Economic and Investment Overview

Transcription

1 Economic and Investment Overview Second Quarter For Public Use

2 Disclosure Atlantic Trust Private Wealth Management includes Atlantic Trust Company, a division of Invesco National Trust Company (a limited-purpose national trust company), and Stein Roe Investment Counsel, Inc. (a registered investment adviser), both of which are wholly-owned subsidiaries of Atlantic Trust Group, Inc. This document is intended for educational purposes only and the material presented should not be construed as an offer or recommendation to buy or sell any security. Concepts expressed are current as of the date of this material only and may change without notice. Such concepts are the opinions of our investment professionals, many of whom are Chartered Financial Analysts (CFA ). The Chartered Financial Analysts (CFA ) designation is globally recognized and attests to a charterholder s success in a rigorous and comprehensive study program in the field of investment management and research analysis. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP and CERTIFIED FINANCIAL PLANNER in the U.S. There is no guarantee that these views will come to pass. Past performance does not guarantee future comparable results. To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Atlantic Trust does not provide legal advice, and the information contained herein should only be used in consultation with your legal, accounting and tax advisers. To the extent that information contained herein is derived from third-party sources, although we believe the sources to be reliable, we cannot guarantee their accuracy. Investment Products Offered are Not FDIC-Insured, May Lose Value and are Not Bank Guaranteed. 2 For Public Use

3 Executive Summary Mixed economic news around the world U.S. economy has strengthened, but fiscal cliff looms Eurozone in recession China slowing, may mean softer overall emerging market growth in the short term Equity investing: Attractive valuations and earnings, challenging macro backdrop Stocks surged in Q1 on better U.S. economic data and hyper-stimulative global monetary policy Gains will be harder to come by over the rest of 2012, and volatility may be higher Valuations are reasonable, but profit margins are at a peak and political risk will rise over the course of the year Emphasize high-quality dividend payers in the U.S. Emerging markets less timely, but best long-term return potential; avoid Europe Fixed income: Yields likely in a holding pattern Q1 rise in Treasury yields as safe haven attraction dulled by easing eurozone debt crisis Early rumblings about inflation make TIPs worthy of portfolio consideration Enhanced yield strategies continue to be attractive (e.g., emerging market debt, floating rate debt, high yield) A tale of two policies: Fiscal austerity and monetary largesse U.S. dilemma: massive tax increases scheduled for 2013 without legislative fix Handicapping a solution to the U.S. fiscal situation a key factor for financial markets Austerity has plunged eurozone into recession The Fed, ECB, BOJ plus China, Brazil and India all working to stimulate money and credit Fed s primary concern remains growth; inflation a longerterm risk Alternative investments: Easing of market correlations improves outlook After a difficult 2011, hedge fund returns rebounded in Q1 As volatility and intra-market correlations recede, fundamentally driven hedged strategies should excel Energy-focused funds remain the most abundant source of private equity opportunities 3 For Public Use This material does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Past performance does not guarantee future comparable results.

4 Economy 2012 off to a good start in the U.S., but not so much in Europe and Asia The U.S. economic recovery has gained traction early in Since August 2011, the jobless rate has dropped almost a full percentage point and overall employment has risen more than 1.5 million. This is flowing through to almost all sectors: consumer spending, manufacturing and capital investment.* We view the risk of recession as low in the short term. Gas prices have garnered a great deal of attention and do put a dent in the economy s potential growth rate in the months ahead. However, a sustained increase in the price of oil well above current levels would be necessary to create a recession. As detailed on the next page, the biggest risk to the economy exists in U.S. Real Retail Sales ($ Billions) Feb-03 Feb-06 Feb-09 Feb-12 The eurozone is in and the UK is on the verge of recession. While the worst of the sovereign debt crisis may be over in Europe, it is having a profoundly negative economic impact on the region. Many countries will face increasing austerity measures, which will further suppress growth potential. Germany has been an exception to the rule, but since a majority of its exports go to other European countries, its outlook is suspect as well. China, the world s second-largest economy, has experienced a growth scare recently. The government downgraded its official GDP growth target to 7%. Two years ago, the economy was growing at nearly 12%. Industrial output growth has slowed, as has construction activity. Relative to the rest of the world, China is still booming. But, it will be somewhat less of a catalyst to global growth in the months ahead. Source: ISI Group as of 2/29/2012 China Business Conditions Survey Source: ISI Group as of 3/31/ For Public Use * Source: Bloomberg L.P. as of 3/31/2012

