the chinese dream - bessemer trust · exposure to value-oriented and emerging market equity...
TRANSCRIPT
The Chinese Dream
October 18, 2018
Rebecca PattersonChief Investment Officer
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Past performance is no guarantee of future results. This material is provided for your general information. It does not take into account the particular investment objectives, financial situation, or needs of individual clients. This material has been prepared based on information that Bessemer Trust believes to be reliable, but Bessemer Trust makes no representation or warranty with respect to the accuracy or completeness of such information. This presentation does not include a complete description of any fund or portfolio mentioned herein and is not an offer to sell any securities. Investors should carefully consider the investment objectives, risks, charges, and expenses of each fund or portfolio before investing.
Views expressed herein are current only as of the date indicated, and are subject to change without notice. Forecasts may not be realized due to a variety of factors, including changes in economic growth, corporate profitability, geopolitical conditions, and inflation. The mention of a particular security is not intended to represent a stock-specific or other investment recommendation, and our view of these holdings may change at any time based on stock price movements, new research conclusions, or changes in risk preference. Index information is included herein to show the general trend in the securities markets during the periods indicated and is not intended to imply that any referenced portfolio is similar to the indices in either composition or volatility. Index returns are not an exact representation of any particular investment, as you cannot invest directly in an index.
Sector and industry classifications included in this presentation utilize the Global Industry Classification Standard (“GICS”). GICS is the exclusive property and a service mark of Morgan Stanley Capital International Inc. (“MSCI”) and Standard & Poor’s (“S&P”), a division of The McGraw-Hill Companies, Inc. Neither MSCI nor S&P makes any express or implied warranties or representations or shall have any liability for any direct, indirect, special, punitive, consequential, or any other damages (including lost profits) with respect to GICS data or results obtained therefrom.
Agenda
2018 Year-to-Date Performance Recap
The Chinese Dream
Other Key Market Drivers into 2019
Key Takeaways
3
2013 2014 2015 2016 2017 2018 YTDBalanced Growth (70/30) Portfolio 14.8% 4.3% -1.1% 4.9% 15.2% 5.2%
Balanced Growth Index 12.6% 3.0% -1.5% 6.5% 16.8% 2.5%
Performance Summary
4
Year-to-date 2018: What has hurt Exposure to value-oriented and emerging market equity strategies Negative performance in fixed income a drag on absolute returns
Year-to-date 2018: What has helped Underweight to high-quality fixed income and overweight to information technology equity Stock selection in Bessemer global large managers, as well as external large and small/mid
cap growth managers Significant overweight to U.S. equities and dollar
Past performance is no guarantee of future results. As of September 30, 2018. The Bessemer Balanced Growth Portfolio represents the intended risk profile (70% equity, 30% fixed income) of the neutral allocation.Source: Bank of America Merrill Lynch, Barclays, Bloomberg, FactSet, J.P. Morgan, Standard & Poor’s
Higher Chinese Incomes Have Kept Population Content and Influenced Economic Drivers
5
As of 2017.Source: World Bank
$0
$2,000
$4,000
$6,000
$8,000
$10,000
1990 1993 1996 1999 2002 2005 2008 2011 2014 2017
Chinese Gross National Income (GNI) Per Capita
Chinese Economy Today Driven More by Consumers than Exports
6
As of December 31, 2015, for Exports and December 31, 2016, for Services Sector.Source: Bloomberg, National Bureau of Statistics of China
Services Sector and Exports of Goods as a Percent of Nominal GDP
0%
10%
20%
30%
40%
50%
60%
1978 1983 1988 1993 1998 2003 2008 2013
Services Sector
Exports
Aging Population a Headwind for Growth
7
As of 2017. Total dependency ratio is the ratio of population aged 0-14 and 65+ per 100 population aged 15-64. Projection is calculated by the United Nations Population Division.Source: United Nations
China's Total Dependency Ratio
0
20
40
60
80
100
1950 1970 1990 2010 2030 2050 2070 2090
Rising dependency ratio shows fewer workers per retirees and children
How to Support Growth in Decades Ahead?“Made in China 2025”
8
As of February 2, 2016. Source: U.S.-China Business Council
Semiofficial Targets for Percent of Domestic Market Share of Chinese Products
0% 20% 40% 60% 80% 100%
Wide-body aircraft
Mobile phone chips
Large tractors and harvesters
High-performance medical devices
Industrial robots
New and renewable energy equipment
High-tech ship components
New energy vehicles
2020 2025
Continuing the Chinese Dream: Xi’s Plan
9
Education Public and private-sector financing
Technology “transfer”
Build R&D culture and domestic technology “know-how”
Create globally competitive tech-savvy firms
Continued growth = social stability = political stability
China’s Dream, U.S.’ Nightmare?
