BOK Financial: Economic and Market Outlook January 13, 2016

Transcription

1 BOK Financial: Economic and Market Outlook January 13, Cavanal Hill Investment Management, Inc. 1

2 About Cavanal Hill Investment Management Cavanal Hill is a multi-billion dollar investment adviser to high-net-worth individuals and institutions. Our firm s seasoned investment team follows proven, disciplined investment processes to manage fixed income, equity, and cash assets. Our unique investment approach looks beyond conventional Wall Street wisdom to discover stock and bond opportunities and takes advantage of those that are within our clients risk tolerance levels. Cavanal Hill Investment Management, Inc. ("Cavanal Hill") is an SEC registered investment adviser and a wholly-owned subsidiary of BOKF, NA, a wholly-owned subsidiary of BOK Financial Corporation, a financial holding company ("BOKF"). Cavanal Hill s equity team leverages its own primary stock research with insights from company management and secondary street research to form the basis of their buy/sell decisions. The firm s fixed income team uses proprietary credit and interest rate modeling tools to analyze investment opportunities within the high grade corporate, municipal, mortgage-backed and government bond markets. Our Investment Professionals Fixed Income Management Team J. Brian Henderson, CFA President Michael P. Maurer, CFA Senior Fixed Income Portfolio Manager Rich Williams Senior Tax Free Fixed Income Portfolio Manager Michael J. Kitchen, CFA, CTP Cash Management Portfolio Manager Russell Knox, CFA Fixed Income Portfolio Manager Tyler Bosworth Junior Portfolio Manager Douglas Benton Senior Municipal Credit Manager Leslie Lukens-Martin Senior Municipal Credit Analyst Keaton Hoppe Municipal Fixed Income Analyst Equity Management Team Matt Stephani, CFA Senior Equity Portfolio Manager Thomas Mitchell, CFA Equity Portfolio Manager Mike Schloss Senior Equity Analyst Brandon Barnes, CFA Equity Analyst Quantitative Equity Team Wes Verdel, CFA Senior Quantitative Equity Portfolio Manager Rob Gaston Quantitative Systems Analyst Trading Team Patti Robertson Head of Trading Chris O Connell Equity Trader Ryan Friedl Fixed Income Trader Our Investment Strategies Tax Exempt Cash/Fixed Income Strategies Equity Strategies Fundamental Multi-Asset Class Strategies Taxable Cash/Fixed Income Strategies Equity Strategies Quantitative Alternative Strategies 2

3 Macroeconomic Perspectives Fourth Quarter 2015: Main Themes Best argument for hiking Federal Funds rate is the progress made on improving the employment situation U.S. service sector is robust while manufacturing is contracting Overseas developed economies in early expansion while emerging markets remain under pressure U.S. financial conditions have tightened much more than the 25bps rate hike 3

4 Justification for Hiking Rates % 10 Progress on Improving Employment Situation Unemployment & Payrolls November 1, 2005 November 30, mm more employed from previous peak In millions At 5%, near full employment /01/05 07/01/06 03/01/07 11/01/07 07/01/08 03/01/09 11/01/09 07/01/10 03/01/11 11/01/11 07/01/12 03/01/13 11/01/13 07/01/14 03/01/15 11/01/15 Unemployment rate (left scale) Total nonfarm payrolls (right scale) Source: BLS 4

5 Bright Spot for U.S. Economy Service Sector Payrolls & ISM Non-Manufacturing Index November 1, 2005 November 30, 2015 Index level New all time high in private sector service providing jobs In thousands /30/05 07/31/06 03/31/07 11/30/07 07/31/08 03/31/09 11/30/09 07/31/10 03/31/11 11/30/11 07/31/12 03/31/13 11/30/13 07/31/14 03/31/15 Expanding Contracting 11/30/15 ISM Non-Manufacturing (left scale) Service sector payrolls (right scale) Source: Federal Reserve 5

6 Manufacturing: Excessive Inventories & Strong Dollar Y o y % Industrial Production January 1, 1980 November 30, Manufacturing activity at recessionary levels /01/80 01/01/83 01/01/86 01/01/89 01/01/92 01/01/95 01/01/98 01/01/01 01/01/04 01/01/07 01/01/10 01/01/13 Source: Federal Reserve 6

