U.S. Economy Back In The Lead, Analysts Say
The U.S. economy will strengthen, and inflation will remain low in 2015, keeping yields and returns of fixed-income investments relatively modest, according to Wilmington Trust.
Emerging markets should also prosper, particularly relative to developed ones, the trust company’s analysts say in its latest Capital Markets Forecast report.
“The U.S. has re-emerged as the dominant global economic powerhouse, and we believe that will increasingly be the case, at least for the first half of our seven-year forecast time horizon,” Wilmington Trust Chief Investment Officer Tony Roth said during a press briefing.
U.S. GDP growth continues to gain traction on the strength of exports and government spending, and Wilmington Trust expects this to continue over the forecast period. Consumer spending and confidence are likely to keep rising, the analysts say.
“If we look back, the longest economic cycle we’ve seen has been 10 years—the longest without a recession,” Roth says. “We think that we could have a period here that is a longer recovery than we’ve seen in the past.”
He acknowledged, however, that the U.S. economy faces persistent challenges, such as a slack job market and sluggish housing market.
With a stronger U.S. economy comes a stronger dollar, he said, which is likely to continue to appreciate against other developed markets. This will bring increased capital flows into the U.S., boding well for domestic stock prices. However, it will likely result in higher prices abroad for U.S. goods and services, meaning investors should anticipate some combination of lower exports or a lower dollar in the latter half of the forecast period, Roth said.
Normalized Environment
The forecast predicts inflation will average 1.9% across the seven-year horizon, with higher rates toward the end of the period. In the shorter term, inflation will be compressed, given that workers are likely to have little pricing power and residual global slack is weighing on prices.
Considering that interest rates may rise this year, probably around the middle of the year, Roth said, “We view that as a move by the government toward a more normalized environment. We do not view that as a move that is in any way, shape or form driven by the need on the part of the government to keep rates in check as a result of inflation. That’s a very important distinction.”
Although bond yields moved lower during 2014, Wilmington Trust forecasts a rise in yield levels in the years ahead. It anticipates that nominal yields for 10-year government bonds will peak at 3.5% during the next seven years, while real returns could range from near zero to negative, both domestically and internationally.
Return prospects for investment-grade and high-yield corporate bonds should be higher than government securities, in a range from 3% to 6% annually—still quite low on a historical basis. Performance for international developed market debt will likely be even lower.
Wilmington Trust continues to favor equities with the expectation that its level of commitment will only modestly exceed market weights. The 2015 forecast predicts mid-single-digit stock returns, more than it forecasts for bonds for the next few years.
No Longer Homogenous
The report expects a convergence between developed and emerging markets during the forecast period, even as a divergence exists between the U.S. and most other developed international markets. Emerging economies will likely emulate economic policies that have worked well in developed markets, and should experience generally solid income, productivity and economic growth, presenting an area of opportunity.
Wilmington Trust projects emerging market nominal growth rates of 6.5% on average between 2014 and 2019, compared with 4.4% for developed economies. Emerging economies’ global share of GDP is expected to rise to 42% and that of developed markets to fall to 58%.
The forecast predicts that emerging markets won’t keep pace with their growth rate of the last 15 years. However, these economies continue to need basics, so they are expected to sustain higher growth rates than developed economies. Mexico, South Korea and Southeast Asia should come to the forefront of emerging economies in the near term, according to the forecast.
Roth said Wilmington Trust has been pointing out to its clients that emerging markets can no longer be viewed as monolithic. “These economies increasingly diverge from one another, and some countries are in much later stages of the development cycle—China, for example,” he said.
Others, such as Brazil, are experiencing significant stalling as a result of their connection to commodities, he said. “We’re seeing much smaller economies in the emerging space that are at an earlier stage of their development cycle that represent interesting investment opportunities over the forecast time line.”
—Michael S. Fischer
Ex-Hedge Fund Manager StartS Fantasy Sports Convention
A former hedge fund manager who served a four-month prison term for insider trading is the driving force behind the first Fantasy Sports Combine in Las Vegas, a three-day event where players can be tutored by industry’s top analysts, former athletes and championship-winning coaches.
