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PRIVATE BANKING INSIGHTS – Market Commentary Yves Cochez Senior Vice President Chief Investment Strategist KEY TAKEAWAYS HEXAKOSIOIHEXEKONTAHEXAPHOBIA Do you fear the number 666? On March 6, 2009, investors showed that they suffer from this very specific arithmophobia. When the S&P500 briefly touched 666, investors got so sick that they spent the following 6 years driving the equity index as far as possible from this satanic number. It is really amazing how this widespread phobia resulted in one of the longest and most powerful equity bull markets in history. On March 6, 2015, the S&P500 closed at 2071.26 for a total gain of 211%, or 20.8% annualized gain. Now, we really need to hope and pray that investors do not suffer from too many other afflictions, such as vertigo or some kind of rearview mirror syndrome. At 72 months, the current bull market is already the third longest in history (since 1929). If the current positive trend is maintained, by July 2016, it will have morphed into the second most enduring bull market in history. In order to dethrone the all-time record of 4,494 days (or nearly 150 months), the bull market will have to go on until at least June 26, 2021. In terms of magnitude of the gains, a further 18% gain would turn this bull market into the second best on record, while the S&P500 would need to climb another 119% (to 4543.12) to reach the top of the charts. March 2015 • Equity bull markets don’t die just because they age. They usually end with the next economic recession. Tight monetary and credit conditions are the warning signals that a recession is imminent. With odds of a recession still very low, we expect the current 6-year old bull market to run further and become the second longest on record. • Bond markets are, and will continue to be, somewhat disconnected from the economy. QE in both Europe and Japan will result in a significant reduction in the net supply of global government bonds available for private investors. Bond yields also reflect investors’ perception that the Fed funds rate will peak at a much lower level in this cycle. • While the Fed is clearly uncomfortable with the current abnormal monetary policy setting, raising rates too soon in an environment of low and falling inflation as well as global monetary easing, will most likely lead to even more significant dollar strength. The ability of the current expansion to translate into higher wages has also yet to be established. • U.S. equities have significantly outperformed overseas markets since 2009, but have underperformed so far this year. We expect this change in fortune to be sustained in the medium term. • U.S. profit margins are rolling over from record high levels. The strong USD will also act as a powerful headwind for USbased multinational companies. As a reminder, a bull market means that rising prices are not interrupted by declines larger than 20%, but corrections are a common feature. Six years into the longest bull market ever (that would be December 1993, with the bull market lasting from December 1987 until March 2000), the environment was not too dissimilar than where we are today. The US dollar had just entered a 1 • Financial conditions and economic momentum are shifting in favor of international markets. Valuation levels will also be another impediment for a continuation of U.S. stocks’ past outperformance. PRIVATE BANKING INSIGHTS – Market Commentary long-term uptrend (which would be sustained until 2001), the US economy was outperforming on a global basis and the Federal Reserve was about to embark on a tightening cycle. Sounds familiar? You can see it in the air, see it on the streets, hear it on the shop floor: This growth is for real, with forecast of 3%-plus gains in GDP for each of the next two years. Measured against past recoveries, that may not sound like much. But it means more factories humming, better sales in stores, and more jobs, not only in services but in long-beleaguered manufacturing as well. Even more important, this moderate expansion looks sustainable. The economy has become much healthier than many people seem to realize. Time and thrift have brought the problems of the past decade, which seemed so intractable only a couple of years ago, down to manageable proportions. Low interest rates have helped consumers and businesses heal their wounded balance sheets; […].Consumer confidence indexes began to tick up, and business mood surveys noted an increase in optimism. […} Make no mistake, hardships remain -- not least for the many people whose jobs are insecure or whose hopes of employment will be frustrated for a long time to come. Behind those concerns are structural changes that will keep the expansion low-key. […] Near-term growth will also be held down by the cyclical miseries of America’s major trading partners. Japan and much of Europe remain in recession, and Mexico’s economy came to a virtual standstill in the past year. While U.S. exports will grow faster this year and next, partly because trade with Mexico will