BC Pension Forum Economic Outlook Presented by: Ben Homsy, CFA Portfolio Manager
1694 1704 1713 1723 1732 1741 1751 1760 1770 1779 1788 1798 1807 1817 1826 1836 1845 1854 1864 1873 1883 1892 1901 1911 1920 1930 1939 1949 1958 1967 1977 1986 1996 2005 Bank Of England Interest Rate History of Interest Rate Policy 18 16 14 12 10 8 6 4 2 0 Long-Term Central Bank Interest Rate Source: Bank of England, The Guardian Interest rate CPBI Jan-2017 Page 2
Policy Rate Global Policy Interest Rates 9.0 8.0 7.0 6.0 Global Policy Rates Source: Bloomberg 5.0 4.0 3.0 2.0 1.0 0.0-1.0 2004 2006 2008 2010 2012 2014 2016 United States Canada Europe Australia Sweden Norway New Zealand Japan CPBI Jan-2017 Page 3
Market Value US$ Trillion How Pervasive Are Negative Yields? Source: BofA CPBI Jan-2017 Page 4
US$ Billion Unconventional Easing 14,000 Central Bank Balance Sheets Source: Bloomberg 12,000 10,000 8,000 6,000 4,000 2,000-2004 2006 2008 2010 2012 2014 2016 US Federal Reserve ECB BoJ Total CPBI Jan-2017 Page 5
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 1,000,000 500,000 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Excess Reserves Required Reserves Total Reserves CPBI Jan-2017 Page 6
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 -2-1 0 1 2 3 4 5 6 7 8 9 10-10% Date since trough in leading indicators (Years) CPBI Jan-2017 Page 7
Building Blocks of Growth Nominal GDP Growth Labour Productivity Inflation Population Capital Investment Participation Factor Productivity Hours CPBI Jan-2017 Page 8
Building Blocks of Growth Nominal GDP Growth Labour Productivity Inflation Population Capital Investment Participation Factor Productivity Hours CPBI Jan-2017 Page 9
Annual % Change Working Age Population 2.5% Working Age Population Source: OECD 2.0% 1.5% 1.0% 0.5% 0.0% 1976 1986 1996 2006 2016 United States Canada CPBI Jan-2017 Page 10
Participation Rate (%) Participation Rate 70 Participation Rate Source: Bureau Of Labor Statistics, Statistics Canada 68 66 64 62 60 58 1976 1986 1996 2006 2016 United States Canada CPBI Jan-2017 Page 11
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
Average Weekly Hours Hours Worked 40 Average Weekly Hours (US Non-Farm) Source: Bureau Of Labor Statistics 39 38 37 36 35 34 33 32 1965 1975 1985 1995 2005 2015 United States CPBI Jan-2017 Page 13
Hours Worked Source: National Bureau Of Economic Research, Working Paper 11629 CPBI Jan-2017 Page 14
Building Blocks of Growth Nominal GDP Growth Labour Productivity Inflation Population Capital Investment Participation Factor Productivity Hours CPBI Jan-2017 Page 15
% Change QoQ SAAR (4-Quarter Moving Average) Capital Investment 15 10 5 0-5 -10-15 US Gross Private Domestic Investment (Non-Residential) Source: Bureau Of Economic Analysis -20 1990 1995 2000 2005 2010 2015 United States CPBI Jan-2017 Page 16
Productivity Growth (%) Productivity Growth (%) Productivity Growth (%) Productivity Growth (%) Global Productivity Challenges 5 4 Canada 5 4 United States 3 3 2 2 1 1 0 0-1 -1 Annual growth rate Trend growth Annual growth rate Trend growth 8 7 6 Japan 6 5 4 Germany 5 3 4 2 3 1 2 0 1-1 0-2 -1-3 Annual growth rate Trend growth Annual growth rate Trend growth Source: OECD CPBI Jan-2017 Page 17
Persons (Thousands) Index Declining Manufacturing 20,000 Manufacturing Output vs Employment Source: Bloomberg 140 18,000 120 16,000 100 14,000 80 12,000 60 10,000 1987 1992 1997 2002 2007 2012 40 Manufacturing Employment (LHS) Manufacturing Output (RHS) Manufacturing Employment = -0.7% / Year Manufacturing Output = +1.7% / Year CPBI Jan-2017 Page 18
Cumulative Percentage Change (%) Service Industry Productivity Challenges 120% Productivity Growth: Trade vs Services Source: BLS 100% 80% 60% 40% 20% 0% 1987 1992 1997 2002 2007 2012 Trade Services Productivity Growth Trade = 2.7% Productivity Growth Services = 1.0% CPBI Jan-2017 Page 19
Nominal GDP %YoY Downshift in Trend GDP 14.0 12.0 10.0 US Nominal GDP Source: Bloomberg, Bureau of Economic Analysis 8.0 6.0 4.0 2.0 0.0-2.0-4.0-6.0 1981 1986 1991 1996 2001 2006 2011 2016 US Nominal GDP Growth 5Y Trend GDP Growth CPBI Jan-2017 Page 20
Percentage (%) GDP and Bond Yield Correlation Nominal US GDP vs 10Y Treasuries 7Y Moving Avg. Source: Bloomberg 12 10 8 6 4 2 0 1980 1985 1990 1995 2000 2005 2010 2015 10Y US Treasury Yield Nominal US GDP Growth YoY% CPBI Jan-2017 Page 21
Percentage % Expected Returns In Fixed Income 25% Barclays US Aggregate Bond Index Source: Bloomberg 20% 15% 10% 5% 0% 1980 1985 1990 1995 2000 2005 2010 2015 Return Starting Yield at time of investment CPBI Jan-2017 Page 22
Expected Returns In Equities Grinold-Kroner Model: Dividends & Share Buybacks Nominal Growth In Corporate Earnings Valuation Adjustment CPBI Jan-2017 Page 23
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 18 30 25 20 15 10 5 0 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 2017 16 14 12 10 8 6 4 2 - S&P500 P/E Ratio 10-Year US Government Bond Yield CPBI Jan-2017 Page 24
Summary CPBI Jan-2017 Page 25
Thank you CPBI Jan-2017 Page 26