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Henry Fund Economic Outlook – October 2016

The following release was prepared by Gaurav Ghantkar and Ajay Kaushik on behalf of the 2016 Henry Fund research team. The team updates its economic outlook several times throughout each semester. This analysis forms the basis for class discussions, company selection, and investment research.

Henry Fund Research

The Henry Fund Research team’s October outlook reflects the tepid outlook for the US economy.

The recent job market report was underwhelming with only 156,000 jobs added for September, which was below the consensus forecast of 172,000. Our outlook for US employment is neutral for the near term with a more favorable outlook for the long term. The team predicts unemployment to remain near the current 4.9% level over the next six months and decreasing to 4.75% over the next 24 months. Additional job growth will continue to be partially offset by workers entering or returning to the labor force.

We expect real GDP growth will average approximately 1.8% over the next six months, down from our September consensus estimate of 2.0% growth. There has also been a downward adjustment to our longer-term real GDP growth forecast. The team continues to expect positive, but moderate growth of 2.0% through 2018. We do not anticipate the US economy entering a recession in the near term.

A strong dollar has made US exports more expensive for foreign customers, while fluctuating oil prices and rampant oversupply have debunked the theories of oil prices rebounding to record high levels. Meanwhile, the latest report issued by the Institute for Supply Management (ISM) indicated that manufacturing and service sector activity have expanded during the month of September as opposed to the contraction witnessed during August. The Purchasing Manager’s Index (PMI) came in at 51.5 that represents a slow but growing economy, which is reflected in the research team’s forecasts for the short term and long term GDP growth.

Henry Fund consensus estimates for interest rates remain largely unchanged through the election cycle. The team expects the Federal Reserve to begin gradually increasing the Fed Funds rate in December of 2016, but does not anticipate a large boost to market rates in the near term. We expect the 10-year Treasury bonds will rise to a 1.75% yield by Q2 2017. The 10-year term premium, i.e. the difference between short-term treasuries and the 10-year note, has been at its lowest levels since 1962. This situation is expected to improve slightly in the next 12 months, signifying a slight acceleration in economic growth. With a wider 10-year term premium, we believe that FOMC will raise the Fed Funds rate to 1.25% by Q3 2018.

The change in the Consumer Price Index (CPI) has hovered in the 0.7 – 1.4% range, despite the low interest rate environment. Low oil prices and falling commodity prices have been the major driver of the low inflationary environment. The team believes that the systemic oversupply of crude oil will continue through 2018 keeping the price of crude oil below the $60 dollar per barrel mark. The low oil prices coupled with the tepid GDP growth expectation in the next 6 -24 months will continue to fuel a low inflationary environment. We anticipate annualized inflation of 1.2% in the next six months and rising to 1.9% within two years. These forecasts reflect a slight upward revision compared to our August estimates.

Weak job numbers and concerns regarding the magnitude of impending interest rate hikes have driven our forecasts for consumer confidence, which has remained strong in 2016. We have a neutral outlook for the consumer confidence index over the next six months with a slightly stronger outlook by 2018.

We expect currency headwinds to continue for American companies as the dollar continues its surge relative to the euro. Exchange rates are projected at $1.10 per euro in six months and continue through to 2018 due to the continue struggles in Europe.

Finally, global trends, expectation of hikes in interest rates, and tepid GDP growth all filter down to our projections for the S&P 500. We anticipate US equities will trade relatively flat over the next six months. We are becoming increasingly concerned about current rich valuation levels in the market. With a median forward P/E of 14.64 for the S&P 500, the team has found it difficult to identify new investment opportunities across most economic sectors given high P/E levels across these economic sectors. However, going forward we like targeted investments in health care and information technology, especially in the areas such as the Internet of Things and cloud services.

 

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Henry Fund Economic Outlook – September 2016

The following release was prepared by Wallace King and Charles Schaller on behalf of the 2016 Henry Fund research team. The team updates its economic outlook several times throughout each semester. This analysis forms the basis for class discussions, company selection, and investment research.

