SPECIALTY ASSET MANAGEMENT OUTLOOK
FEBRUARY 2017
U.S. Trust Specialty Asset Management
U.S. Trust, Bank of America Private Wealth Management
2017 Viewpoint: Shifting winds
Navigating Uncertainty with Specialty Assets
The winds of change blew steadily throughout 2016, bringing unexpected
events which will influence the U.S. and world economy in the year ahead
and give pause to investors seeking both stability and opportunity. First, in
June, on the strength of a populist movement, Britain stunned the world by
voting itself out of the European Union, and in November, the election of
Donald Trump to the U.S. presidency
concluded a year of divisive
Specialty assets, by their very politics. While in 2016 investors
maneuvered in anticipation of
nature, offer the significant
change, in 2017 change is here.
advantage of broadening
portfolio diversification while
diluting market influence.
During shifting times such
as these, we turn to what is
foundational. Specialty assets,
by their very nature, offer the
significant advantage of broadening portfolio diversification while diluting
market influence. Investments in real assets such as farm and ranch land,
timberland and commercial real estate are independent of most of the
factors that cause market volatility and can be an effective hedge against
inflation. Patient investors can see consistent performance through market
shifts as they reap the potential benefits of illiquidity.
Specialty Asset
Management Outlook
Oil and Gas..................................................3
Farm and Ranch Land...........................5
Timberland..................................................6
Commercial Real Estate.....................8
Private Business......................................9
In Summation.........................................10
U.S. Trust Specialty Asset
Management Team.............................10
As we make our way through 2017, active management of assets in this class
will be key as particular changes brought about by a new administration and
other developments on the world stage materialize. Careful stewardship of
specialty assets can offer opportunities to maximize value while mitigating
unfavorable impacts.
In light of the atmosphere of change, we begin 2017 with optimism for
commercial real estate as well as oil and gas investments. We see a potential
advantageous entry point for timberland investments developing and believe
the long-term fundamental benefits of farmland ownership remain sound.
In addition, persistent concerns regarding the impact of regulation, taxes and
employer mandates on private business may be answered in the short term.
Our optimism extends to the overall U.S. economy, which continues to lead
the world and will serve as a springboard for the specialty asset class to take
advantage of a growing global population and emerging economies worldwide.
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2017 Specialty Asset Management Outlook (cont.)
Oil and Gas
Crude oil prices have rebounded well from the lows experienced in 2016 and recent agreements by members of OPEC
(Organization of the Petroleum Exporting Countries) — as well as several non-OPEC producers — to cut production may
spur oil prices even higher in 2017. In the U.S., crude oil production continues to decline, but producers are profitably
developing at Permian Basin in Texas and STACK (Sooner Trend oil field, Anadarko basin, Canadian and Kingfisher
counties) in Oklahoma.
Farm and Ranch Land
The price of farmland continued to trend back to normalcy in 2016 and should remain on that path in the year ahead
as speculators exit and a more traditional supply-demand point of view returns to the forefront. 2016 was the 4th
consecutive year of record crop production, creating all-time high surplus inventories and driving down commodity
prices. Yet, as a long-term holding, a growing, hungry population coupled with finite supply make farmland an
important fundamental in a broad portfolio that is subject to disciplined management.
Timberland
Timberland investments were slow to recover in 2016, as there were reduced acquisitions by large, institutional
investors. Yet, the optionality offered by timberland — the option to harvest trees during favorable market conditions
or allow the timber to grow and amass inventory during market downturns — can be significantly advantageous during
times of flux when change is afoot but has not fully materialized. Additionally, timber prices should improve in light of
the forecasted recovery for housing starts and a shift to a buyer’s market.
Commercial Real Estate
We expect commercial real estate to perform well in 2017 due to projected growth in the Gross Domestic Product
(GDP), a healthy job market, consumer optimism and low (albeit rising) interest rates. A flow of domestic institutional
and offshore capital emphasizing direct investment in U.S. real estate supports our view. Selectivity will be key and
skilled investors and investment managers must look carefully at geographic areas, property type and other factors to
maximize value.
Private Business
In light of the 2016 election, 2017 could be the year that private businesses see a dial-back in regulations, tax codes
and employee mandates that have presented them with headwinds in recent years, driving down profitability and
acquisition prices. A healthier consumer and business climate, along with continued developments in technology,
should spur businesses to invest in research and development and infuse capital, while also encouraging start-ups.