7 /31/98 11/30/98 07/31/99 03/31/00 11/30/00 07/31/01 03/31/02 11/30/02 07/31/03 03/31/04 11/30/04 07/31/05 03/31/06 11/30/06 07/31/07 03/31/08 11/30/08 07/31/09 03/31/10 11/30/10 07/31/11 03/31/12 11/30/12 07/31/13 03/31/14 11/30/14 07/31/15 Improving European Employment Trend Eurozone Unemployment Rate March 1, 1998 October 31, 2015 % Remains very high, but heading in right direction. Keeps pressure on the ECB to do more. Source: Eurostat, Bloomberg 7

8 How Low Can You Go? % 2.5 European Government Yield Curves December Negative interest rates in Europe Tenor (Years) German Yield Swiss Yield Sweden Yield France Yield Source: Bloomberg 8

9 Emerging Markets Hit From All Sides China PMI and Brazil GDP March 1, 2007 September 30, 2015 y o y % 10 8 Index level China manufacturing in doldrums. Yuan allowed to depreciate Brazil in a nasty recession /01/07 11/01/07 07/01/08 03/01/09 11/01/09 07/01/10 03/01/11 11/01/11 07/01/12 03/01/13 11/01/13 07/01/14 03/01/15 Brazil GDP growth (left scale) China PMI (right scale) Source: Bloomberg 9

10 Forecasting Economic Cycles y o y % Nominal GDP and Personal Consumption January 1, 1970 July 31, 2015 Length of expansions: 7+ yrs 10 yrs 6 yrs 6+ yrs Weak nominal GDP growth Previous recessions occurred while year overyear personal consumption remained positive -4 01/01/70 01/01/73 01/01/76 01/01/79 01/01/82 01/01/85 01/01/88 01/01/91 01/01/94 01/01/97 01/01/00 01/01/03 01/01/06 01/01/09 01/01/12 01/01/15 Nominal growth rate GDP Personal expenditures growth rate Source: Federal Reserve 10

11 Much More Than A 25Bps Interest Rate Hike % Junk Credit Yields December 1, 2010 December 17, Now above 8.5%. May attract equity crossover buyers Corporate yields below 5.5% /01/10 08/01/11 04/01/12 12/01/12 08/01/13 04/01/14 12/01/14 08/01/15 BofA Merrill Lynch U.S. High Yield Barclays US High Yield ex Energy Source: Federal Reserve, Bloomberg, L.P 11

12 Disclosure 1. Standard and Poor s, 2. MSCI Barra Indices, 3. Bloomberg Professional Service, Bloomberg Finance L.P. 4. Federal Reserve Board, 5. BIS Quarterly Review, International banking and financial developments, Bank for International Settlements, December Barclay s Capital Research, Global Family of Indices 7. The Keys for our 2016 Market Call, Strategas, December 2, Goldman Warns of Brazil Depression After GDP Plunges Again, Bloomberg L.P., David Biller December 1, Goldman Sachs Global Macro Research, Global Markets Daily, November 3, Cornerstone Macro, Economic Research, October 30, Stuck, Andrew G Haldane, Chief Economist of the Bank of England, June 30, How Low Can You Go?, Andrew G Haldane, Chief Economist of the Bank of England, September 18, US Fixed Income Markets 2016 Outlook, JP Morgan Chase Bank, November 25, Requiem for QE, Cato Institute Policy Analysis, Daniel Thornton, November 17, Inflation Dynamics and Monetary Policy, Chair Janet Yellen, Board of Governors of the Federal Reserve System, September 24, The US economic outlook and monetary policy, William Dudley, President of the Federal Reserve Bank of New York, November 12,

13 Disclosure Cavanal Hill Investment Management, Inc. ("Cavanal Hill") is an SEC registered investment adviser and a wholly-owned subsidiary of BOKF, NA, a wholly-owned subsidiary of BOK Financial Corporation, a financial holding company ("BOKF"). Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. The opinions expressed herein reflect the judgment of the author at this date and are subject to change without notice and are not a complete analysis of any sector, industry or security. This report is not to be considered a recommendation of Cavanal Hill s investment management services, any particular security, strategy or investment product, nor is it intended to provide personal investment advice. It does not take into account any specific investment objectives, financial situations, or particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed in this report and should understand that statements regarding future prospects may not be realized. The information provided in this presentation is for informational purposes only and is not an offer to sell or a solicitation of an offer to buy any securities in any jurisdiction. Investors should note that income from such securities or other investments, if any, may fluctuate and that price or value of such securities and investments may rise or fall. Investments are not insured by the FDIC and are not guaranteed by Cavanal Hill or any bank, including any banking affiliates of Cavanal Hill. Investments are subject to risks, including the possible loss of the principal amount invested. Past performance does not guarantee future results. This document contains forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates, and projections, the securities and credit markets and the economy in general. Words such as "anticipates," "believes," "estimates," "expects," "forecasts," "plans," "projects," variations of such words and similar expressions are intended to identify such forward-looking statements. Management judgments relating to and discussion of the value and potential future value or performance of any security, group of securities, type of security or market segment involve judgments as to expected events and are inherently forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what is expressed, implied, or forecasted in such forward-looking statements. The potential realization of these forward-looking statements is subject to a number of limitations and risks. Cavanal Hill does not undertake any obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events or otherwise. This report may not be reproduced, redistributed, retransmitted or disclosed, or referred to in any publication, in whole or in part, or in any form or manner, without the express written consent of Cavanal Hill. Any unauthorized use or disclosure is prohibited. Receipt and review of this research report constitutes your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this report. For questionsabout this report, please contact Brian Henderson at (918)

