C.J. Lawrence Portfolio Strategy & Outlook 2018 Webinar Recording
Good, afternoon everyone, and welcome to, the CJ lives portfolio. Strategy, in Outlook 2015. Call we. Are privileged, today to have three, very talented speakers, on the call. The first is Bernard cuff he is, CJ largest CEO and leaves. The investment management team here prior. To relaunching, CJ Lawrence in 2014. Bernard. Spent 16, years at, ISI, together, with the existing, team including, CJ Lawrence as chairman Jim molt Bernard. Began his career in 1989, as a corporate banker in London at Deutsche Bank and it's structured, finance division, at. CJ Lawrence Bernard advises, high net worth clients across, most the most invested. Oh sorry, and closed across, most investable, at my classes he. Also managed, manages. The American Renaissance and, Bulldog even, investment trusts portfolios, here, Bernard. Is also the president accessory, of the upper foundation a new york-based nonprofit. In the, arts based in New York City, Kerry. Gardner is also speaking today he is a senior managing director and portfolio, strategist, Terry. Rejoins CJ Lawrence in 2015. Bringing a wide range of experience, to our investment management efforts in addition. To managing clients, portfolios he's, also the author of CGA, Lawrence's weekly, market commentary, prior. To cg alliance he provided strategic, advice to companies and incidentally. Institutional. Research market, via. His own firm Gardner capital, we. Also have David, Gallagher speaking, today David, is a senior, managing director and portfolio, manager here at CTL arts prior. To CJ Lawrence David was a managing, director at ISI, where. He expanded. Their private client base and managed, their international, money, management capabilities, David. Is the lead portfolio, manager of CJ, Lawrence's international, portfolios, including, the European select, portfolio. With. That I'm going to hand it to Bernard first to, provide his thoughts, Bernard, then. Thank you very much for the interruption introduction. While. 2017. Was was what, we would call a perfect year it's, actually the first time that the S&P 500 was, up every. Every. Month for. An entire year that's, never happened. In the indexes, history we've, also after. 13, months now had. Absolutely. No, three, percent correction, in, in 13, months that's also never happened, so it's, certainly been an extraordinary year. This, is now the second, longest, bull mark market, in duration, I mean the last bull. Market that we had that was almost as long was in the 1990s.
So. Certainly. There are questions, about the duration, of this bull mark market, and. Hopefully. At the end of this webinar, we, will have answered, some of your questions about. Where. Where we're headed in the next year so, one. Of the big surprises I think in 2017. Was that grows from value, I mean after the election in November of 2016. You know there was a lot of money flowing into value. Type investments. Because, the, surprise. Election, certainly. Caught. Economists, by surprise because, it, was unclear, that or, was not expected. That we would have a president that would basically create. A road. Map or an environment, which would be, very. Business-friendly so, I mean the, business friendly type their legislation, that we got certainly, lower taxes, lower regulation. It took a while for these to take hold but you, know it basically. Until, August, of last year. We. Finally, saw a rotation. Into some of the more value type stocks that are more cyclical. In nature so. As. We, sit here today it does not feel like a top I mean we're always asked this question is this the top of the market is at the end of the cycle having. Done this through, a number. Of cycles. We. Don't think this is a talk so it, feels, more like the, mid 1990s where, there was certainly, a lot of exuberance. But. There was certainly a few. More years or at least one or two more years to go for. Positive returns in terms of baseball. Terminology. We would say this is sort of the bottom of the seventh inning in terms of the market so things. Get more exciting, towards the end of ballgames, but. And. Certainly things can get more volatile. But. We, think there are a few more exciting, innings to go in terms, of our clients. We. Had a great year for our clients, our equity, only Bulldog and Bulldog, portfolios, were up 27%. About. 27%. In 2017. Even. Our balanced, portfolio. Is, worth 21%, these are certainly exceptional, returns, and. We would certainly say that it. Would be foolish. To think that such. Lofty, returns, could be repeated in the coming year so turning. To the. Next. Slide, at, cj Lauren's a very believe in active management I mean typically, in, the later stages, of a bull market there's, always this, this. This. Chatter. Or. Discourse. Which is centered around active. Versus passive management. And it's. Interesting it's not just technology, that's driving, this I mean we saw this even. In the 80s, when. There was this notion about creating. Country baskets, and creating, indices, for, certain, asset, classes so, we, we. Would argue, this is a typical. Sign towards, the end of a cycle when, a. Lot. Of portfolio. Managers are either behind the index are not beating the index so there, is this sense that well, why don't we just ditch active, management and go. With indexing, we, would think that is a misguided. Sort. Of approach, and. The. Reason we say that is it's very interesting if you look at the chart on slide. Number four. Correlations. In the market are breaking down so if you look at just. In the last two years I mean we had this very. Interesting period certainly, after the financial crisis. Were, correlations. Were very high. And. It, was very hard for active, managers, to add any value so if you look at the, chart on on. Page. Four. We. Are now I mean every time there's a crisis, there, is certainly, a tightening. Up of correlations, within the market but every time we we, go from one crisis, to the next actually. The correlations, continue, to drop so, that's, why we've seen in, 2017. I would argue a big, discrepancy between types. Of styles of investment. Which. We believe will continue. Certainly. You know lots of money is flowing into ETFs. You know that's something we're, watching, very closely I mean there are now three point four trillion dollars, in ETS I mean, that compares, to about 14, trillion and mutual funds.