The IPO climate was slow in 2016 and a seller’s market is still expected in 2017.
2017 promises to present investors with uncertainty, as changes in government and
policy affect not only the U.S., but economies throughout the world. Specialty assets offer
important foundational benefits due to their independence from market influences. We are
optimistic about investments in specialty asset sub-classes such as commercial real estate,
timberland and oil and gas as we move into 2017 and value the class as a whole for its
diversification potential.
2017 SPECIALTY ASSET MANAGEMENT OUTLOOK
2
OIL AND GAS OUTLOOK
Oil
2016 began with plunging oil prices which have since rebounded to approximately double those lows. On the strength
of healthy world oil demand, coupled with a recent pledge by OPEC to remove 1.2 million barrels a day from global oil
production, and similar pledges by non-OPEC producers such as Russia, we anticipate the trend toward higher prices
to continue throughout 2017. Granted, OPEC members have historically had difficulty maintaining the discipline to
stick to quotas. However, this time the economic viability of Saudi Arabia and some other OPEC members is at stake,
so perhaps there will be better quota adherence.
Additionally, with most OPEC members having
Oil Price Turnaround Gets Support from OPEC Deal
produced at or near capacity for the majority of
U.S. Crude Oil Trends
2016, OPEC does not have the spare production
2011=100
$/Barrel
it once had, nor do many of the significant non175
350
OPEC producers.
Because world demand for oil has remained
strong, petroleum reserves have been drawing
down since August 2016, with supply, demand
and inventory conditions creating upward pressure
on crude oil prices. The IEA (International Energy
Agency) estimates that a price of approximately
$80 per barrel (in 2015 dollars) would be necessary
to balance the oil market in 2020.1 The market
dynamics and our 2017 oil price forecast of
$50–$70 per barrel are first steps in that direction.
150
300
125
250
100
200
75
150
50
100
25
50
0
0
2009
Inventories*
2010
2011
2012
Production
2013
2014
Rig Count
2015
2016
2017
Oil Price WTI†
LS
LS
2011=100, RS
$/Barrel, RS
In the U.S., crude oil production peaked in
April 2015. Both the U.S. Department of Energy
* Excluding Strategic Petroleum Reserve
†
West Texas Intermediate
and the IEA project full-year U.S. production in
Source: Bloomberg, EIA, WSJ/Haver Analytics. Data as of 12/19/2016.
2
2017 to be slightly less than in 2016, but monthly
Past performance is no guarantee of future results.
domestic production appears to be currently
turning a corner. While it is reasonable to expect
continued volatility, we look to crude prices to continue trending upward this year. The Department of Energy’s Energy
Information Administration (EIA) forecasts an average WTI (West Texas Intermediate) price of $52.50 per barrel for
2017, surpassing the WTI 2016 average price of $43.33 per barrel.3 That said, the 50% advance in rig count from the
trough has resulted in only a small gain in production.
Gas
U.S. natural gas production has continued its downward trend with domestic gas prices low relative to prices in other
parts of the world. Pipeline exports of U.S. natural gas have been increasing for the last several years, as have LNG
(liquefied natural gas) exports. Yet, LNG exports are modest compared to pipeline exports, accounting for only 6% of
total natural gas exports for the U.S. in the first ten months of 2016 and not considered impactful at this time. The EIA
projects an average Henry Hub spot price of $3.67 per thousand cubic feet for 2017, as compared to $2.60 for 2016.3
IEA, World Energy Outlook 2016.
1
Cornerstone Analytics, January 3, 2017.
2
EIA Short Term Energy Outlook, January 2017.
3
2017 SPECIALTY ASSET MANAGEMENT OUTLOOK
3
OIL AND GAS OUTLOOK (cont.)
Key U.S. Field Developments
Permian Basin, Texas (pictured)
The Permian Basin is still “hot” by historical standards,
with many attractive target zones in the stratigraphic column,
including the highly favored Spraberry and Wolfcamp zones.
Drillinginfo.com records show nearly 3,000 horizontal
completions in 2016, a trend which will likely continue if oil
prices stabilize above 2016 averages. Recent announcements
by the Apache Corporation and the U.S. Geological Survey
highlight the importance of these emerging plays and suggest
billions of barrels are awaiting profitable development.