14 Money Market Reform January 13, 2016 Bill King, Senior Vice President 14

15 2A7 Reform Overview SEC voted to approve Money Market rules on July 23, 2014 Requires implementation of reform measures by October 14, 2016 CAVANAL HILL FUNDS 15

16 Key Points of Reform Defines the type of Money Market Fund based on the Investor Retail Funds A fund that limits all beneficial owners to natural persons Institutional Fund A fund that allows some or all beneficial owners to be nonnatural persons CAVANAL HILL FUNDS 16

17 Key Points of Reform Requires some Institutional Funds to maintain a Floating Net Asset Value (FNAV) FNAV Funds required to report NAV with 4 decimal places Requires Funds to disclose instances when a Fund s weekly liquid assets fall below 10% Requires Funds to have additional disclosures, stress testing and regulatory directives CAVANAL HILL FUNDS 17

18 Key Points of Reform All Prime and Municipal Funds that allow for institutional investment are required to maintain a FNAV All Government Securities/Treasury Money Market Funds will continue to maintain a constant Net Asset Value of $1.00 per share CAVANAL HILL FUNDS 18

19 Key Points of Reform Liquidity Fees and Redemption Fees The Board of a Prime or Municipal Money Market Fund has discretion on whether or not to enforce liquidity gates and fees that fall below certain trigger levels Liquidity Fee of 0 2% if a Fund s level of weekly liquid assets fall below 10% Impose gate for up to 10 business days if Fund s level of weekly Liquidity Assets fall below 30% CAVANAL HILL FUNDS 19

20 Retail vs. Institutional Accounts Examples of Retail Accounts Individual accounts College savings plans Defined contribution plans Health savings plans Ordinary Trust Accounts sold through intermediaries with the underlying beneficial ownership being a natural person Examples of Institutional Accounts Accounts with registrations based on a tax identification number with a beneficiary not being a natural person Any business account Defined benefit plan Endowment Some Irrevocable Trusts CAVANAL HILL FUNDS 20

21 Fund Type Requirements Fund Type NAV Liquidity Fee/Redemption Gate Retail Prime Stable Required Institutional Prime Floating Required Retail Municipal Stable Required Institutional Municipal Floating Required U.S. Treasury Stable Not Required U.S. Government Stable Not Required CAVANAL HILL FUNDS 21

22 Cavanal Hill Funds Cavanal Hill Cash Management Fund: The Fund will become a government money market fund and will change its name to: Cavanal Hill Government Securities Money Market Fund*, effective April *Prospectus not yet available CAVANAL HILL FUNDS 22

23 Cavanal Hill Funds Cavanal Hill Tax Free Money Market Fund: The Fund will be a retail money market fund and the name of the Institutional Share Class will be changed to the Reserve Share Class*. The Fund will be closed to new institutional money on January 1, Existing institutional shareholders will need to transition out of the Fund by April *Prospectus not yet available CAVANAL HILL FUNDS 23

24 Cavanal Hill Funds Cavanal Hill U.S. Treasury Fund: The Fund will be a government money market fund and will continue to be focused on U.S. Treasury securities. CAVANAL HILL FUNDS 24

