SVB Asset Management Economic Book Q1 2013


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SVB Asset Management is pleased to announce the release of the Q1 2013 Economic Booklet as a research piece summarizing the macro-economic and sector trends in the global market. The Economic Booklet is our reference tool for clients. Displaying graph and chart views of the global economy, this piece guides clients through factors that impact their business. Some highlights from the Economic Report include:
• The Fed has taken a strong stance that it will continue with quantitative easing until unemployment improves substantially with a 6.5% target and as long as inflation in contained below 2.5%.
• Growth continues to be anemic despite the Fed’s aggressive pump of liquidity into the economy. Q4 GDP expanded at a dismal 0.4% due to cuts in defense spending and inventory.
• There has been no acceleration in employment the last two years. There were 2.10M and 2.12M jobs added in 2011 and 2012, respectively. This is evidence of diminished returns of monetary policy.
• Average jobs added in Q1 were 148K and the unemployment rate at the end of Q1 was 7.6%. The lower rate was due to the lowest participation rate in over 30 years.
• Bond investors remain bullish as long-term yields remain relatively unchanged over the past year.
• The US Dollar: Has benefited from economy woes in Europe and the UK and the prospects of further easing by the BOJ. 10-year yields have drifted from 1.76 at the end of December to 2.02 as of March 13, 2013.
• Dodd Frank started with 2300 pages and has metastasized to 8843 pages and will continue to grow.

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SVB Asset Management Economic Book Q1 2013

  1. 1. SVB Asset Management Q1Quarterly Economic Report 2013
  2. 2. Table of ContentsThoughts from our CIO CIO 03Overview 04Overview 04Domestic Economy Economy 06The Federal Reserve Reserve 16Markets & Performance Performance 20Global Economy Economy 31Regulatory 37Regulatory 37 SVB Asset Management | Quarterly Economic Report Q1 2013
  3. 3. Thoughts from our CIO Start Your Engines…U.S. economic stability that began forming in 2012 continued into the first quarter, and in some areas true signs of growth areemerging. From employment to housing, positive weekly and monthly statistics are diverting us from today’s all-too-gloomyfeelings.Growth for the fourth quarter was originally reported in the negative column, but very quickly has been revised well into additiveterritory with an outlook for positive integers left of the decimal place in the near future.Europe is another story as the recent trials of Cyprus can attest. In particular, the threat to confiscate insured deposit funds isanathema to euro-savers. Today, numerous press reports assert that the decisions about Cyprus do not imply a model for anyfuture action in the region. But I am not so sure.However, there is no escaping the good news that the markets are ignoring such lunacy on the Continent.Back in the U.S., Ben Bernanke and company are keeping their feet on the pedal with low rate targets and a continued pace ofQE that is likely forcing investors into riskier asset classes than they would otherwise consider.Geopolitical concerns are always in play. The most recent example is Kim Jong-Un’s decision to deploy mid-range missiles toNorth Korea’s east coast.So, is it time for the National Anthem to end as we hear the announcement of the phrase ‘start your engines’ that sends us off tothe races?Perhaps not yet, but we remain in our fire-resistant suits checking all the dials and balances so that we shall be ready when theflag falls.– Joe Morgan, Chief Investment Officer SVB Asset Management | Quarterly Economic Report Q1 2013 3
  4. 4. OverviewSpecial Topic: The Fed Domestic Economy The Fed has taken a strong stance that it will continue with Growth continues to be anemic despite the Fed’s aggressive pump of liquidity into the economy. Q4 GDP expanded at a dismal 0.4% due to quantitative easing until unemployment improves substantially cuts in defense spending and inventory. with a 6.5% target and as long as inflation is contained below 2.5%. There has been no acceleration in employment the last two years. There were 2.10M and 2.12M jobs added in 2011 and 2012, respectively. This is evidence of diminished returns of monetary policy. Prolonged monetary policy has resulted in diminished results. Average jobs added in Q1 were 148K and the unemployment rate at the end of Q1 was 7.6%. The lower rate was due to the lowest Q.E. 3, aka QE “Infinity”, amounts to $85B a month in the form participation rate in over 30 years. of Treasury and MBS purchases. Housing will be one of the main drivers of growth this year with By year end, at the current pace of asset purchases the U.S. acceleration in both home sales and home values. In Q4, residential investment increased by over 17%. With home values still down 25% balance sheet will hit $4T. from their peak, the recovery is incomplete. The Fed is keeping a close eye on inflation, unemployment The consumer appears to be resilient with sentiment rising in spite of higher taxes and modest growth. Consumption increased by a strong and other economic markers before taking its foot off the gas 2.1% in Q4 and retail sales had the largest gain in 5 months at 1.1% in pedal. February, right in the middle of fiscal negotiations. With interest rates at all -time lows, investors are reaching Inflation continues to hover below target levels causing no immediate concerns. Core PCE currently stands at 1.3%, well below the Fed’s across asset classes seeking out yield. long-term 2% target level and below their monetary policy threshold of 2.5%. SVB Asset Management | Quarterly Economic Report Q1 2013 4
