Macroeconomic Trade and Bonds

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              The market responded positively to President Trump’s comments on Chinese ZTE Corp. Investors see the comments as a sign for easing U.S-China trade tensions. The president made a statement that he would help ZTE get “back into business fast”, saying too many jobs in China were at risk. With concerns the high-level trade talks between the countries to resume with a potentially stronger tone after a tough stance on trade and tariffs, the chance of a potential trade war is being priced lower. Should negotiations break down, tariffs on tens of billions of dollars of products could appear before the end of next earnings season, with impact on earnings delayed but financial markets certainly instantaneous.

              Market noise should now increasingly be derived from real economic activity and experience less volatility from overtones of tariffs. Equity holders are now looking towards earnings seasons for changes in their portfolios.

              Macroeconomically, the government bond prices and the U.S. dollar fell, with the yield of 10-year U.S. Treasury note rising from 2.97% to 2.99%. After Friday, where the spread between US government bonds and the German Bund was the widest in roughly three decades, investors remain confident in economic growth in the US over that of Europe. Whether this trend of investor confidence will continue will remain to be seen. After all, the development of ultralow and in some instances negative rates in Europe could be increasing the appeal of US Treasury to foreign investors.

              Keith Knutsson of Integrale Advisors commented, “Investors should remember that the economic fundamentals in the United States remain superb at the moment.”

 

Tensions Arise in the Eurozone

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With tensions rising over trade disputes and the strengthening of the euro, the economy in the Eurozone has started to slow down. Taking into account all global market events, the European Central Bank (ECB) is now contemplating rate movement and rethinking its decisions on proceeding forward. Analysts have also dialed back their forecasts for when the ECB might increase short-term rates this year.

Trade disputes have been an important concern for the central bank because the Eurozone was successfully able to escape the trenches of a major debt crisis through the strong export system around the world. The Eurozone exported goods and services worth 44% of its economic output last year and had plans to do the same going forward. With the recent news on President Trump’s plan for tariffs, the Eurozone could face some headwind with its export business. Rising tensions around U.S. tariffs and an appreciating currency against the dollar has resulted in a temporary slowdown on rate adjustments within the Eurozone.

President Mario Draghi claims, “the banks will move only cautiously to withdraw its large monetary stimulus in light of trade disputes and a volatile currency. We are aware that an escalation of protectionist threats from the United States would dampen-growth everywhere and the recent uncertainty is probably already having some negative effects on investments.”

The ECB is set to meet this week to discuss current economic conditions and its next steps to decimate any major slowdown. Investors are planning on waiting for a potential rate hike to the second half of the year given the current ECB contemplation on short-term rates. The strengthening of the euro, which has appreciated roughly 15% against the dollar last year partly reflects U.S. policy decisions going forward. Investors are worrying about the Federal Reserve’s plan to offload balance sheets and its current budget deficits. As of now, the Euro and Yen might be safer options for investors looking into safer investments to diversify their portfolio with global currencies.

How Investors Should Navigate a Volatile Market

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With markets becoming increasingly volatile this year, investors have started to question their investment decisions. The year 2018 has been a surprise to investors as there was an initial selloff period and then a strong rebound.

The question is, will an increased market volatility serve to be a problem for investors?

Even though volatility might not be favorable to investors as the risks associated with an investment go up, volatility fluctuations have been based on the current U.S. business cycle. The U.S. economy is currently in the later stages of a long period of expansion that followed the financial crisis of 2008. Until the economy started to get on a firm footing, the U.S. witnessed lower interest rates, an improving global economy, a Federal Reserve Bank that showed reluctance in pulling back on unconventional monetary policies and events like quantitative easing.

More recently, we have seen a pickup in global economic growth, which has started to raise concerns about inflation and what it could mean for the markets going forward. Theoretically, small amounts of inflation are healthy for the markets. However, a sudden spark in inflationary risk could prompt the Federal Reserve Bank to halt expansion and put a stop on economic growth by increasing the interest rates. This will in turn affect the global markets and corporate profitability for companies around the world. The small increase in volatility compliments the increase in uncertainty and this has started to come up during portfolio decision-making.