STACK, Oklahoma
(Sooner Trend oil field, Anadarko basin,
Canadian and Kingfisher counties)
The STACK shale play has gained more prominence in the
mid-continent region recently. As this play continues to
Horizontal completions in the Permian Basin in 2016. Green dots are oil
completions and red dots are gas completions. Source: DrillingInfo.com.
develop, it has been delineating westward and outperforming
expectations. Operators in some areas of the STACK are
beginning to drill density tests and move toward pad development (drilling multiple wells from one surface location), which
increases efficiency, lowers completed well costs and has the potential to improve STACK economics. This play appears to
have sufficient potential to shape not only Oklahoma’s oil and gas production, but domestic oil and gas production as a whole.
BOTTOM LINE
2016 saw domestic oil production and prices continue their decline as the industry downturn was fully realized.
Both U.S. production and commodity prices, however, are expected to end 2017 higher, signaling the potential
beginning of a long-cycle recovery. Key energy policy and infrastructure changes have the potential to drive demand
and increase production.
2017 SPECIALTY ASSET MANAGEMENT OUTLOOK
4
FARM AND RANCH LAND OUTLOOK
Average Value Per Acre of U.S. Farmland ($)
3500
3000
2500
2000
1500
1000
2015
2016
2013
2014
2011
2012
2010
2009
2007
2008
2006
2005
2003
2004
2001
0
2002
500
2000
2017 is shaping up to be a continuation of the 2016
“return to normalcy” for farmland. 2016 brought flat
commodity and land prices and another year of record
crop production. This came on the heels of record
production yields in 2013–2015. The subsequent alltime surplus, which resulted in a downward trend in
commodity prices, will likely carry forward into 2017.
That said, if any of the crop-producing countries
on the world stage were to suffer a crop production
setback due to weather or other factors, U.S. surpluses
could be drawn down to support an increase in U.S.
commodity prices. In addition, the expected shift
from the El Niño to the La Niña weather pattern may
lead to more normal crop production weather and a
return to more average yields.
Source: United States Department of Agriculture. Data as of January 2017.
The farmland market has had reduced activity since early 2015, but in late 2016, the land market had a slight increase
in activity with stronger correlations between cash lease rates and listed prices per acre. According to the USDA
(United States Department of Agriculture), farmland has historically traded as a function of the cash lease yield it will
produce. Given that lease rates have been flat, land values have rebalanced to reflect this principle. Land values are
historically slow to react to farm income cycles, and it appears it will take more time for the land market to embrace
commodity and lease rates. In the second half of 2016, many sellers had to concede that a farm income rally would not
occur in the short term, and entered into the farmland market with a strong intent to sell.
Investors are beginning to look at farmland through the lens of long-term fundamentals and are re-valuing the finite supply
of farmland. Global population growth and increased demand from emerging economies for food commodities must all be
satisfied with a finite, or reasonably reduced, supply of farmland. The precious cycle of high farm values and income has been
replaced with the current cycle of less income, strong production yields and value pullbacks. We like to remind clients to look
at land ownership performance in 10-year segments. While there has been income volatility during these periods, farmland
has still produced income and value, ending these segments more favorably than at the time of inception or purchase.
Current grain prices are close to unsustainable lows, just as past prices were unsustainably high. Grain prices could
still trend downward, but macro demand, driven by a growing world population, lends more credence to an upside
pressure. While we may not see a rapid growth in demand as a result of global economic recovery, we expect, at
minimum, a slow growth in demand on pace with global population expansion.
As we seek to identify farmland investments, we focus on the expected cash an acre of land can produce based on
current prices and yield. We then allow that expected gross income to determine our maximum purchase price
to generate. In today’s current conservative commodity price market, a reasonable return expectation is at least a
3.25% net, cash-on-cash return. Demand for farmland is still high as many believe this downward trend in income
and subsequent prices provide an ideal entry point.
Changing Weather Patterns and U.S. Crops
In 2017, the continental U.S. could begin to see a transition from the El Niño climate pattern to the La Niña pattern, which
would generally mean wetter than normal conditions in the Pacific Northwest and drier than normal conditions in the Midwest.
El Niño is noted for unusually warm water in the Pacific Ocean, while La Niña is noted for a cold event or episode in the Pacific.
Due to this shift, the U.S. could see more normal crop production weather with a return to more “average” crop yields. This
could ultimately mean that small quantities of excess domestic inventory get reduced, but the greatest impact to inventories
would likely be a result of a production impact to one of our global competitors.