  5. 5. OverviewMarkets/Performance Global Economy Regulatory Bond investors remain bullish as long- Europe: The European economy is Regulations are here to stay; with a lot term yields remain relatively poised to contract by 0.5% or more in of uncertainties swirling around, moral unchanged over the past year. 2013. hazard, and financial institutions will be hamstrung until they find a way to live Price increases for energy and China: Positive trade data shows with the new regulations. renewed strength in exports, trailing 6 commodities look to have stalled as month average at $26B trade surplus, the global recovery hits a plateau. the economy appears to have Dodd Frank started with 2300 pages bottomed. and has metastasized to 8843 pages Mergers and acquisitions and public and will continue to grow. The large offerings are gearing up for another Asia–Japan: The economy is size of the document is an illustration good year. stagnant, but more easing is expected. of the complexity of implementing such Japan’s GDP at the end of December a massive overhaul to the financial The U.S. stock market is continuing its printed at +0.5% YoY. services industry. run up and finally getting a positive net inflow of funds from investors. Appetite The U.S. Dollar: Has benefited from and demand for investment economic woes in Europe and the UK and the prospects of further easing by opportunities remain strong. the BOJ. 10-year yields have drifted from 1.76 at the end of December to 1.85 as of March 29, 2013. SVB Asset Management | Quarterly Economic Report Q1 2013 5
  6. 6. SVB Asset ManagementDomestic EconomyDomestic EconomyFirst Quarter 2013First Quarter 2013
  7. 7. GDP Stuck in First GearGDP Q4 2012 GDP expanded at a rate of 0.4 percent, which was better than 10.0% the initial two estimates. The improvement is attributed to a greater than estimated gains in business spending and a narrower trade gap. 5.0% The relatively lackluster Q4 GDP was caused by the biggest reduction in 0.0% military spending since the 1970s and lower inventory building. In response to anemic growth and slow job growth the Fed has stated it -5.0% will continue with loose monetary policy and its current pace of quantitative easing at $85 billion a month.-10.0% Lower base could produce stronger Q1 2013 growth.Components of GDP Gross Domestic Investment150.0% $3.0100.0% $2.0 Trillions 50.0% $1.0 0.0% -50.0% $0.0 Consumption Government spending Investment ex-housing Residential Net exports Domestic Business Household & Institutional Federal State & LocalSource: Bureau of Economic Analysis (BEA), Congressional Budget Office (CBO) and SVB Asset Management.Note: GDP values shown in legend are % change vs. prior quarter annualized. SVB Asset Management | Quarterly Economic Report Q1 2013 7
  8. 8. Employment Acceleration NeededEmployment Landscape Full-Time Employment 1,000.0 125,000.0 10,000.0 15.0% 500.0 120,000.0 Thousands Thousands Thousands 5.0% 115,000.0 0.0 5,000.0 110,000.0 -500.0 -5.0% 105,000.0 -1,000.0 -15.0% 100,000.0 0.0 Non-Farm Payroll (LHS) Unemployment Rate (RHS) U-6 (RHS) Full Time Employment (LHS) Part Time for Economic Reasons (RHS)Long Term Unemployment Unemployment rate in the U.S. decreased to 7.7 percent in February50.0% 2013 from 7.9 percent in January 2013, driving the rate down to its lowest in over four years.40.0% Total nonfarm payroll employment increased by 236,000 in February.30.0% The main sectors that added jobs were professional and business20.0% services, construction, and healthcare.10.0% The number of long-term unemployed has not improved very much and remained close to 4.8 million in February, almost 40.2 percent of the 0.0% unemployed are long-term . Labor force participation continues to be low, as workers opt for early Recession Period Unemployed 27 Weeks and Over retirement or stop searching entirely.Source: U.S. Bureau of Labor and Statistics (BLS), SVB Asset Management, National Bureau of Economic Research (NBER).Note: The underemployment rate U6 defined as persons marginally attached to the labor force are those who currently are neither working nor looking for work but indicate that they want and areavailable for a job and have looked for work sometime in the past 12 months. SVB Asset Management | Quarterly Economic Report Q1 2013 8