pick up again, the big gains won’t come until Europe and Japan return from the cellar. If you like the flow and the style of the previous section, it is probably because I didn’t write it – it’s a newspaper article from Fortune Magazine, dated January 10, 1994. While 1994 was not a particularly good year for US equities (the actions of the Fed – 6 rate hikes during the year – were mostly to blame), the equity bull market stayed alive and US stocks finished the decade on a very strong note (26.2% annualized gain in the next 5 years). At the same time, tighter monetary conditions, higher financing costs and a surging US dollar wreaked havoc on emerging markets (Tequila crisis, Asian currency crisis and Russian debt default). BULL MARKETS DON’T DIE JUST BECAUSE THEY AGE Since 1929, bull markets have lasted anywhere from less than a year to nearly twelve years and there is no way to tell in advance how long the current run will last. One thing we do know however is that bull markets don’t end just because they get too old or because the Federal Reserve is raising rates. The reference to 1994 (right in the middle of the longest bull market ever) has to be put in that context. The experience of 1994 shows that even a very badly communicated tightening of monetary policy (dramatically different than the communication and guidance overkill from Fed officials today) and several EM crises were not sufficient conditions to halt the march towards higher stock prices. Bull markets usually end with the next economic recession, or more precisely a few months in advance as the stock market is a discounting mechanism. Tight (not just tighter) monetary and credit conditions are the warning signals that a recession is imminent. In turn, inflation tends to be the main factor forcing central banks to tighten monetary policy. Excessive valuations and/or too much reliance on credit tend to make matters significantly worse but are usually not what causes recessions and bear markets. External shocks or geopolitical events can be highly disruptive, can cause a jump in market volatility and a temporary price correction, but a bear market will take hold only if these events lead to significant economic weakness (a euphemism for recession). 2 PRIVATE BANKING INSIGHTS – Market Commentary I think that a silver medal is definitely within reach for the current bull market (it will need to last until July of next year) and the gold medal is not totally unthinkable. This view is underpinned by my belief that the current economic expansion will rank among the longest in history, with inflation and interest rates likely to remain low for much longer. Also, many of the excesses that are typical at market peaks are not present yet, such as extremely rich valuations, euphoric investor sentiment and rapid credit growth. ODDS OF A RECESSION ARE VERY LOW As can be seen on the following chart, with the exception of Black Monday in 1987, bear markets usually start ahead of an economic recession. Recessions typically lead to a large drop in corporate earnings and uncertainties about the length and the magnitude of the economic decline result in higher risk premiums (lower valuation multiples). In the current cycle, a recession would be particularly devastating as central banks have very limited ammunition left to revive economic growth through more accommodative monetary policies. However, as I have argued in previous editions of this newsletter, the current recovery has been one of the weakest on record and inflationary pressures, six years into this cycle, are still very minimal. Based on the output gap (which measures the difference between the current GDP level and the level we would have reached if the economy had been growing at its potential growth rate), the U.S. economy is still operating below potential. Economies go through cycles and a recession develops when the economy is overheating and central bank policy needs to be tightened in order to deal with rising inflationary pressures. Over the past few years, the U.S. economy has been the bright spot on a global basis with much weaker (and at times negative) growth momentum in other large advanced economies. Nevertheless, the annual growth rate has remained at or below 2.5% since 2010, a disappointing showing on the heels of the deepest recession since the 1930s. The good news is that the growth momentum seems to be accelerating. Good news is good news, despite investors’ growing concerns that stronger economic data will force the Fed to hike rates sooner rather than later (more on this later). Job creation in particular has shown a vigor not seen since the late 90s. Consumer confidence has recovered close to its highest levels in more than 10 years. This augurs well for household spending going forward. Other factors will act as tailwinds for consumer spending in coming months. Households’ balance sheets have been largely repaired and access to (still cheap) credit has improved as banks are also much more willing to lend than in years past. While wage gains have been limited, low inflation