Henry Fund Research

The Henry Fund research team’s September outlook for the US economy shows a decline in our projected 6-month real GDP growth to 2.0% down from our April consensus of 2.4%. Real gross domestic product increased at a revised annual rate of 1.1% in the second quarter of 2016. The GDP increase was driven by growth in personal consumption expenditures (PCE) and exports. The team’s long term GDP outlook remains relatively unchanged at 2.3%.

The CPI inflation rate for July declined by 0.2% but was unchanged on a seasonally adjusted basis. July’s CPI decline was driven by a 1.6% reduction in the energy index due to falling oil prices. The change in CPI for the past 12 months of 0.9% is still significantly below the FED’s targeted rate of 2.0%. The suppressed inflation rate has been driven in large part by low oil prices, as the energy index has declined by almost 11% in the past year. The Henry Fund research team expects the inflation rate to increase at 1.0% over the next 6 months and to 1.75% over the next 2 years.

The unemployment rate fell to 4.9% in July 2016 from 5% in April 2016. The reduction in the unemployment rate was driven by gains in non-farm payroll employment. Nonfarm payrolls rose from 11,000 to 287,000 between June and July. Employment gains occurred in professional and business services, health care, and financial activities while jobs in mining continued to decline. The research team expects the unemployment rate to remain flat at 4.9% over the next 6 months before declining to a long term rate of 4.8% in two years.

The FOMC left benchmark interest rate unchanged at 0.25% to 0.50% in both the June and July meetings. The decision to leave rates unchanged in June was driven in large part by the economic volatility caused by the U.K. referendum on leaving the EU (BREXIT) and the University of Michigan’s survey predicting lower than expected inflation. At the July meeting, the FOMC expressed more confidence in the economy and issued a statement that “near-term risks to the economic outlook have diminished.” The FOMC also expressed caution as inflation remains stalled and is “expected to remain low in the near term.”

The Henry Fund research team expects the federal funds rate to remain unchanged at 0.50% percent over the next 6 months. We anticipate that a more robust jobs market and stronger inflation will lead the FOMC to increase the federal funds rate to 1.0% over the next two years. We anticipate that other key short term and long term rates will follow a similar trajectory to the fed funds rate. We forecast that 6-month T-Bill rates will remain relatively unchanged at 0.6% before rising to 0.95% over the next two years. We expect the 6-month 10-year T-Bond yield to remain relatively unchanged at 1.58% before rising to 2.3% over the next 2 years.

In the month of August, oil prices made their highest monthly gain since April 2016, increasing by about 20%.  We forecast a slight increase in oil prices over the course of the next 6 months, increasing to $49 from the current price of $47. Although prices will rise, the increase will be modest as the long-term effects of the global oversupply will continue to be felt into the near future. We forecast oil prices will continue increasing to $57 by late 2018.

August of 2016 saw an 11-month high in consumer confidence due in part to job growth and low gasoline prices. The consumer confidence index rose to 101.1, up from a downwardly revised 96.7. This increased confidence could bode well for the housing market with 6.4% of Americans planning to purchase a house in the next 6 months. We forecast consumer confidence to remain stable over the next 6 months, with a slight growth over 2 years.

The US dollar fell following comments from Fed Chair Janet Yellen that a 2016 increase in interest rate would be highly likely. We forecast a very slight 6-month drop in USD per Euro, falling to $1.12 from 1.13. Strong job numbers and a surprise bump in consumer confidence have led the dollar to edge higher against the Japanese Yen. We forecast a slight the Yen will remain stable at 100 in the near term and increase to 105 by August 2018.

The S&P 500 has recovered from its brief 113 point drop following the Brexit vote in June, posting a positive YTD return of 6.5%. We anticipate that over the next 6 months the S&P will see a slight dip to 2170. Over the intermediate term we forecast continued positive, but low returns, growing to 2375 by 2018 for an 8.8% gain as the market waits for earnings to catch up to current valuation levels.

