Global Insight Weekly - RBC Wealth Management USA
Transcription
Global Insight Weekly - RBC Wealth Management USA
R B C W E A LT H M A N A G E M E N T GLOBAL INSIGHT W E E K L Y D ECE M B E R 1 9 , 2 0 1 4 A C LO S E R LO O K Glass Half Full for 2015 Kelly Bogdanov – San Francisco With 2015 just around the corner, it’s time to step back from the day-to-day and week-to-week noise of financial markets and focus on potential opportunities for the year ahead. Earlier this month, our team of analysts in the U.S., Canada, Europe, and Asia published the Global Insight 2015 Outlook report, which provides RBC Wealth Management’s views on the economy, financial markets, commodities, and currencies. It also includes thought-provoking Q&A on timely issues that could impact investment portfolios next year. North America and Japan Led Among Major Markets in 2014 Year-to-Date Total Return Performance in Local Currencies 13.8% 8.3% Following are highlights from the report: ■ ■ ■ ■ ■ We have a “half full” outlook for the global economy. We expect 2015 growth to modestly surpass the 2014 pace. U.S. GDP could grow 3%+ for the first time since 2005. Investors should maintain their full allocation to equities. The Federal Reserve likely starts hiking rates midyear. But watch the data—the timing will depend on how it unfolds. Rate hikes shouldn’t pose a problem for the U.S. stock market until partway through or late in the tightening cycle (likely beyond 2015). However, corrections could occur as monetary policy transitions. We expect the S&P 500 to deliver high single-digit returns plus dividends. Canadian equity markets will experience conflicting crosscurrents: energy and resource stocks will likely remain under pressure while Canada’s export sector benefits from stronger U.S. demand and a lower Canadian dollar. On balance Canadian equities should deliver positive returns. Europe is the “half empty” part of our view. Considerable structural reforms are needed at the country level to get Click here for authors’ contact information. For Important Disclosures, see page 6. U.S. Canada S&P 500 TSX 7.7% Japan TOPIX 2.7% 2.0% German DAX Hang Seng -0.5% U.K. FTSE All Share Source - RBC Wealth Management, Bloomberg; data through 12/18/14 M A R K ET P U L S E 4 An eventful year ahead for U.K. telecoms 4 More evidence the services sector drives China’s growth The Global Insight Weekly will not be published during the holidays. The next edition will be available January 9 in North America and January 12 in Europe and Asia. the economy moving. If reforms do occur, it could spur an equity rally, especially considering valuations are relatively low and earnings are expected to grow. But it’s not a given that meaningful reforms will actually transpire. ■ ■ ■ ■ Asian stocks are attractively valued. Central bank and fiscal policies have begun to boost Japan’s inflation, and are quite supportive of stock prices there. The Chinese government will likely introduce pro-growth measures if GDP growth is at risk of slowing below 7%. In fixed income, investors would benefit from diversifying their portfolios to minimize volatility and liquidity risks that could emerge in 2015. Those risks may come into play as major central banks move in different directions. China’s slower growth will likely continue to constrain commodity prices in 2015. Following a steep decline this year, oil prices should stabilize once supply and demand come into balance later in 2015. (See chart for RBC Capital Markets’ updated oil forecasts.) Oil Prices Should Bounce, but Remain Relatively Low in 2015 RBC Capital Markets Average Annual and Long-Term Estimates WTI Crude Oil Brent Crude Oil $100 $90 $80 $70 $60 $54 $59 $65 $83 $89 $95 $74 $71 $50 $40 $30 $20 $10 $0 Current Price 