Only. In 2010. There were only one trillion, in etf so there's a lot of passive, money out there but. We, would argue the danger is with the passive, money not with the active money so. If we turn to to, what. We would argue is a stock, pickers, market, on. Slide, number five if, you look at a picture of the 50 largest. Companies. In sp500, right now. And. Just plot their their p/e ratios, it's, a pretty tight range I mean the median of these p/e ratios, a certainty, you, know quite. Lofty, at 19 times or 19 point seven times but. If you look at the concentration, of these Pease ratios. It's in a pretty tight range that's, not typical, for tops, and markets so if you look at the same picture, at. The top of the market in March 2000. You see a much more fanned, out. Picture. Of different PE ratios, so what. That really means is for us as stock pickers, a lot. Of stocks especially large stocks are being pretty, much. Painted. With the same valuation, brush, we. Think that will change in, the next couple of years so you, know we're trying to figure out which kinds, of stocks will. Get premiums. Versus. Others and. I think that's where we can as active, managers, add a lot of value this, was very similar action similar similar, actually in the mid-90s when. We you know we. We. Were very excited, that large. Cap companies, that had sustainable. Growth rates were, given, very similar. Valuation. Or p/e, ratios, relative, to some of their peers on the value, side which was not justified, so. If we turn to the. Next slide, it's. Always interesting to ask portfolio, managers, where, are you spending your time so, you know we're still, very excited, about the stock market there are basically. Four, areas, where we're spending a lot of time I, mean, the. The the the, the, biggest area, which is produced, outsized, returns early in technology, is in cloud computing. I mean, cloud computing. Has has. Basically. Created. Opportunities. That, are only just, at the beginning stages of being. Developed and where what I'm talking about here is artificial, intelligence, it's autonomous, vehicles, and it's genome, human. Genome sequencing, so, and, it's, interesting, if you think about all those four areas, it's. Really convergence. Of big, data that, is now being actively. Used in different areas, everything from you, know retailers. I mean it's if I would tell you that one-third. Of all orders, and Amazon, are actually, created, by artificial, intelligence or machine learning you'd probably be surprised so when, you're you, know basically. Searching for an item to buy on Amazon Amazon knows, what you're looking for already they're suggesting things, for you to buy so what, we're gonna see in the next couple years is a transformation. In machine. Learning and how that basically. Will transform. Retail. We're. Seeing similar things happening, in the autonomous, vehicle, side so with. All the chips and sensors, that are being produced by some, pretty innovative. Semiconductor. Companies, these include Intel, which. Purchase, mobile I these, include Taiwan, Semiconductor these. Include NXT, we're. Collecting, a ton of data so. This data is being used, by, you. Know active, cloud. Computing, companies, and its really the big companies, I mean there's a lot of discussion, who's going to be the big beneficiary.
