Source: Advisor Perspectives

Ken Fincher, First Trust Advisors, highlights that the Fed has signalled plans to gradually increase interest rates this year. It’s important for investors to remember that the cost of leverage will narrow the differential between the long and short end. The narrowed leverage could force closed-end funds to search for higher yields.

There will be a period of transition for many funds, as their cost of leverage moves higher. But eventually it will move everything higher. So while leverage will be an issue in the months leading up to more rate increases, in the long term it will play well in to the common shareholders.

The key for investors now is patience. Many retail investors when they start to see rates rise, or they start to see their distributions move lower, they tend to panic and they tend to sell out ahead of when they should. So they sell into the weakness. Take a long-term perspective.

Basically it means that increasing interest rates would remove speculative element from oil and gas stock price and investments to a certain degree. Since the increasing rates would have an impact on the cost of leverage, it may also increase oil companies’ debt. Therefore, it is important to estimate what level of investments outflow shall be expected once closed-end funds start shifting to the higher yields. 

 

Source: Advisor Perspectives

Brad McMillan, Senior Vice President, CIO, Commonwealth Financial Network indicates that globally, economics are very positive, which supports financial markets. Fundamental factors are also improving, and that looks likely to continue. What do we need to worry about? One word: politics. Although markets have largely priced in U.S. political risk, Europe poses greater concerns. Overall, though, the picture is quite positive going forward.

It is necessary to keep in mind that when Brad McMillan says that economy did very well, he speaks from financial market perspectives. However, considering that the main driver for financial markets is sentiments, the assumption that the global economy is doing well might be misleading.

Because the numbers that create illusion of economic growth, simply represent enthusiasm of the stock market. However, these numbers do not improve fundamentals. Instead, they may contribute to a problem.

Therefore, I think that this optimism is groundless. The current president of the United States is a person who manifests total lack of experience and maturity which are basic requirements for this position.  Considering that the U.S. is #1 global economy, the presidency of Donald Trump inflates the issue by folds.

Besides the following factors do not provide a solid ground for optimism.

DANGER OF TRUMP’s LACK OF EXPERIENCE

President Donald Trump unveiled a one-page plan on Wednesday proposing deep U.S. tax cuts, many for businesses, that would make the federal deficit balloon if enacted, drawing a cautious welcome from fiscal conservatives and financial markets.

While the proposed tax cuts would please those helped by them, such as multinational corporations and wealthy taxpayers, Trump’s package fell far short of the kind of comprehensive tax reform that both parties in Washington have sought for years.

Investors, who had been awaiting tax-plan details for months, largely shrugged off the news, with many saying it was still short on specifics and faced a long road to enactment. “Wake me up when something actually gets signed into law,” said Greg McBride, chief financial analyst at Bankrate.com in West Palm Beach, Florida.

Only Congress can make major tax law changes, and Democrats immediately attacked the Republican president’s plan as fiscally irresponsible.

“President Trump’s tax plan is short on details and long on giveaways to big corporations and billionaires,” said Nancy Pelosi, the top Democrat in the House of Representatives.

U.S. stocks pared gains on Wednesday after the plan was unveiled. While Wall Street has been optimistic about the prospect of corporate tax cuts since Trump’s election in November, the stocks rally has stalled lately because of a lack of clarity about Trump’s policies and concern over his failure to push through a healthcare bill.

The benchmark Dow Jones industrial average of blue-chip stocks .DJI on Wednesday closed down one-tenth of 1 percent.

In February 2017, the Sveriges Riksbank published “The Monetary Policy Report” indicating that the international recovery is proceeding at a moderate pace. Forward‐looking indicators, such as the Purchasing Managers’ Index and consumer confidence, have strengthened, and development in the near term looks slightly stronger.

Continued expansionary monetary policy and to some extent also more expansionary fiscal policy will support the recovery. The political situation in several countries around the world, including the United States, is making it more difficult to predict economic and political developments. After the US presidential election in November 2016, long‐term global interest rates and equity prices increased although the upturn slowed before the turn of the year.

The optimism on the financial markets during the autumn can be linked to several aspects including expectations of fiscal policy stimulation in the US that would make a positive contribution to economic activity and to higher inflation in the years ahead. Recently, however, growing uncertainty regarding the formulation of US economic policy has been reflected in developments on financial markets in the form of, among other things, a clear depreciation of the US dollar. 