Taking into consideration the past market cycle short and medium terms, we can predict that the market will head lower because growth will eventually stall. Recession is a feature of the market and is also completely common throughout the world. When this downturn comes up, the markets will decline, and losses might be incurred. With the correct hedging strategies, it is likely that investors will be able to successfully jump from this potential hurdle.

Some worried investors might ask, should we sell? The answer to this question is dependent on how risk-adversity. Nobody knows when the next recession might occur because there is no definite answer. Predicting an event like the recession is complex and at times inaccurate. Investors who take an aggressive approach to their portfolio will play with the risk-return strategy embedded in their respective portfolios, but the ones who might be risk-averse could lose major returns if the recession never hits. Instead, hedging your portfolio through diversification might seem like an optimal approach.

Another perspective to think about might be your personal goals. If investors have achieved their monetary goals, it might make sense to take a less riskier approach. Sometimes hedging your portfolio and riding out the market jitters is a better idea than to liquidate your investments because of the small subtleties of how the market is designed with respect to the economy.

Municipal Bonds Performance

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The first quarter of 2018 has been disappointing for investors due to concerns about rising interest rates, inflation, and newly established tax rules. In February and March, municipal bond mutual funds only saw an investment of $268 million – a 92% drop from the five-year average. In the past three months, a majority of municipal bonds ETFs have returned between a negative 1%-2%. A bad quarter for municipal bonds has not occurred in the markets since Q1 2008. Yet, despite concerns about such congruence, much of the effect is caused by lower taxes leading to lower demand for tax-exempt bonds.

Due to worrying purchasing powers, investors are looking towards newly issued bonds rather than outstanding bonds (only until the price of such securities falls). From a perspective of the government, low bond prices have resulted in rising borrowing costs on the state and local level.

Yet, there also remains optimism in the market; a bipartisan bill, aimed at reducing the reach of Dodd-Frank would classify municipal debt as high-quality liquid assets, is expected to pass. The National Association of State Treasurers has attributed higher borrowing costs for the government to the lack of exclusion from the high-quality liquid assets designation. Currently, the municipal bond spread results in a ~85% yield of comparable Treasury bonds, a value higher than the historical average.

Keith Knutsson of Integrale Advisors commented, “Given that lots of uncertainty remain regarding the deregulation of Dodd-Frank, it makes municipal bonds too speculative for the average investor currently.”

The Future of Artificial Intelligence in the Insurance Industry

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Insurance companies are facing rapid tectonic shifts in their business operations as the financial environment changes and new technological advancements are made in the insurance industry. In such a competitive environment, many insurers are restricted to paper-based infrastructures and legacy IT implementation thus limiting their ability to make technological advancements. As new ideas and companies emerge in the industry, insurance companies will have to rely on artificial intelligence (AI) to meet practical uses. This creates a dynamic segue into the future of robotic process automation (RPA), a leading AI mechanism in the insurance industry.

RPA is a sophisticated “software” robot programmed to maintain everyday tasks that were previously handled by humans. The difference between the RPA technology versus a traditional robot is the fact that this software robot is programmed for tasks that are manual, rule-based and repetitive. In terms of being a true “game changer” in the insurance industry, robotic process automation has practical uses too. For example, it can be used in the transfer of coverage details from the product offering system to the policy system to prepare the issuance of the policy. In simpler terms, RPA efficiently connects multiple IT systems and mimics human actions at a user interface to speed up processes. The luxury of RPA is the fact that it compliments other software programs that companies currently use.

How will this impact the insurance industry?

With competition increasing in the industry, insurers are constantly placed in stressful situations to meet shareholder expectations and generate strong profits. Traditionally, insurers invest premiums paid by customers and generate strong returns. However, the current economic condition and volatility in the rates market has created strong headwind for many insurance companies. With major market volatility and competition from private brick and mortar insurance providers, prices have spiraled downwards. Not only that, but bigger tech giants like Google, Facebook and Amazon have accumulated tremendous amounts of data giving themselves the ability to offer customized insurance products based on specific customer profiles at competitive prices. To get an edge over these competitors, insurance companies need to find ways of creating tech-savvy products in the most efficient ways possible.