Threat from Chinese technology to U.S. companies, economy
China not following spirit/letter of international laws and best practices
Potential military applications of Chinese technology — geopolitical threat
10
U.S. Steps Have Stopped Escalation of Chinese Direct Investments
11
As of May 2018. 2018 includes cumulative total for January to May 2018. All other figures are annual. Source: Rhodium Group
Chinese Foreign Direct Investment in the U.S.
$0
$10
$20
$30
$40
$50
2000 2003 2006 2009 2012 2015 2018 YTD
Where From Here Between U.S. and China?
Trade war appears supportive for administration as election campaign strategy
Rhetoric from China suggests desire to resolve conflict and find compromise; ready to agree to one-third of U.S. demands and discuss another third
U.S. and Chinese leaders tentatively scheduled to meet at multilateral summit in November
12
Chart: As of October 3, 2018. Survey Monkey online poll conducted September 28-30 of 2,291 U.S. adults.Source: Axios
0 10 20 30 40 50 60 70 80 90
Total
Republicans
Independents
Democrats
% Who Think Trade War with China Has Been Good for U.S. Jobs
% of Respondents
Sep
16
Oct
16
No
v16
Dec
16
Jan
17
Feb
17
Mar
17
Ap
r17
May
17
Jun
17
Jul1
7
Au
g17
Sep
17
Oct
17
No
v17
Dec
17
Jan
18
Feb
18
Mar
18
Ap
r18
May
18
Jun
18
Jul1
8
Au
g18
Sep
18
Global 51 52 52 53 53 53 54 53 54 54 54 54 54 54 54 54 54 55 53 54 54 55 54 54 53
U.S. 51 51 52 55 55 54 56 54 53 53 54 56 55 55 55 54 53 56 54 55 57 57 56 55 54
Eurozone 53 53 52 53 54 54 54 56 56 56 56 55 56 55 56 57 58 56 55 55 54 55 54 54 55
Japan 50 50 48 51 52 52 52 51 53 52 53 52 51 53 51 51 52 52 51 53 51 51 51 52 50
U.K. 47 53 53 55 55 56 55 53 55 56 54 53 54 56 54 54 53 55 52 53 54 55 54 54 54
Emerging Markets 51 51 51 51 51 52 52 52 52 52 53 52 52 52 52 53 54 54 53 53 53 53 53 52 52
Brazil 46 43 45 44 44 45 45 46 48 50 49 49 51 49 47 47 50 53 50 50 50 47 50 47 46
China 52 52 52 52 53 53 53 53 52 52 53 53 51 51 52 54 55 54 52 53 53 54 53 52 53
India 52 55 52 55 47 47 49 50 52 50 52 48 51 52 49 51 52 48 50 51 50 53 54 52 51
Russia 55 54 53 53 55 57 58 56 57 56 56 54 55 54 57 57 55 57 54 56 54 52 53 53 55
Sep
16
Oct
16
No
v16
Dec
16
Jan
17
Feb
17
Mar
17
Ap
r17
May
17
Jun
17
Jul1
7
Au
g17
Sep
17
Oct
17
No
v17
Dec
17
Jan
18
Feb
18
Mar
18
Ap
r18
May
18
Jun
18
Jul1
8
Au
g18
Sep
18
Global 51 52 52 53 53 53 53 53 53 53 53 53 53 54 54 55 54 54 53 54 53 53 53 53 52
U.S. 52 53 54 54 55 54 53 53 53 52 53 53 53 55 54 55 56 55 56 57 56 55 55 55 56
Canada 50 51 52 52 54 55 56 56 55 55 56 55 55 54 54 55 56 56 56 56 56 57 57 57 55
Eurozone 53 54 54 55 55 55 56 57 57 57 57 57 58 59 60 61 60 59 57 56 56 55 55 55 53
Japan 50 51 51 52 53 53 52 53 53 52 52 52 53 53 54 54 55 54 53 54 53 53 52 53 53
U.K. 56 54 53 56 55 55 54 57 56 54 55 57 56 56 58 56 55 55 55 54 54 54 54 53 54
Emerging Markets 50 51 51 51 51 51 52 51 51 51 51 52 51 51 52 52 52 52 51 51 51 51 51 51 50
Brazil 46 46 46 45 44 47 50 50 52 51 50 51 51 51 54 52 51 53 53 52 51 50 51 51 51
China 50 51 51 52 51 52 51 50 50 50 51 52 51 51 51 52 52 52 51 51 51 51 51 51 50
India 52 54 52 50 50 51 53 53 52 51 48 51 51 50 53 55 52 52 51 52 51 53 52 52 52