2015E 2016E Long Term Source - RBC Capital Markets estimates. “Current Price” reflects 12/18/14 close. We expect continued dollar strength, but at a slower pace, and with a handful of currencies gaining against the dollar. Happy holidays and have a prosperous 2015! WWHHATAT’ S’ SMMOOV VI NI NGGMMA AR RK KETETS S Can’t Ignore the Wounded Russian Bear Sentiment has been swinging widely as three forces—crude oil, high yield debt, the Russian ruble—have tugged markets. On Tuesday, global equity markets traded tentatively as memories of the 1998 ruble crisis rushed back to the fore. The ruble collapsed to 79.17 against the dollar during intraday trading, the lowest level in the post-Soviet era. This came despite the Central Bank of Russia’s unexpected 650-basis point overnight rate hike to 17%, which was intended to stabilize the currency. The severe crude oil correction, along with Western sanctions, has hammered the ruble and threatens to push the Russian economy to the brink. But equity markets staged a dramatic rally following the Federal Reserve meeting—despite the fact the statement and press conference merely trimmed around the edges. Equities were also helped along because the oil decline lost momentum, energy stocks and high yield rallied, and the ruble bounced. Russia Battles Second Currency Collapse in 20 Years, First in Putin Era Russian Ruble per U.S. Dollar (RUB/USD inverted) 0 10 20 30 40 50 60 70 1994 1998 2002 2006 2010 2014 Source - RBC Wealth Management, Bloomberg. Data reflects closing prices and is through 9:00 pm GMT 12/19/14; final data point bounced up to 59.07. Yet while Russia is in better fiscal shape than it was in 1998, it is vulnerable. Even though major economies don’t have significant trade linkages with Russia, and only select European banks are materially exposed, the intertwined nature of the global financial system forces markets to pay close attention to the Russian bear. GLOBAL INSIGHT WEEKLY December 19, 2014 2 U N I T E D S T AT E S Kelly Bogdanov – San Francisco ■ ■ ■ ■ ■ Second Half of December Is Usually Stronger Than the First S&P 500 Performance in December Since 1930 The Dow Jones Industrial Average rallied 709 points (4.2%) following the Fed meeting, the biggest two-day point gain since November 2008 and the largest two-day percentage gain since November 2011. All 10 S&P 500 sectors rallied. Energy led the way, surging 9.7%, which more than offset its month-to-date losses. The broader market’s move was likely influenced by the calendar, not just the Fed. The Dow and S&P 500 typically rally in December, usually more forcefully during the second half of the month as the holidays approach. Since 1930, the S&P 500 has traded higher 61% of the time during the first half of December, but 78% of the time in the second half. While it inched up 0.12%, on average, during the first half, it rallied 1.37% in the second half (see chart). One reason the market tends to rally in December, especially during years when it has been relatively strong, is because some institutional fund managers play “catch-up” and chase the market toward year-end, in an attempt to boost performance and show winning stock positions among their holdings. Since the crude oil collapse, S&P 500 earnings estimates have shifted lower. The consensus forecast for full-year 2015 earnings growth has fallen to 8.4% y/y ($127.07 per share) from 12.4% on October 1, according to Thomson Reuters I/B/E/S. No surprise, energy sector estimates have plummeted to a 20.4% y/y decline from 7.0% growth during the same period. Only one sector has experienced an uptick—financials (to 17.6% y/y growth from 16.7%). The Fed meeting was perceived as hawkish by some and dovish by others. Committee members removed the “considerable