BOTTOM LINE
Farmland is not an asset class to be viewed in short-term or year-over-year increments. The current cycle is not
a new scenario for production agriculture and time erodes volatility for long-term farm ownership. Farmland
investments offer unique diversification benefits due to low correlations with traditional asset classes, and given
the basic fundamentals of farmland holdings, coupled with the two income streams of income and appreciation,
we remain steadfast in our outlook over the long term.
2017 SPECIALTY ASSET MANAGEMENT OUTLOOK
5
TIMBERLAND OUTLOOK
Despite favorable market patterns, timberland investments remained slow to recover through 2016 — as measured by
the NCREIF (National Council of Real Estate Investment Fiduciaries) — but yet in positive territory.4 This is likely the
result of reduced acquisitions by large institutional investors, which have a disproportional impact on NCREIF indexes.
This may be due to a number of factors, including the fact that many funds are moving into the liquidation phase and
the shortage of large tracts that funds must acquire to meet their minimums.
This activity does not directly impact private investors which are primarily
Factors that should prove
purchasing in the middle market. A key question is whether that pattern will
positive for timberland
be maintained in 2017.
market advances remain
in place in 2017.
Factors that should prove positive for timberland market advances remain
in place in 2017. We believe that patient investors will be rewarded for past
investments, while new investors should enjoy favorable entry points. Market
factors that suggest a possible turn in the business cycle have not been observed and, in fact, we believe the markets
remain at the early to mid-point of the timberland cycle, which appears to be in an extending state. Attempts at timing
cycles are discouraged, however, as this normally results in lagged reactions to perceived inflection points. Vintage
year investors may find that their strategy of investing over multiple years provides valuable diversification from cycle
factors, particularly with the discipline of acquiring investment grade properties.
Reflecting on observed returns, and consistent with a conservative outlook, we believe that return expectations
should be modestly lower, with a reasonable expectation of total returns in the 6%–8% range as an average if held for
a 10-year investment period. According to the 3Q2016 NCREIF Timberland Index, annualized 10-year investments
showed a 6.8% return. This longer-term hold allows biology to drive returns, as the majority of the trees purchased
early in the investment have the opportunity to grow into higher-return products.
This longer-term hold
allows biology to drive
returns, as the majority of
the trees purchased early
in the investment have the
opportunity to grow into
higher-return products.
Demand Factors
Timberland is a unique asset class in that it enjoys internal market
diversification due to its support of multiple industrial and consumer markets.
Pulp and paper and building materials are the two major timber product
markets. An emerging third market — with as yet a small market share — is
bio energy in the form of wood pellets. Lastly, timberland provides cellulosic
derivatives used in a variety of consumer goods.
Pulp and Paper
Pulp and paper markets are expected to remain robust, with the U.S. Southern
region pulpwood harvest demand forecasted to increase by 8.6 million green tons
over the next five years.5 This market generally uses smaller, younger timber or
older flawed or defective trees and the very high capitalization of pulp mills mean they almost never shut down. Thus, forest
landowners typically find continued demand for “pulpwood” to be used by the mills. This market also supports numerous
other products such as newsprint, office and printing papers, corrugated and cardstock packaging, versatile structural wood
panel including OSB (Oriented Strand Board) and “fluff” products such as disposable diapers. As middle-class economies
across the globe develop, demand for consumer goods once considered luxuries will continue to drive demand for consumer
pulp products and packaging. In addition, demand for wood chip product exports, especially to China, has increased.
Building Materials
As housing starts continue the slow recovery being observed since the housing crisis seven years ago, building
materials should continue to also show improved demand. Total housing starts from January–November 2016 were up
5% from the same period in 2015.6 This recovery has been slower than expected due to economic headwinds suffered
in certain sections and was also adversely affected by a shortage of skilled laborers and insufficient available building
lots.7 On the positive side, housing starts do not show signs of outstripping demand, as we saw prior to the housing
crisis. House sizes are increasing, which will benefit future wood consumption. Continued recognition by commercial
builders of lessee’s desires to occupy LEED-certified buildings for corporate citizenship purposes could suggest further
positive demand for renewable and sustainable building materials such as forest products.
NCREIF Timberland Property Index 3Q2016.
4
RISI North American Timber Forecast 2017.