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CFA Scholarship Opportunity for Tippie Students

The CFA Institute, administrator of the Chartered Financial Analyst (CFA) designation, offers a scholarship program to subsidize the enrollment fees for students to sit for all levels of the CFA examination.  As a CFA Program Partner, the Department of Finance at the University of Iowa is eligible to award up to fifteen (15) Awareness Scholarships to graduate or undergraduate students.

The Department of Finance is now accepting applications from graduate or undergraduate students who plan to sit for the December 2016 or June 2017 examinations.  Students selected for these scholarships will be eligible to enroll for the CFA exam at a reduced rate ($350).  (Normal enrollment fees range from $1,310-$1,810 depending upon the sign-up period.)  Scholarship recipients who have already registered for the exam will receive a refund of the fee differential from the CFA Institute once the scholarship forms are processed.

Application  Deadlines:

  • December 2016 Exam: Friday, August 26, 2016, 12:00 p.m.
  • June 2017 Exam: Monday, December 5, 2016, 12:00 p.m.

Application Requirements:  To apply for the scholarship, students must submit the following information to the Department of Finance, S252 PBB, by the deadlines noted above:

  • One-page cover letter discussing your career goals and the role of the CFA designation.
  • Resume with email address and current contact information.
  • A copy of your UI grades (does not need to be an official transcript).
  • Completed CFA Scholarship Form: https://www.cfainstitute.org/Forms/dec_june_student_scholarship.pdf
  • If applicable, proof of CFA exam registration such as a copy of your confirmation email. (Pre-registration for the exam is not a requirement to apply for one of the scholarships.)

All students selected to receive one of the 15 University of Iowa sponsored scholarships may be required to sign a waiver authorizing the release of examination scores to the UI CFA program faculty committee, so that we may monitor student performance across areas of the CFA curriculum.

Students planning to sit for the June 2017 exam are strongly encouraged to also apply for the CFA Institute’s Access Scholarships. These need-based scholarships lower the enrollment fee to only $250. The application deadline for 2017 is Sept. 15, 2016.

https://www.cfainstitute.org/programs/cfaprogram/scholarships/Pages/index.aspx

The CFA Institute also offers a scholarship program for women who are interested in earning the CFA charter. The application form is at: https://www.cfainstitute.org/Forms/womens_scholarship_june_2017.pdf

University of Iowa Program Partner Scholarship Eligibility Requirements:

  • Applicants must be current undergraduate or graduate students at the UI.
  • Applicants must have a valid passport (CFA exam registration requirement).
  • Applicants must fulfill all CFA candidate requirements. CFA Institute guidelines require all applicants to hold a bachelor’s degree (or equivalent) or be in the final year of your bachelor’s degree program at the time of registration. Thus, undergraduate candidates may only enroll in the Level I exam during their final year of studies.  For more information on the CFA examination or candidate requirements, visit the CFA Institute website (cfainstitute.org).
  • Applicants must choose whether to apply either for the December 2016 or June 2017 exam scholarship, but not both.
  • If you are an MBA-PM student and employed, your employer cannot provide reimbursement either before or after the exam.

Scholarship Selection Details:  The selection process is often very competitive for the limited number of scholarships available to the UI. Scholarships will be assigned in proportion to the total number of undergraduate and graduate student applicants.  Selection criteria may include the following:

  • Academic performance as a student at the University of Iowa
  • Academic performance in courses that are part of the CFA curriculum.
  • Work, internship, and professional experiences.
  • While these scholarships are available for all levels of the CFA exam, the selection committee reserves the right to give priority to new Level I examination candidates for the December 2016 or June 2017 exams over those candidates who are taking Level I again or taking Levels II or III.
  • Priority may be given to students currently enrolled or applying for the MBA FIN:9250 Applied Security Analysis (Henry Fund) course or the undergraduate FIN:4250 Applied Equity Valuation (Krause Fund) course.
  • Priority may also be given to students who have already enrolled for the CFA examination.
  • Scholarship recipients for the December 2016 exam will be contacted by Wednesday, August 31st. Scholarship recipients for the June 2017 will be notified by mid-December.
  • Depending on the number of applications historically, we anticipate that approximately five (5) scholarships will be available for the December 2016 exam, and the remaining ten (10) scholarships will be reserved for the June 2017 exam.
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Henry Fund Economic Outlook – April 2016

The following release was prepared by Ben Martin and Qian Wang on behalf of the 2016 Henry Fund research team. The team updates its economic outlook several times throughout each semester. This analysis forms the basis for class discussions, company selection, and investment research.

