Total time: 18:09

00:00

Bob Smith: Good day everyone. My name is Bob Smith. I am the Chief Investment Officer here at Sage Advisory Services. And I'm very happy to be joined today by other members of our investment committee. And together, what we'd like to try and do today is to give you a very quick review of how Sage saw 2020 and review some of the highlights and the lowlights. And at the same time, we'd like to then give you a sense of where we think we're headed in 2021 – give you our investment outlook, as we sit today, and perhaps discuss some of those highlights that we expect for the year going ahead. With that in mind, I'd like to turn now to Rob Williams, who's head of our investment strategy and research group, to discuss kind of the bigger macroeconomic picture, kind of where we've come from and where are we today? So, Rob?

00:55

Rob Williams: Great, thanks, Bob. I appreciate it, great overview. And I'll put a bit little more meat on the bones on some of the macro inputs. Certainly, we'll all be happy to get 2020 under our belts. It’s been a year like none other – deepest recession, one of the deepest on record, but also one of the quickest rebounds. And, you know, looking back and talking to clients, a lot of people wouldn't have expected the kind of positive returns it looks like we're going to end the year on. But just in the last couple months, the recovery itself has been exceeding expectations. So let's look at that first input of economic growth and add some detail on that. We're on board with consensus in that neighborhood of over 5%. U.S. should be right up there, a little bit less, maybe four and a half percent or so but still very robust for the year, maybe a little slower out of the gate. Why do we stand behind this outlook? Well, for one, like I said, we've been very resilient the last couple months. If you follow U.S. data in particular, it has beaten consensus consistently, and that's without the additional stimulus. You look at China, the other engine of global growth, they've been strengthening, and they got on the strengthening path earlier than we did. Right? Their export growth is picking up. Very early, they had a property boom. And they have signs of a broadening recovery. So basically, what I'm saying is we went into this surge, this virus surge, the winter surge here on better footing than anyone expected. And additionally, lockdowns have been more limited. And with these vaccines on the horizon, we think we'll continue to avoid these broad-based blunt lock downs, and you'll start to see activity normalization over the first half. So that's kind of the economic path that we see and are hoping for. Policy has been a key input to this equation the whole time. And when you look to 2021 it is going to remain extremely supportive. So why this phase four fiscal stimulus package has proved pretty elusive. So far, we do expect one to get done at some point here, perhaps the end of the year, perhaps very early into the beginning of the year. Signs point at that being somewhere around a trillion dollars, maybe a little less than that – $750 billion to a trillion, maybe somewhere in that range. The other side of the equation, monetary policy going to stay extremely accommodative throughout the whole year, Fed has made that very clear, central banks around the world have made that pretty clear. That keeps borrowing costs low, that's going to encourage some risk taking and bolster sentiment.

03:28

Rob Williams: Policy, we can't stress it enough for investors, has been a key pillar of support. And it's really one of the reasons why we've been so resilient, is policy. If you think about it, the low rates kind of fed this housing recovery in the U.S., it has encouraged risk taking, it has encouraged flows into higher yielding fixed income, which helps spreads narrow throughout the year. And most importantly, it has stabilized liquidity in the fixed income markets early in the year when we really needed it. Also, one of the reasons why we've been resilient recently, consumer savings rate in the U.S. has risen. They haven’t spent all the stimulus that's given us consumers a little bit of cushion, to kind of weather what we're going through right now. So that's supportive, we expect growth to continue. On the fundamental side, look, you know, this pent-up demand, strong consumer, we're on board with this idea of a robust kind of earnings rebound in 2021. That's typical in a recovery, you get some momentum, some upward revision momentum in earnings. And we've said time and time again, if you read our research to look at some of the linkage between kind of these global PMI or manufacturing survey indices, and earnings, and they're linked pretty closely together, and manufacturing data globally, that does support this notion that you're going to get a rebound in earnings. And it could be what consensus is saying in the U.S. is upwards of 20%. That's feasible when you look at the economic data. Hopefully stronger in certain areas, even like value in small caps, and some of the numbers overseas, where things have been beaten down even more are expected to also have a rebound. Finally, I'll touch on the political front, we could certainly do a whole call on politics, and we're not going to get mired down on that, but I'll give you a couple key takeaways. For the market at least is that, look, we didn't have this blue wave notion. So, you're going to get a little bit of smaller fiscal package than what was thrown around six months ago. That's one implication to it. I think that the odds of tax hikes right now are small, because of the mix in Congress. And what I've read recently, even if the democrats were to win the runoff and get the edge, there are enough democratic senators in republican leaning states that make a tax increase a high bar. So that's the other thing that could, people could worry about that over the coming weeks, but the bar is high for that. And then the third thing is easing trade tensions. I think that's one clear investment implication of the election is that tariffs aren't going away. But you're going to have lower trade tensions, you're going to have improvement in some of the transatlantic partnerships, perhaps the idea of aggressive auto tariffs for EU are off the table, less heated sort of rhetoric. And that does feed directly into some investment implications, whether you want to overweight international and have a more diversified portfolio that I think is a benefit to some regions outside the U.S.