time” language, as expected, and replaced it with “patient.” But then they quoted a prior statement’s “considerable time” reference later in the text. It’s no wonder economists can’t shake their reputation for doublespeak! Regarding inflation, the Fed is more focused on surveys that measure price changes than market-based inflation data (breakevens, 5y5y forward rates), and cares more about inflation projections rather than the current inflation rate. This explains why the Fed is not overly bothered by recent low inflation readings. The meeting and press conference support the notion the Fed will indeed be patient in raising rates. In fact, Fed Chair Janet Yellen emphasized that once the Fed begins hiking rates, it won’t necessarily raise them by 25 basis points at each subsequent meeting, as some hawkish market participants have been assuming. The climb back up toward GLOBAL INSIGHT WEEKLY 1.37% Average Return Median Return 1.02% 0.77% 0.12% 1st Half of December 2nd Half of December Source - RBC Wealth Management, Bloomberg; data through 2013 interest rate normalization seems like it could go far more slowly than prior cycles, and look more like a walk up a low-grade hill rather than a hike up a steep mountain. CANADA Patrick McAllister & Eric Lafortune – Toronto ■ The S&P/TSX rallied amid a surge in energy stocks. The sector managed to gain over 10% despite crude oil prices that remained relatively flat. ■ Despite positive stock performance overall, it wasn’t all good news in the energy sector. Several companies including Twin Butte Energy, Argent Energy Trust, Penn West Petroleum, Bonavista Energy, and Long Run Exploration added their names to the list of companies forced to cut their dividends in response to the lower crude oil price reality. ■ Alimentation Couche-Tard is set to leverage some of the spare capacity on its balance sheet to acquire The Pantry. The deal was well received by investors with Couche-Tard shares trading up nearly 9% post-announcement. With a store network complementary to its existing footprint, Couche-Tard has significant potential to extract synergies and improve productivity at The Pantry assets. ■ Investors interpreted Wednesday’s Federal Reserve policy statement as being hawkish in tone and raising the possibility of a rate hike in the second half of 2015. Government of Canada bond yields moved in sympathy with U.S. Treasuries as the 2- to 30-year component of the Canadian government yield curve increased 4–8 basis points. December 19, 2014 3 ■ ■ The Canadian dollar traded at its lowest level in over five years on Monday, closing at $0.8612 CAD/USD. Continued oil price weakness has driven investors to safer assets and out of commodity-based economies. The S&P/TSX Canadian Preferred Share Total Return Index is down around 2.5% m/m. We now see attractive entry points in lower-quality shares following strong selling for year-end tax-loss trading. China Revises 2013 GDP Number Up 3.4% Annual GDP of China ($B) 10,000 GDP Revision of 3.4%: $305B 9,000 2010 to 2013 CAGR = 10.53% 8,000 7,000 EUROPE 6,000 Frédérique Carrier & Davide Boglietti – London ■ ■ European equity markets rose in a volatile week despite fears of ongoing macroeconomic deterioration of oilexposed countries (Russia), Greek political uncertainty, and the latest comments from major central banks. The STOXX Europe 600 Index closed up 3.0% at 340.3 points. 