Of Growth going forward is. It the small guys is it the big caps you, know isn't, it the fact that you know Facebook's in the googles in the Microsoft, have had a great run well we, would argue this gross, wave wave, that we've seen with these technologies, is not over, and the the. Beneficiaries. Of these, technologies. Are actually going to be with the very large companies, because, they're they are the ones that own the data there, are the ones that have the the resources. To exploit, this data and so forth so. Healthcare, is sort of the last piece of this it's, very interesting, if you look at how the. How, cheap, computing, power has changed, the healthcare sector if you look at the very. Exciting new technology, which is the human genome, sequencing. I mean that project, began there, was a three trillion dollar project, back in 2003. Where he had a bunch of scientists, trying, to map the human genome so, in, 2006. It. Cost twenty million dollars, to actually, sequence one human genome twenty, million dollars today, that's a hundred dollars so. If you think about health. Care going forward you. Know when you go to visit your doctor it's not just going to be about okay. Give me your blood. Sample and so forth you're, gonna as. A part of your regular checkup, you're gonna have DNA, testing, and part of that and that's going to open a whole new, exciting. Growth sector, from, diagnostic. Companies, the likes of Illumina, and thermo Fisher but, also new, types. Of services, that are going to going, to spring, up and that's for, us very exciting. To find ideas there so. I'll. Turn to the next page which is just to back up a little bit where where, we are from or from a big picture point of view I. Would, argue what. We've seen since 2008. Which has been coined sort of the new, normal economic environment. Is now over, so. We've seen this what. We could call the the, lost decade of growth in the United States which is basically. In the wake or from the from.
The 2008, period, where, potential. Growth in GDP, in the US was, always, lagging so, we had ten years of that well guess what that's over so, now we have to prepare for normal. And what. Is normal mean so, I've. Listed a few things that that is normal, and it's actually, you. Know it's it means, a lot of things it doesn't mean it should necessarily has to be scary but it, just means that that market. Purchase, practitioners. And investors. Need, to be prepared, that normal. Markets, produce certain outcomes, so when. We talk about normal, what does that mean it means that stocks and bonds will diverge, I mean, we've seen a thirty-year, bull, market, in bonds and we, also also have seen stocks, make no high so that, is in a normal, market, not that, that should not continue, so. The, second thing is our front financial, system has always been, based. On positive interest, rates you know we still have negative, interest rates in Europe, as. Well as in Japan it's. Very hard for for. Risk, managers, to figure out what the risk-free rate is, and, determine what, asset classes are riskiest, if you have negative rates that, will change so if, you think about inflation and deflation it, will basically. Again, tell you where the risks are because, we can better calculate, risk-free rates. The. Next thing is deficits, will matter again I mean, we saw, the historic. Tax cut. And and reform, that was passed. Certainly. That. Was very similar DIF to to the GDP growth in the US but. It will also add fiscal. To. The fiscal deficit, so. Our. Our, sort, of estimate on that is about six hundred billion annually, we. Know that the. US government, or the Federal, Reserve has announced that its balance sheet will basically, not expand, beyond. 2018. So we, need to worry about the concept, of crowding, out so. Crowding. Out is something people are very familiar with who lived through the 1980s. So where we had deficit. Type spending, as well it, created certainly, created GDP, growth but it also created, very high interest rates so I'll give, you an example when I got my first mortgage. In the 1980s. I paid 13, percent, for my mortgage so, the. US government was rolling it and borrowing its money and it got it in a much lower rate but, my. Mortgage was at 13%, so, basically. That the the lesson here is the. Government, will get its money and. The. The the part that we need to watch very carefully is, if you look at the total, outstanding debt, of the US government right now 50%. Of that needs. To roll in the next three years and the, coupon, on that is less than 2% so interest. Rates will rise quite, dramatically. Profit. Margins that's the next thing that's going to be a normal, situation so, we, need to worry about companies. Defending. Their, profit. Margins, in, a rate rising, environment, wage. Costs, also rise so we need to find companies, that we, often call Bulldogs, that. Demonstrate. Pricing, power pricing. Power is going to be very very important, in this next cycle. The. Other normal. Aspect. Of, or. Normalization, process is that business cycles will also become shorter. We've, seen this sort of low growth environment, to, two to two and a half percent growth since, eight but, when we normalize, interest, rates and inflation is. On the horizon, that's when business, cycles become shorter, so we will start worrying about recessions. Much sooner, rather, than later, the. Cost of capital for companies, will go up so I mean, you saw what happened, with GE I mean ge used to be one of the greatest, allocators. Of capital, and now, it's a company that's trying to figure out where to go next so, in this next cycle we got to be very. Clear. To find companies, that are good allocators. Of capital, because the cost of capital is going up, currencies. Which. Is more of a macro thing. Currencies. Have been all over the place and it's been it's very difficult, to forecast currencies. In the current environment but one thing is clear, once. We normalize. The, economic, environment around, the globe, the. Relative, strength of currencies, will be determined, less by, central, banks but more by the relative, strength strength of the economies, which, is very important, so. The, last thing I'll leave you on the normal. Side. Is, for. Money managers, it means you have to be much more active and. That's very, difficult actually, I mean it's very easy to say you have to be more active but. It means you have to do your homework you have to have conviction, about you do about. What you do and. There will in normal. Conditions, there will there, will be certainly winners and losers so, you, know when the tide goes out you, will see winners and losers so. I will, end my piece with just the. Business. Cycle on a global basis. It's. Very I mean the good news here, is that. Pretty, much every, region. Of the world right now is in growth mode so. Every. Economy, has has has, come out, of the you, know the the. Wake of the 2008, crisis, and is actually, accelerating, growth this, is a good, environment, for us to be.