  9. 9. Employment Acceleration NeededFewer Workers Supporting Greater Population Will the Recent Spike in Earnings Hold Up? 11.0% 57.0% 68.0% 5.0% 67.0% 4.0% 9.0% 59.0% 66.0% 3.0% 7.0% 61.0% 65.0% 2.0% 64.0% 5.0% 63.0% 1.0% 63.0% 3.0% 65.0% 62.0% 0.0% Unemployment Rate (LHS) Employment to Population Rate (RHS) Labor Force Participation Rate (LHS) Avg Hourly Earnings Growth (RHS)Hires and Quits Remain Depressed Workers as a percent of the total population remain 5.0% depressed even as the unemployment rate declines due to 4.0% people dropping out. 3.0% 2.0% Average hourly earnings growth increased in recent quarter, but total hirings have yet to turn upward. 1.0% 0.0% Turnover, as measured by job hires and quits remains depressed vs. recent growth trends. Job Hire Rate Job Quit RateSource: U.S. Bureau of Labor Statistics (BLS), SVB Asset Management. SVB Asset Management | Quarterly Economic Report Q1 2013 9
  10. 10. Consumption Seemingly ResilientConsumer Sentiment – University of Michigan In the midst of fiscal negotiations, the payroll tax hike, and 120.0 higher gasoline prices, the consumer has been fairly resilient in terms of overall sentiment and spending. 100.0 Consumer sentiment in the first quarter ranged from 72-78, as 80.0 Average shown by the University of Michigan index. This is above the five-year average of 69, but still below the 30-year average of 60.0 86. 40.0 Consumer purchases managed to rise at a healthy pace of 2.1 percent in the fourth quarter and strong retail sales in February signal continued growth in the first quarter of 2013.Retail & Food Services Sales Personal Consumption – % Change $450.0 $25.0 8.0% Vehicle Sales (Millions) 6.0% Retail & Food Services $400.0 $20.0 4.0% Sales (Billions) $350.0 $15.0 2.0% $300.0 $10.0 0.0% -2.0% $250.0 $5.0 -4.0% -6.0% Ex Autos Vehicle SalesSource: U.S. Bureau of Economic Analysis (BEA),, University of Michigan / Thomson Reuters - Survey of Consumers, SVB Asset Management. SVB Asset Management | Quarterly Economic Report Q1 2013 10
  11. 11. Consumption Seemingly ResilientPersonal Income Personal Savings as a % of Disposable Income 3.0% 10.0% Monthly Percentage Change 2.0% 8.0% 1.0% 0.0% 6.0% -1.0% 4.0% -2.0% 2.0% -3.0% -4.0% 0.0%Household Net Worth $80.0 Personal incomes dropped by 3.6 percent in January, one of the $70.0 largest declines on record. This was mostly attributed to the $60.0 payroll tax increase kicking in at the start of the year. $50.0 Consumers spent more and saved less as evidenced by a Billions $40.0 $30.0 corresponding drop in the savings rate. Savings rates as a $20.0 percentage of disposable income dropped to 2.4 percent in $10.0 January, compared to 6.4 percent in December 2012. $0.0 On the other hand, household net worth is on the rise once again due to higher home values and rising equity prices. The net worth of U.S. households increased to $66.1 trillion, the highest level in five years and up 9 percent on a year-over-yearSource: U.S. Bureau of Economic Analysis (BEA), Federal Reserve, SVB Asset Management. basis. SVB Asset Management | Quarterly Economic Report Q1 2013 11
  12. 12. Inflation Stable ExpectationsComponent Distribution February 2013 Core PCE CPI Components 12-month Change 2.8% 4.1% 10.0% Food & Bev. 1.6% % change from prior year 6.0% Housing 1.9% 8.0% Apparel 2.4% 6.8% 41.0% Housing Transportation 3.1% Transportation 6.0% Medical Care 3.9% Food & Bev. Recreation 2.7% 7.2% 4.0% Medical Care Educ. & Com . m 2.2% Educ. & Comm. 2.0% Other 2.7% Recreation Headline CPI 2.0% Apparel less footwear 0.0% Less: 15.3% Other Energy 2.3% Food 1.6% 16.8% Core CPI 2.0% Core PCE Fed Target Monetary Policy ThresholdConsumer Price Index Producer Price Index 15.0% 15.0%% change from prior year % change from prior year 10.0% 10.0% 5.0% 5.0% 0.0% 0.0% -5.0% -5.0% -10.0% CPI Ex Food & Energy CPI PPI Ex Food & Energy PPISource: U.S. Bureau of Economic Analysis (BEA), U.S. Bureau of Labor Statistics (BLS) and SVB Asset Management. SVB Asset Management | Quarterly Economic Report Q1 2013 12
  13. 13. Inflation Stable ExpectationsWage Growth: Average Hourly Earnings Crude Oil – Spot & Futures 4.5% $150.0 Annual percentage change Price per barrel 4.0% $100.0 3.5% 3.0% $50.0 2.5% 2.0% $0.0 1.5% Crude Oil Crude Oil FuturesUniv. of Michigan Survey of Inflation Expectations Inflation continues to take a back seat as measures point 5.5% to a steady inflationary environment. Furthermore, the 4.5% Fed maintains its stance that longer-term expectations remain stable. 3.5% 2.5% Core PCE, the Fed’s target measure, is currently running below its longer-run objective of 2 percent and below its 1.5% monetary policy threshold of 2.5 percent. Facing little threat of inflation, the Fed continues its accommodative monetary policy through low interest rates 1 Year Ahead 5-10 Year Ahead and additional bond purchases.Source: U.S. Bureau of Labor Statistics (BLS), U.S. Energy Information Administration (EIA), University of Michigan / Thomson Reuters - Survey of Consumers and SVB Asset Management. SVB Asset Management | Quarterly Economic Report Q1 2013 13