5
TMS 3Q2016.
6
RISI Log Lines December 2016.
7
2017 SPECIALTY ASSET MANAGEMENT OUTLOOK
6
TIMBERLAND OUTLOOK (cont.)
Wood Pellets
Wood pellet demand, primarily from Europe, has continued to increase, and U.S. infrastructure to meet that demand
has responded with steady growth over the last several years. While still a limited market share, it is becoming
increasingly apparent that this class has the potential to continue to add new demand on U.S. timber resources.
Pellet production is expected to increase by 3.3 million green tons over the next five years in the U.S. South alone.8
Timberland investors will likely benefit from increased competition for product between traditional pulpwood
markets and the new pellet markets.
Supply Factors
We believe that the increase in timber inventory supply from landowners exercising optionality (withdrawing timber
sales from the market due to lower-than-desired prices) during the housing crisis has had the effect of dampening
price increases as demand has returned.9 This has taken longer to rebalance to normal supplies than was anticipated,
however the inevitable result will be that saw log (larger timber used for building materials) prices should return to
long-term averages in the near- to mid-term.
Of more short-term interest, the supply shock stemming from the mountain pine beetle, most notably in British
Columbia, may finally be impacting markets. Salvaged wood from dead or dying forests has flooded markets longer
than anticipated, delaying the impact of a constrained supply of timber in the Pacific northwest. As the supply of this
salvaged wood appears to be waning, the long-anticipated upward pressure on investment quality timber in the region
may soon be forthcoming.
Longer term, as general economic conditions improve, development of rural land should inevitably increase. While
conversion from timber use to farm use and back can and has occurred due to considerations of best and highest usage,
it is unlikely that property that is converted into housing, warehousing, distribution centers and other developed uses
will be de-converted. If land supply for core timberland shrinks as anticipated over the long term, the value of remaining
timberland should have upward pressure benefiting long-term investors.
Optionality: Timberland’s Extra Asset
As an investment, timberland can offer many advantages, including providing a source of differentiated return to a diversified
portfolio. The biological growth associated with timberland has historically produced returns that are independent of the
typical business cycle and virtually uncorrelated with traditional investments. In addition, timberland investors have optionality:
the option to harvest and sell trees during favorable market conditions or to defer a harvest, allowing the timber to grow
and amass inventory, when market downturns take place. Timberland investors’ ability to control how they react to market
conditions is a further advantage of this asset class and one that is best exercised through careful and diligent management.
BOTTOM LINE
Timberland remains a valuable tool for investors seeking tax efficiency, a hedge against inflation and attractive
risk-adjusted return assets that can preserve and appreciate wealth while providing excellent risk diversification.
Mid- and long-term outlooks for this asset class remain attractive, with good short-term opportunities emerging
as well. That said, timberland may not be appropriate for investors seeking regular income yield or those having
a short-term outlook. The ability to schedule timber sales to match unfavorable market windows means that
revenue events can become irregular or “lumpy”. Additionally, if trees are harvested before they grow into higher
valued products over time, anticipated returns might not materialize. Patient, long-term investors not in need of
consistent yield may find timberland to be an excellent part of a diversified portfolio.
RISI North American Timber Forecast 2017.
8
F&W 2016 Forestry Annual Economic Summary.
9
2017 SPECIALTY ASSET MANAGEMENT OUTLOOK
7
COMMERCIAL REAL ESTATE OUTLOOK
We anticipate continued positive performance for the primary commercial real estate (CRE) sectors heading into 2017,
driven largely by continued growth in Gross Domestic Product (GDP). This growth may even be accelerated by changes
wrought by the new administration, according to some observers. Other factors contributing to positive performance
are a healthy job market, increased consumer spending, continuing (albeit increasing) low interest rates and a flow of
domestic institutional and offshore capital emphasizing direct investment in U.S. real estate.
Supply-side fundamentals for rentable space across the major property sectors and in most U.S. markets are considered
to be in generally good shape and may be expected to remain that way through 2017, notwithstanding what we
consider to be relatively full valuations and a maturing cycle. The demand side of the equation for rentable space also
continues to be strong. Increasingly, growth in property-level net operating income (NOI) may be expected to be the
main driver of CRE returns in 2017. As always, property fundamentals (occupancy, rent growth, supply and demand)
and investment results will vary by property type and geographic location.