This is where the use of RPA comes into play for insurance companies facing a potential downturn in the future. With the ability to make quick decisions using RPA, customers can get bigger returns on their investments much faster. Not only that, but RPA helps insurance companies bring down the cost in operations and in turn provide competitive prices to its customers. Robotic process automation has the ability to re-shape the infrastructure of insurance companies by giving employees more time to focus on quality control instead of repetitive operational tasks.

The insurance sector is at a crossroad in terms of meeting the competitive challenges of technological advancements in the industry. RPA can quickly streamline costs, create an efficient operational network and add value for both insurers and the customers

Global Real Estate Market Status and Forecasts

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The Global Real Estate Market performed exceptionally well in 2017, with yields compressing and prime rents rising above consensus forecasts, rising 0.12% and 1.7% respectively, all while overall volumes increased by 13.2%, the highest level of real estate investment on record. The Industrial sector benefited from low comparable prices as well as new growth opportunities, factors that led to investment growth of 29.5% YOY. Asia captured 52% of the global market, setting a record for the highest share by any continent in recorded history. This influx was felt in the EMEA region where Asian capital increased 95% YOY to a total that remains below investment of North American Investors. Latin America markets are experiencing economic growth from primary and secondary effects of increasing commodity prices.

For 2018, real estate investors are expecting to leverage the positive impact of the technology industry. The growth of the share economy and big data may prove profitable for tech hubs and specialized second tier cities. Despite the continued rise of the “internet-age”, investors believe that location in prime real estate will be of profound importance.  While these locations are already mapped out in the developed world, emerging markets do not have such defined bounds. Gateway cities have proven as a potential common data point for highest growth. Overall, the benefits of economic momentum with risk of global shift in monetary policies are expected to balance results. Real estate will continue to operate as a tool against fears of inflation.

Keith Knutsson of Integrale Advisors commented, “The global economy is at an interesting point past the recession; the performance in 2018 will dictate the performance for supply and demand in the coming years.”

President Trump’s Tariff: Future Outlook & Market Volatility

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Last week, President Donald Trump announced a plan to set imposed tariffs on steel and aluminum imports further adding a layer of uncertainty on the future outlook of the markets. Tariffs of 25% on steel imports and 10% on aluminum imports will result in a price increase for multiple consumers and slow down growth for many businesses globally. This news could also play a major impact on foreign countries as they might also impose a similar tariff on U.S. exports.

President Trump’s announcement resulted in a decline in the stock market and backlash from global leaders who might have to face the burden on billions of dollars’ worth of U.S. imports. Shares of industrial companies and automakers face heavy headwinds with a sharp decline in share price going forward. The U.S. dollar continued to pull-back against the yen and euro as rumors about a potential trade war created a volatile environment according to Brad Sorensen, managing director of the Schwab Center for Financial Research.

“The market doesn’t like uncertainty. We don’t know if the tariffs will be targeted or widespread, what the foreign reaction will be, or whether this is an opening shot in a battle for tighter trade restrictions or a standalone action designed to send a message in ongoing trade negotiations.”

The biggest question has still been left unanswered because there is no concrete direction the market is headed due to the Cboe Volatility Index (VIX), a measure of market volatility expectations. With the recent news on tariffs and the Fed’s potential short-term rate hikes, the VIX has sparked to a level around 19.59 further implying a 30-point swing in either direction for the S&P 500.

As potential tariffs could impact the job market and change investment strategies going forward; only time will tell if tensions rise between the United States and its foreign trade partners.

BlackRock’s Efforts Do Not Go Unnoticed

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BlackRock is stepping up their intelligence research. The hedge fund is setting up a new center dedicated to research in artificial intelligence, placing an emphasis on interest among asset managers in how machine learning can revolutionize the investment industry. The world’s biggest investment group, with $6.3tn of assets under management, is establishing a lab for AI research in Palo Alto, California.

“Research in AI can enhance current investment strategies and accelerate efforts to bring the benefits of these technologies to the entirety of the investment industry” said Keith Knutsson of Integrale Advisors.”