Mexico 52 52 51 50 51 51 52 51 51 52 51 52 53 49 52 52 53 52 52 52 51 52 52 51 52
Russia 51 52 54 54 55 53 52 51 52 50 53 52 52 51 52 52 52 50 51 51 50 50 48 49 50
Beyond China: Global Growth Still Robust, but Less Synchronized
13
As of September 30, 2018. A reading above (below) 50 indicates an expansion (contraction) in business activity.Source: Bloomberg, Markit
Global Manufacturing PMIs
Global Service PMIs
Small Business Optimism at an All-Time High
14
As of August 31, 2018.Source: Bloomberg, National Federation of Independent Business
U.S. NFIB Small Business Optimism
75
80
85
90
95
100
105
110
1985 1990 1995 2000 2005 2010 2015
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
2016 2017 2018-1%
0%
1%
2%
3%
4%
5%
6%
7%
2000 2005 2010 2015
Core Inflation Rates Remain Below the 2% Target
Inflation Still Tame; Central Banks Can Go Slow
15
Left as of August 31, 2018, for Japan and U.S. and September 30, 2018, for eurozone. Right as of September 30, 2018. Key inflation rates are core CPI for Japan and eurozone and core PCE for U.S. Source: Bloomberg, Bank of Japan, European Central Bank, Eurostat, Federal Reserve, Japan Ministry of Internal Affairs and Communications, U.S. Bureau of Economic Analysis
Central Banks Maintain Low Policy Rates
Fed Funds Policy Rate
BOJ Policy Balance Rate
ECB Deposit Rate
Japan
U.S.
YoY
Eurozone
Target Rate
-250
-200
-150
-100
-50
0
50
100
150
200
250
300
1976 1984 1992 2000 2008 2016
U.S. Curve Inversion: How Important?
As of October 11, 2018. Source: Bloomberg, National Bureau of Economic Research, J.P. Morgan
Yield Curve Set to Invert Around End-2018Difference Between 10-Year and 2-Year Yields
16
bps
Recession Yield Curve Inversion
Date S&P 500
Peak Date
Months BetweenYield Curve
Inversion & S&P 500 Peak
Months Between Yield
Curve Inversion & Recession
Dec 67 Nov 68 11 25
Mar 73 Oct 73 7 9
Nov 78 Feb 80 15 14
Aug 80 Nov 80 3 11
Dec 88 Jul 90 19 19
Mar 00 Aug 00 5 12
Aug 06 Oct 07 13 16
Median 11 14
Average 10 15
-20%
-10%
0%
10%
20%
30%
40%
0%
5%
10%
15%
20%
25%
30%
2010 2012 2014 2016 2018
Balance Sheet Reduction a New Factor in the Mix
As of July 31, 2018. Global equities measured using MSCI ACWI and reflect the price level. G3 includes the European Central Bank, Bank of Japan and Federal Reserve. Source: State Street, Bloomberg, Bank of England, Bank of Japan, European Central Bank, Federal Reserve, MSCI
17
G3 Central Bank Balance Sheets (constant USD, L)
Global Equities (12-month lag, R)
Global Equities and Central Bank Balance SheetsYoY YoY
U.S. 10-Year Yield Broke Through 3% “Threshold”
18
As of October 12, 2018.Source: Bloomberg
U.S. 10-Year Government Bond Yield
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
2008 2010 2012 2014 2016 2018
S&P 500: Tighter Monetary Policy = More Volatility
19
As of October 12, 2018.Source: Bloomberg
2500
2550
2600
2650
2700
2750
2800
2850
2900
2950
3000
Jan 18 Apr 18 Jul 18 Oct 18
Two Notable Corrections This YearPrice Level Year-to-Date
Important to Remember the Larger PicturePrice Level Since 1995
0
500
1000
1500
2000
2500
3000
1995 2000 2005 2010 2015
Italian Populists + ECB Policy = Trouble?