Henry Fund Research

On March 25, Q4 2015 real GDP growth was revised upward for the second time to 1.4%, surprising both analysts and investors. The boost was primarily driven by a 2.4% increase in personal consumption expenditures. The Henry Fund team currently anticipates growth to moderate a little in 2016 before accelerating in subsequent years. Our 6-month forecast currently stands at 2.1%, which we expect to increase to 2.6% over the next 2 years. Our GDP expectations were influenced by lower personal income and consumer spending in February of 0.2% and 0.1%, respectively.

Driven by a 6% decline in energy prices, headline CPI inflation declined 0.2% in February which brought the annual rate down to 1%. However, at the core, CPI increased 0.3% and came in at 2.3% on an annual basis. The Henry Fund team currently expects headline CPI to increase very slightly to 1.1% over the next 6 months. Our 2-year forecast is of about 1.8% is predicated on a moderate recovery in energy prices and increases wages.

Despite a higher than expected 215,000 increase in nonfarm payrolls, the official unemployment ticked up to 5% in March. However, the increase in the headline rate was the result of a higher participation rate, signaling strength in the labor market. The Henry Fund team anticipates this strength to continue over both a 6-month and 2-year horizon with the unemployment rate coming in at 4.8% in both periods.

On April 6, the FOMC voted against a second increase in the fed funds rate. In light of this, our view that the Fed will not meet their stated goal of four rate hikes this year is unchanged from last month. However, we still anticipate one more 25 bps hike over the next 6-months (0.75% target) and a gradual rise to 1.25% over the next 2 years. Consistent with this belief, we anticipate both the 1-year and 10-year to increase as well. We currently expect the 1-year T-bill rate to increase to 0.7% over the next 6-months and 1.3% over the next 2-years. The 10-year T-bond is expected to follow a similar pattern, rising to 2.0% over the next 6-months and 2.8% over the course of 2 years.

As the global economy is easing into a steady growth phase, top oil producers such as Russia and Saudi Arabia have reached an oil-freeze agreement and will discuss the details in Doha on April 17th. Crude oil prices have been bouncing back since the beginning of April, rising from $36 per barrel to $42, which is the highest price YTD. The team has positive thoughts on oil prices, as we do not see any material deterioration in the global economy, and the current over-production problem is diminishing slowly but steadily. We forecast oil prices will stabilize around $40 in the short-term and will increase to $51 by 2018.

With lower oil prices and unemployment, as well as generally higher disposal income, consumer confidence bounced back to 96.2 in April after it dropped to 92.2 in March. Overall, the team expects consumer confidence to be stable in both the short and long-term. Though currently there is economic weakness in certain emerging and developed markets, we are optimistic that the US economy will not be negatively affected any further.

In an effort to boost their respective economies, both the European and Japanese central banks have continued to loosen monetary policy, taking rates negative in some instances. The Japanese yen has appreciated against the US dollar since January, with the current exchange rate around 110. However, the Henry Fund team does not foresee any substantial economy growth within Japan or increasing demand for the Japanese yen. We believe the exchange rate should be around 115 and 120 in the short and long-term, respectively. The euro has depreciated around 20% to the dollar between the beginning of 2015 and now. Currently, the exchange rate is 1.14. The team expects it will drop to 1.10 in the short-term and 1.06 by 2018, as there is more economic growth in the US relative to Europe, which is also facing some major societal issues such as the immigration crisis.