should help purchasing power, and the recent US dollar strength will keep the prices of imported goods down. Other areas of the economy are also showing signs of renewed strength, in particular capital spending. Most companies have so far used a large part of their record free cash-flows towards share buybacks and 3 PRIVATE BANKING INSIGHTS – Market Commentary increased dividends, but we expect a shift towards a bigger emphasis on capital spending going forward as capacity utilization rates rise and profit margins cannot be raised any longer. Fiscal retrenchment is also largely behind us after a few years of belt tightening. On a global basis, things are also looking brighter with growing signs of a more robust economy in Europe and increasingly aggressive central banks outside the U.S. As always, there are some caveats. The rapid increase in the value of the dollar is eating into US multinationals’ competitiveness and earnings and will limit the extent to which net exports can add to economic growth. The oil price plunge will negatively impact capital spending and employment prospects in some regional economies, but overall, lower energy prices will, with the typical lag, be a net positive for the economy. Leading economic indicators are pointing towards a further improvement in the economy and are certainly not consistent with looming recession risks. DECIPHERING THE MESSAGES FROM THE BOND MARKETS If you have recently paid some attention to developments in the bond markets, you would be excused for doubting the actual and future strength of the economy. Indeed, bond yields have actually moved lower over the past few months and have reached levels which seem at odds with a robust economy. While it seems difficult to make sense from these very depressed bond yields, it is important to recognize that bond markets are, and will continue to be, somewhat disconnected from the economy. Contrary to sin city, whatever happens in Frankfurt or Tokyo does not stay there. While the Fed is in the starting blocks to raise rates, we have witnessed in recent weeks a flood of monetary easing decisions on a global basis with interest rate cuts in more than 20 countries and the start of QE in the Euro area. The spread between the 10-year Treasury yield and the yield on comparable bunds in Germany is reaching unprecedented levels, making US bonds particularly attractive for global investors (with the added benefit of investing in a strong currency). QE in both Europe and Japan will result in a significant reduction in the net supply of government bonds in these markets. The existence of negative deposit rates across several European countries will most likely reinforce the impact from QE. The current shortage of government bonds in the face of still strong demand (particularly from commercial banks due to regulatory requirements and, in the case of Europe, punitive deposit rates) is the primary factor driving bond yields lower on a global basis. Nevertheless, economic developments are not completely irrelevant. Long bond yields reflect the consensus view of where short-term rates will be over the next few years as well as a term premium. The term structure is based on the expectations hypothesis - the expected return from holding a long bond until maturity should 4 PRIVATE BANKING INSIGHTS – Market Commentary be the same as the expected return from rolling over a series of short bonds with a similar total maturity. Forwards rates (rates at which investors agree today to lend in the future) are used to measure the expected future shortterm rates. While forward rates are readily available, the return on a long bond is uncertain unless it is held until maturity. Investors will therefore require a compensation for this interest rate risk, the so called “term premium”. Today, term premiums are very low and, in some cases, negative. This would be consistent with the perception that forward short-term rates are pricing too much policy tightening. Term premiums also need to offer some protection against inflation risk and the current term structure seems to indicate that investors collectively expect very subdued inflationary pressures in the next few years. Obviously, supply/demand dynamics will at the end of the day determine the value of the term premium and, from that perspective, the picture is heavily skewed towards abnormally low term premiums. THE FED, INFLATION AND GROWTH As mentioned, equity bull markets usually go on until evidence build that a recession is in store. Aggressive tightening by central banks - in an effort to ward off excessive inflation - is what typically pressure down the economy towards the abyss of recession. Monetary and credit conditions are therefore useful tools that can provide early warning signals of future economic trends. Recessions have always been preceded by a sharp rise in real shortterm rates (today, they are below zero based on core inflation), a flat to inverted yield curve (despite recent flattening, the yield curve is still relatively steep), tighter lending conditions (banks are today