Left as of September 30, 2018. Right as of October 11, 2018. Sources: Bloomberg, European Central Bank
20
ECB Cumulative Government Bond Purchases by Country
Billions of Euros
Italy 10-Year Government Bond Yield
0%
1%
2%
3%
4%
5%
6%
7%
2011 2013 2015 2017
€ 29
€ 30
€ 32
€ 36
€ 57
€ 72
€ 114
€ 228
€ 257
€ 360
€ 414
€ 510
Other EU nations
Ireland
Finland
Portugal
Austria
Belgium
The Netherlands
Supranationals
Spain
Italy
France
Germany
3.60.5
-0.1-2.1 -2.7 -2.9 -3.4 -3.5
-5.6 -6.5-8.8 -8.8 -9.6 -10.9 -12.5 -13.0 -13.8 -15.4
-35.9
-49.1
-60
-50
-40
-30
-20
-10
0
10
Mexic
an P
eso
Japa
nese
Yen
Norw
egian
Kro
ne
Britis
h Pou
nd
Malay
sian R
inggit
Sing
apor
e Doll
ar
Euro
Cana
dian D
ollar
Chine
se R
enmi
nbi
South
Kor
ean W
on
Austr
alian
Doll
ar
Swed
ish K
rona
Chile
an P
eso
Indon
esian
Rup
iah
Braz
ilian R
eal
Russ
ian R
uble
Indian
Rup
ee
South
Afric
an R
and
Turki
sh Li
ra
Arge
ntine
Pes
o
Stronger Dollar, Higher U.S. Rates Have Hurt Emerging-Market Currencies
As of October 11, 2018 Source: Bloomberg
21
2018 Returns Versus U.S. DollarPercent Change
-60%
-40%
-20%
0%
20%
40%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
2005 2008 2011 2014 2017
Iran Sanctions: Upside Risk for Oil Prices, Downside Risk for U.S. Consumers
22
As of September 30, 2018. Commodity prices measured using Bloomberg Commodity Index. SAAR stands for seasonally adjusted annualized rate. Source: Bloomberg, U.S. Bureau of Labor Statistics
Commodity Prices and U.S. Inflation
U.S. CPI (L)
Commodity Prices (3-month lead, R)
YoY YoY
Energy Prices and U.S. Consumption
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%0%
1%
2%
3%
4%
5%
6%
15 16 17 18
6M/6M,SAAR
6M/6MSAAR
Midterm Elections: Incumbent President’s Party Tends to Lose House Seats
23
As of 2014.Source: The Brookings Institution
Number of House Seats Won or Lost by Incumbent President's Party in Midterm Elections
-140
-120
-100
-80
-60
-40
-20
0
20
1862 1882 1902 1922 1942 1962 1982 2002
Average: -33 seats
Democrats Have 15 More Senate Seats than Republicans up for Re-Election
24
As of 2018. Total seats up for re-election includes only seats controlled by Democrats and Republicans (e.g., does not include Senate seats controlled by independents). Source: 270toWin, state election filings
Number of Democrat Minus Republican Senate Seats Up for Re-Election During Midterm Years
-15
-10
-5
0
5
10
15
20
1946 1958 1970 1982 1994 2006 2018
Median: +4 seats 15
U.S. Debt-Ceiling and Deficit Concerns Likely to Resurface in the Coming Year
25
As of August 31, 2018, for rolling 12-month sum and June 30, 2018, for percent of GDP.Source: Bloomberg, U.S. Treasury
Federal Government Budget Deficit/Surplus
-12%
-9%
-6%
-3%
0%
3%
-$1,600
-$1,400
-$1,200
-$1,000
-$800
-$600
-$400
-$200
$0
$200
$400
1968 1978 1988 1998 2008
Percent of GDP (R)
Rolling 12-Month Sum (L)
Recession
$ Billions
Key Takeaways
While less synchronized, global growth still solid – too early to retreat from equities
Tighter monetary policy and other uncertainties to trigger bouts of market volatility
Impact of 2018/19 fiscal stimulus, plus defensive characteristics, keeps us biased toward U.S. equities and dollar
U.S.-China trade war impact still broadly modest but with potential to weigh more on markets and economies
26
Growth 90/10 Index represents:
After 12/31/2015, a composite of:BofA Merrill Lynch 1-10 Year AAA-A U.S. Corporate & Government Index (10%)MSCI All Country World IMI (90%)
Before 1/1/2016, a composite of:BofA Merrill Lynch 1-10 Year AAA-A U.S. Corporate & Government Index (10%)S&P Global Broad Market Index (86%)Bloomberg Commodity Index (4%)