Despite some volatility early on, the S&P 500 is currently up just under 1% YTD. The team anticipates it will continue to trend upwards over the next 6 months to 2070, returning 1.3%. Overall, we are very confident about the US economy in the long-run. Thus, we anticipate the S&P 500 will continue to increase to 2200 or 6.8% by 2018.

 

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Henry Fund Economic Outlook – March 2016

The following release was prepared by Casey Spoden and Sam Atari on behalf of the 2016 Henry Fund research team. The team updates its economic outlook several times throughout each semester. This analysis forms the basis for class discussions, company selection, and investment research.

Henry Fund Research

Real GDP growth for 4Q 2015 was revised upwards to 1.0%, signaling slightly stronger growth than expected.  Overall 2015 real GDP was 2.4% – the same as it was in 2014. The Henry Fund team predicts short term (6 month) U.S. economic growth of 2.1%, while our long-term (2 year) forecast is 2.7%. We are optimistic due to the strong American consumer which is the primary driver in our growth forecast. This is signified by two important metrics. Personal income jumped 0.5% in January, ending 0.2% higher than expected, and consumer spending also outperformed expectations, increasing by 0.5%. Inflation rose a higher-than-expected 0.3% in January, but has increased only 0.7% over the last 12 months. Because we are starting to see some wage inflation, which is good for the labor market, consumer spending is increasing and will contribute to the broader economic growth driving our estimates.

We see the wage inflation discussed above leading to price inflation, but this growth will be slightly offset by the low oil and commodity price environment. Overall, we see CPI rising slightly over the next 6 months and over the two-year horizon. Our short term forecast for CPI inflation is 1.7% and 1.8% in the long-term outlook.

Unemployment is currently at 4.9% and the Henry Fund team does not predict a drastic change in the short or long term rate, with both forecasts holding steady at current levels. Many economists believe full employment occurs at 5%, so with the labor market essentially at full employment now, there is little room for it to grow. Monetary policy is tightening, and wage growth shows that employers are spending money on current employees rather than expanding payroll as the recovery reaches its eighth year.

The Henry Fund team forecasts a short-term increase in the 1-year U.S. Treasury bill rate to 0.75% and long-term increase to 1.35% within two years. For the 10-year Treasury bond, we predict yields of 2.2% within 6 months and 3.0% within two years. We anticipate at least one additional 0.25% increase in the Fed Funds rate to 0.75% over the next 6 months, as well as two or three more rate hikes to 1.25% by early 2018. These rate increases will shift the overall Treasury yield curve upwards over time.

The Fed announced that it would increase rates up to four times in one year, but we think that with current market volatility and uncertainty in the overall economy, the Fed will not get to four this year. If the economy, wages and CPI inflation increase as expected, this would provide the Fed more reason to boost rates more quickly.

Oil prices currently stand around $41 per barrel, but we predict it will fall back to around $35 per barrel in 6 months, before rising to $45 by 2018. In the short term, we see the supply of oil continuing to outpace demand, which will prevent any major increase in price. The team expects the oil market to pick back up over the next 2 years as supply and demand get closer to equilibrium and geopolitical uncertainty in the Middle East increases. Both of these factors would contribute to a boost in price.

We see the US dollar continuing to strengthen against the euro from expectations of Fed funds rate hikes as well as from monetary policy changes abroad. We anticipate the Euro will drop to $1.05 in the short-term and $1.04 in the long term. The European Central Bank continues to loosen monetary policy, while the US is focused on tightening. Relative to Japan, we see the yen weakening against the dollar, decreasing to 115 in the short term and 120 in the long term. This is due primarily to diverging monetary policy and the stronger US economy. In particular, as Japan begins to experiment with negative interest rates, the future of their currency is very unclear, as there is no precedent for negative rate expectations.

Athough the S&P 500 began with a rocky start to 2016, it has rallied back to even for the year-to-date period. We expect the index will continue to trade in a narrow range with only modest changes over the next six months, but we anticipate an 11.5% return to the index by 2018. In other words, the Henry Fund team sees the market trending slightly upward even in the presence of daily market volatility. The underlying economic growth we have predicted will contribute to the slight upswing. We believe the market has priced in the Fed funds rate hikes, but corporate earnings need to catch up to valuation levels before we might see a strong growth in overall equity market returns.

