Summary views from Pavilion’s Investment Outlook – Q3 2015

Economic Backdrop: Growth remains uneven across countries

The IMF forecasts global GDP growth of 3.3% and 3.8%, for 2015 and 2016, respectively. The expected 2015 growth rate is now slower than growth in 2014. Longer term, pressures from aging populations in advanced economies and slowing productivity growth in emerging economies remain an issue. Nearer term, uncertainties related to the strength of the U.S. dollar and low oil prices have exacerbated already uneven economic growth patterns across countries. Central bank watching remains a favorite pastime.

Equity Market Valuation

U.S. stock market valuations are trading near historic average levels based on trailing 12-month earnings, but trending toward expensive on forward earnings. While valuations are still within normal bands, the Insider Selling/Buying Ratio is near an all-time high – selling remains strong while buying has been flat since late 2012. Canadian equity market valuations appear expensive. By comparison stock market valuations in international developed and emerging market are trading slightly below average levels. Although U.S. stocks look expensive relative to other markets, economic and corporate fundamentals generally are positive. A strong U.S. dollar is proving a headwind for corporate competitiveness and earnings, particularly for large-cap, export oriented companies. Large oil companies are suffering from continued low oil prices as well. Economic momentum is gaining some traction, but China’s rebalancing and the Fed’s move toward policy normalization raises some uncertainties. Given stronger economic growth, improving competitiveness from cheaper currencies, and more favorable valuations, emerging market stocks should perform as well or better than developed market stocks long term, but likely are subject to more volatility.

U.S. Small Growth vs. Value Price/Earnings Ratios – Growth Stocks Very Expensive
3a

Source: Russell cap-weighted indices

Emerging Markets Growth vs. Value Price/Earnings Ratios – Growth Stocks Look Expensive3b

Source: MSCI

Interest rates & Spread Sectors

Projected fixed income returns remain low given the current yield environment. With the exception of the U.S. and the U.K., global growth forecasts for most advanced economies are just about 1.5% and largely will be achieved across much of the world as a result of monetary stimulus that has pushed rates into negative territory, especially after adjusting for inflation. A strong U.S. dollar, low oil prices, and concerns about ramifications for emerging market countries have pushed out projections for an increase in U.S. interest rates to September 2015, with the IMF recommending no movement until 2016. U.S. interest rates are now among the highest in the world.

The search for yield has pushed investment grade and mortgage spreads to historically tight levels. Spreads remain a bit wider than average for below-investment-grade credit and emerging markets. If oil prices remain at current low levels, rising default rates are likely to be concentrated in the energy sector and select energy exporting emerging market countries.

U.S. Rates Top European and Canadian Rates For Maturities From One to Ten Years5a

Source: Bloomberg as of July 29, 2015

This is a short summary only. The complete Investment Outlook is a quarterly publication that has more than 30 pages covering multiple asset classes and regions.
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Pavilion Advisory Group is a registered trademark of Pavilion Financial Corporation used under license by Pavilion Advisory Group Inc. in the United States and Pavilion Advisory Group Ltd. in Canada. This information is intended for sophisticated and/or accredited investors and is for illustrative use only. While the assumptions, data and models used to develop the information contained herein are from sources deemed to be reliable, there can be no certainty or guarantee regarding the likelihood of the outcomes as presented. This document is not and should not be construed as a solicitation or offering of units of any fund or other security or as legal, taxation or investment advice. Any investment advice would be delivered pursuant to a written agreement and legal and taxation advice should be obtained from appropriate and qualified professionals. No part of this publication may be reproduced in any manner without our prior written permission. © 2015 Pavilion Advisory Group Inc.