Investing. Money and so forth so I don't want you to feel like there. There are only clouds on the horizon but. So if we're going to go from the new normal, to normal, the. The macro. Environment globally. Is actually, quite, good for us to achieve that in. A in a, somewhat orderly way so, I'm going to turn it turn this over now to Terry, who will go into more detail. On portfolio. Strategy, thank you very much. Great. Thanks Bernard and good, afternoon everybody, let's, take a look at the current market environment engage where things can go from, here in the markets, so. You. Know we try to stay very focused, here at cj Lawrence on a couple of key elements, of equity, market, behavior and they would be corporate earnings interest. Rates and inflation, and. As. You, may. Be aware corporate. Earnings are growing at a pretty rapid clip interest rates are low and. Remain low and inflation. Is in check, creating, a very supportive environment for, for higher stock prices, so some might say that Goldilocks is actually still in the house on, page. 12, to dig, into the earnings a little bit deeper and I know this is a busy slide but I want to draw your attention to the box, in the middle of the page on the right side, that, line, shows, the. Annual, year, of a year earnings, growth of the S&P 500 and, as, you can see for. The past several years earnings. Growth has been in the mid single, digit range if, you see in the box starting, in 2017. Earnings. Are now growing at a double-digit, clip, and in fact growing, at a double-digit, clip, for, three years, consecutively. 20 17 18, and 19 that's. The first time that earnings will grow. Three. Consecutive years at a double-digit, rate since the early 1990s in, fact. They've only been four periods, since, 1960. When. You've, had three years of consecutive double-digit. Growth and all, three, all four of those periods, with the exception, of one which. Took, place in the 70s, during a period of very high inflation and, an inverted, yield curve are, the, other three periods. Delivered. Average, annual, returns of 15 percent, so that earnings. Growth schedule for the next couple years is very supportive, of. Very. Positive, stock returns, also. On this slide I draw your attention to something that I think is interesting, down.
Towards The bottom I've boxed in two numbers that's. The capital expenditure, growth line so, this line just shows the capital, expenditure growth year to year of S&P 500. Companies and looking, back over a long period of time it averages, five to seven percent well. You'll notice in 2015, and 2016 that, those numbers went negative, so there's not been much capital spending, by some of the largest companies in. The, United States and for the world, in that, regard and so, we, would expect a capital, spending. Growth would accelerate even, on a normalized, basis, just you to pent up demand but, based on corporate tax reform but. Those numbers could go much higher and that would be very supportive for. The US economy and, for corporate profit growth, flipping. Over to page. 13, as, bernard, mentioned, you know profit margins, are relatively, high and in fact quite resilient. I mean surprising. If you look at this chart to see that profit more rebounded. In, the, first quarter of 2016. And, what this means is that business. Models have leverage so as the economy grows, as, companies, grow their businesses, a lot, of that game. Will drop to the bottom line and that's again supportive, of corporate. Profit, growth on. Page. 14, not just focusing, on interest rates for a moment you often hear, in today's press, about. Rising interest, rates and how and, the chances, that that those rate. Rises, could upset the equity markets and in fact that's true I mean rising, interest rates is, typically. Negative for, equity, prices, but, I think it's important to keep rising. Rates in perspective. This chart takes, the ten-year benchmark. US Treasury, yield back to 1950. And, as you can see we're. Still even, with the recent bump, up in 10-year. Yields, we're still at a relatively. Low, historically. Low level, of interest rates in fact, today the, 10-year yield is around 2.6. - if you wanted to add that plot to, this chart so we. Don't necessarily get nervous until the 10-year yield starts to move rapidly between, kind of four and five percent so we've got a ways to go where, we believe the interest rate environment, is still very supportive, of stock, prices and. Corresponding. With that on slide 15 is, the, inflation picture. Inflation, is important. Because. A, high. Inflation, erodes pricing, power but it has an impact on on the market multiple as well but as you can see inflation, for, the most part remains in check in fact close, to historic, loads. Now, we would expect an inflation will rise you've got tight labor markets, you've got high raw material, prices you, still have accommodative.