Hang Seng Investment in its “2Q 2017 Investment Outlook” issued on 6th April 2017 highlighted that S&P 500 is likely to face more correction pressure if Trump policy continues to disappoint. Watch out Fed members to turn more hawkish amid further strength on economic indicators. On the other hand, the major laggard year to date – energy stocks, are expected to rebound with the OPEC’s production cut extension into 2H17 and members support to maintain oil price at $50-$60 level.

The recent retreat on USD and political risks posted on DM (US, Europe, Japan) likely to favour Global fund flows to EM. While USD Index is currently lingering at its 14-year high, EM Asia currencies has started to rebound from its 12-year low. We like both Asian emerging market equities and debts.

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Heng Seng Investment points out that Janet Yellen stated that the US labour market is getting better, local economic activities are expanding in a mild pace, unemployment rate improved slightly and claimed that the current policy will be able to strengthen the employment market, which will lead to sustainable raise of the inflation to achieve 2% target. She also mentioned that the inflation rate of more than 2% in the short term is acceptable.

According to Heng Seng Investment, investors fear that 4 rate hikes this year might be implemented. It may cause a sideways move in the short run. 10 Year US Treasury Yield is expected to trade within the range of 2.3% to 2.6%. But investors should not forget that the US rate hike is still continuing and the probability of June rate hike is now approximately 50%.

In Europe, market expectation on moderate tightening of ECB monetary policy is heating up as 10-year German Government Bond Yield has recently tested the 52- week high of 0.5% level again. Negative interest rate in Europe may may be gradually replaced by a positive rate. Previously investors thought European and Japanese easing policy can counteract the effect of US rate hike. However with the higher chance of Euro rate hike, global interest rates may enter a phase of upward movement. It would become a long term supporting factor for further upside of US treasury yield.

Consensus Economics reports that changes in G-7 Quarterly Forecasts for GDP contrasts the December 2016 consensus projections in blue (pages 3, 28 and 29) with those from June 2016 and December 2015. In general, the outlook for all countries (except Japan) has deteriorated since our June survey. GDP growth in the US has been below-par in 2016 but could pick up pace next year supported by strong personal consumption and firmer manufacturing production. Italian forecasts have tumbled amid renewed political uncertainty after the resignation of the prime minister.

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Heightened concerns over the fragile banking sector could yet have more far-reaching implications on the Euro bloc. Key elections next year in France and Germany add risk to near-term sentiment in these respective economies. Brexit has softened the UK outlook, although it could still be sometime before a formal EU exit is finalised.

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Source” Consensus Economics

Consensus Economics panellists predict that US GDP growth will settle around 2.2% (y-o-y), and it is still unclear whether the new government will immediately embark on fiscal expansion and tax cuts as promised. (Moreover, Canadian GDP expectations are also uncertain, pending Trump’s criticism of NAFTA).+0c

Source” Consensus Economics

This 2.2% US growth projection is relatively solid but modest when compared with around 3% exactly a decade ago. Indeed, quarterly GDP forecasts for the rest of the G-7 also indicate only modest rates of activity.

Quarterly sentiment has deteriorated compared with 6 months and one year ago, especially in the case of France, the UK and Italy. Factors including widespread loss of confidence in the political status quo are impinging on all three countries. Brexit hangs over UK estimates, its outcome an unknowable factor at this point, but with risk edging to the downside due to fears of trade isolation and lost dynamism. 

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Source: Vanguard Investment Strategy Group

“2017 economic and market outlook: Stabilization, not stagnation”, published by Vanguard Investment Strategy Group, specifies that since the end of the Global Financial Crisis, economic growth rates have fallen short of historical norms (see Figure I-1a), and interest rates have hovered at historical lows (Figure I-1b) despite increasingly high levels of debt (Figure I-1c).

A significant share of the world’s government bonds have negative yields. With 80% of the world economy at full employment, real wage growth nevertheless remains low and growing income inequality remains an issue in developed markets (Figure I-1d). Policymakers’ aggressive efforts to boost growth and counteract deflationary shocks have become exercises in disappointment.

Stubbornly low growth has raised concerns that the global economy is settling into a Japanese-style secular stagnation. These concerns reflect a misunderstanding of the structural forces that have shaped growth, inflation, and interest rates and will continue to do so in the years ahead.