  14. 14. The Housing Market Key Economic DriverHome Sales & Supply Housing was a main driver of economic growth in the fourth quarter with 9.0 15.0 residential fixed investment increasing 17.6 percent. Home Supply (months) Home Sales (Millions) 7.0 10.0 Home sales, both new and existing, continued their upward trend. Sales of existing homes hit a three-year high at an annual pace of 4.98 million 5.0 5.0 in February. Greater housing demand combined with lower home supply drove home 3.0 0.0 values higher. As shown by the S&P/Case-Shiller index of property values, prices climbed over 8 percent on a year-over-year basis in their 20-city composite – the largest gain since 2006. Total Sales (new & existing) Existing Home SupplyHousing Starts Home Prices – Indexed to 100 2.5 240 2.0 190 1.5Millions 1.0 140 0.5 90 0.0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Case Schiller 20 City FHFA Purchase Median Home PriceSource: National Association of Home Builders (NAHB),, S&P, and SVB Asset Management. SVB Asset Management | Quarterly Economic Report Q1 2013 14
  15. 15. The Housing Market Key Economic DriverHomeownership Rate Housing Affordability Composite Index 70.0% 250.0 15.0% Affordability Index 200.0 68.0% 10.0% 150.0 66.0% 100.0 5.0% 50.0 64.0% 0.0 0.0% 62.0% Housing Affordability 30 Year Fixed Mortgage RatesHome Foreclosures - % of Total Loans The homeownership rate hovered around 65.5 percent last year, 5.0% down from its peak of 69 percent in 2004, as we saw a shift 4.0% towards renting over the past few years. 3.0% Record low interest rates caused by easy monetary policy and 2.0% depressed home values prompted more home buyers to enter the market last year. Approximately a third of sales are cash 1.0% buyers, however, and investors compromised the majority of 0.0% these sales.Source:, National Association of Realtors and SVB Asset Management. SVB Asset Management | Quarterly Economic Report Q1 2013 15
  16. 16. SVB Asset ManagementTheFederal ReserveThe Federal Reserve
  17. 17. Federal Reserve Top Gear Recent Balance Sheet TrendsAs the Federal Reserve embarks onmore quantitative easing, the U.S. $3.5balance sheet continues to grow. Other Fed Reserve AssetsAt the current pace of $85 billion $3.0 Central Liquidity Swapsdollars per month of combined Othermortgage backed securities andlonger-term treasury purchases, the $2.5 AuroraFed’s balance sheet will be close to Maiden Lane III$4 trillion dollars by year end. Thatis more than quadruple where the $2.0 Maiden Lane IIbalance sheet was at the start of the Trillions Maiden Lane Ifinancial crisis. $1.5 TALFDespite all the effort by the Federal AIGReserve with monetary policy, the $1.0U.S recovery is yet to pick up speed. Seasonal Credit Secondary Credit $0.5 Primary Credit Other Loans $0.0 Treasury Currency Outstanding Source: Federal Reserve and SVB Asset Management. SVB Asset Management | Quarterly Economic Report Q1 2013 17
  18. 18. Federal Reserve Trying to Get on Track Fed Inflation, Employment Thresholds Worry Two of the Fed PresidentsThe Fed has continued with its QE3program. As announced in theDecember FOMC meeting, the 3.0% 12.0%Committee will continue withpurchases of mortgage backed Core PCE Threshold 2.5%securities at the pace of $40 billion 10.0%per month and longer-term treasurysecurities at the pace of $45 billion a 2.0% 8.0%month. 6.0%The Fed is using the unemploymentrate and inflation rate as thresholds 1.0% 4.0%to monitor the need for monetarypolicy. The unemployment target is U.S. Unemployment Target 6.5% 2.0%set at 6.5 percent and loosermonetary policy will continue aslong as inflation remains below 2.5 0.0% 0.0%percent.The U.S. economy has a ways to gobefore reaching 6.5%unemployment, estimates are for Core PCE (LHS) Core PCE Threshold (LHS)another 2 years before reaching the U.S. Unemployment Rate (RHS) U.S. Unemployment Target (RHS)target. Meanwhile, inflation remainsmuted. Source: U.S. Bureau of Economic Analysis (BEA), U.S. Bureau of Labor Statistics (BLS) and SVB Asset Management. SVB Asset Management | Quarterly Economic Report Q1 2013 18
  19. 19. Federal Reserve Wealth Effect Speeds Up U.S. House Price Index1 vs. the Stock MarketThere have been some visibleeffects of recent quantitative easing 250 1,800 QE 1 QE 2 Continuous Stimulus:effort. The growth in equities and Operation Twist,housing are both viewed as Extension of Operationcontributing to the wealth effect of Twist & QE 3 1,600the consumer. 230With yields at all-time lows, many 1,400investors are hunting for yield. The 210search for yield has shifted manyinvestors to a “risk-on” mentality 1,200causing equities to rally. 190In addition, the housing sector is 1,000recovering, albeit slowly, thanks torecord low mortgage rates, 170investors’ percentage of rental 800properties and improved consumerbalance sheets. The housingrecovery is a much anticipated 150 600improvement and if sustainedshould help propel growth. Home Prices (LHS) S&P 500 (RHS) Source: Federal Housing Finance Agency, Bloomberg and SVB Asset Management. Note: 1 U.S. House Price Index - Purchase Only Index (Indexed to 100 in Q1 1990), by the Federal Housing Financing Agency SVB Asset Management | Quarterly Economic Report Q1 2013 19