very much willing and able to lend) as well as wider credit spreads and poor liquidity in corporate bond markets (with the exception of the energy sector, the current environment remains very supportive for credit markets). When the Fed eventually starts raising rates, short-term rates will move higher (albeit from record low levels - as in “zero”) but real rates might stay relatively stable if inflation starts to rebound from record low levels (as in negative 0.1% last month). The debate surrounding the timing of the Fed liftoff has intensified in recent weeks. Despite trying to be as transparent as the waters off the coast of Cancun, Fed officials have not gone as far as publishing a report with the exact timing for the first rate hike in almost 9 years. Fed watchers are trying to make sense of every bit of information they can gather from Fed chairwomen Janet Yellen and other Fed officials, with the latest hot topic centered around the word “patience”, when it will be removed from the FOMC statement and how 5 PRIVATE BANKING INSIGHTS – Market Commentary this would have to be interpreted. The reality is that the Fed will have to get back to a data-dependent mode and, by definition, forecasting Fed policy based on economic data is not as easy as looking for (and maybe not finding) the word “patient” in a statement. While recent market gyrations and volatility seem to indicate that the fate of financial markets will be vastly different if the Fed hikes in June or September (or maybe wait until next year), the reality is that this will likely only have a short-term impact on the markets as monetary conditions will still remain very accommodative with rates at extremely low levels. Fed officials are clearly uncomfortable with the current abnormal monetary policy setting. They are eager to start a “normalization” process but, at the same time, inflation trends provide them with the luxury of being patient and wait until they deem the economic recovery strong enough to be able to stand on its own (often referred to as “escape velocity”). Let’s leave aside the fact that the Fed has implemented ZIRP (Zero Interest Rate Policy) since the end of 2008 and let’s focus on the most recent economic data in order to gauge the pressures for the Fed to tighten monetary policy at this juncture. Looking at labor markets, there is a sense of “mission accomplished” for the Fed with the unemployment rate down to 5.5% and 12 consecutive months of 200,000+ net job creations. Indeed, nearly 3.3 million new jobs have been created over the past 12 months, the best performance since 1997. As indicated, the current economic expansion is already in its sixth year, both consumer and business confidence indices are elevated, balance sheets have been repaired, credit growth has picked up and leading indicators point to a continuation of these positive trends. If we stop the analysis here, it seems be a no-brainer, why wait any longer? But the Fed mandate is a fine balancing act between reaching full employment and achieving price stability (or inflation close to 2%). Looking at this side of the equation, the picture is quite different and overheating seems like a very distant worry. The Fed does not need to raise rates just because growth is strong – what matters is whether strong growth is actually sowing the seeds for a more pronounced inflation breakout. There is no doubt that job creation has accelerated in recent months but the underlying details for the labor markets are not as rosy as the headline would suggest. Ahead of this year’s compensation discussions, I tried to make the case to my management that wage pressures are building fast (one can always find a nice chart or some piece of information to make a compelling case). Now that wage and bonus negotiations are behind us (me), I can look at the broader picture and face the reality that wage growth remains lackluster. Hourly wages are growing at an anemic 1.6% on a yearly basis and the employment cost index is up only 2.2% over the past year. Additional data points also suggest that the job market can further recover before wage inflation becomes a serious threat. The labor force participation rate is still hovering near multi-decade lows and the number of full-time jobs is still below the pre6 PRIVATE BANKING INSIGHTS – Market Commentary recession levels. The Phillips curve (which represents the relationship between the rate of inflation and the unemployment rate) appears to have become irrelevant or at least a lot flatter than in previous cycles as the sharp drop in the official unemployment rate has so far had very limited impact on wage inflation. Indeed, a lot has changed since the great recession. The economy suffered a traumatizing blow and strong deflationary forces are pulling prices down on a global basis. For all the talk about deflation in Europe, let’s not forget that headline inflation came in at -0.1% in the U.S. last month. Granted, this is a very minimal decline and is mostly the consequence of the recent plunge in oil prices. However, the Fed’s preferred