Fantasy sports has grown into a $3.6 billion industry, with increasingly popular daily-play games joining the traditional season-long formats. Drew “Bo” Brownstein, whose Denver-based hedge fund Big Five Asset Management was shut down in 2011, came up with the idea last year. Guest speakers include Super Bowl-winning former coaches Mike Ditka and Mike Shanahan.
“Fantasy sports touches everyone from the head trader at Goldman Sachs to a guy making $60 a week,” Brownstein, 38, said in a telephone interview. “And it touches both men and women. Its popularity is booming and only getting bigger.”
The event borrows its name from the National Football League’s annual Scouting Combine in Indianapolis, where this week the nation’s top college players are showcased before coaches and executives for the league’s 32 teams. Some of those NFL prospects may soon become important in fantasy sports, where participants select real players to their rosters and accumulate points based on the game-day statistics they generate.
The event is scheduled for July 17-19 at the Wynn Las Vegas, and Brownstein said he wants the convention to someday become as popular as Comic-Con, which for more than 40 years has brought fans together with comic book creators, science fiction and fantasy authors, television and movie directors, producers and writers.
“I have no illusions of that, but it’s something to aspire to and learn from,” said Brownstein, who played college football at the University of California at Los Angeles. “It’s a community experience and it offers something people are passionate about in an attractive package.”
$995 Tickets
Tickets to the conference start at $995—not including the cost of a room at the Wynn—with a discounted price of $895 for those who register before April 3 at the Fantasy Sports Combine’s website. Brownstein said he expects between 1,500 and 2,000 attendees for the event, which begins three days after Major League Baseball’s All-Star Game.
There will be panels that feature fantasy sports analysts such as John Hansen of DirecTV and Sirius XM and Brad Evans of Yahoo Sports. Shanahan, who coached the Denver Broncos to two Super Bowl titles, will break down game film with participants while Ditka, a member of the Pro Football Hall of Fame who was coach of the Chicago Bears’ 1985 championship team, will share behind-the-scenes NFL stories.
An NFL draft room will be recreated with general managers and front-office personnel, while other featured topics include winning strategies in daily leagues for football and baseball. Among the experts participating will be Drew Dinkmeyer, who spent seven years as a senior investment analyst before deciding to pursue fantasy sports professionally. Dinkmeyer won $1 million in December in a one-week NFL contest on daily fantasy sports website DraftKings.
Current and former NFL players such as Brandon Marshall, Von Miller, Miles Austin, Kyle Orton and Brandon Stokley will be among the professional athletes in attendance along with former National Basketball Association player Chauncey Billups and recently retired MLB slugger Adam Dunn.
“I played fantasy baseball and fantasy football when it wasn’t cool, way back when I was in middle school,” said Stokley, 38, who spent 15 seasons in the NFL as a wide receiver. “It’s been amazing to see the growth of it, especially throughout my career, and the impact it has on the sport. When people leave this event, they’ll have learned something and they’ll have had a blast.”
Insider Trading
In 2011, Brownstein was sentenced to one year and one day in prison and had to forfeit $2.44 million he made from trading on a tip in advance of Apache Corp.’s $2.7 billion acquisition of Mariner Energy Inc.
Brownstein said he was working out at the gym with his long-time friend, Drew Peterson, who mentioned the sale of Mariner Energy because Peterson’s father was on the board. Brownstein wound up serving four months in jail. He said he returned his investors’ money and closed Big Five Asset Management.
Brownstein’s focus soon returned to his other love, sports, and he turned to some of his former hedge fund investors to help kick off the Fantasy Sports Combine.
“Bo was faced with a challenge, accepted his responsibility and resolved his issue with no continuing obligations,” Fantasy Sports Combine organizers said in a statement.
Brownstein said moving into fantasy sports was the natural direction for him to take.
“I made a decision that I’d really pursue something I was as passionate about as I was being in the investing world,” he said, without disclosing the initial investment in the event. “But I couldn’t have done this alone. We built a strong team and went at it full sprint. When you see the opening, you better run through it while you still have the chance.”
—Bloomberg News