Monetary, Policy and, the, recent of fiscal. Policy stimulus. Will. All add, to a very potent inflationary, mix, so. Inflation, is something that. We're going to be on the watch for but. At the same time, inflation. That remains below, 2% and, it makes them may take some time for, for. That figure to climb higher than 2%. And the, reason as I suggested, on page. 16, you'll see you. Know the importance, on how inflation impacts, the. Equity markets. It, matters because it impacts the multiple. Which, investors, are willing to pay for stocks so on this page you'll see the. CJ, launch rule of 20 which was conceived, by, our chairman Jim bolts back in the early. 1980s. And this the simple rule states that if, you add the mark the market multiple to. The annual, rate of inflation you should get about 20, and it's. Just a quick rule of thumb but it's proved very useful. Historically. As you can see where we are today given. 2% inflation and, in. 18, or 19 multiple. On the market, that, that ratio, is hovering around 20, so some would you know tell you that the market is extended, from a valuation perspective the. Rule of 10 of 20 we tell you that valuations. May be relatively, high but given the, backdrop of inflation, there in a reasonable, range. So. Let's take a look then on, where this market can go everyone, loves forecasts. We try not to, necessarily. Point put a point target, out there where we think the market can go but, we do try to frame the discussion with. Some discussion, of of. Multiples. And earnings and and, bracket. The market based on on those expectations, and, estimates, and all you see on this chart is um, some. High-low multiples, for the years. Annotated. Earnings, per share and, then and then prices and so 2018. And 2019 are estimates. We've. Used a 20, is a high multiple and a low of 17, and I. Dropped. In there, $155. For earnings, for 2018, now that number that. Estimate, is not there yet if you pulled up any of the consensus. Services. That provide averages. Analysts, estimates but. It's headed there, because. With corporate tax reform being factored. Into results. And guidance the numbers for, 2018. Have been creeping up quite steadily they'll probably top. Route top out around 155. And if you use. That. Earnings, estimate, with the range that we've indicated you, get a market. High an, SP, number, somewhere around 3100. It's, currently around, 2002.
28 39 is the current level which. Means you know me to the top you've got another, 9% to go but, it also means at the lower end of the multiple range you've got 7%, on the downside, so. Just using a simple math the risk reward still favors upside but. The point I think is that. Expectations. For returns, should. Be lower in, 2018. Than they were in 2017. And. That's, confirmed as well if you look on page 18 by our CJ, Lawrence Market Monitor, which, is a model, that we've used since the early, 1980s. Which compares, the attractiveness, of stocks, versus, bonds so as you can see the market monitors, and by territory. At a, score. Of 3 out. Of a total maximum of 6 there's, six, there's six, components, within the monitor, to. Our, fundamental. Base to our interest rate models, and to our technical, and breadth and and. We use this model to gauge the attractiveness, of the, stock market versus. Fixed income instruments and, it's the, market is still supportive, of owning stocks versus, fixed income, so. If you drill this down a little bit further for market down into sectors on slide, 19 you, can see that we're, continuing. To overweight. Technology. Healthcare. And financials, and we. Would be underweight, in what. Many would consider some, of the value, sectors, like staples. Utilities. And REITs. And. Then finally on slide. 20, look just to summarize, our perspective. You, know, we do believe that stocks will move higher in 2018. But we, believe that investors, should keep their. Expectations. Muted, and. Probably. More closer to historic, ranges, of 7 to 10 percent returns, we. Continue, to favor growth, versus value and, one of the things I think that may be missed in the market is that value is just not cheap so for those that are rotating from grow stocks to value, their, finding expensive, outcomes, and. Just an example of that would be, if you took Clorox, which is kind of the quintessential, value, stock. Growing. At 3% on, the top-line 6%. On the bottom-line the, stocks trading at 23, times forward estimates that, to. Us sounds, relatively, pricey. Versus. Facebook, which you could consider a quintessential, growth stock which. Is growing, at 34% on the top line. 16%. Growth on the bottom line this year because they're considering an investment year. But 25%. Growth from the bottom line next year trading. At 20. And a half times next year so you can see the relative value, can sometimes be a trap, for those rotating, thinking, that it's cheaper. On the value side, our. Views evaluations. Are high but as the rule 21, points. Out are not extended, and bull, markets, in fact don't die on valuation so, we're. Keeping an eye on on the, fundamental, factors, including, leading indicators, interest rates and inflation and. I would also point out the supply demand for, stock still favors, higher. Stock prices, when you think of the actual, number of shares available to investors in the market that, pool of shares has actually shrunk over the last several years due.
