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The Year Ahead: Looking for Surprises

The Year Ahead: Looking for Surprises. January 2014 Rebecca H. Patterson Chief Investment Officer Bessemer Trust. Agenda. What The CFA Thinks Where You Might Be Surprised Macro and Market Views For the Year Ahead Key Takeaways. What CFA Members Think: Getting More Upbeat.

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The Year Ahead: Looking for Surprises

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  1. The Year Ahead: Looking for Surprises

    January 2014 Rebecca H. Patterson Chief Investment Officer Bessemer Trust
  2. Agenda What The CFA Thinks Where You Might Be Surprised Macro and Market Views For the Year Ahead Key Takeaways
  3. What CFA Members Think: Getting More Upbeat Percent of Members Expecting Global Economy to Expand in Coming Year Percent of Members Expecting a Global Financial Bubble to Burst in 2014 As of October 17, 2013. Source: CFA Institute
  4. Room For At Least Three Surprises Emerging-Market Growth Geopolitics Shift in Federal Reserve Policy
  5. Emerging Markets: Not Enough Focus? Biggest Risk to Global Capital Markets in 2014 As of October 17, 2013. Source: CFA Institute
  6. U.S. Dollar and Yields: Headwinds for Emerging Markets Current Account Balance2 Rising Dollar Suggests Emerging-Market Underperformance1 Emerging Markets Outperform Surplus Developed Markets Outperform Deficit 1As of December 31, 2013. EM/DM reflects MSCI Emerging Markets Index divided by MSCI World Index, with both indices in U.S. dollars and indexed at 1 on January 4, 1995. The Trade-Weighted U.S. Dollar Index is a weighted average of the foreign exchange value of the U.S. dollar against the currencies of a broad group of major U.S. trading partners. 2Reflects IMF estimates for 2013. Source: FactSet, Federal Reserve, International Monetary Fund
  7. 2014 Elections Create Policy Uncertainty, Especially in Emerging Markets As of November 30, 2013. European Union includes 28 member states. GDP is based on IMF estimates for 2013. Source: International Monetary Fund 8
  8. Geopolitical Risks: Could History Repeat? Source: Bloomberg #twitter-hashtag
  9. U.S. Economy To Positively Surprise this Year? Net Federal Fiscal Stimulus/Drag Jobs and Housing Net Federal Fiscal Stimulus/Drag Actual Estimated Stimulus Stimulus Drag Drag Oil and Inflation As of December 31, 2013, except for Building Permits and CPI (as of November 30, 2013). Crude oil price represents Brent. Source: Commodity Research Bureau, FactSet, Federal Reserve, Strategas Research Partners, U.S. Census Bureau, U.S. Department of Labor
  10. European, Japanese Economies Also Showing Relative Improvement EMU Borrowing Costs Lower, Confidence Higher Bank of Japan Adding Liquidity Low Risk High Risk As of December 31, 2013. Consumer confidence is measured on a scale of -100 to 100, where -100 indicates extreme lack of confidence about the economy, 0 indicates a neutral view, and 100 indicates extreme confidence. Bank of Japan’s balance sheet assets are indexed at 100 on December 31, 2006. Source: Bank of Japan, European Commission, FactSet, Strategas Research Partners
  11. China: Longer-term Challenges Remain but Near-term Looks Stable Domestic Rebalancing Still Needed Exports by Region: Looking Up As of December 31, 2013, except for right chart, which is as of December 31, 2012. Exports shown represent a 5-month moving average. Source: Bloomberg, The World Bank
  12. Cyclical Assets Helped by Global Liquidity, Not Just Fed Actual as of October 31, 2013 with J.P. Morgan estimates thereafter. Source: Bank of England, Bank of Japan, European Central Bank, Federal Reserve, J.P. Morgan
  13. Bottom-Up: U.S. Equity ValuationsNot at Highs The S&P 500 Index Oct 9, 2007 Level = 1565 P/E = 15.2x Dec 31, 2013 Level = 1848 P/E = 15.4x Mar 24, 2000 Level = 1527 P/E = 25.2x +106% +101% -57% +173% -49% Dec 31, 1996 Level = 741 P/E = 15.9x Oct 9, 2002 Level = 777 P/E = 13.8x Mar 9, 2009 Level = 677 P/E = 10.2x As of December 31, 2013. P/E ratio represents price-to-earnings ratio for next 12 months, based on FactSet aggregated consensus estimates. Source: FactSet, Standard & Poor’s
  14. Market Positioning Not Even Close to Stretched Cumulative Net Fund Flows Four Most Recent Bull Markets Left chart as of November 30, 2013. Right table as of December 31, 2013. Fund flows reflect cumulative net flows into mutual funds and ETFs from January 1, 2007 through November 30, 2013. Source: FactSet, Strategas Research Partners
  15. Key Taper Transmission Channels Taper Begins Higher Longer-Dated U.S. Treasury yields Stronger U.S. Dollar Pressure on Commodity Prices Low inflation Moderate EM demand Greater supplies EM debt positioning Focus on deficit countries with inflation 2014 political risk Pressure on Emerging Markets
  16. Positioning Going into 2014 #twitter-hashtag
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