5 Politics and Policy The fiscal cliff looms large Current law dictates that on January 1, 2013, tax rates on all income tax brackets, payroll taxes, dividends, capital gains and estates will rise in tandem. An additional tax from the Affordable Care Act on investment income also begins, and over $1 trillion in rather indiscriminate spending cuts begin due to the failure of last year s congressional super-committee to enact reform. Fed Chairman Bernanke has termed this a massive fiscal cliff which the economy may tumble over. Given the partisan divide in an election year, it is unlikely that this mess will be resolved prior to November. That would leave it up to a lame duck session of Congress to enact a fix in a few short weeks before the new year begins. Ultimately, this austerity-in-a-day arrangement will likely be revoked, or at least smoothed out so it does not crash the economy. But it may only happen retroactively, well into This looming debacle is the greatest risk to economic and investor confidence. The Federal Reserve s battle to avoid deflation, prop up the banking system and stimulate growth has been joined by central bankers around the world. The ECB has lent over 1 trillion euros to eurozone banks to calm liquidity concerns and avert a funding crisis. The Bank of Japan has embarked upon quantitative easing, and the central banks of China, Brazil and India are loosening policy as well. This provides a counterweight to the fiscal austerity being implemented in many parts of the world and has provided liquidity to support equity prices. Down the road, the unwinding of this unprecedented easy money policy represents a substantial risk to both equity and fixed income markets. If Nothing Changes... U.S. Federal Income Tax Rates % 25% 28% 28% 31% 33% 33% 35% 39.6% Global Central Bank Balance Sheets ($Billions) $10,000 $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 Source for both charts: Strategas as of 12/31/2011 U.S. Dividend Tax Rates 10 Dividend Tax Rate 8 will be 43.4% Note: The investment income tax of 3.8% is part of the Healthcare law, and that number has been incorporated in the 2013 dividend tax rate. 5 For Public Use

6 Bonds Treasury yields on the rise Q1 saw the first increase in 10-year Treasury yields in a year, an unusual occurrence unless you look at the behavior of equities in the preceding six months and the behavior of bonds following recent large central bank interventions. The two Quantitative Easing (QE1 and QE2) moves by the Federal Reserve added $1.0 trillion and $0.6 trillion to the banking system, respectively. Each occurred near low points in Treasury yields and perceived high points in market fear. Subsequent to the introduction of each QE, Treasury yields and riskier asset prices moved to higher ground. The long-term refunding operation (LTRO) launched by the European Central Bank qualifies as a large central bank intervention with over 1 trillion euros made available to member banks. The reaction has been slower this time around, but it re-established a positive correlation between the Treasury yield and equity prices Year Treasury Yield (%) LTRO Announced 2 1 QE 0 Announced Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Source: Bloomberg L.P., Federal Reserve, European Central Bank as of 3/31/2012 S&P 500 versus 10 Yr Rolling 13 Wk Correlation Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Source: Bloomberg L.P., Federal Reserve, European Central Bank as of 3/31/ For Public Use