measure of inflation - the core personal consumption expenditure inflation rate - stands at 1.3%, way below target and still coming down. The surging US dollar complicate matters even more for the Fed as it does equate to a tightening of overall monetary conditions. As such, a stronger dollar removes some of the pressure for the Fed to raise rates. Developments overseas will also have to be taken into consideration. The combination of rate cuts overseas and the prospect of higher rates in the U.S. has already resulted in massive dollar strength. Fed officials are keenly aware that, at some point, the dollar will start hitting the economy (we have already seen the adverse impact of the dollar’s rise on corporate earnings). Despite an obvious willingness to normalize monetary policy and despite a relatively strong and healthy economy, the Fed can and should remain…patient. The ability of the current expansion to translate into higher wages has yet to be established and the combination of weak commodity prices and a strong dollar will help keep inflation at bay. Raising rates too soon in an environment of low and falling inflation as well as global monetary easing will most likely lead to even more significant dollar strength. It would also seem to make sense to wait and assess the effectiveness of QE in Europe and a confirmation of recent positive economic data – higher rates in the US will most likely be less disruptive if implemented in a context of a more robust rebound in global growth. Developments in some developing economies should be taken into consideration as well. While emerging markets are today 7 PRIVATE BANKING INSIGHTS – Market Commentary much better armed to deal with higher US rates and a stronger dollar (large FX reserves, floating exchange rates and local currency debt markets), some areas of weakness remain in economies where dollar denominated debt has grown rapidly, particularly for the corporate sector. Excessive dollar strength and higher interest rates could lead to a vicious cycle of capital flight, additional local currency weakness, tighter monetary policy in an effort to shore up the currency and more pronounced economic softness. The 1994 Fed tightening cycle resulted in the Tequila crisis. Let’s hope that untimely Fed actions do not result in a Caipirinha crisis this time around (as you can see, I am an expert when it comes to Latin America). LEADERSHIP CHANGE Most of the ingredients are still in place for a continuation of the bull market in US stocks: - The US economic expansion has further to run – current economic conditions are indicative of a mid-cycle environment with very limited recession risks in the foreseeable future. At the same time, global growth is expected to pick up and a broader and more synchronized recovery will provide a further boost to stocks. - Inflation is not an imminent threat: limited signs of wage inflation, weak commodity prices and a strong dollar combine to keep inflation in check. - Interest rates are unlikely to move significantly higher: we expect the Fed to be patient and gradual in their monetary policy decisions and long bond yields will remain depressed due to global supply/demand imbalances. - Global liquidity is not going away: the combined QE purchases from the BOJ and the ECB are larger than the latest round of QE in the US. - Corporate balance sheets are healthy: net debt to equity ratios are indeed close to record low levels. Equity and credit markets tend to run into trouble once companies have increased their leverage for at least a few years While we forecast further gains for US stocks, we believe that the early part of this year is an indication of what is likely to unfold in coming months, i.e. a continuation of recent overseas outperformance. So far this year, US stocks are broadly while European and Japanese equities are up 10%+ in local currency. This change in fortune was long in the tooth and our portfolios have been positioned already for a while in order to benefit from this emerging trend. Given the extent of US equities’ outperformance since the market bottom in March 2009 (up 205% compared to only 101% for non-US stocks), there is still significant catch-up potential for foreign markets. Our preference for international markets is driven both by factors specific to these markets as well as some growing headwinds which have started (and will likely continue) to adversely impact US stocks: 8 PRIVATE BANKING INSIGHTS – Market Commentary Monetary policy divergence: QE is over in the US and while the Fed’s balance will remain relatively stable in coming months, it will start to shrink as a share of GDP. Moreover, interest rate hikes are coming, whether in June, September or even later, it does not change the fact that we are getting closer to tighter monetary policy in the US. A shift in monetary policy always leads to rising market volatility as investors discount the potential for a policy mistake. In this particular cycle, the Fed will be raising rates in an environment of lower potential growth rate and intense deflationary