To Buybacks, retirements. And a, lack of IPO, activity, in fact, a number of companies listed, on public, exchanges. Peaked, out in the late 90s. At, just, north of 7,000. Companies, and there's only now about less. Than four thousand, companies publicly, traded so as money comes into the market it's got fewer stocks. To buy and, as, a reminder our largest overweights would continue to be in technology, health, care and financials, what. We don't know is what we don't know the risks are always that Black Swan event that could be out there looming, a, geopolitical. Event, that's unanticipated. But, one of the things that we will keep a close eye on which I think we can gauge over time is whether, or not interest, rates will rise at, a rapid, pace and. Inflation, will rise at a rapid, rapid. Pace those, would be warning signs to us and of course you, know China's economy is growing at a good clip but should there be some contraction, in there credit conditions that. Would be a warning sign for the global economy and, for, stock prices as well as, course it's growth, falls, short of expectations, well. You. Know people would have to ratchet down expectations, from, there and that would be negative. On stock prices, but generally we, remain constructive. On stocks expect. Single-digit, returns and, we continue to favor growth. Versus value so. With that I'll turn. The discussion over to my colleague, David Gallagher, who will address the, international. Market opportunities. Dave. Thanks. Terry and good afternoon everyone. International. Markets in general had a terrific year in 2017. It. Was the first time pretty much post-crisis. Since, 2008, 2009, that the US was not among, the top performers, you, know it was obviously a great year in the US as well, emerging. And select, asia-pacific. Markets were, generally, standouts, career, led the charge with with 45, percent returns, in, u.s. dollar terms that. Was closely followed by China India, Hong Kong and Singapore all up over 30 percent again, in US, dollar terms. European. Markets broadly. Similar in aggregate to the US Germany. France Italy and Spain were ahead in the high twenty percent range and. The UK lagged a little bit but still put in a high teens return. Some. Of the slower markets, really were the commodity, driven economies, like Canada, Australia Russia, although. They still put, in a pretty healthy on, those low, or high single digit low double-digit, return. For the year in US dollar terms so that's you, know that's certainly not bad, at. A sector, level international. Markets tracked pretty, closely with the US despite. You know a number you know a number of the economies being in different stages of the business cycle I, think, one difference. Just. Worth noting, is that some, of the more defensive sectors. Like consumer, goods utilities, and telecoms, tracked. Ahead in international, markets, I think that probably reflects, a moderate. Lingering, caution, among international investors, and also. I think a generally, more dovish interest, rate environment, particularly, in Europe in Japan so that probably accounts for the difference there. Despite. The strong performance of international, markets and 17 that remains a significant. Gulf in. Performance, between the US and global markets, that's emerged after over, the past 10 years. If, only, as a catch-up play there's potentially, tremendous, relative, upside in international, stocks should the global, macro backdrop, remain constructive.