Supply and Demand for Space
On a national basis, we generally find healthy demand indicators with occupancy rates near long-term averages across
most property types and in most geographic markets. Consistent job growth and new household formations, along
with consumer confidence, have helped to generate steady demand to absorb vacancies and drive rents. New supply,
governed in part by a reasonably disciplined approach to construction lending by banks, remains largely in balance
with expected demand.
Multifamily: New supply is running at or below long-term averages, which is approximately 320,000 units year-over-year as
compared to the long-term average of approximately 400,000 new units per year.10
Industrial: The year-over-year new industrial supply of 173 million square feet per year exceeds the long-term average of
approximately 150 million square feet per year.10 We believe this to some extent reflects the trend toward development of large
fulfillment warehouse centers (on average over 500,000 square feet per property), fueled by the explosive growth in e-commerce.
Office and Retail: The year-over-year new supply for both office and retail are both roughly one-half of their long-term averages.10
This data fails to capture the pronounced functional obsolescence of rentable space in suburban office as well as industrial settings.
A look at debt markets for real estate indicates that lending appears to be more conservative today than during the
pre-recession peak, helping to moderate speculative construction of new supply of rentable space. For example,
construction lending by banks, the traditional source of project-level development loans for commercial real estate,
is at 53% of the peak levels of 2008.11 Additionally, the commercial mortgage backed securities (CMBS) market new
issuance market is much less active with 2016 year-end volume of $76 billion compared to $228 billion in 2007.12
Overall, CRE lenders have so far maintained good underwriting standards and debt markets do not appear to pose an
immediate risk of overfinancing for a pipeline of speculative projects.
Considering Capitalization (“Cap”) Rates and Property Values
The current market opened against a backdrop of several years of cap rate compression coming out of the great recession,
along with continuing low interest rates. Since long-term Treasury yields are the accepted proxy for a risk-free rate and an
important component of cap rates, there is concern that cap rates may go up with an increase in Treasury yields, potentially
resulting in declining property values. However, it is important to bear in mind that cap rates are also a function of other
factors, including growth in rents and NOI, average cost of capital, and investors’ risk appetites. Current cap rate spreads
(the spread between cap rates and Treasuries and a good benchmark for gauging value expectations) for core properties
are generally in the range of long-term averages, suggesting fair valuations at this stage in the cycle and that NOI growth is
expected to be the main driver of CRE returns into 2017.
BOTTOM LINE
Commercial real estate is expected to perform well in 2017 and beyond, based on the expectation of solid job and
GDP growth aided by consumer and government spending. As the current cycle matures, we continue to emphasize
the importance of a deep dive into property fundamentals and regional macro-drivers in making investment
decisions. Well-selected commercial real estate offers long-term durability of cash flow and value, along with a hedge
against inflation and low relative volatility. This is especially important in the current and mature phase of the cycle
with increased inflationary expectations and continuing volatility in other asset classes during a time of change.
CoStar 3Q2016.
10
Bloomberg, FDIC December 2016.
11
Commercial Mortgage Alert December 2016.
12
2017 SPECIALTY ASSET MANAGEMENT OUTLOOK
8
PRIVATE BUSINESS OUTLOOK
Although the results of the election are now known, much remains unknown about the long-term impact of the
new administration on business owners. Thus, while steady, modest growth has been present for a considerable time
in the business arena, volatility is expected to creep in during 2017. That said, there is an uptick in optimism in the
business community as they expect favorable change in three key areas of longtime concern: regulation, taxes and
employer mandates.
The Federal Reserve reported modest economic expansion in most regions in 2016 and economic drivers have
remained fairly consistent in recent years. Growth has remained adequately constant to warrant a modest increase in
interest rates and additional upward movement is expected as we move into 2017. Consumer confidence was somewhat
volatile in 2016 in anticipation of the election but had a sizable uptick afterward, ending the year at a 13-year high.13
Exports have faced considerable headwinds given the strength of the U.S. dollar but there was good news on the
employment front as the unemployment rate remained within a fairly tight band. Many business owners report tight
labor supply, especially for skilled workers and many states enacted higher minimum wage standards in 2016.
Concerns among business owners regarding
taxation have abated somewhat with the
expectation of lower rates and simplified structures.
Another key source of improved sentiment stems
from expected improvement in the regulatory
climate, following long-awaited changes in
overtime rules and employee classification that
went into effect late in 2016. The debate about the
Affordable Care Act is expected to escalate in 2017,
with considerable impact in the balance for both
individual and business obligations.