forces globally. As such, there is a nontrivial risk that the Fed will end up tightening too aggressively. As already noted before, outside the U.S., the exact opposite trend is taking place with central banks easing monetary conditions through official rate cuts, the implementation of negative deposit rates and quantitative easing. The strong US dollar, a trend likely to continue, will contribute to a rebalancing of growth in favor of international economies. It will also help ease deflationary forces which have plagued some foreign economies over the recent past. Profit margins are rolling over: corporate profitability is at record high levels in the US while still relatively depressed on a global basis. However, margins are likely to roll over going forward. Cost pressures are likely to build further in coming months with some level of wage price inflation and higher funding costs. Moreover, margins have benefited from limited capital spending in recent years, but this is about to change. While capital spending will help boost demand, the resulting increase in productive capacity will further erode profit margins. As a result, earnings growth will rely solely on top line growth and, given the large and increasing share of foreign profits for US companies, the US dollar will act as a significant headwind in the near term. Although the US economy is not overly sensitive to exports (they account for only 13% of GDP), foreign sales account for a much more significant share of total S&P500 revenues (close to 35%). The negative impact of a strong dollar (and plunging oil prices) became clear during the most recent corporate earnings season, not only in terms of actual profits but also in terms of forward guidance. As a result, 2015 consensus EPS for the S&P500 plunged from $127 at the end of last year to $119 today and, for the first time in this cycle, 12-month forward earnings estimates are moving lower. Although earnings usually only decline during a recession, given the near-term headwinds of a strong currency and downward pressures on margins, it is not totally inconceivable that corporate earnings could actually decline in 2015. In any case, the outlook for profits appears much more robust outside the U.S. as profit margins are likely to rebound from depressed levels and the benefits from cheap commodity prices will not be partially offset by a strong currency. Shifting economic momentum: while the U.S. economy has outperformed over the past few years, the momentum is shifting towards international economies. So far this year, economic data have come in weaker than expected in the US and have surprised on the upside in Europe and other large foreign economies. Growth expectations are 9 PRIVATE BANKING INSIGHTS – Market Commentary still downbeat in Europe, Japan, China and other economies and the impetus from easing monetary and credit conditions, lower oil prices and weak currencies is likely to lead to upside surprises. Valuations will be another impediment for a continuation of the past years’ relative US outperformance. Most equity markets currently trade on relatively high P/E ratios, or at least above their long term averages. There is nothing alarming with the current level of PE ratios, particularly in a context of extremely depressed yield on competing assets and valuations are usually a poor market timing indicator. However, the fact that valuations are more attractive outside the U.S. at a time when the earnings, margins, monetary and economic momentum is also more attractive overseas should help support a continuation of the shift in regional performance we have seen so far this year. In the case of US equities, high PE ratios are more worrying since earnings have already rebounded significantly since the end of the recession and, as indicated, profit margins are more likely to roll over rather than expanding further. Looking at Shiller Price/Earnings ratios (computed by using a rolling average of earnings over the past 10 years in order to smooth the impact from economic cycles), the S&P500 currently trade at 27.8x cyclically-adjusted earnings, significantly above the long term average of 17x. By comparison, the Shiller PE stands at only 15x in Europe, a record discount of nearly 50% (vs an historical average discount of 10-15%). The relative valuation argument of equities against bonds is even more compelling in Europe and Japan where bond yields are close to zero (and in some cases negative) and significantly lower than dividend yields. 