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Henry Fund Economic Outlook – February 2016

The following release was prepared by Nihar Patel and Josh Vander Plaats on behalf of the 2016 Henry Fund research team. The team updates its economic outlook several times throughout each semester. This analysis forms the basis for class discussions, company selection, and investment research.

Henry Fund Research

With real GDP growth for 3Q2015 at 2% coupled with a 0.7% growth rate in 4Q2015, the Henry Fund research team’s short-term forecast (6 month) for US Real GDP growth is 2.3%. Our long-term forecast (2 year) expects growth to increase to 2.8% by 2018. The current volatility in the market has not dulled consumer confidence, and consumer spending remains strong. An improving labor market and low inflation should also have a positive effect on GDP growth. A risk to the economy is the contraction in the energy market caused by the decline in oil prices. We expect this to dampen growth in the near-term, but our long-term outlook remains strong.

Oil continues to cause ripple effects through the global economy. It recently dipped below $30 per barrel for the first time since 2001, before recovering back above $30/barrel. We feel the weak GDP growth of the final quarter was driven by the dramatic decline in the price of oil. The team’s 6-month price estimate is at $33 as over production continues to keep a cap on prices. The uncertainty in the Middle East and unsustainability of current production levels lead the team to expect the price of oil to increase over the long term to $48 by 2018.

Inflation is expected to stay at current low levels for the near term with the 6-month rate forecasted to be 0.8%. The low price of gasoline, driven by the collapse of oil prices, and cheaper food is responsible for lowering change in CPI. The long-term 2-year outlook has CPI moving up 1.7%. The team expects that the price of oil will stabilize and rise some, because the oversupply will eventually lead to a cut in production. Demand for oil might also pick up, driven by emerging economies. With this weight lifted inflation will begin to rise. Core CPI, which excludes oil and food, has been on an upward trend. The Core CPI change reported in Dec 2015 was 2.1%. The Federal Reserve uses Core CPI as part of its overall outlook when deciding monetary policy including increases in the Fed Funds rate. Core CPI excludes volatile goods, but eventually the low cost of oil will filter down and keep a lid on Core CPI increases, even if CPI starts to rise.

The US unemployment rate has continued to decline with the Dec 2015 rate being reported at 5.0%. However, this must be balanced against the labor participation rate, which measures the part of the labor force that is employed or looking for work. This rate gives more context to the unemployment rate, and a fuller picture of the US labor market and the health of the economy. The labor participation rate is at its lowest level since the late 1970’s, and has been stable between 62% and 63% since 2014. As more working age people leave the workforce the unemployment rate will artificially decline, but a strong labor market might see people enter back into the active labor force. In this case, we should see the labor participation rate start to increase. Many economists also believe that full employment in the US is around the 5% unemployment mark. Considering all this, the team does not expect any significant moves in unemployment, with only a decline to 4.9% expected over the next two years.

The Federal Reserve has a stated inflation target of 2%, and it has a mandate to achieve maximum employment. The current 0.25%-0.5% rate range is the 6-month expectation. The long-term 2-year forecast sees the fed funds rate going to 1.25% once the recent weakness passes and the underlying strength of the economy requires balancing growth against inflation.

With the increase in the fed funds rate, the 1-yr T-Bill and the 10-yr T-Bond yields are expected to increase over the next 2 years. The team has projected the yields to be 0.8% for 1-yr T-Bills and 2.2% for the 10-yr T-Bond by mid-2016, which are modest increases over current levels. The 2-year projection calls for yields to increase to 1.6% for the 1-yr T-Bill and 3.2% for the 10-yr T-Bond.