Record Jump in Businesses Thinking That “Now Is
a Good Time to Expand”
Index*
16
12
Biggest two-month gain on record
8
4
0
A healthy business climate and rapidly changing
-4
technology will likely attract startups and lead
-8
existing businesses to invest in R&D (research and
1986
1990
1994
1998
2002
2006
2010
2014
development) and capital. 2016 saw increasing
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Jan
divergence in the amount of capital poised for
NFIB: Percent Reporting Now Is a Good Time to Expand (Two-Month Change)
acquisition and the supply of companies ready for
*The Index of Small Business Optimism refers to a survey conducted in December 2016 and a
transition. Growth, being more difficult to sustain
sample of 5,000 small-business owners/members was drawn.
in the more mature companies, is the target for
Source: National Federation of Independent Business/Haver Analytics.
Data as of January 12, 2017.
strategic and financial acquirers. The IPO climate
remained slow in 2016 with a number of headwinds
still present as we begin 2017. While transactional multiples remained high, they moderated somewhat toward the end
of 2016, based on somewhat lower quality among companies on the market. Financial buyers, with a great deal of new
capital at their disposal, will continue to pay top prices for target companies.
Taxes, Mandates and Regulation: What Changes Could Be Wrought?
•T
he Affordable Care Act – In the days since the election, the new administration has dialed back promises of a
full repeal, in favor of amendments to the plan that might include partial repeal of key provisions such as the individual/
employer mandates and new policies intended to increase limits for Health Savings Accounts.
•P
arental Leave – Although the new president favors deregulation in many areas, he appears to favor more regulation
regarding parental leave and during the campaign proposed six weeks of paid leave for mothers, financed through the
unemployment system.
• Immigration Reform – Businesses could be affected by immigration reform that would likely include an increase in
enforcement of immigration and workforce authorization at the worksite.
BOTTOM LINE
Just as the election brought a number of surprises, the new administration is expected to follow suit. This brings
significant expectations around business and personal taxation, business regulation and employer mandates.
A seller’s market is still present in the M&A (mergers and acquisitions) arena.
University of Michigan consumer sentiment survey January 2017.
13
2017 SPECIALTY ASSET MANAGEMENT OUTLOOK
9
IN SUMMATION
In 2016, the winds of change brought the U.S. a new presidency along with events abroad promising significant
ramifications for the world economy. As we progress into 2017, investors look to practice prudence and diligence in
broadening their portfolios and leveling out potential market volatility, while still seeking return. Specialty assets have
the potential to balance out the impact of change over the long term. Assets such as oil and gas, farmland, timberland,
commercial real estate and private business have long been held as a building block of wealth in the United States and
present themselves with particular appeal in 2017, a year of change.
U.S. TRUST SPECIALTY ASSET MANAGEMENT TEAM
The Specialty Asset Management Team at U.S. Trust can offer the strategic insight and
specialized expertise required to manage and maximize the potential of these investments.
U.S. Trust, Bank of America Private Wealth Management
Dennis Moon, SAM National Sales Executive
Doug Donnell, National Timberland Executive
John Taylor, National Farm and Ranch and Oil and Gas Executive
Andrew Tanner, National Private Business and Real Estate Services Executive
This publication is designed to provide general information about economics, asset classes, ideas and strategies. It is for discussion purposes only since
the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances.
Neither U.S. Trust nor any of its affiliates or advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before
making any financial decisions.
Past performance is no guarantee of future results.
Nonfinancial assets, such as closely held businesses, real estate, oil, gas and mineral properties, and timber, farm and ranch land, are complex
in nature and involve risks including total loss of value. Special risk considerations include natural events (for example, earthquakes or fires),
complex tax considerations and lack of liquidity. Nonfinancial assets are not suitable for all investors. Always consult with your independent
attorney, tax advisor, investment manager, and insurance agent for final recommendations and before changing or implementing any
financial, tax, or estate planning strategy. Client eligibility may apply.
Diversification does not ensure a profit or protect against loss in declining markets.
This report may not be reproduced or distributed without prior written consent.
© 2017 Bank of America Corporation. All rights reserved. | AR5MG8MT | 02/2017
2017 SPECIALTY ASSET MANAGEMENT OUTLOOK
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