May‐15 May‐17 May‐19
MSCI EAFE MSCI EAFE MSCI ACWI ex USA MSCI EM
Source: MSCI, as of 12/31/20 Source: MSCI, as of 12/31/20 Source: MSCI, Bloomberg, as of 12/31/20
Investment Landscape 31
1st Quarter 2021Emerging market equity
Emerging market equities (MSCI EM +19.7%) outperformed in recent years and causing above‐average levels of inflation.
U.S. (S&P 500 +12.1%) and international developed equities
(MSCI EAFE +16.0%) once again in Q4. Latin American Emerging market currencies sold off significantly during the
equities showed significant outperformance during the beginning of the year as investors bid up safe‐haven
quarter (MSCI Latin America +34.8%), after years of lagging currencies, including the U.S. dollar, amid unprecedented
behind other emerging markets. economic and market uncertainty. Since March, however, the
embedded currency portfolio of the MSCI Emerging Markets
The pandemic placed downward pressure on inflation earlier Index began to recover significantly and ended the year
in 2020. Since then, the rate of price movement has nearly on par with where it had started. Continued
recovered in many markets. China appears to be an outlier, appreciation of emerging market currencies could provide
as inflation recently dipped below zero. This move was tailwinds for unhedged U.S. investors in the asset class.
fueled by falling pork prices, which had been moving higher
EMERGING MARKET EQUITY INFLATION (YOY) MSCI EM INDEX EMBEDDED CURRENCY
1600 101 Indexed 3/31/20 = 100 10%
18
EM expected to accelerate
‐10%
while DM expected to slow 100
14 ‐30%
99 Sep‐18 Sep‐19
800
Inflation (%)
98
Log Scale
10
97
6 96
400
95
2
94
200 ‐2 93
Dec‐95 Dec‐00 Dec‐05 Dec‐10 Dec‐15 Dec‐20 2009 2010 2012 2013 2014 2016 2017 2019 2020
92
IMF Forecasts
MSCI Emerging Markets Brazil CPI YoY China CPI Russia CPI YoY Dec‐19 Feb‐20 Apr‐20 Jun‐20 Aug‐20 Oct‐20 Dec‐20
Source: MSCI, as of 12/31/20 Source: Bloomberg, as of 12/31/20 or most recent data Source: Bloomberg, as of 12/31/20
Investment Landscape 32
1st Quarter 2021Equity valuations
Particularly during the last two months of the year, valuations they are expected (+8.2%/+22.6%), there could be room for a
shot higher alongside equity prices as markets digested news correction.
that several COVID‐19 vaccine candidates proved more
effective than anticipated. Today, price‐to‐earnings multiples On a trailing‐earnings basis, international developed equities
appear stretched relative to long‐term averages. appear most expensive as the second series of lockdowns
which swept over the continent toward the end of the year
Markets have shown a remarkable ability to look past the have severely impacted earnings. The question in Europe,
pandemic‐related disruptions and focus on the light at the end however, is largely the same one we are grappling with in the
of the tunnel. Some in the industry have viewed the U.S.: are earnings temporarily depressed and ripe for a quick
exceptional performance of U.S. equities in 2020 as the rebound next year, or are the earnings streams impaired and
“check” that fundamentals will need to “cash” next year, and equity prices less justified?
that if sales and earnings do not recover at the strong pace
FORWARD P/E RATIOS BLENDED 12‐MONTH EARNINGS EXPECTATIONS VALUATION METRICS (3‐MONTH AVERAGE)
25 $180 45 41.1
$170 40
20 $160 35
28.6
$150 30
$140 25 22.8 24.1
21.8
15 $130 20
*projected
$120 15 9.8
10 $110 10
4.0 3.5 2.4 4.4
$100 5 1.7 1.9 1.6 2.5 2.1
$90 0
5
Dec‐10 Dec‐12 Dec‐14 Dec‐16 Dec‐18 Dec‐20 P/B P/E P/FCF Dividend Earnings
Dec‐05 Dec‐10 Dec‐15 Dec‐20
Yield (%) Yield (%)
U.S. EAFE EM S&P 500 Index United States EAFE Emerging Markets
Source: MSCI, 12m forward P/E, as of 12/31/20 Source: Bloomberg, as of 12/31/20 Source: Bloomberg, MSCI as of 12/31/20 ‐ trailing P/E
Investment Landscape 33
1st Quarter 2021Equity volatility
The Cboe VIX Index remained rangebound in the fourth Since implied and realized volatility spiked in the first quarter,
quarter, ending the year at 22.8. Priced volatility is options‐implied volatility has receded significantly, back
moderately elevated relative to the longer‐term average of toward more normal levels. As equity markets climbed to
19. new highs in the final few months of the year, the U.S.
implied volatility curve began to steepen. During the fourth
The U.S. equity market exhibited surprisingly high volatility in quarter, the implied volatility of deeply out‐of‐the‐money
2020 relative to other global markets. The domestic market puts was little changed, while the implied volatility of deeply
has typically been a lowest risk market. In recent years, this out‐of‐the‐money call options declined to more‐average
relationship has flipped, with U.S. stocks showing higher levels. The steepening of the implied volatility curve likely
volatility than developed market stocks, and nearly on par demonstrates the market’s marginal preference for downside
with emerging market equities. protection over upside participation at current price levels.