Pressure on US exporters will continue as the dollar strengthens. There are a few drivers to the dollar. The increased US interest rates make it an attractive currency compared to others whose central banks have kept the interest rates low. There is also the flight to safety of the US dollar as the migrant crisis strains Europe, the slowdown in China, and the collapse of commodity prices. Over the next 6 months the EUR/USD is expected to be $1.08. Our 2-year long-term outlook sees the Euro weakening against the dollar to $1.03.

Market volatility has yet to hurt consumer confidence to this point, but we expect a decrease in consumer confidence in the short-term. The market volatility and international environment will make consumers wary. The collapse of oil prices is straining many states, the flood of migrants is straining the EU, and terrorism is still a big problem. With the effects from the fed funds rate hike uncertain, we expect caution and fear to drive down consumer confidence. These doldrums will pass quickly, and we expect that by 2018 we will see consumer confidence rebound to current levels.

Following the sell-off that started off 2016, the team expects short-term volatility in the markets and the price of the S&P 500 staying close to current levels. In the long-term, we expect equities to experience strong gains and a simple return of 14.69% from the S&P 500 level of 1890 over the next two years to 2168. Once the shock of the first rate increase in almost a decade passes the index should recover.

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Introducing the 2016 Henry Fund Research Team

Congratulations to the newest members of the Henry Fund research team! The following 11 analysts will take over management of the $5.0 million Henry Fund portfolio at the start of the spring 2016 semester.

  • Qian Wang (Financial Services)
  • Sam Atari (Financial Services)
  • Josh Vander Plaats (Consumer Staples)
  • Gaurav Ghantkar (Technology)
  • Ajay Kaushik (Technology)
  • Casey Spoden (Health Care)
  • Charles Schaller (Health Care)
  • Cole Lambert (Energy & Utilities)
  • Nihar Patel (Telecom & Consumer Discretionary)
  • Benjamin Martin (Consumer Discretionary & Materials)
  • Wallace King (Industrials)

This group represents the 23rd team to manage the fund since the program’s inception in January 1994.

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Henry Fund Economic Outlook – November 2015

The following release was prepared by Amit Shah on behalf of the 2015 Henry Fund research team. The team updates its economic outlook several times throughout each semester. This analysis forms the basis for class discussions, company selection, and investment research.

Henry Fund Research

The Henry Fund research team’s outlook for the US economy has been stable since October. Our 6-month GDP growth estimates declined marginally to 2.6% after the official GDP growth rate slowed to a 1.5% annual pace over Q3 2015  as companies cut back production to prevent a buildup in inventories. However, Henry Fund analysts believe that US GDP growth will rebound on the back of steady consumer spending. Our 2-year GDP growth forecast remains steady at the 3.0% level.

The CPI inflation rate fell 0.2% in October led largely by declining energy and commodity prices. Over the prior 12 months, the US inflation rate has held at 0.0%. We see this rising to 0.7% over the next 6 months, an improvement unseen year-to-date including food and energy, and 1.6% over our 2-year horizon. Both measures, however, are still below the Fed target rate of 2.0%.

Unemployment continued its decline ending October at 5.0%. Over the past 12 months,  the unemployment rate is down 0.7%. Our outlook remains stable at this rate over the next 6 months and rises to 5.3% over the following 2 years. The energy and mining industries have been a burden on employment as companies continue to cut labor force but other industries including retail, healthcare, food services and construction have increase the workforce with improvements in GDP and steady consumer spending.

Despite the stability in unemployment, expectations that the Fed will enact an increase in the Fed Funds rate by year end continue to rise. Altough the Fed Funds rate remained unchanged following the September Fed meeting, the 1-year and 10-year T-Bond yield increased to 0.51% and 2.32% respectively in ancipation of rate increase announcement in near term. We expect the 10-year rate to rise further to 2.7% over next 6 months and 3.4% over next 2 years. The market continues to anxiously await the first anticipated 25 basis point increase and FOMC guidance toward future expectations.