One. Of the characteristics. Of international. Stock market performance over the past decade, has, been the risk-on. Risk-off. Pattern. That we've seen in most major international. Markets, Europe. In particular which is obviously, long been considered a developed, market region. Has. Traded much like an emerging market in the past decade, where. Volatility, has been significantly. Higher than the US that. Is not, historically, the norm but but obviously you know reflects some of the acute problems, Europe's experienced. In. A sovereign debt concerns, Greece, Spain Italy, etc. But. As Europe recovers. Economically. And improves you know it's structural, problems, you, know including, you know strengthening, its banking, system, the, gap between US, and Europe. European, equities, over time should reduce. I. Think, the pie charts on on slide 24, revealed, to me a significant, shift in global asset, flows over the past decade, and a, potentially, significant. Opportunity. When. You know discussing, global investment, strategy I always like to start by showing investors. What the world actually looks, like in economic. And market terms and, the. U.s. currently accounts for 51, percent of world stock market capitalization. But. What the first shot doesn't show her is that since. I came to the US a you, know 11 years ago and started presenting these numbers the, share of US market capitalization. In 2006. And 7. Pre-crisis. Was, close to the mid-40s, and. At that time I was actually presenting, on the long-term trend, of international. Markets growing and. Of course that trend has been rudely. Interrupted. Was. Rudely interrupted in 2008. And subsequent. Years and. The opposite is actually hacking happened. However. If you consider the economic share, during the past decade, and particularly if you look at asia-pacific. You, know thanks largely, to China and India economic. Share in. A number of these countries has increased substantially. So, you've got a trend for the past decade, where major emerging. Market economies, have grown but. Their actual market capitalization, share in relative, terms has declined. Long-term. Forecasts. For GDP put you, know China and India ahead of the US by 2050. If. That, occurs can you just imagine the relative stock capitalization. Growth potential, in these two countries and other, related markets, you, know the problem, is that in the short intermediate, term, you, know booms busts cycles. In general, can knock investors, way off course for very long periods and that's just what we've seen over. The past ten years now. As we're returning to normal as Bernard suggests, then then, the opportunity, could be enormous long term for those select. International, markets, where you know economic, performance is, ahead. Of us, performance. Long-term. We're. Currently experienced, in, a globally. Synchronised, upturn, in the macroeconomic. Environment. Leading. Indicators, are positive. Central, bank postures, range from accommodative. In the u.s. to. Highly accommodating, in Europe outrageously. Accommodative, in Japan. And the, world is really a wash with cash, central. Bank policy you, know starting, here in the US is beginning. And oil tanker, turn but we are so, far out on the, monetary spectrum, that is a very, very long way between here and monetary, tightness. Empirical. Evidence abounds of improving, macro conditions globally. You see European, GDP is reached you know is reaching, to match the US and. Japan is experiencing, a generational. Improvement. In economic conditions. Brazil's. Turn the corner from an acute recession, just a couple of years ago to three percent growth expected. This year you. See things structural, reforms, in France are showing genuine economic benefits. Particularly. In unemployment, and business confidence. You, know it's not all wonderful.
You Know structural, issues like too much debt among major economies, have not gone away but. A sustained, better economic, performance will only help improve, some, of these issues. In. Terms of valuations. It, seems to be a common, assumption that international, stocks are cheap. That's. Partly. True but it's certainly, not always the case you. Know for example between, 2004. And 2007. Arguably. The last above-average growth, period, for the global economy european. Stocks actually traded at a premium to the US you. Know but that's obviously, that's not the norm and generally, international. Stocks do trade at a discount, for the US but. If a discount, is often. The constant, then a discount, by itself, you. Know doesn't necessarily, provide. You with you. Know a reason, to. Invest you, know and if in. You. Know if a, discounted, share price is fairly confident. You. Know and to be perfectly straight I don't think international. Stocks, are especially cheap, at this point an absolute basis, at. The current time I would argue that valuation alone, is not a good enough reason to invest overseas the story is, really, has to be driven I think today much more by improving fundamentals. And that's I think what, we are seeing. However. If we analyze, some global markets there are pockets where valuation, discounts, the u.s. is wider. Than normal and this, adds support to the investment. Thesis if you look at Singapore. Hong, Kong Taiwan Korea, those are those, are markets that are all trading, on a wider than average discount to the US and. This jibes with my earlier comments, of you, know we've seen a shift. In global asset, prices, allocations. Over that over the last ten years and. That's left some of these company, some, of these countries a, disc. Of wider than average discount, some. Of those discounts, are actually. Of, a logistical. Or technical, nature you. Know Korea places like Korea Taiwan very, very difficult for US investors to actually get access to so. One would expect discounts. In those markets you, also expect, discounts, in places like China and India. As well I think it's very unlikely that stocks. In those countries or asset prices in those countries would trade in line with, the u.s. so. Discounts, you know I think are evident, long-term occurrence. But. If these markets, are showing strong fundamentals. You know the there you know any valuation discounts. Are adding you know a little bit more incentive. If. You look at Europe discounts. Really that's not that far off historical. Norms. Which. You know I think it's probably valid given, that the lagging, in Europe's you, know business cycle versus the u.s. but, overall I'd argue that the International, backdrop, of asset prices remained highly constructive.