  20. 20. SVB Asset ManagementMarkets & PerformanceMarkets & Performance
  21. 21. Funds Flow Investors Piling into the Driver’s Seat Mutual Fund Flows Bond investors remain bullish, despite the low yield $60,000 environment. $40,000 The curve has changed very little from a year earlier. $20,000 Millions $0 Equity mutual funds have experienced net inflow of cash since -$20,000 the beginning of the year. -$40,000 Despite the increase in equity mutual funds, even more cash has flowed into bond funds over the same period. Total Equity Total BondTreasury Curve Change Recent Fund Flows 4.0% $8,000 3.0% $6,000 Millions 2.0% $4,000 1.0% $2,000 0.0% $0 Mar-12 Mar-13 Total Equity Total BondSource: Bloomberg and SVB Asset Management. SVB Asset Management | Quarterly Economic Report Q1 2013 21
  22. 22. Bond Market Will the Momentum Continue? U.S. Since 2008, bond markets U.S. have produced four consecutive years of positive total and excess returns. Bonds exhibited positive performance led by Banking, Insurance, and Financial Services sectors. U.S. Treasuries had their third worst return in the last 16 years at 2.16 percent, compared to 2008, which had the best return at 13.98 percent. The biggest long-term risk is a reversal in central bank policies. At record low yields, total returns would be significantly exposed to any tightening policy. However, this should not be a concern for 2013.Source: Bloomberg, BoAML and SVB Asset Management. SVB Asset Management | Quarterly Economic Report Q1 2013 22
  23. 23. Bond Sector Spreads Right Back at the Start LineSpread Performance by Asset Class Credit spreads declined back to levels not seen since prior to the financial crisis of 2008, driven by tightening spreads, government funding programs, supply/demand factors and Fed actions on interest rates. The post crisis period was defined by a shift towards the fixed income spread product and a preference away from equities. Strong performance across the credit markets will be sustained due to supply/demand nature of the markets and ongoing concerns about global economic growth. Expectations are for no change in Fed policy, and as a result, credit will continue to benefit from tight spreads. U.S.Source: Bloomberg, BoAML , Barcap Live, Citigroup and SVB Asset Management. SVB Asset Management | Quarterly Economic Report Q1 2013 23
  24. 24. Bond Sector Spreads Tightening Struts 10-year Range in Credit SpreadsAll fixed income asset classcategories closed 2012 solidlyin the bottom quartile of theirrespective spread ranges. Source: Bloomberg, BoAML, Citigroup and SVB Asset Management. SVB Asset Management | Quarterly Economic Report Q1 2013 24
  25. 25. Inverse Relationships Directional IndicatorsVIX is the Directional Indicator for Equities (VIX - inverse scale) Improved Leverage Ratios Led to Improved Liquidity Index Index 1600 10 110.0% $340.0 1550 12 $330.0 108.0% 14 1500 $320.0 16 106.0% 1450 18 $310.0 1400 104.0% 20 $300.0 1350 22 102.0% 1300 $290.0 24 1250 26 100.0% $280.0 1200 28 Dec-11 Jan-12 Jun-12 Jan-13 May-12 Jul-12 Apr-12 Oct-12 Aug-12 Sep-12 Nov-12 Dec-12 Feb-12 Mar-12 Feb-13 Mar-13 98.0% $270.0 S&P 500 (LHS) VIX (RHS) Total Debt to Total Equity (LHS) Cash & ST Investments/Share (RHS)Source: Bloomberg and SVB Asset Management Source: Bloomberg and SVB Asset Management. SVB Asset Management | Quarterly Economic Report Q1 2013 25
  26. 26. S&P 500 Companies Room to Accelerate Debt to Equity Ratio and Cash on Balance of S&P 500 CompaniesS&P 500 companies continue toconserve cash, although the level ofgrowth in cash balances has tapered 235.0% $350.0off in recent quarters. 215.0% $300.0On the other hand, S&P 500companies have greatly reduced their 195.0%leverage ratios, likely due to limited $250.0capital and investment opportunities. 175.0% $200.0Companies have plenty of dry powder Billionson their balance sheets, both in cash 155.0%and further leveraging up, to take $150.0advantage of opportunities if global 135.0%economies improve. $100.0 115.0% 95.0% $50.0 75.0% $0.0 Total Debt to Total Equity (LHS) Cash & Equivalents (RHS) Source: Bloomberg and SVB Asset Management. SVB Asset Management | Quarterly Economic Report Q1 2013 26