06:38

Bob Smith: Rob, well thank you very much that was a pretty good rundown of all things, macroeconomic and big picture. We're very happy to have Komson Silapachai, member of our investment committee, to come and kind of bring you up to date on where are we on not only all things fixed income, as expressed in ETFs, but also on the equity side, and to take perhaps a little bit more of a global perspective, and talk about some of the things that occurred in 2020, that may not likely reappear in 2021. And perhaps some of the things that we haven't seen for a very long time, that are actually going to start to show up in 2021, perhaps with some force. So Komson, what do you have to say?

07:23

Komson Silapachai: Thank you, Bob. If you would have told me at the start the year that we would be seeing stellar returns across the board, not only in equities, but fixed income, credit, rates, I would have told you you were crazy, because the year really started off in one of the worst kind of crises, not only just for the markets, for risk markets, but for ETFs. We saw a lot of fixed income ETFs really get put to the test. And so, let me kind of recap the year across asset classes here. I think, within equities there's really three stages about the year here. The first was a COVID shock. It was A Tale of Two Worlds, you know, it was the stay at home stocks, versus everything else. And so during the COVID meltdown initially, there was a massive sale of risk assets, of equities across sectors. You saw technology companies like Zoom, cloud companies really come to the fore, aggressive growth companies really come to the fore, and that really persisted for the first I would say half of the year. And then the second stage of this equity journey this year, has been kind of this mega cap led rally. Off the lows and in March there was a massive rally, but it was really only led by about, you know, five stocks, especially in the S&P 500. And just a crazy stat from the lows to the high of the year, Apple added $1 trillion in market cap. So that's about one unit of Google, which is the fourth largest company in the world. And that was just to tell you how much these mega cap stocks gained, versus the rest of the market this year. And so throughout the summer, it was really a story of mega cap tech, really leading the way. The top five names in the S&P 500 were up over 60% on average, while the rest of the index was negative. And so that's not the case today, but you know, at some point during the summer, that was really the case, and it was just, I would say this policy induced rally on the market was discounting these companies continuing to gain market share, continuing to kind of exist, and have advantages in this, kind of COVID dominated environment. And then the third stage is, and this is where we are today in equities, is your kind of classic, cyclical rally. And that really started, I would say, in November, I would say late October, going into the election when we were expecting a little bit more of stimulus, but it really started in earnest on November 9, when Pfizer announced encouraging data on the vaccine that really kind of, I would say, solidified the light at the end of the tunnel, so to speak for markets. And on that day was a, I would say a several standard deviations move in terms of value rally, a lot of stay at home stock that had been floundering all year, rally super hard, energy, stocks, resource names, really rallied. And I think that's the recovery that I think we've seen in the past off of recession lows, that's the recovery that we saw off the financial crisis lows. And so that's the stage that, I think that we're in right now, and how we're positioned in our equity allocations are for a further cyclical rotation. And so our recovery really underpins kind of two pillars. The first is consumer strength. So, consumers came into the crisis on very strong footing, there wasn't a big debt bubble or anything, you know, in terms of financial crisis during the COVID shutdowns, it was just incomes being taken away. And so what the Fed and the administration and Congress did with the Cares Act was to replace that income and savings rate at one point was up at 33%, it's fallen all the way down to about 13%, on a personal savings rate, you know, a normal rate for that is about 4%. So, the private sector households still have savings to spend. And so we think that consumers, as a whole, there's definitely pockets that are hurting things like restaurants, retail, certain retail sectors, but as a whole, we still think that there's still some runway for folks to spend, and especially with the vaccine coming down now at the end of the year, you know, potentially approved here in December, we think that consumers will remain strong and come out of this relatively in a position of strength.