4,000 In the U.K., inflation as measured by the CPI fell by a larger-than-expected 0.3% to 1.0% y/y in November. Food, beverage, and transport price components were the main negative contributors. RBC Capital Markets expects wage pressures to become more visible as spare capacity continues to be absorbed. ■ Changes are afoot in the U.K. telecoms market. The industry landscape will look markedly different in a year’s time. The well defined silos of mobile, fixed line, television, and broadband are starting to merge as telecom players position themselves for quadplay, a bundle of all four services. ■ BT announced it is in exclusive talks to acquire EE, the U.K.’s largest mobile provider (£12.5B). This could be greeted with retaliatory action by competitors who feel threatened. Overall, we are likely entering a less stable period for telecoms, should each participant react to the other’s moves. A S I A PA C I F I C Jay Roberts – Hong Kong Japan’s Liberal Democratic Party (LDP), led by Prime Minister Shinzo Abe, won the general election, as forecast. The coalition between the LDP and its partner, Komeito, GLOBAL INSIGHT WEEKLY 2010 2011 2012 2013 Source - RBC Wealth Management, Bloomberg All major U.K. banks passed the Bank of England’s stress test, showing an adequate level of capital in an adverse macroeconomic scenario. Co-operative Bank was the only financial institution that failed. But the leverage ratio of some of the banks under a stress scenario raised concerns. HSBC showed one of the best levels of capital, although the Asian part of its asset portfolio won’t be tested until next year. ■ ■ 5,000 maintained its two-thirds majority in the lower house of the Diet, albeit with very low voter turnout. The victory extends Abe’s mandate to 2016, which is positive for Japanese equities, in our view, as Abe continues to pursue a progrowth, reformist policy agenda in 2015 that may include cuts in Japan’s corporate tax rate. ■ China significantly revised its GDP data for 2013. The revision was the result of a detailed economic census that China conducts every five years (GDP for 2008 was also revised higher as a result of the previous census). The increase of 3.4% to China’s economy reflected a more accurate accounting of China’s services sector, which has been growing consistently well in recent years and became the country’s largest employer in 2011. The revision will have limited impact on 2014 data, though, according to the National Bureau of Statistics. ■ In Hong Kong, Thomas Kwok, co-chairman of Sun Hung Kai Properties (0016.HK), a major local firm and major Hang Seng Index component, was convicted of conspiring with Rafael Hui, previously one of the most senior officials in the government, to commit misconduct in public office. Raymond Kwok, his brother, was cleared of charges. Effectively, it was found that Thomas Kwok paid Hui in order to gain favourable treatment for the company. ■ The ruling is unlikely to have a major impact on the stock, in our view, and may even turn out to be a positive event as it removes an overhang that has been in place since May 2012 when the Kwok brothers were initially arrested. Investors have had plenty of time to consider the ramifications of the case in terms of the stock price. December 19, 2014 4 M A R K ET S C O R E C A R D Data as of December 19, 2014 Equities (local currency) Level S&P 500 1 Week MTD YTD 12 Mos Govt Bonds (bps chg) Yield 1 Week MTD YTD 12 Mos 2,070.65 3.4% 0.1% 12.0% 14.4% U.S. 2-Yr Tsy 0.638% 9.8 17.0 25.8 27.4 17,804.80 3.0% -0.1% 7.4% 10.0% U.S. 10-Yr Tsy 2.158% 7.7 -0.6 -87.0 -77.1 NASDAQ 4,765.38 2.4% -0.5% 14.1% 17.4% Canada 2-Yr 1.013% 4.9 1.9 -12.4 -12.5 Russell 2000 1,195.96 3.8% 1.9% 2.8% 6.3% Canada 10-Yr 1.810% 5.3 -4.8 -94.8 -89.4 S&P/TSX Comp 14,468.26 5.4% -1.9% 6.2% 8.0% U.K. 2-Yr 0.473% 0.7 -3.9 -9.1 -6.2 FTSE All Share 3,515.70 3.7% -2.2% -2.6% -0.2% U.K. 10-Yr 1.850% 5.0 -7.6 -117.2 -110.9 Dow Industrials (DJIA) STOXX Europe 600 340.30 3.0% -2.0% 3.7% 6.5% Germany 2-Yr -0.081% -3.6 -4.9 -29.4 -29.8 9,786.96 2.0% -1.9% 2.5% 4.8% Germany 10-Yr 0.592% -3.2 -10.8 -133.7 -127.9 23,116.63 -0.6% -3.6% -0.8% 1.0% 3,108.60 5.8% 15.9% 46.9% 46.1% YTD 12 Mos Nikkei 225 17,621.40 1.4% 0.9% 8.2% 11.1% India Sensex 27,371.84 0.1% -4.6% 29.3% 32.2% 3,279.53 -1.3% -2.1% 3.5% 6.8% Brazil Ibovespa 49,650.98 3.4% -9.3% -3.6% -3.8% Mexican Bolsa IPC 42,529.89 2.0% -3.8% -17.4% 0.8% Commodities (USD) Price German DAX Hang Seng Shanghai Comp Singapore Straits Times Gold (spot $/oz) MTD YTD 12 Mos U.S. Dollar Index Rate 1 Week MTD 89.58 1.4% 1.4% 11.9% 11.1% CAD/USD 0.86 -0.2% -1.6% -8.5% -8.1% USD/CAD 1.16 0.2% 1.6% 9.2% 8.8% EUR/USD 1.22 -1.8% -1.8% -11.0% -10.4% GBP/USD 1.56 -0.5% -0.1% -5.6% -4.5% AUD/USD 0.81 -1.3% -4.3% -8.7% -8.2% USD/CHF 0.98 2.1% 1.9% 10.2% 9.5% 1,195.51 -2.2% 2.4% -0.8% 0.6% USD/JPY 119.46 0.6% 0.7% 13.4% 14.6% 16.07 -5.6% 4.0% -17.4% -16.5% EUR/JPY 146.14 -1.3% -1.1% 1.0% 2.6% Silver (spot $/oz) Copper ($/ton) 1 Week Currencies 6,362.00 -2.8% -0.8% -13.7% -11.7% EUR/GBP 0.78 -1.3% -1.6% -5.7% -6.2% Oil (WTI spot/bbl) 56.52 -2.2% -14.6% -42.6% -42.8% EUR/CHF 1.20 0.2% 0.1% -2.0% -1.9% Oil (Brent spot/bbl) 62.28 0.7% -11.2% -43.8% -43.5% USD/SGD 1.31 0.1% 0.8% 4.1% 3.8% 3.45 -9.0% -15.5% -18.3% -22.6% USD/CNY 6.22 0.5% 1.2% 2.8% 2.5% 339.22 2.6% 4.7% -3.5% -4.6% USD/BRL 2.66 0.2% 3.7% 12.6% 12.8% Natural Gas ($/mmBtu) Agriculture Index Source - Bloomberg. Note: Equity returns do not include dividends, except for the German DAX. Bond yields in local currencies. Copper and Agriculture Index data as of Thursday’s close. Dollar Index measures USD vs. six major currencies. Currency rates reflect market convention (CAD/USD is the exception). Currency returns quoted in terms of the first currency in each pairing. Data as of 9:35 pm GMT 12/19/14. Examples of how to interpret currency data: CAD/USD 0.86 means 1 Canadian dollar will buy 0.86 U.S. dollar. CAD/USD -8.1% return means the Canadian dollar fell 8.1% vs. the U.S. dollar year to date. USD/JPY 119.46 means 1 U.S. dollar will buy 119.46 yen. USD/JPY 14.6% return means the U.S. dollar rose 14.6% vs. the yen year to date. U P CO M I N G EV E N TS MON, DEC 22 TUE, DEC 23, cont. TUE, DEC 30 FRI, JAN 2, cont. U.S. Chicago Fed Nat'l Activity Canada Oct GDP (0.1% m/m) China HSBC Manufacturing PMI U.S. ISM Manufacturing (57.5) U.S. Exist. Home Sales (-1.1% m/m) THU, DEC 25 U.S. S&P/Case-Shiller Home Prices RBC Canadian Manufacturing TUE, DEC 23 Japan CPI (2.5% y/y, core 2.1% y/y) WED, DEC 31 U.K. Q3 GDP (0.7% q/q, 3.0% y/y) Japan Industrial Prod. (1.1% m/m) China Official Manufacturing PMI U.S. Q3 GDP (4.3% q/q annual) Japan Vehicle Production FRI, JAN 2 U.S. Personal Consumption FRI, DEC 26 China Official Non-Manufacturing PMI U.S. New Home Sales (0.4% m/m) China Industrial Profits Eurozone Markit Manuf. PMI (50.8) U.S. PCE (1.3% y/y, core 1.5% y/y) All data reflect Bloomberg consensus forecasts where available GLOBAL INSIGHT WEEKLY December 19, 2014 5 AUTHORS Kelly Bogdanov – San Francisco, United States [email protected]; RBC Capital Markets, LLC. Patrick McAllister – Toronto, Canada [email protected]; RBC Dominion Securities Inc. Eric Lafortune – Toronto, Canada Distribution of Ratings For the purpose of ratings distributions, regulatory rules require member firms to assign ratings to one of three rating categories - Buy, Hold/Neutral, or Sell regardless of a firm’s own rating categories. Although RBC Capital Markets, LLC ratings of Top Pick (TP)/Outperform (O), Sector Perform (SP) and Underperform (U) most closely correspond to Buy, Hold/Neutral and Sell, respectively, the meanings are not the same because our ratings are determined on a relative basis (as described below). [email protected]; RBC Dominion Securities Inc. Frédérique Carrier – London, United Kingdom [email protected]; Royal Bank of Canada Investment Management (UK) Ltd. Davide Boglietti – London, United Kingdom Distribution of Ratings - RBC Capital Markets, LLC Equity Research As of September 30, 2014 Investment Banking Services Provided During Past 12 Months Count Percent Count Percent [email protected]; Royal Bank of Canada Investment Management (UK) Ltd. Rating Jay Roberts – Hong Kong, China Buy [Top Pick & Outperform] Hold [Sector Perform] Sell [Underperform] [email protected]; RBC Dominion Securities Inc. 858 683 98 52.35 41.67 5.98 308 151 8 35.90 22.11 8.16 Explanation of RBC Capital Markets, LLC Equity Rating System D I S C LO S U R E S A N D D I S C L A I M E R Analyst Certification All of the views expressed in this report accurately reflect the personal views of the responsible analyst(s) about any and all of the subject securities or issuers. No part of the compensation of the responsible analyst(s) named herein is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the responsible analyst(s) in this report. Important Disclosures In the U.S., RBC Wealth Management operates as a division of RBC Capital Markets, LLC. In Canada, RBC Wealth Management includes, without limitation, RBC Dominion Securities Inc., which is a foreign affiliate of RBC Capital Markets, LLC. This report has been prepared by RBC Capital Markets, LLC. which is an indirect wholly-owned subsidiary of the Royal Bank of Canada and, as such, is a related issuer of Royal Bank of Canada. Eric Lafortune, Patrick McAllister, and Jay Roberts, employees of RBC Wealth Management USA’s foreign affiliate RBC Dominion Securities Inc.; and Davide Boglietti and Frédérique Carrier, employees of RBC Wealth Management USA’s foreign affiliate Royal Bank of Canada Investment Management (UK) Limited; contributed to the preparation of this publication. These individuals are not registered with or qualified as research analysts with the U.S. Financial Industry Regulatory Authority (“FINRA”) and, since they are not associated persons of RBC Wealth Management, they may not be subject to NASD Rule 2711 and Incorporated NYSE Rule 472 governing communications with subject companies, the making of public appearances, and the trading of securities in accounts held by research analysts. In the event that this is a compendium report (covers six or more companies), RBC Wealth Management may choose to provide important disclosure information by reference. 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This material has been prepared for general circulation and does not take into account the objectives, financial situation, or needs of any recipient. Hong Kong persons wishing to obtain further information on any of the securities mentioned in this publication should contact RBC Investment Services (Asia) Limited, RBC Investment Management (Asia) Limited or Royal Bank of Canada, Hong Kong Branch at 17/Floor, Cheung Kong Center, 2 Queen’s Road Central, Hong Kong (telephone number is 2848-1388). To Singapore Residents: This publication is distributed in Singapore by RBC (Singapore Branch) and RBC (Asia) Limited, registered entities granted offshore bank status by the Monetary Authority of Singapore. This material has been prepared for general circulation and does not take into account the objectives, financial situation, or needs of any recipient. You are advised to seek independent advice from a financial adviser before purchasing any product. If you do not obtain independent advice, you should consider whether the product is suitable for you. Past performance is not indicative of future performance. Copyright © RBC Capital Markets, LLC 2014 - Member NYSE/FINRA/SIPC Copyright © RBC Dominion Securities Inc. 2014 - Member CIPF Copyright © RBC Europe Limited 2014 Copyright © Royal Bank of Canada 2014 All rights reserved December 19, 2014 7