  27. 27. Investment Performance Where’s the Horsepower?Benchmark Performance Ticker 1Q 2013 2012 2011 2010 2009 2008 2007 Short Benchmarks 3-Month Treasury Bill G0O1 0.000 0.111 0.103 0.126 0.207 2.057 5.004 3-Month Citi/Salomon CD SBMMCD3 0.031 0.307 0.289 0.310 0.822 3.442 5.448 6-Month Treasury Bill G0O2 0.018 0.171 0.268 0.365 0.579 3.582 5.607 6-Month Cit/Salomon CD SBMMCD6 0.047 0.488 0.389 0.437 1.611 3.756 5.459 1-yr Treasury Bill G0O3 0.020 0.204 0.496 0.792 0.813 4.746 5.948 Treasury 1-3 yr Treasury G1O2 0.094 0.434 1.554 2.348 0.785 6.609 7.317 3-5 yr Treasury G2O2 0.132 1.577 6.229 5.695 -0.672 12.153 9.836 Corporate/Govt (A Rated and Above) 1-3 yr Corp/Govt B110 0.141 1.188 1.527 2.641 2.766 5.184 6.981 3-5 yr Corp/Govt B210 0.233 3.077 5.479 5.925 2.958 6.174 8.324 Agencies 1-3 yr Agencies G1P0 0.057 0.847 1.536 2.338 2.189 7.034 6.735 3-5 yr Agencies G2P0 0.139 2.588 5.290 4.900 3.223 8.971 8.261 Municipals - Tax Exempt 1-3 yr Pre-refunded U1AF 0.300 0.520 1.800 0.923 3.189 5.875 4.710 3-7 yr Pre-refunded U2AF 0.409 1.539 4.951 2.087 5.345 7.992 5.390 Auto Asset Backed Securities ABS, Autos, Fixed Rate, (1.45yrs) R0U0 0.224 2.291 1.689 3.077 14.845 -0.682 5.723 Other Indices Dow Jones Industrial Average INDU 12.960 7.257 5.544 11.023 3.116 -33.762 6.432 S&P 500 SPX 12.030 13.405 2.110 12.783 23.454 -38.486 3.530 NASD CCMP 10.320 15.906 -1.799 16.910 43.888 -40.541 9.812 MSCI World Index MXWO 9.950 13.184 -7.615 9.262 27.283 -42.081 7.093 CRB Index (Commodities) CRY 1.173 -3.372 -8.264 15.430 23.563 -39.450 16.679Source: Bloomberg, BoAML, Morgan Stanley. SVB Asset Management | Quarterly Economic Report Q1 2013 27
  28. 28. Commodities At a StandstillCrude Futures – Per Barrel Prices seem to have flattened out with commodities, energy, $120.0 and precious metals. $105.0 The slowdown in China has certainly affected crude and metal prices as construction has leveled off. $90.0 The recent uptrend for gold is tied to higher inflation expectations on the Federal Reserve’s continuing $75.0 accommodative policy.Gold Prices – An Ounce Iron Ore Futures – Per Ton $1,900.0 $200.0 $1,800.0 $175.0 $1,700.0 $150.0 $1,600.0 $125.0 $1,500.0 $100.0 $1,400.0 $75.0Source: Bloomberg and SVB Asset Management. SVB Asset Management | Quarterly Economic Report Q1 2013 28
  29. 29. Banking How Far Can You Go?Loans-to-Deposits Ratio Net Interest Margin and Capital Ratio 100.0% Q3 ‘00 14.0% 4.3% 97% 95.0% 12.0% 4.1% 10.0% 3.9% 90.0% 8.0% 3.7% 85.0% 6.0% 3.5% 80.0% 4.0% 3.3% Q4 ‘12 2.0% 3.1% 73% 75.0% 70.0% Tier 1 Risk-Based Capital Ratio (LHS) Quarterly Net Interest Margin (RHS) Although banks have strong capital levels, lending is constrained Loan-to-deposits ratio is the lowest since Q3 2000 and has fallen due to low margins which may make it economically unfeasible from 97 percent in Q2 2008 to 73 percent in Q4 2012. for banks to lend.Source: FDIC and SVB Asset Management. SVB Asset Management | Quarterly Economic Report Q1 2013 29
  30. 30. Insurance Gearing Up for a Future RaceReturn On Average Assets % (ROAA) Debt / Capitalization 3.0% 50.0% 1.0% 45.0% -1.0% 40.0% -3.0% 35.0% -5.0% 30.0% -7.0% 25.0% While sustained low interest rates are constraining insurers profitability, improved leverage and capital positions continue to provide a cushion.Source: SNL and SVB Asset Management. SVB Asset Management | Quarterly Economic Report Q1 2013 30
  31. 31. SVB Asset ManagementGlobalEconomyGlobal Economy
  32. 32. Europe Could Use a BoostGDP The euro zone economy is poised to contract by 0.5 percent or 8.0% more in 2013, continuing the lackluster performance of the 4.0% previous two years. Even Germany appears to be in danger of slipping into a recession. 0.0% Italy was downgraded by Fitch recently, while talk of a tax on-4.0% bank deposits in Cyprus caused a ripple effect across Europe-8.0% in mid-March. These types of occurrences illustrate the current fragility of sentiment in Europe. The ECB is resisting further rate cuts for now, but will cut later UK Germany France Italy Spain this year. What is needed by most struggling economies in Europe is economic growth to boost tax revenues and slow soaringConsensus GDP Forecast unemployment . However, the deficit situation has handcuffed fiscal spending and retail spending is unlikely to rise unless 3.0% confidence does. 2.0% 1.0% Growth forecasts for the major European economies are if 0.0% anything overly optimistic; it is hard to pinpoint a potential -1.0% catalyst for growth in this environment. -2.0% UK Germany France Italy SpainSource: Bloomberg and SVB Asset Management. SVB Asset Management | Quarterly Economic Report Q1 2013 32
  33. 33. Europe What Will Put the Brakes on the Euro?Currency Performance The EUR is poised to go lower, weighed down by concerns about the 1.7 1.7 debt crisis, a widening recession and continuing political uncertainty. 1.6 EUR / USD 1.5 GBP / USD The GBP registered gains against the EUR for several months, but 1.5 has begun to lose ground recently, as the economy struggles to 1.3 recover from the economic downturn. 1.4 1.3 1.1 A lower EUR is in Europe’s interest, despite occasional talk to the contrary. It remains one of the few ways to stimulate growth, using a weak currency to fuel export competitiveness. GBP EUR The EUR does not require a break up of the euro zone to head lower; economic and political uncertainty coupled with continuing subpar10Y Sovereign Yields growth is sufficient to cause a further fall. 8.0% Lower yields would normally help boost economic activity, but 6.0% sovereign spreads to Germany remain wide. As a result, the countries that would really benefit from lower borrowing costs don’t reap the 4.0% benefit. 2.0% 0.0% Longer term, the EUR could recover against the USD, assuming the euro zone survives this crisis. Europe has a stronger balance of payments position than the U.S. and a central bank with a single mandate of controlling inflation, which should lead to a less expansionary monetary policy. However, as John Maynard Keynes ES FR IT DE famously said, “In the long run we are all dead”.Source: Bloomberg and SVB Asset Management. SVB Asset Management | Quarterly Economic Report Q1 2013 33