7 Bonds Near term versus long term Easy money helps to avert near-term disaster scenarios and buys some time for developed economies with risky assets as the main beneficiaries. As a result, the market lens on monetary policy will likely shift from liquidity provision to inflationary risk. Treasury market implied inflation has already responded, but lags the actual price change in retail gas prices. Treasury Inflation Protected Securities (TIPS) can provide inflation protection against further rate increases as long as those increases are not driven by supply or refunding concerns. Longer-term excesses remain and will likely cap the near-term rise in nominal Treasury rates. Debt continues to rise on an absolute basis in the U.S. and other developed markets with only marginal improvements relative to GDP. Recent improvements in employment have not been enough to move the Fed from its accommodative stance. Bernanke has confirmed that he will need more convincing evidence that the economy can establish sustainable growth before easy policy comes to an end. TIPS versus Treasury in Rising Rate Environment May 2003 June % 2% 1% -1% -2% -3% -4% 1.8% 10 Year Rate Change 5/03-6/06 0.7% 5-10 Year TIP Price Return Leverage Longer-term Constraint -3.4% 5-10 Year Treasury Price Return Source: Bloomberg L.P., Federal Reserve, Bank of America as of 3/31/ Total Debt / GDP Domestic Financial Debt /GDP Past performance does not guarantee future comparable results. Source: Bloomberg L.P., Federal Reserve, Bank of America as of 3/31/ For Public Use

8 Stock Market Liquidity provides momentum Following on the 11.8% fourth quarter 2011 surge, the S&P 500 finished the first quarter up 12.6%, bringing the index back to 2008 levels. This is the best start for the S&P 500 since 1998 and the best six-month stretch for the S&P 500 since the 28% rally from August 2010 through February 2011.* Strong Global Equity Returns in Q1 S&P 500 MSCI World Ex-US 115 While higher-yielding stocks moderately appreciated in the first quarter, principal appreciation and lower-yielding stocks provided the majority of gains as stocks with yields less than 2.1% accounted for approximately 65% of the S&P 500 total return.* While corporate fundamentals and moderate earnings growth are key drivers of stock performance, another key input is globally coordinated monetary easing. With accommodative policies and low rates in place globally, traditional sources of income return have waned. Therefore, investors have looked to source returns further out the risk spectrum. This has driven asset classes with traditionally higher beta profiles higher for the quarter. We expect a more challenging environment for equities going forward, and we believe dividends will be an important component of return. * Source: FactSet as of 3/31/2012 Index Dec-11 Jan-12 Feb-12 Mar-12 Source: Bloomberg L.P., as of 3/31/2012 Growth Outperformed High Dividend Yielders in Q1 2 Q1 Returns 15% 1 5% % 1.2%-2.1% 2.1%-3.1% 3.1%-14.6% Range of Dividend Yields for S&P 500 Index Source: FactSet as of 3/31/ For Public Use

9 Stock Market Dividends and quality: Not crowded Central banks around the globe are quite likely to keep rates historically low for the intermediate term. The global search for yield outside of traditional fixed income sources continues in earnest in the equity space. The absolute yield on the S&P 500 is low by historical standards; however, there have been only a few times over the last 60 years that stock yields have been this attractive when compared to U.S. Treasury yields. With a nonexistent spread, being paid to wait by investing in high-quality, dividend-paying stocks remains an attractive proposition. A 25-Year History of Stock and Bond Yields % Barclays Municipal Bond Index U.S. 10-Year Treasury (Generic) Barclays U.S. Agg Corporate S&P 500 Dividend Yield Yield on its own is an important input, but the ability to consistently grow income streams paid to investors is even more important. Quality companies typically grow dividends over time, and in the past, they have been a source of excellent returns for investors. Growing income payouts will be especially important as the Baby Boomer generation ages and current income becomes necessary to support living standards. Source: Strategas as of 2/29/2012 Forecasted Baby Boomer Population % of U.S. Population 65 Years and Over 25% 2 15% 1 5% Past performance does not guarantee future comparable results. Source: Strategas as of 12/31/2011, after 2010 is forecasted 9 For Public Use