10 PRIVATE BANKING INSIGHTS – Market Commentary INVESTMENT STRATEGY • The upcoming Fed tightening cycle will inevitably result in higher market volatility and more frequent corrections, but the underlying uptrend for global equity markets will be sustained. We are therefore sticking with our strategy of overweighting global equities in our portfolios. • Two consecutive months with a Friday 13th (February and March) was maybe all we needed for a reversal in the relative fortunes of US and International markets. We keep our preference for international equities – we are overweight Europe, Japan and Emerging Asia at the expense of US, Australia, Canada and Emerging Markets exAsia. We also continue to partially hedge the foreign exchange exposure in Japan and Europe, despite the already sharp US dollar appreciation in recent months. • We remain underweight fixed income markets as risk-adjusted returns look more attractive for equity markets, but we are not overly negative on the outlook for bond markets, at least in the medium term. Indeed, we maintain a fixed income duration in line with our benchmark, at around 5 years. We do not believe that the 10-year treasury is overvalued with a 2% yield, although we expect ongoing volatility in the near term given current uncertainties around the timing, pace and final level for the Fed funds rate in this cycle. • The 10-year treasury yield should trade at a level consistent with where investors expect short-term rates to be, on average, over the next 10 years and a term premium. If, as we believe, the Fed funds rate is unlikely to peak much higher than 2.5% in the current cycle, the average is likely to be below 2% (since the current level is close to zero and one should expect the Fed to have to cut rates at some point in the next 10 years as the economy faces the threat of another recession later in the forecasting period). The term premium is likely to be minimal in the current environment of extremely depressed bond yields and ongoing QE purchases in the Eurozone and Japan. • We remain overweight corporate bonds, with a particular focus on high yield bonds. The current environment of decent global growth, strong corporate balance sheets and limited net supply of government bonds will drive asset allocation flows towards this relatively high-yielding asset class. • We have been USD bulls for the past 18 months and this view has played out far beyond our wildest expectations, with the USD index up a staggering 25% since mid-2014. We are getting less comfortable with this view which has become a massive consensus. The Euro appears to be on a free fall towards parity and negative deposit rates combined with QE purchases, as well as interest rate hikes in the US, might sustain this momentum for a while. However, the Euro is already significantly undervalued when looking at the current account and purchasing power parity. The situation is however different in Japan where the trade surplus has basically disappeared in recent years and where more pronounced deflationary forces warrant efforts to sustain a much cheaper currency. At some point, a further appreciation of the dollar will become a bigger problem for the US economy and will likely limit the Fed’s ability to raise rates, thereby removing one support for the dollar. For now though, we feel that our strategy to partially hedge our foreign exchange exposure still makes sense as we don’t see yet factors which would lead to a reversal of the current strong trends supporting the dollar. 11 PRIVATE BANKING INSIGHTS – Market Commentary • Finally, we remain underweight commodities but we are gradually warming up to the sector. Lower oil prices should eventually boost demand and reduce the current oversupply situation. The futures curve is discounting higher prices, which gives an incentive for some market players to build up oil stocks but for most investors, this will limit potential returns (negative “roll yield”). As such, we think it makes sense to wait for the futures curve to flatten before increasing our investments in oil. Gold has come down substantially in recent weeks, most likely on the back of dollar strength. While we have no specific allocation to gold today, the likely persistence of very depressed real interest rates should help lift gold prices later, once the USD rally matures. FOR MORE INFORMATION CONTACT YOUR WEBSTER PRIVATE BANK PORTFOLIO MANAGER OR EMAIL US AT [email protected]. Source for charts: FactSet 03/15 Investment, trust, credit and banking services offered through Webster Private Bank, a division of Webster Bank, N.A. Investment products offered by Webster Private Bank are not FDIC or government insured; are not guaranteed by Webster Bank; may involve investment risks, including loss of principal amount invested; and are not deposits or other obligations of Webster Bank. Webster Private Bank is not in the business of providing tax or legal advice. Consult with your independent attorney, tax consultant or other professional advisor for final recommendations and before changing or implementing any financial, tax or estate planning advice. All credit products are subject to the normal credit approval process. SEI Investments Management Corp. (SIMC) and Webster Private Bank are independent entities. SIMC is the investment advisor to the SEI Funds and co-advisor to the Individual Managed Account Program (IMAP). SEI Funds are distributed by SEI Investment Distribution Co. (SIDCO). SIMC and SIDCO are wholly owned subsidiaries of SEI Investments Company. The Webster Symbol is registered in the U.S. Patent and Trademark Office. FN01453 03/15 12