AI has emerged as a topic of interest in the corporate world. Furthermore, the power of modern computers and expanding digital data have allowed for natural language processing and machine learning. Asset management teams are especially interested in enhancing AI as they try to improve the performance of their fund managers, automate back-office functions, and enhance their client outreach by analyzing large amounts of data. Some researchers believe that AI could ultimately replace human fund managers completely.

BlackRock seeks to be on the cutting edge of technology in the world of finance and the setting up of the AI lab, and an internal “Data Science Core” unit announced is part of the company’s technological advancement plan. Included in this plan is the use of investing machines to analyze traffic through corporate websites as an indicator to the future growth of a company. Another technology that the firm uses is text analysis to filter through transcripts of earnings calls, looking for signs of whether a management team is positive or negative about their company’s prospects.

Analyzing large amounts of data with ease opens a world of possibilities for generating alpha. However, traditional techniques must continue to be improved if a firm is to outperform their competitors. The new lab represents a deepening of those efforts to enhance AI in the financial field.

U.S Reported GDP Growth

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The United State Commerce Department posted GDP numbers at 2.6% on January 26th for Q4 2017. Those numbers missed Wall Street expectations of 3% but remain much better than the average 2% growth since the early 2000s, and the 1.5% increase in 2016.  The United States has not been able exceed the 3% mark for three quarters in a row for 13 years now, during the George W. Bush presidency. The growth was attributed due to increases in personal consumption expenditures, nonresidential and residential fixed investment, exports, and government spending on the local, state, and federal level. Limiting factors included reduced inventories and an increasing trade deficit; imports and exports rose 13.9% and 6.9% respectively, with rising oil prices having a profound impact on the import numbers.

Consumers and businesses powered the economy to a 2.6% rate of gross domestic product growth in the final three months of 2017. But declining inventories and a wider trade deficit kept the U.S. from hitting the 3% mark for the third quarter in a row for the first time in 13 years. Meanwhile, the Federal Reserve projects 2.5% growth for 2018, and other economists expect short-term growth of 3%. Factors such as an aging population and meager productivity growth remain key factors to subdue additional GDP growth.

Inflation rose 2.8% in the Q4, marking the highest quarterly increase since 2011. While 2.8% is above the 2% goal of the Federal Reserve, the year to year number was under 2%. Investors remain curious whether this development will draw comments from the Federal Reserve.

Equities have experienced strong quarterly results as well. Over 70% of S&P 500 companies beat EPS expectations in Q4, with an earnings growth rate of 12.3%.

Keith Knutsson of Integrale Advisors commented, “consumer confidence, according to the OECD, is at the fourth highest level since the 70s, the unemployment rate is incredibly low considering structural and frictional unemployment, and capital investments carry momentum with the new tax plan – the U.S is looking forward with much strength.”

German Economic Growth

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In 2017, Germany’s economy grew at the fastest annual pace in nearly a decade. As a result, this is a large contribution to the pickup in growth across the eurozone.

According to the German National Statistics Office, GDP (gross domestic product) grew 2.2% last year, after analysts expected growth of 2.3%. Nevertheless, it was the fastest pace of growth recorded since 2011.

Germany’s strong performance feeds into the success of the eurozone. On Tuesday, the World Bank estimated the EU’s economy grew 2.4% in 2017, which would be its strongest performance since 2007. The expectation is that Germany’s positive growth and momentum will continue in the current year. Trade played a big role in the growth: imports grew 5.2%, exports were up 4.7%.

“Looking to the future, the fundamental factors that supported growth in 2016 and 2017, such as rising industrial production and larger demand for real estate, should still be in place in 2018” said Keith Knutsson of Integrale Advisors.

The recent pickup in growth across the eurozone has made policy makers at the European Central Bank more confident that they will reach their inflation target over the next couple of years. The central bank is decreasing monthly bond purchases under the quantitative easing program from €60 billion from €30 billion.

The acceleration in growth has been fueled in part by a rise in business investment, with Germany seeing a 3.5% rise in spending on domestic plant and machinery in 2017. Eurozone industrial production was 1% higher than in October, and 3.2% higher than in November of 2016. As a result, Germany remains the Eurozone’s manufacturing powerhouse.