Outlook as of June 2016
World Economy
•
•
•
•
•
The recent improvement in US consumption statistics (retail sales, consumer spending, residential housing) is brightening the outlook for US and
world GDP, and should help offset the impact of slower growth in China.
Job and wage growth, with some help from lower gasoline prices over the past year, have finally provided the necessary catalyst for a
meaningful advance in US consumer spending, which will be reflected in a much-improved 2Q GDP print of approximately +2.5%.
Growth in Europe has been stronger than that experienced in the US so far this year, but the accompanying currency strength could have a bit of
a dampening effect over the coming quarters, due to the impact on export competitiveness. Rising German consumption will help generate
domestic growth, while higher sales to the US will help cushion, but not fully offset, weaker sales to Asia.
Japanese growth will suffer from the combined effect of the 10% rise in the yen against the dollar and weaker growth in neighboring countries,
particularly China. The Abe government delayed the proposed tax increase until October 2019, which will provide some needed fiscal relief.
The Chinese government’s current spending initiatives aimed at softening the impact of the transition from investment-driven growth towards a
consumption-based economy may be counter-productive, by exacerbating the oversupply in the housing and commodity sectors.
Monetary Policy & Currencies
•
•
•
•
•
The recent dollar weakness has effectively ended, with improved US economic data and the Fed’s reaffirmation of its intent to return to a more
“normal” rate environment.
The Fed continues to emphasize that the glide path to higher rates will be measured and gradual. More careful management of the tightening
process should better control the magnitude of expected dollar strength as we move into the summer months.
Better economic readings, particularly from Germany, have put the ECB’s plans for further monetary easing on hold for now. However, continued
low inflation and further strengthening of the euro will allow the ECB to resume easing, most likely through another extension of the bond
purchase program.
Sterling strength over the past month is an important indicator of reduced market concern over the UK leaving the European Union. While we do
not expect any monetary ease from the BOE unless the “Leave” vote wins, monetary tightening should be delayed even further into 2017 to
combat the impact of the stronger pound.
The Bank of Japan remains cautious about further currency devaluation, but the combination of yen strength, continued weak domestic demand,
and slower growth in many of their regional export destinations should induce some form of additional monetary easing over the summer.
Bond Markets
•
•
•
•
•
With Fed tightening initiatives delayed, but still intact, improved GDP growth over the coming months should drive 10 year Treasuries above
2.0% by year end. Moving significantly above that level will require greater global growth and higher rates in other international markets.
Investment grade corporate debt looks rich and does not adequately compensate investors for any uptick in credit risk. Conversely, belowinvestment grade (high yield) debt remains attractive in an environment of improving economic and earnings growth, plus continued low
expected default rates.
Higher energy prices should boost headline inflation, making relative returns on Treasury inflation-protected securities (TIPS) more attractive as
overall yields rise in the coming months.
Near-zero interest rates in Europe and negative Japanese yields are two examples of uncompensated risk in the developed international bond
markets. An unexpected rise in economic growth could cause rates to spike and hurt holders of longer-dated bonds.
Higher commodity prices have benefited emerging market debt this year. However, persistent oversupply conditions for most commodities,
coupled with the Fed’s resolve to tighten US interest rates, suggests a cautious approach to the asset class and a continued bias to dollar
denominated debt.
Equity Markets
•
•
•
•
The second quarter of 2016 should mark the end of the earnings recession. Rising energy prices and the weaker dollar should greatly help
earnings comparisons for the balance of the year. Resumed earnings growth should help boost US equity markets above the May 2015 highs.
European equities have underperformed US equities this year, mainly due to euro appreciation. Rising export demand from the strengthening US
economy should help offset slowing exports to Asia and boost markets. However, additional monetary easing may be a precondition for
European equities to outperform their US counterparts.
It appears that further depreciation of the yen may be the only way for Japanese equity markets to overcome this year’s dismal performance.
With interest rates already negative, the BOJ’s willingness to ease further is questionable; hence we are cautious about the outlook for Japanese
equities.
An improving economic outlook for developed markets may be requisite for any rebound in emerging market equities. Compared to early in the
year, markets appear reconciled to a measured and gradual tightening path by the Fed. Uncertainty around the Chinese growth outlook
continues to be the main obstacle to improved performance.
Alternatives & Commodities
•
•
•
•
•
Disruptions from the Canadian wildfires, Nigerian sabotage, and French labor strikes are expected to have only a transitory effect on global
energy supplies, given that North American shale production has fallen off only slightly this year. We expect crude oil prices to fall back to the
mid $40’s by the end of the summer.
Confirmation of the Fed’s tightening resolve has produced the expected weakness in gold prices. The expectation of two hikes in the fed funds
rate prior to year-end represents a formidable challenge for precious metals to retrace their spring highs.
Given the continuing falloff in Chinese demand, the current oversupply of industrial metals is expected to keep prices low for the rest of the year.
The advent of US policy normalization should benefit hedge funds positioned for macroeconomic uncertainty and market volatility, as investors
continue to seek downside protection and lower correlations to less stable public markets.
In the private equity arena, we maintain our focus on seasoned, disciplined managers as high asset valuations make it challenging for private
equity firms to buy companies at reasonable prices. We also continue to seek out opportunities in markets affected by pricing or credit
dislocations, or by regulatory changes.
HPM PARTNERS
Important Information
Ben is the firm’s Chief Investment Officer and a member of the
Investment Committee. He has more than 25 years of experience in
investment management. Prior to joining HPM Partners, he was Chief
Investment Officer and Head of Global Investment Solutions for
Deutsche Bank Private Wealth Management in the U.S.
Benjamin Pace
Benjamin Pace
Chief Investment Officer
HPM Partners LLC (“HPM”) is an SEC registered investment adviser with offices in New York, Illinois, Ohio, Michigan and California. This
commentary is limited to general information about HPM’s services and its financial market outlook, which may not be suitable for everyone.
The information contained herein should not be construed as personalized investment advice. Past performance is no guarantee of future
results. There is no guarantee that the views and opinions expressed in this brochure will come to pass. Investing in the financial markets
involves risk, including the risk of loss of the principal amount invested; and may not be appropriate for everyone. The information presented is
subject to change without notice and should not be considered as an offer to sell or a solicitation of an offer to buy any security. All information
is deemed reliable but is not guaranteed. For information pertaining to the registration status of HPM, please contact us or refer to the
Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). For additional information about HPM, including fees and services,
send for our disclosure statement as set forth on Form ADV Part 2A using the contact information herein. Please read the disclosure statement
carefully before you invest or send money.
HPM PARTNERS