Before 1/1/2014, a composite of:S&P Global LargeCap Index (38%) [which replaced the S&P 500 Index (24%) and S&P Global ex-U.S. LargeCap Index (14%) after 11/20/11]S&P Global LargeMidCap Index (19%)S&P Global MidSmallCap Index (20%)Real Assets (7% consisting of the Bloomberg Commodity Index (5%) and Barclays Capital U.S. TIPS Index [2%])Hedge Funds (11% consisting of the S&P Global Broad Market Index (Hedged) [9%] and Barclays Capital U.S. Government Index (2%)]3 Month Treasury Bills (5%)
Balanced Growth 70/30 Index represents:
After 12/31/2015, a composite of:BofA Merrill Lynch 1-10 Year AAA-A U.S. Corporate & Government Index (30%)MSCI All Country World IMI (70%)
Before 1/1/2016, a composite of: BofA Merrill Lynch 1-10 Year AAA-A U.S. Corporate & Government Index (32%)S&P Global Broad Market Index (65%)Bloomberg Commodity Index (3%)
Before 1/1/2014, a composite of:BofA Merrill Lynch 1-10 Year AAA-A U.S. Corporate & Government Index (25%) [which replaced the Barclays Capital U.S. Government/Credit Index after 2/28/13]S&P Global LargeCap Index (25%) [which replaced the S&P 500 Index (15%) and S&P Global ex-U.S. LargeCap Index (10%) after 11/20/11]S&P Global LargeMidCap Index (14%)S&P Global MidSmallCap Index (14%)Real Assets (7% consisting of the Bloomberg Commodity Index [5%] and Barclays Capital U.S. TIPS Index [2%])Hedge Funds (10% consisting of the S&P Global Broad Market Index (Hedged) [7%] and Barclays Capital U.S. Government Index [3%])3 Month Treasury Bills (5%)
Balanced 55/45 Index represents:
After 12/31/2015, a composite of:BofA Merrill Lynch 1-10 Year AAA-A U.S. Corporate & Government Index (45%)MSCI All Country World IMI (55%)
Before 1/1/2016, a composite of:BofA Merrill Lynch 1-10 Year AAA-A U.S. Corporate & Government Index (46%)S&P Global Broad Market Index (51%)Bloomberg Commodity Index (3%)
Before 1/1/2014, a composite of:BofA Merrill Lynch 1-10 Year AAA-A U.S. Corporate & Government Index (39%) [which replaced the Barclays Capital U.S. Government/Credit Index after 2/28/13]S&P Global LargeCap Index (19%) [which replaced the S&P 500 Index (12%) and S&P Global ex-U.S. LargeCap Index (7%) after 11/20/11]S&P Global LargeMidCap Index (10%)S&P Global MidSmallCap Index (10%)Real Assets (7% consisting of the Bloomberg Commodity Index [5%] and Barclays Capital U.S. TIPS Index [2%])Hedge Funds (10% consisting of the S&P Global Broad Market Index (Hedged) [6%] and Barclays Capital U.S. Government Index [4%])3 Month Treasury Bills (5%)
The Bessemer Balanced Growth 70/30, Growth 90/10 and Balanced 55/45 portfolios (all excluding Hedge Funds) represent model portfolios comprised of: Large Cap Core, Large Cap Strategies, Small and Mid Cap Core, Small and Mid Cap Strategies, Strategic Opportunities, and Fixed Income. Investments cannot be made directly in these model portfolios. Portfolio components and relative weightings vary over time. Returns for the Large Cap Strategies, Small and Mid Cap Strategies, and Strategic Opportunities portfolios are after fees and expenses. Returns for the Large Cap Core and Small and Mid Cap Core portfolios and Bessemer’s Fixed Income and Municipal Bond Common Trust Funds are before fees and expenses. The results also include the reinvestment of all dividends and capital gains. Bessemer’s model portfolios included the performance of the Real Return portfolio, after fees and expenses, through its liquidation on March 17, 2015.
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