BC Pension Forum. Economic Outlook. Presented by: Ben Homsy, CFA Portfolio Manager

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1 BC Pension Forum Economic Outlook Presented by: Ben Homsy, CFA Portfolio Manager

2 Bank Of England Interest Rate History of Interest Rate Policy Long-Term Central Bank Interest Rate Source: Bank of England, The Guardian Interest rate CPBI Jan-2017 Page 2

3 Policy Rate Global Policy Interest Rates Global Policy Rates Source: Bloomberg United States Canada Europe Australia Sweden Norway New Zealand Japan CPBI Jan-2017 Page 3

4 Market Value US$ Trillion How Pervasive Are Negative Yields? Source: BofA CPBI Jan-2017 Page 4

5 US$ Billion Unconventional Easing 14,000 Central Bank Balance Sheets Source: Bloomberg 12,000 10,000 8,000 6,000 4,000 2, US Federal Reserve ECB BoJ Total CPBI Jan-2017 Page 5

6 US Dollars Millions Negative Policy Rates Required versus Excess Reserves 3,000,000 U.S. Aggregate Reserves Of Depository Institutions Source: Bloomberg 2,500,000 2,000,000 1,500,000 1,000, , Excess Reserves Required Reserves Total Reserves CPBI Jan-2017 Page 6

7 Percentage Extended Recovery 30% Real per Capita GDP Source: Bloomberg, Reinhart & Rogoff 25% 20% Average Post-WWII recoveries 15% 10% 5% 0% -5% Current US Recovery Severe Crises % Date since trough in leading indicators (Years) CPBI Jan-2017 Page 7

8 Building Blocks of Growth Nominal GDP Growth Labour Productivity Inflation Population Capital Investment Participation Factor Productivity Hours CPBI Jan-2017 Page 8

9 Building Blocks of Growth Nominal GDP Growth Labour Productivity Inflation Population Capital Investment Participation Factor Productivity Hours CPBI Jan-2017 Page 9

10 Annual % Change Working Age Population 2.5% Working Age Population Source: OECD 2.0% 1.5% 1.0% 0.5% 0.0% United States Canada CPBI Jan-2017 Page 10

11 Participation Rate (%) Participation Rate 70 Participation Rate Source: Bureau Of Labor Statistics, Statistics Canada United States Canada CPBI Jan-2017 Page 11

12 Changes In The Labour Force 6% 5% 4% Canada 4% 3% United States 3% 2% 2% 1% 1% 0% 0% -1% -1% Labour Force Growth Labour Force Trend growth Labour Force Forecast Growth Labour Force Growth Labour Force Trend growth Labour Force Forecast Growth 4% 3% Japan 4% 3% Germany 2% 2% 1% 1% 0% 0% -1% -1% -2% -2% Labour Force Growth Labour Force Trend Growth Labour Force Forecast Growth Labour Force Growth Labour Force Trend Growth Labour Force Forecast Growth Source: OECD CPBI Jan-2017 Page 12

13 Average Weekly Hours Hours Worked 40 Average Weekly Hours (US Non-Farm) Source: Bureau Of Labor Statistics United States CPBI Jan-2017 Page 13

14 Hours Worked Source: National Bureau Of Economic Research, Working Paper CPBI Jan-2017 Page 14

15 Building Blocks of Growth Nominal GDP Growth Labour Productivity Inflation Population Capital Investment Participation Factor Productivity Hours CPBI Jan-2017 Page 15

16 % Change QoQ SAAR (4-Quarter Moving Average) Capital Investment US Gross Private Domestic Investment (Non-Residential) Source: Bureau Of Economic Analysis United States CPBI Jan-2017 Page 16

17 Productivity Growth (%) Productivity Growth (%) Productivity Growth (%) Productivity Growth (%) Global Productivity Challenges 5 4 Canada 5 4 United States Annual growth rate Trend growth Annual growth rate Trend growth Japan Germany Annual growth rate Trend growth Annual growth rate Trend growth Source: OECD CPBI Jan-2017 Page 17

18 Persons (Thousands) Index Declining Manufacturing 20,000 Manufacturing Output vs Employment Source: Bloomberg , , , , , Manufacturing Employment (LHS) Manufacturing Output (RHS) Manufacturing Employment = -0.7% / Year Manufacturing Output = +1.7% / Year CPBI Jan-2017 Page 18

19 Cumulative Percentage Change (%) Service Industry Productivity Challenges 120% Productivity Growth: Trade vs Services Source: BLS 100% 80% 60% 40% 20% 0% Trade Services Productivity Growth Trade = 2.7% Productivity Growth Services = 1.0% CPBI Jan-2017 Page 19

20 Nominal GDP %YoY Downshift in Trend GDP US Nominal GDP Source: Bloomberg, Bureau of Economic Analysis US Nominal GDP Growth 5Y Trend GDP Growth CPBI Jan-2017 Page 20

21 Percentage (%) GDP and Bond Yield Correlation Nominal US GDP vs 10Y Treasuries 7Y Moving Avg. Source: Bloomberg Y US Treasury Yield Nominal US GDP Growth YoY% CPBI Jan-2017 Page 21

22 Percentage % Expected Returns In Fixed Income 25% Barclays US Aggregate Bond Index Source: Bloomberg 20% 15% 10% 5% 0% Return Starting Yield at time of investment CPBI Jan-2017 Page 22

23 Expected Returns In Equities Grinold-Kroner Model: Dividends & Share Buybacks Nominal Growth In Corporate Earnings Valuation Adjustment CPBI Jan-2017 Page 23

24 P/E Ratio 10-Year Govt Bond Yield Valuation Multiples and Interest Rates 35 S&P500 Price/Earnings Ratio vs 10-Year Govt Bond Yields Source: Bloomberg S&P500 P/E Ratio 10-Year US Government Bond Yield CPBI Jan-2017 Page 24

25 Summary CPBI Jan-2017 Page 25

26 Thank you CPBI Jan-2017 Page 26

Seven Lean Years Explaining Persistent Global Economic Weakness

Seven Lean Years Explaining Persistent Global Economic Weakness 9 June 2015 Bank of Canada and European Central Bank Conference Tim Lane Deputy Governor Bank of Canada The global economy remains weak and