10 Non-U.S. Equities Remain cautious in Europe The European Central Bank (ECB) injected massive amounts of liquidity, which helped restore investor confidence in the eurozone during the first quarter. The roughly $1.2 trillion in loans provided by the ECB to eurozone banks has reduced systemic risk. This more aggressive policy action to combat the fiscal crisis produced a recovery in European markets in the first quarter. However, results lagged the emerging markets and the U.S. Problems for Europe are not over, as the region is likely to be in a recession through the first half of Spain is probably the most important bellwether, as it has a combination of high deficits and unemployment, along with rising bond yields. Equity valuations across Europe ticked up, as the P/E ratio on the STOXX Europe 600 went from 11.3x at the end of 2011 to 14.5x in Q Valuations remain attractive compared to historical levels, but the earnings outlook is shaky. The Asset Allocation Committee recommends U.S. and emerging equity markets, while continuing to avoid Europe.* * Source: Bloomberg L.P. as of 3/31/2012 This material does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Past performance does not guarantee future comparable results. Q1 Returns: Europe Recovers, Lags Rest of World 24% 2 16% 12% 8% 4% 7.48% STOXX Europe % MSCI Emerging Markets Source: Bloomberg L.P., as of 3/31/ % STOXX Europe 600 P/E Through 3/31/ % Nikkei 225 S&P Current 14.5x 2011 Q Source: Bloomberg L.P., as of 3/31/2012, 2012 and 2013 data projected FY1 11.4x FY2 9.8x For Public Use

11 Emerging Market Equities Inflation fears take a backseat Central banks focused on slowing growth in Q The outlook remains optimistic in Brazil despite slowing growth prospects. The Brazilian central bank reduced rates by 75 basis points in March and domestic demand remains favorable. The Reserve Bank of India attempted to stimulate lending during the quarter by reducing the cash reserve ratio as growth slowed. Due to inflation remaining at roughly 7%, the bank did not cut rates. China s focus is on domestic growth rather than inflation, which actually hit a recent low in February. With inflation declining, the People s Bank of China should have leeway to ease monetary policy and stimulate growth. Growth prospects will continue to be a significant focus in the emerging markets. Consumers and corporations remain guarded and governments are limited in their ability to borrow and spend. Despite growth decelerating somewhat in Asia and Latin America, it is more robust than Europe and the U.S. We are cautiously optimistic on the emerging markets outlook. Slowing Industrial Activity in China Source: Bloomberg L.P. as of 11/30/2011 YoY % Change (CPI) Official Purchasing Managers Index Expansion/Contraction = Chinese Inflation Source: Bloomberg L.P., as of 11/30/ For Public Use

12 Hedge Funds Opportunities to hedge without sacrificing upside potential Hedge funds had their best quarter in over a year. The HFRX Global Hedge Fund Index was +3.1% in Q1.* Volatility and correlation levels normalized during the quarter, which was a welcome sign for hedge funds that employ strategies predicated on fundamental analysis. Thus far, equity markets are following a pattern similar to 2010 and 2011, in which performance for the first few months of the year was quite strong, coming out of a period of significant macroeconomic uncertainty. The combination of record profit margins and elevated bullish investor sentiment could set the stage for attractive short investment opportunities in companies with share prices that are not reflecting the potential difficulties in sustaining such a high level of profitability. Historically, profit margins have reverted to the long-term mean. The aforementioned market dynamics could create an attractive opportunity set for directional equity long/short managers. These strategies maintain higher net long exposures that allow them to participate in market upside and also have the ability to generate additional alpha from short selling, which provides a partial market hedge. * Bloomberg L.P. as of 3/31/2012 Hedge fund investments may not be suitable for all investors and may only be available to certain qualified investors; therefore, investors should seek financial advice regarding the appropriateness of any particular investment strategy. Past performance does not guarantee future comparable results. 12 For Public Use S&P 500 Calendar Year Returns 2010 (Cum) 2011 (Cum) 2012 (Cum) 15% 1 5% -5% -1-15% Source: Pertrac Analytics as of 3/31/2012 S&P 500 Net Profit Margin (Annual Average) 1 +2 standard deviations 8% 6% 4% 2% -2 standard deviations Source: FactSet as of 12/31/2011 Avg. (5.4%)