25 CAVANAL HILL FUNDS Questions? 25

26 Disclosure Cavanal Hill Investment Management, Inc. is an SEC registered investment adviser and a wholly-owned subsidiary of BOKF, NA, a wholly-owned subsidiary of BOK Financial Corporation, a financial holding company ( BOKF ). BOKF, NA serves as the custodian for the Cavanal Hill Funds. BOKF holdings also include BOSC, Inc., the distributor for the Cavanal Hill Funds (the Funds). BOSC, Inc. is a registered Broker/Dealer, member FINRA/SIPC. BOSC, Inc. is wholly-owned subsidiary of BOK Financial Corporation, and an affiliate of BOKF, NA and Cavanal Hill Investment Management, Inc. Lipper, Inc., is a Reuters Company. Lipper ranks the performance of mutual funds within a universe of funds that have similar investment objectives. Bonds will tend to experience smaller fluctuations in value than stock funds. However, investors in any bond fund should anticipate fluctuations in price, especially for longer-term bonds in a rising interest rate environment. Fund rankings are from Lipper. The Lipper Mutual Fund rankings are the ranking of mutual funds within their respective Lipper classification, adjusted for reinvestment of capital gains distributions and income dividends. Past performance does not guarantee future results. Investments are subject to risks, including the possible loss of the principle amount invested. An investor should consider the Fund s investment objectives, risks, and charges and expenses carefully before investing or sending money. This and other important information about the investment company can be found in the Fund s prospectus or summary prospectus. To obtain a prospectus or summary prospectus online, please visit or call Please read the prospectus or summary prospectus carefully before investing. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE CAVANAL HILL FUNDS 26

27 BOK Financial Economic and Market Outlook Conference Call Wednesday, January 13, 2016 Jim Huntzinger, Chief Investment Officer BOK Financial Corporation 2016 BOK Financial Corporation. Member FDIC. Equal Housing Lender. Services provided by BOKF, NA doing business as Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Kansas City, Bank of Oklahoma, Bank of Texas, Colorado State Bank and Trust. 27

28 Labor Market Solid Civilian Unemployment Rate: 16 yr + (SA, %) Unemployment down to 5.0%. Unemployment still in an improving trend. 5.0% Source: Strategas Research Partners, LLC 2016 BOK Financial Corporation. Member FDIC. Equal Housing Lender. Services provided by BOKF, NA doing business as Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Kansas City, Bank of Oklahoma, Bank of Texas, Colorado State Bank and Trust. 28

29 U.S. Job Creation All Employees: Total Nonfarm % Change Year to Year SA, Thous. Job Creation is solid, broad based and Relieves some fear that U.S. economy is close to recession BOK Financial Corporation. Member FDIC. Equal Housing Lender. Services provided by BOKF, NA doing business as Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Kansas City, Bank of Oklahoma, Bank of Texas, Colorado State Bank and Trust. 29

30 Wages Slowly Improving Avg. Hourly Earnings: Prod. & Nonsupervisory: Total Private Industries % Change Year to Year SA, $/Hour Wage growth story still rebooting. Decent 2 ½% growth over last year BOK Financial Corporation. Member FDIC. Equal Housing Lender. Services provided by BOKF, NA doing business as Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Kansas City, Bank of Oklahoma, Bank of Texas, Colorado State Bank and Trust. 30

31 Consumer Income Real Disposable Personal Income % change Year to Year SAAR, Bil. Chn, 2009$ Tough to get bearish on the consumer with income up +3.9% y/y. Consumer make up about 70% of GDP BOK Financial Corporation. Member FDIC. Equal Housing Lender. Services provided by BOKF, NA doing business as Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Kansas City, Bank of Oklahoma, Bank of Texas, Colorado State Bank and Trust. 31

32 High Yield Spreads High Yield Spread to 10 Year (bps) Wider credit spreads do bear watching. Still, I think it s important to view the move in historical context. Energy is THE reason for higher spreads. Source: Strategas Research Partners, LLC 2016 BOK Financial Corporation. Member FDIC. Equal Housing Lender. Services provided by BOKF, NA doing business as Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Kansas City, Bank of Oklahoma, Bank of Texas, Colorado State Bank and Trust. 32

33 Federal Interest Costs Net Interest Cost & Weighted Average High Yield Spread to 10 Year Cost of Marketable (bps) Debt Keeping an eye on interest costs as the Fed tightening cycle begins. Source: Strategas Research Partners, LLC 2016 BOK Financial Corporation. Member FDIC. Equal Housing Lender. Services provided by BOKF, NA doing business as Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Kansas City, Bank of Oklahoma, Bank of Texas, Colorado State Bank and Trust. 33

34 Corporate Profits Corporate Profits as % GDP Margins typically peak before market peaks. Slightly lower margins make it difficult for equity market to run higher. Source: Strategas Research Partners, LLC 2016 BOK Financial Corporation. Member FDIC. Equal Housing Lender. Services provided by BOKF, NA doing business as Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Kansas City, Bank of Oklahoma, Bank of Texas, Colorado State Bank and Trust. 34