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Source: Vanguard Investment Strategy Group

Vanguard believes that the long-term interest rates outlook depends more on the direction of these structural forces than on the next move in central bank policy rates (see Figure I-3). When we evaluate the forces’ longer-term paths, we see that although they will most likely keep interest rates considerably lower than in the past three decades, these drivers are unlikely to drive rates lower. The potential global growth could pick up modestly over time.

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Source: Vanguard Investment Strategy Group

The expectation is based on the potential for a rebound in productivity growth as new digital technologies are better utilized and a slight recovery in the labour force as the baby boom generation finishes transitioning to retirement.

Meanwhile, the combination of an ageing population entering the spenddown phase of its investment life cycle (see Figure I-4a), the secular slowdown in emerging markets and China resulting in lower trade surpluses and less accumulation of U.S. Treasury reserves (Figure I-4b), and a continued increase in global debt levels (Figure I-4d) could put some upward pressure on rates.

At the same time, the ever-falling cost of technology could serve to anchor both inflation and yields in the long term (Figure I-4c). The central tendency of our projections does not include a significant departure from past norms, but world real interest rates somewhere near the 115-year historical range of 0.6%–1.4% are entirely possible in years to come.2

Despite potentially heightened volatility during the transition from today’s extreme levels of policy rates toward modestly higher rates, we remain cautiously optimistic about the long term. An equilibrium interest rate that is positive in inflation-adjusted terms means that investors should be reasonably compensated for saving and investing, justifying our modest, yet positive, long-term real return outlook for cash and bonds.

In February 2017, Martin Beck and Andrew Goodwin (Oxford Economics) published “The UK Economic Outlook”. It is expected that the U.K. growth in potential output to average 1.5% a year between 2017 and 2021. This is well below the average of the decade prior to the financial crisis (2.7%) and represents a modest step down on the 1.6% a year that we estimate was achieved between 2007 and 2016.

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They also forecast that GDP growth to average 1.8% a year over the 2017–21 period. Ordinarily, a sizeable output gap would be expected to foster stronger GDP growth, partly via more accommodative macroeconomic policy.

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In addition Brexit negotiations would take a few years. The long process is not in favour of the U.K. interests as it might cause further deterioration of the economy and decline in living standards. Needless to say that as a result, the Conservative Party ‘s popularity will  drop significantly. 

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Economic and political uncertainties have also weighed on investment demand in many countries, while the nexus between profits and investment has weakened in both developed and developing countries (UNCTAD, 2016a). The declining demand for capital goods associated with weak investment restrains global trade, which in turn curtails investment further.

Meanwhile, the extended period of weak investment is a driving factor behind the more medium-term phenomenon of a slowdown in productivity growth. Weaker productivity growth may be compounded by the broad slowdown in global trade growth, as international trade, supported by a universal, rules-based, open, non-discriminatory and equitable multilateral trading system, has the potential to speed the rate of technological diffusion between countries and improve the efficiency of resource allocation.

The fact that EIA downgraded crude oil price forecast is another strong signal indicating that there is no significant reason for optimism.

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According to the Economy Forecast Agency, crude oil prices are expected to be even lower that forecasted by EIA.

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In the beginning, Brent price at 53.53 Dollars. High price 56.42, low 50.60. The average for the month 52.98. The Oil Price forecast at the end of the month 51.37, change for April -4.0%. Average price of WTI is expected at 50.85 Dollars. High price 53.57, low 48.67. The average for the month 50.63. The Oil Price forecast at the end of the month 49.41, change for April -2.8%.

In February 2017, PwC published “The Long View How will the global economic order change by 2050?” whereby it highlights that the world economy is expected to increase more than double in size by 2050, assuming broadly growth friendly policies (including no sustained long-term retreat into protectionism) and no major global civilisation-threatening catastrophes. 

Wood Mackenzie revised its Brent price outlook down to $55/ bbl in 2017, and $50/ bbl in 2018 based on our assumption OPEC does not rollover its agreement for 2018. In the short-term we see higher than expected stock build, driven mainly by temporary weakness in the three engines of demand growth.

With supply growth in 2017 of just 140,000 b/d, and demand expected to gain 1.3 million b/d, we see price support in the second half of 2017 as global implied stocks are drawn down. Underpinning weak supply growth this year is our assumption that OPEC and Russia rollover supply cuts for H2 2017 and adherence remains strong.