Over The long term and with. International allocations. Generally, below average. Normalizing. International, exposure a thing here is justified. So. That's all from me and now I'll pass it back to, the moderator many thanks oh. Great. Thank you we, do have a couple of questions that came in from. Participants. So I'm actually going to direct the first question, to. Bernard and. The question, is with. Everything, that went well in the markets in 2017. What. Do you think are some potential, headwinds. That we may see in 2018. Yeah. That's a good it's a very good question I mean certainly a. Lot of things went well in 2017. And especially if you look. At the technology, sector so one of the things we're looking at is regulation. Of the technology, sector I mean we're we're, breaking, new ground with, everything. From you, know news, feeds through. Facebook. And and, the whole notion of fake news and, and whether you, know Facebook, is a media company or, just a platform, but. It all goes even further than that I mean if we're we're in the, world where, you, know you're gonna have a device, on your desk or in your kitchen that we're going to ask questions and, it's going to actually. Mine. Data from, your personal, life all, of these things are our, issues Society hasn't really grappled, with so, one, of the things were a headwind. Potentially. For this extraordinary, these. Extraordinary, technologies. Which, certainly. Will provide growth is to see how. Regulation. And government actually, respond, to this so I mean that would be one of the headphone wins that we look at in the technology, sector oh. Great. Excellent. Our, next, question I'm going to direct to Terry because you had brought this up a little in your in. Your commentary, and the question, is what do you think yields, will be in the next 12 on. Sure. So that's a great question and.
It's. Clear to us that yields, are going to be higher, in. Terms of magnitude it's obviously a tougher, calculation. But, you know we're going to go with what. The Fed has guided, us towards in terms of hikes. And short, rates adding. Another three. Potentially. For rate, hikes in the coming, 12. To 18 months that would take the. Fed. Funds rate target, up somewhere, around 2% and if, the yield curve, steepened. Could. Take the 10-year yield, to, between. Three and three, and a half percent, so again, reflecting. Back to the comments I made earlier. If, yields, were on the 10-year - rise to three three and a half percent that. Would still be within. The low, range, low, level range of the, historical, average of the 10-year, yield so our. Forecasts. Are thinking is that we'll. Get to three, potentially. Three percent and, and. But, it'll take us 12 to 24, months, to get there. Great. Great thanks for taking the question and I'm. Going to do one more question and this, is for David so this based on a little of your commentary, the, question is what countries, will, see the highest growth in your opinion outside of the US in 2018. Well. I think you. Know generally, I would look again to all towards Asia on this from you, know obviously China's going to have a growth. Rate in, excess. Of the US but it's moderated. A little bit I think we're looking at sort of the mid 6s for China, but. What's really I think. What's really interesting and, helpful. That's happening is that India. And Brazil I, think are going to fill some of the some, of that decline, left. By China and so I think we're probably going to see India. Grow closer to eight nine percent and Brazil. Obviously, that has kind of been out of the equation. For the last couple of years as, you know now you. Know returning. From from a deep recession is going to be, growing at about three percent this year probably, accelerating. A little bit next year so so, some of those you, know BRIC countries, that have really had a tough time of it are really back in play again but. Then some of the other Asian, economies I mentioned, earlier Taiwan, Singapore. Korea. You, know those countries, are you, know seeing you, know they're very geared towards, global, economic, growths as we see global economic, growth in general. Accelerating. Those, countries, are kind of basic plays on that growth and so they should be pretty successful, as. You know as long as you, know the backdrop remains constructive. Excellent. Thank you for the NSA.