35 Payroll and Rig Count Y/Y Change In Energy Payrolls & Oil Rig Counts Both falling dramatically. Source: Strategas Research Partners, LLC 2016 BOK Financial Corporation. Member FDIC. Equal Housing Lender. Services provided by BOKF, NA doing business as Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Kansas City, Bank of Oklahoma, Bank of Texas, Colorado State Bank and Trust. 35

36 European Unemployment EA 19: Unemployment Rate (SA, %) Slack remains in the Euro area economy. ECB is set to be easy for awhile BOK Financial Corporation. Member FDIC. Equal Housing Lender. Services provided by BOKF, NA doing business as Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Kansas City, Bank of Oklahoma, Bank of Texas, Colorado State Bank and Trust. 36

37 China Reserves China Foreign Exchange Reserves (Y/Y%) China maintains a soft landing but is seriously challenged. Policymakers are expected to remain accommodative and they have a far greater ability to stimulate their economy than policymakers in developed markets. Source: Strategas Research Partners, LLC 2016 BOK Financial Corporation. Member FDIC. Equal Housing Lender. Services provided by BOKF, NA doing business as Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Kansas City, Bank of Oklahoma, Bank of Texas, Colorado State Bank and Trust. 37

38 S&P S&P 500 Lots of volatility, little growth. Look for a repeat Source: Strategas Research Partners, LLC 2016 BOK Financial Corporation. Member FDIC. Equal Housing Lender. Services provided by BOKF, NA doing business as Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Kansas City, Bank of Oklahoma, Bank of Texas, Colorado State Bank and Trust. 38

39 Economic & Market Outlook Themes Economy U.S. l o n g s l o w, sustainable recovery. GDP not surging but growing moderately. Employment gains solid. Central bank easing and QE is global, and will be ongoing. U.S. and Euro economies doing okay, despite Chinese weakness. Market Cash will remain near zero, bond yields on a slow track higher. U.S. equities still okay, despite the turmoil but still priced on high side of normal. Recent sell off addressing this issue confidence lacking. Fed cycle has changed increasing volatility. Oil and Chinese market need to find a low in order for our equity market to improve BOK Financial Corporation. Member FDIC. Equal Housing Lender. Services provided by BOKF, NA doing business as Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Kansas City, Bank of Oklahoma, Bank of Texas, Colorado State Bank and Trust. 39

40 Legal Information Disclaimers The information provided in this was prepared by Jim Huntzinger, Chief Investment Officer of BOK Financial Corporation. The information provided herein is intended to be informative andnotintendedtobeadvicerelativetoany investment or portfolio offered through BOK Financial Corporation (NASDAQ:BOKF). The views expressed in this commentary reflect the opinion of the author based on data available as of the date this report was written and is subject to change without notice. This commentary is not a complete analysis of any sector, industry or security. Individual investors should consult with their financial advisor before implementing changes in their portfolio based on opinions expressed. The information provided in this commentary is not a solicitation for the investment management services of any BOKF subsidiary. BOK Financial Corporation (BOKF) offers wealth management and trust services through various affiliate companies and non-bank subsidiaries including advisory services offered by BOKF, NA (and its banking divisions Bank of Oklahoma, Bank of Texas, Bank of Albuquerque, Bank of Arkansas, Bank of Arizona, Colorado State Bank and Trust, and Bank of Kansas City) and its subsidiaries BOK Financial Asset Management, Inc., and Cavanal Hill Investment Management, Inc. each an SEC registered investment adviser. BOKF offers additional investment services and products through its subsidiary BOSC, Inc., a broker/dealer, member FINRA/SIPC, an SEC registered investment adviser and The Milestone Group, also an SEC registered investment adviser. Investments are not insured by the FDIC and are not guaranteed by BOKF, NA or any of its affiliates. Investments are subject to risks, including the possible loss of the principal amount invested. This report may not be reproduced, redistributed, retransmitted or disclosed, or referred to in any publication, in whole or in part, or in any form or manner, without the express written consent of BOKF. Any unauthorized use or disclosure is prohibited. Receipt and review of this research report constitutes your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this report BOK Financial Corporation. Member FDIC. Equal Housing Lender. Services provided by BOKF, NA doing business as Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Kansas City, Bank of Oklahoma, Bank of Texas, Colorado State Bank and Trust. 40