U.S. IMPLIED VOLATILITY (VIX) REALIZED VOLATILITY 1‐MONTH U.S. IMPLIED VOLATILITY CURVE
90 90 40 60 80%
30
80 20 70%
40 50
10 60%
Volatility (1yr Rolling)
70
Implied volatility
‐10 Sep‐18 Dec‐18
60 40 50%
Dec‐19 Jun‐20 Dec‐20
40%
50 30
30%
40
20 20%
30
10%
20 10
0%
10 80% 90% 100% 110% 120%
0
0 Dec‐02 Dec‐05 Dec‐08 Dec‐11 Dec‐14 Dec‐17 Dec‐20 Option moneyness
Jun‐90 Jun‐94 Jun‐98 May‐02 May‐06 May‐10 Apr‐14 Apr‐18 12/31/2020 9/30/2020 6/30/2020
VIX S&P 500 MSCI EAFE MSCI EM
3/31/2020 12/31/2019
Source: Cboe, as of 12/31/20 Source: Standard & Poor’s, MSCI, as of 12/31/20 Source: Bloomberg, as of 12/31/20
Investment Landscape 34
1st Quarter 2021Long-term equity performance
4000
3500
3000
Growth of $1,000
2500
2000
1500
1000
500
Dec‐10 Dec‐12 Dec‐14 Dec‐16 Dec‐18 Dec‐20
S&P 500 Russell 2000 MSCI EAFE MSCI EAFE Small MSCI Emerging Markets MSCI ACWI
Source: Morningstar, as of 12/31/20
Investment Landscape 35
1st Quarter 2021Other assets
Investment Landscape 36
1st Quarter 2021Currency
Weakness in the U.S. dollar relative to both emerging market The onshore Chinese renminbi rallied significantly over the
and developed market currencies remained a theme in the fourth quarter. The strength has been primarily credited to the
fourth quarter, as the Bloomberg Dollar Spot Index fell to a two apparently‐blistering pace of China’s recovery from pandemic‐
and a half year low. Analysts attributed some of the weakness of related disruptions, which has fueled capital inflows from
the greenback to lower relative real yields in the United States, offshore investors. Looking ahead, the election of Joe Biden has
as nominal Treasury yields rose less than inflation expectations. been viewed largely as constructive for the yuan, as the
Many in the industry have made calls for a continuation of dollar expectation remains that Biden’s stance on China will be less
weakness into 2021. If that weakness were to materialize, it confrontational than his predecessor’s, reducing trade tensions.
would supply significant tailwinds for unhedged U.S. investors in On the other hand, the rising value of the yuan may make
non‐U.S. equities. We continue to believe that unhedged China’s exports less‐affordable for Europeans still recovering
currency exposure results in uncompensated risk, which is a from the pandemic. This dynamic has stoked speculation that the
suboptimal approach for many investors. People’s Bank of China might soon step in to cool the rally.
BLOOMBERG DOLLAR SPOT INDEX USD CURRENCY LEVEL & SUBSEQUENT RETURN USD/CNY CROSS RATE
1300 140 6% ¥7.2
1250 4%
120 ¥7.0
1200
2%
1150 ¥6.8
100 0%
1100
¥6.6 Onshore
1050
‐2% renminbi
80 strengthening
1000 ‐4% ¥6.4 relative to the
U.S. dollar
950 60 ‐6% ¥6.2
900 Dec‐74 Dec‐84 Dec‐94 Dec‐04 Dec‐14
US Major Currency Index (real) ¥6.0
850
Average Currency Index Value
Dec‐04 Dec‐08 Dec‐12 Dec‐16 Dec‐20 Dec‐10 Dec‐12 Dec‐14 Dec‐16 Dec‐18 Dec‐20
Subsequent 10 Year Return