Notably, lower prices have implications for US producers. Year-end 2018 Lower 48 crude output is 170,000 b/d lower than in our previous forecast.  Outside of core acreage, the economics of most tight oil assets will be stressed in H1 2018.

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McKinsey Energy Insights believes that crude oil prices will remain low for a considerable period of time.

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In its “Monthly OIl Market Report”, OPEC indicates that Demand for OPEC crude in 2017 was revised down by 0.1 mb/d from the previous month. This downward adjustment came mainly from an upward revision in non-OPEC supply, as world oil demand remained unchanged. Within the quarters, the first quarter was revised up by 0.1 mb/d, while both the second and fourth quarters were revised down by 0.2 mb/d. The third quarter was revised down by 0.3 mb/d.

Demand for OPEC crude is projected to increase this year by 0.6 mb/d to average 32.2 mb/d. Comparing to the same quarters of last year, the first and second quarters are expected to increase by 1.5 mb/d and 0.2 mb/d, respectively, while the third and fourth quarters are projected to increase by 0.1 mb/d and 0.4 mb/d, respectively.

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It is also necessary to keep in mind that oil companies have accumulated sizeable debt. Considering that oil price is expected to remain low, upcoming multiple interest rate hikes, fast approaching debt maturity and long list of political risks, it may lead to additional problems. If we combine the above information with the following long-term forecast, it would strongly suggest that the time for optimism is not planning to come soon.

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Source: PwC

Emerging markets will continue to be the growth engine of the global economy. By 2050, the E7 economies could have increased their share of world GDP from around 35% to almost 50%. China could be the largest economy in the world, accounting for around 20% of world GDP in 2050, with India in second place and Indonesia in fourth place (based on GDP at PPPs).

A number of other emerging markets will also take centre stage – Mexico could be larger than the UK and Germany by 2050 in PPP terms and six of the seven largest economies in the world could be emerging markets by that time.

Meanwhile, the EU27 share of world GDP could be down to less than 10% by 2050, smaller than India.

We project Vietnam, India and Bangladesh to be three of the world’s fastest growing economies over this period. UK growth has the potential to outpace the average rate in the EU27 after the transitional impact of Brexit has passed, although we project the fastest growing large EU economy to be Poland.

Today’s advanced economies will continue to have higher average incomes, but emerging economies should make good progress towards closing this gap by 2050. This will open up great opportunities for businesses prepared to make long-term investments in these markets. But this will require patience to ride out the storms we have seen recently in economies like, for example, Brazil, Nigeria and Turkey, all of which still have considerable long-term economic potential based on our analysis.

To realise this growth potential, emerging market governments need to implement structural reforms to improve macroeconomic stability, diversify their economies away from undue reliance on natural resources (where this is currently the case), and develop more effective political and legal institutions. 

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Emerging market development will create many opportunities for business. These will arise as these economies progress into new industries, engage with world markets and as their populations – which will also be more youthful on average than in advanced nations – get richer. As these emerging countries develop their institutions, fostering social stability and strengthening their macroeconomic fundamentals, they will become more attractive places to do business and live, attracting investment and talent.

These economies are rapidly evolving and often relatively volatile, however, so companies will need dynamic and flexible operating strategies to succeed in them. Businesses should be prepared to adjust their brand and market positions to suit differing and often more nuanced local preferences. An in-depth understanding of the local market and consumers will be crucial, which will often involve working with local partners.

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India currently comprises 7% of world GDP at PPPs, which we project to rise steadily to over 15% by 2050. This is a remarkable increase of 8 percentage points, gaining the most ground of any of the countries we modelled. PwC’s model indicates that India has the potential to overtake the US as the second largest economy in the world by 2040 in GDP at PPPs.

Europe set to steadily lose ground relative to the Asian giants. The rise of China and India will also reduce the share of world GDP accounted for by Europe, with India projected to be larger than the EU279 by 2035.

As a result, the EU’s share of the world economy (at PPPs) is projected to fall steadily from almost 15% to 9% by 2050. While the exact extent and timing of these shifts is subject to considerable uncertainty, the general direction of change is clear.

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According to PwC, the top three countries of emerging economies up the rankings into the top 10, with a corresponding fall in the rankings of today’s advanced economies. With the exception of Turkey, the E7 economies will dominate the top 7 places, with Indonesia, Brazil, Russia and Mexico taking 4th to 7 th places in 2050. 

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