Q4 2016 Market Commentary

Q4 2016 Market Commentary

Oct 28, 2016

This quarter, our investment team —Marc Heilweil, Senior Portfolio Manager, and Todd Jones, Director of Investments—weigh in on the current financial environment. They lend context to common areas of interest or concern, and hopefully spark new conversations between you and your Gratus advisor. Here’s what Marc and Todd are talking about this month:

Relative to other market environments you have experienced over your 30+ year career, how would you characterize where we are currently in the US?

MH: We are in unknown territory right now. I’ve been a student of market history for many years, and this is perhaps the first time wherein history offers very little to inform us about what to expect. Therefore, we all need to be humble in the current environment. Central banks are suppressing interest rates by buying up fixed-income instruments (government bonds, etc.) throughout the major economies of the world. As a result, asset prices are higher than they normally would be. I think the overarching message is to take any major forecast with a grain of salt, and remain cautiously optimistic with individual investment selections.

It seems as if the markets approve of the recent OPEC plan to curtail production.  What are your thoughts?

TJ: This is a topic that’s been in the news quite a bit. It’s certainly on the minds of our clients and investors. To us, the whole energy question is not necessarily impactful to how we manage accounts (because we work on a much longer-term basis than this question might suggest). But as far as putting credence into the OPEC decision, I would just remind people we’re talking about a loose association of countries that don’t like each other very much. Expecting them to do what they say they’ll do is a large ask. Right now these are just words, not actions; and historically you can’t trust what all OPEC members say. Short term, people should be skeptical of the bottom line.

What types of opportunities are you finding in international markets versus domestic?  Do you have a preference at this point in time?

MH: If I had to make a generalization, most markets—adjusting for their riskiness—are somewhat more attractive than U.S. markets. Part of the reason for that is because (except for China, which never saw a big dip) the U.S. recovery has been much faster in the wake of the Great Recession. The dollar has also been quite strong, so that has attracted more investments from abroad rather than the reverse: U.S. investors going to international markets. People would rather have dollar-denominated investments.

At the moment, Switzerland is a particularly attractive market. There are some extraordinarily well-run, multinational corporations in that country, and there’s been an effort made by Swiss National Bank to keep the currency from becoming too strong. Somewhat more speculatively, India seems to have enormous potential. If policies continue to address India’s financial reforms, I think the Indian market will be quite profitable over the next decade. 

What is the outlook for interest rates over the next 12 to 18 months? 

TJ: Again, this is a bit of a challenge to answer, but the discussion is critical to understanding forward-return projections for a number of different asset classes—specifically equity or fixed income. Barring periodic spikes higher in global rates, it’s been our belief—at least over the past five years—that the long-term trajectory of interest rates remains firmly downward. That may be a non-consensus view, but there are definitely a number of factors keeping rates low for the time being:

  • Declining worker productivity—Workers are becoming less productive, so less income is being generated.
  • Demographics—The world is getting older. Seniors require higher levels of fixed-income investments. Going forward there will be buying pressure from older cohorts, globally.
  • Tech improvements leading to job disintermediation—Increasingly, robots can do the routine jobs that people used to do, putting deflationary pressure on wages.
  • Debt—In and of itself, debt is deflationary. It’s pulling demand forward, and at some point you have to pay back your debts.

What could send rates higher, on a more predictable trajectory? Following the next recession, once all the excess debt gets worked out, we may see a more sustained trend upward.

What do you see as the biggest risk to global financial markets currently?

MH: The biggest risk comes from central bank policies. The markets have been somewhat complacent ever since the 2008 financial crisis, in assuming central banks can bail financial markets out. That has been true, but it won’t always be true. At some point, the markets will become more powerful than banks, which have been weakened in their ability to react. The rekindling of inflation is another factor. From a macro point of view, I’ll be keeping my eye on that.

Why are investors turning to private real estate investments?  What is the opportunity in private investments versus public right now?

TJ: Private investments are a big focus for us at Gratus these days. Many markets—equity and fixed-income, for example—are elevated in valuation relative to historic norms. Bond yields are a lot lower than where we started the recovery; the S&P is about 100 percent higher than where it started in 2009. And forward returns, based on valuation metrics, aren’t nearly as good as they were even a couple of years ago.

All told, returns are getting harder to make in public markets. That leads us to the private investments, which certainly has its risks and unique considerations, but also far higher starting return potential because of the large illiquidity premium—i.e. the amount you’re compensated for taking on illiquidity risk.

We’ve hired a talented and experienced real estate analyst to identify opportunities and create fund strategies in this arena. These “less traveled” roads are a natural place to look, as we work to help clients earn an acceptable rate of return, in an effort to achieve their financial goals.

Where can people follow up with you on these issues and any related questions?

TJ: I gladly welcome any follow-up questions or questions for next month’s commentary. Send them to tjones@gratuscapital.com.


Marc Heilweil

Marc Heilweil, Senior Portfolio Manager


Todd Jones,  Director of Investments


Gratus Capital is an SEC registered investment advisor.  Registration with the SEC does not imply any level of skill or training. Our ADV documents are available upon request.  The opinions expressed are as of October 28, 2016, and may change as economic conditions vary. The information provided is not intended to be relied upon as specific investment advice and is not a recommendation, offer or solicitation to buy or sell any securities.  As with any investments, past performance is not a guarantee of future results. In illiquid alternative investments, returns will be reduced by investment management fees and fund expenses. There is no guarantee that any investment strategy will achieve its objectives, generate profits or avoid losses.