Source: Bloomberg, as of 12/31/20 Source: Federal Reserve, as of 12/31/20 Source: Bloomberg, as of 12/31/20
Investment Landscape 37
1st Quarter 2021Appendix
Investment Landscape 38
1st Quarter 2021Periodic table of returns
BEST
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 5‐Year 10‐Year
Large Cap Growth 38.7 66.4 31.8 14.0 25.9 56.3 26.0 34.5 32.6 39.8 5.2 79.0 29.1 14.3 18.6 43.3 13.5 13.3 31.7 37.3 6.7 36.4 38.5 21.0 17.2
Small Cap Growth 27.0 43.1 22.8 8.4 10.3 48.5 22.2 21.4 26.9 16.2 1.4 37.2 26.9 7.8 18.1 38.8 13.2 5.7 21.3 30.2 1.9 31.4 34.6 16.4 14.0
Large Cap Equity 20.3 33.2 12.2 7.3 6.7 47.3 20.7 20.1 23.5 15.8 ‐6.5 34.5 24.5 2.6 17.9 34.5 13.0 0.9 17.3 25.0 0.0 28.5 21.0 15.6 13.5
Small Cap Equity 19.3 27.3 11.6 3.3 1.6 46.0 18.3 14.0 22.2 11.8 ‐21.4 32.5 19.2 1.5 17.5 33.5 11.8 0.6 12.1 22.2 ‐1.5 26.5 20.0 13.3 11.2
Emerging Markets Equity 16.2 26.5 7.0 2.8 1.0 39.2 16.5 7.5 18.4 11.6 ‐25.9 28.4 16.8 0.4 16.4 33.1 6.0 0.0 11.8 21.7 ‐3.5 25.5 18.3 12.8 10.5
60/40 Global Portfolio 8.7 21.3 4.1 ‐2.4 ‐6.0 29.9 14.3 6.3 15.5 10.3 ‐33.8 23.3 16.1 ‐2.1 15.3 23.3 4.9 ‐0.8 11.2 14.6 ‐6.0 22.4 14.0 9.7 8.9
Hedge Funds of Funds 15.6 24.3 6.0 2.5 ‐5.9 30.0 14.5 7.1 16.6 10.9 ‐28.9 27.2 16.7 0.1 16.3 32.5 5.6 ‐0.4 11.3 17.1 ‐4.8 22.0 10.3 9.7 8.7
International Equity 4.9 20.9 ‐3.0 ‐5.6 ‐11.4 29.7 12.9 5.3 15.1 7.0 ‐35.6 20.6 15.5 ‐2.9 14.6 12.1 4.2 ‐1.4 8.0 13.7 ‐8.3 18.6 7.8 9.5 6.8
US Bonds 1.2 13.2 ‐7.3 ‐9.1 ‐15.5 25.2 11.4 4.7 13.3 7.0 ‐36.8 19.7 13.1 ‐4.2 11.5 11.0 3.4 ‐2.5 7.1 7.8 ‐9.3 18.4 7.5 7.4 5.5
Small Cap Value ‐2.5 11.4 ‐7.8 ‐9.2 ‐15.7 23.9 9.1 4.6 10.4 5.8 ‐37.6 18.9 10.2 ‐5.5 10.5 9.0 2.8 ‐3.8 5.7 7.7 ‐11.0 8.7 4.6 5.7 3.8
Large Cap Value ‐5.1 7.3 ‐14.0 ‐12.4 ‐20.5 11.6 6.9 4.6 9.1 4.4 ‐38.4 11.5 8.2 ‐5.7 4.8 0.1 0.0 ‐4.4 2.6 7.0 ‐11.2 7.8 2.8 4.4 3.6
Real Estate ‐6.5 4.8 ‐22.4 ‐19.5 ‐21.7 9.0 6.3 4.2 4.8 ‐0.2 ‐38.5 5.9 6.5 ‐11.7 4.2 ‐2.0 ‐1.8 ‐7.5 1.0 3.5 ‐12.9 7.7 0.5 4.4 3.3
Cash ‐25.3 ‐0.8 ‐22.4 ‐20.4 ‐27.9 4.1 4.3 3.2 4.3 ‐1.6 ‐43.1 0.2 5.7 ‐13.3 0.1 ‐2.3 ‐4.5 ‐14.9 0.5 1.7 ‐13.8 6.4 0.5 1.1 0.6
Commodities ‐27.0 ‐1.5 ‐30.6 ‐21.2 ‐30.3 1.0 1.4 2.4 2.1 ‐9.8 ‐53.2 ‐16.9 0.1 ‐18.2 ‐1.1 ‐9.5 ‐17.0 ‐24.7 0.3 0.9 ‐14.6 2.1 ‐3.1 1.0 ‐6.5
WORST
Large Cap Equity Small Cap Growth Commodities
Large Cap Value International Equity Real Estate
Large Cap Growth Emerging Markets Equity Hedge Funds of Funds
Small Cap Equity US Bonds 60% MSCI ACWI/40% BBgBarc Global Bond
Small Cap Value Cash
Source Data: Morningstar, Inc., Hedge Fund Research, Inc. (HFR), National Council of Real Estate Investment Fiduciaries (NCREIF). Indices used: Russell 1000, Russell 1000 Value, Russell 1000 Growth, Russell 2000,
Russell 2000 Value, Russell 2000 Growth, MSCI EAFE, MSCI EM, BBgBarc US Aggregate, T‐Bill 90 Day, Bloomberg Commodity, NCREIF Property, HFRI FOF, MSCI ACWI, BBgBarc Global Bond. NCREIF Property Index
performance data as of 9/30/20.
Investment Landscape 39
1st Quarter 2021You can also read