12:19

Komson Silapachai: The second kind of pillar of our recovery, and where we're focused on with our equity allocations is this industrial recovery. So, we're seeing a massive amount of encouraging data come out of the Asian region exports. Also, input prices are rising significantly, and what I mean by that are just commodity prices. That just kind of points to the fact that there's a ton of construction demand, a ton of demand in order to restock global supply chains. And then coupled with what I mentioned before, about, consumption remaining resilient, we think that coming out of this recovery, you could see kind of a double whammy, where you have a restocking pent up demand and an increase final demand. And so just kind of a big upward thrust in terms of consumption. And so we're focused on those sectors, really on a global basis. What does that look like? That looks like value both in U.S. and international. That looks like being long emerging market Asia, a region that is tied to global growth. Within the U.S., we like small cap, we like value. We also are long transports, we think that is an area that will benefit with the upcoming environment in the next three to six months. We also like consumer names, as well as the metals and mining sector to kind of benefit from this industrial recovery. And so within the equities model, we continue to position for cyclical recovery. Another big theme in equities this year, and this is really persistent throughout the year from start to finish, was the rise of ESG. ESG has seen a tipping point, we think, and flows this year, over 25 billion in flows in the ETF space alone. That is, I would say more than all the prior years combined since the release of ESG oriented ETFs. And so that's something we're encouraged by because we launched some ETF strategies about four years ago, and to see the market follow suit is really encouraging to us. And within our ESG equity strategy, we're positioned the same way with small cap bias, with the value bias, except, you know, we're expressing those through ETFs that have an ESG orientation. And so that's in equities. Within our multi asset class models, we're overweight equities. Within our multi asset income model, we're also overweight equities. And we continue to maintain allocations in spreads sectors and non-core spread sectors such as high yield emerging market debt. We continue to think that the Fed, central banks will continue to support credit markets. You know, valuations are definitely very full, and so we will be cautious in terms of the size of those positions. And I think that there'll be opportunities to play the reins, so to speak, you know, trim some when positions get overvalued, but also we think if there is volatility, it's a buy the dip type environment next year, just given policy support. Within our fixed income strategies, again, similar to our multi asset income, mindful evaluation, but continuing to maintain a posture of out yield in the benchmark through spreads sectors, such as high yield corporates, mortgages, and then even within our ESG strategies, in fixed income, we are overweight, high yield in an ETF that has a superior ESG profile, we’re overweight spread sectors. In terms of our duration posture, we're slightly underweight duration. So we think that we will see potentially higher yields, but not too much, because I think the Fed, their best interest is not to have kind of higher mortgage rates and affect the U.S. consumer, given all the work that they've done this year to ease financial conditions.

16:37

Bob Smith: Okay. So, it sounds to me like we're going into 2021 with our eyes wide open and on the balls of our feet because anything can happen. But we are definitely pulling for a very constructive year. I would like to close by saying that our best wishes go out to all of you for a peaceful, a well-deserved, peaceful close to the year and we hope that you enjoy a much happier and indeed a very prosperous 2021. Thank you for listening.

17:09

Disclosures: Sage Advisory Services is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. This podcast is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

For additional information on Sage and its investment management services, please view our web site at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.