  34. 34. China Steady As She Goes Yuan Appreciates Steadily February trade data showed renewed strength in exports, 6.9 reversing recent declines and possibly signaling a resumption of reserve accumulation. 6.7 CNY / USD The central bank (PBoC) has maintained control of domestic 6.5 monetary policy despite relaxing some capital controls and remains alert for signs of an asset price bubble. 6.3 GDP growth has moderated to a respectable 7.5 to 8 percent, 6.1 but a far cry from the double digit growth of a few years ago. The CNY is likely to continue its modest appreciation this year.Monthly Trade Balance Pace of Growth Moderating $175.0 12.0% % GDP Change YoY $125.0 10.0% 8.0% Billions $75.0 6.0% $25.0 4.0% -$25.0 2.0% 0.0% Trade Balance Exports ImportsSource: National Bureau of Statistics of China, Bloomberg and SVB Asset Management. SVB Asset Management | Quarterly Economic Report Q1 2013 34
  35. 35. Asia Set to Stall?Yen Retreats Indian Rupee 100 60 95 55 INR / USD JPY / USD 90 85 50 80 45 75 70 40Japan GDP Japan: The economy is stagnant and more easing is expected. The 8.0% 6.0% BOJ’s balance sheet has expanded by about 4 percent this year and is % GDP Change YoY 6.0% 4.9% 4.4% now over a third of GDP, the largest of any other G-4 country. The JPY 3.9% has weakened significantly. While this trend could continue, additional 3.3% 3.4% 4.0% sustained JPY weakness would require significant monetary easing 2.0% 0.0% 0.4% 0.5% beyond what is currently factored in. -1.6% 0.0% -0.5% -0.3% India: Equity-related inflows from offshore investors have stabilized the INR recently. Rate cuts are priced in and are expected to provide a -2.0% near-term boost to the economy. However, the longer-term outlook for a reduction in the twin budget and trade deficits appears unlikely. As a result, renewed INR weakness is possible in the medium term.Source: Economic and Social Research Institute Japan, Bloomberg and SVB Asset Management. SVB Asset Management | Quarterly Economic Report Q1 2013 35
  36. 36. The U.S. Dollar Uphill Climb10Yr U.S. Treasury Yield The U.S. dollar has benefited from economic woes in Europe and 5.0% the UK and the prospects of further easing by the BOJ. 4.0% 3.0% Recent policy statements by central banks in many developed and emerging economies have signaled their intention to maintain 2.0% monetary stimulus, thereby resulting in further weakness in their 1.0% currencies. 0.0% The U.S. economy is growing faster than most developed countries and data in early 2013 has generally surprised to the upside, despite concerns about the lack of a longer-term deficit strategy.DXY USD Index Despite a slight uptick in recent weeks, treasury and other market 90 yields remain close to historic lows and are a reflection of the dollar’s continuing role as the reserve currency of choice and a 85 safe haven in uncertain times. 80 With global yields low, the dollar has not weakened in response to 75 low U.S. yields as it has in the past. 70 Look for the dollar index to retest highs from last summer, possibly even as far back as 2010, in coming months. Longer term, concerns about the deficit and subpar economic growth will stall the rally, especially versus the more fiscally sound, faster growing emerging market currencies.Source: Bloomberg and SVB Asset Management. SVB Asset Management | Quarterly Economic Report Q1 2013 36
  37. 37. SVB Asset ManagementDomestic EconomyRegulatoryDodd Frank, Basel & Money Market Fund ReformDodd Frank, Basel & Money Market Fund Reform
  38. 38. Dodd Frank Act Quality Control Stress Test/ CCAR Dodd Frank was designed to address the Consumer Financial Financial Stability risk management issues Protection Bureau Oversight Council that reared their heads during the financial crisis. However, the Orderly Liquidation Volcker Rule amount of regulation Authority would result in additional costs to the banking system. Securitization Say on Pay Reform Office of Financial ResearchExamples of additional regulation included in Dodd-Frank. Source: Dodd-Frank Act, SVB Asset Management. SVB Asset Management | Quarterly Economic Report Q1 2013 38
  39. 39. Basel III Speed BumpBasel III Common Equity Tier-1 Ratio Requirements12.0% Beginning fiscal 2013, banks are recommended by BIS to begin adopting Basel III requirements. Most countries have begun to adopt their own interpretation of the requirements.10.0% Banks are recommended to maintain a minimum common equity Tier 1 ratio of 3.5 percent and the requirements gradually increases to 7.0 percent on January 1, 2019. 8.0% Starting in 2016, globally systemically important banks(GSIBs) as designated by the Financial Stability Board (FSB), will have to maintain an additional buffer. The additional buffers range 6.0% from 1.0 percent to as high as 3.5 percent, depending on the bucket assigned by FSB. 4.0% As such, some banks would be required to maintain CET1 ratio as high as 10.5 percent, though no banks have been assigned to the highest bucket as of November 2012. 2.0% Although this will result in larger buffers to absorb losses, it would be more expensive for the banks to operate due to the high capital intensity and banks will be passing this higher costs 0.0% to their clients. The banks would also need to adhere to new liquidity and funding requirements, although the exact details remain under CET1 GSIB Buffer discussion and is not expected to take place until 2015 and 2018 respectively.Source: Bank for International Settlements and SVB Asset Management. SVB Asset Management | Quarterly Economic Report Q1 2013 39
  40. 40. Regulatory Environment Fog Ahead Potential Reform Proposals by the FSOC as of March 2013 Amendments to SEC 2a-7 rule Mark-to-market NAV valuation Option One have been in place since February Pro: Daily pricing would reflect gains and losses fostering 2010, to improve the stability of Floating NAV greater transparency MMF industry. Con: Causes a “first-mover advantage” As of March 2013, no additional SEC proposals have been put 1 percent capital buffer and Minimum Balance at Risk (MBR) forward. However, the FSOC MBR: 3 percent of investor’s highest account value above Option Two (Financial Stability Oversight Council) closed an extended Stable NAV with $100,000 will be subject to a redemption delay. Does not apply comment period on February 25, a Capital Buffer to Treasury MMFs 2013. The market is still waiting & MBR Pro: Eliminates “first-mover advantage” for an FSOC official recommendation. Con: Undermines the principle characteristic of liquidity within the MMMF industry Regulatory action is likely to come into play in 2013 as the 3 percent capital buffer and more stringent regulatory standards Option Three pending recommendation by the Stable NAV with Pro: The investor is not subject to a MBR and the stable NAV FSOC would force a response by a Capital Buffer feature continues the SEC within 90 days of the and Other release. Measures Con: Fund managers could pass on the costs of this buffer to the investor reducing net yield to a level that is not attractive *Potential reforms are likely to be a combination of the above proposals by the FSOC however the SEC has not released any official insight into their own investigationsSource: SVB Asset Management. SVB Asset Management | Quarterly Economic Report Q1 2013 40
  41. 41. Our TeamManaging Director Portfolio Managers Credit and RiskJeff Schnitz Minh Trang, CFA Sook Kuan Loh, Paula Solanes Tim Lee, CFAChief Investment Officer tlee@svb.comJoe Morgan, CFA Renuka Kumar Kyle Jose SevillaHead of Portfolio Management Silicon Valley Bank PartnersNinh Dave Bhagat Kelly Caviglia Priyanka RajuHead of Credit Research Girish Mallya Sudhakar PattabiramanMelina Hadiwono, SVB Asset Management | Quarterly Economic Report Q1 2013 41
  42. 42. SVB Asset ManagementThis material, including without limitation the statistical information herein, is provided for informational purposes only.The material is based in part upon information from third-party sources that we believe to be reliable, but which has notbeen independently verified by us and, as such, we do not represent that the information is accurate or complete. Theinformation should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making aninvestment or other decision. You should obtain relevant and specific professional advice before making any investmentdecision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire ordispose of any investment or to engage in any other transaction.All material presented, unless specifically indicated otherwise, is under copyright to SVB Asset Management and itsaffiliates and is for informational purposes only. None of the material, nor its content, nor any copy of it, may be alteredin any way, transmitted to, copied or distributed to any other party, without the prior express written permission of SVBAsset Management. All trademarks, service marks and logos used in this material are trademarks or service marks orregistered trademarks of SVB Financial Group or one of its affiliates or other entities.©2013 SVB Financial Group. All rights reserved. Silicon Valley Bank is a member of FDIC and Federal ReserveSystem. SVB>, SVB>Find a way, SVB Financial Group, and Silicon Valley Bank are registered trademarks. SVB AssetManagement, a registered investment advisor, is a non-bank affiliate of Silicon Valley Bank and member of SVBFinancial Group. Products offered by SVB Asset Management are not FDIC insured, are not deposits or otherobligations of Silicon Valley Bank, and may lose value. B_SAM-13-12687 Rev. 04-11-2013 0413-0042
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