The price of oil has again declined to $40 after a bounce back in September to $48 per barrel. The build up of crude oil inventory is weighing heavily on oil prices.  We expect oil prices will rebound to $49 over next 6 months.  Our 2-year outlook has slighly increased to from September at $63 as we expect continued decline in US shale oil production, thereby mitigating the global demand-supply mismatch.

Consumer confidence has declined over September from 103 to 97.6 level despite strong growth in employment rate. Despite the decline, consumers still rate current conditions favorably. We expect both the short-term and 2-year outlook to increase as consumers continue to benefit from low oil prices, low unemployment and moderate GDP growth.

We expect the dollar to strengthen slightly from our October outlook in the short term following the recent rally in the dollar. However we estimate dollar to depreciate slighly over next 2 years as global economy stabilizes.  We expect the US dollar to trade at $1.10 per Euro and the Yen to trade at ¥124.6 per dollar in the short term.  In the 2-year horizon we expect the US dollar to trade at $1.12 per Euro and the Yen to trade at ¥123.8.

The US equities market continues to recover from from a large drop at the end of August.  However, we expect the markets to remain at current levels over the next six months due to rising interest rates and concerns on valuations.  However, in the long-term we expect a modest increase for equity markets in the 5-8% range as the US economy continues to strengthen.  We feel the most value will come from large and mid-cap companies within the consumer discretionary, financials, energy and information technology sectors while being underweight in the utilities, telecomm, material and healthcare sectors.

 

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Henry Fund Economic Outlook – October 2015

The following release was prepared by Stuart Hemesath and Jonathan Kerr on behalf of the 2015 Henry Fund research team. The team updates its economic outlook several times throughout each semester. This analysis forms the basis for class discussions, company selection, and investment research.

Henry Fund Research

The Henry Fund research team’s outlook for the US economy has improved since September with 6-month GDP growth estimates improving to 2.7% after the official GDP data rose to a 3.9% annual pace over Q2 2015. This had minimal impact on our 2-year outlook which remains just under 3%. With a volatile summer, we do not foresee this strength continuing over the fourth quarter.

The CPI inflation rate remains sluggish falling an additional 0.2% in September for all items, led largely by energy prices as they continue to impact the greater economy. We see this rising to 1.2% over the next 6 months, an improvement unseen year to date including food and energy, and 1.6% over-our 2 year horizon. Both measures, however, are still below the Fed target rate of 2%.

Unemployment continues its decline ending September at 5.1%. Our outlook remains stable at this rate over the next 6 months and rises to 5.3% over the following 2 years. Energy has been a burden on this measure but stability comes through the improvements in GDP and an increasing consumer confidence level.

Despite the stability in unemployment, expectations that the Fed will enact an increase in the Fed Funds rate by year end continue to diminish. After the rate remained unchanged following the September Fed meeting, fears of increased global volatility now loom over the decision, echoed by IMF heads. The 10 year T-Bond yield remains steady at 2.1% and our expectations see marginal increases to 2.5% over the next 6 months and 3.3% over the next 2 years. The market continues to anxiously await the anticipated 25 basis point increase and guidance toward future expectations.

The price of oil has bounced back from the summer’s low of near $38 per barrel.  Our 6-month outlook of $49/barrel is in line with currently trading levels.  Our short-term outlook has improved, but only slightly from our September outlook of $43 as there is still a worldwide oversupply of about 2 million barrels per day.  Our 2-year outlook remains unchanged from September at $61 as Saudi Arabia and other Middle Eastern countries will begin to suffer financially as a result of decreased oil prices.

Consumer confidence is up as consumers view current economic conditions more favorably despite recent market volatility. We expect both the short-term and 2-year outlook to increase as consumers continue to benefit from low oil prices, low unemployment and moderate GDP growth.

We expect the dollar to weaken slightly from our September outlook.  However, US consumers will continue to benefit from a strong US dollar as global investors continue a flight to quality moving funds to the US due to continued uncertainty in the global economy.  We expect the US dollar to trade at $1.13 per Euro and the Yen to trade at ¥121.50 per dollar in the short term.  In the 2-year horizon we expect the US dollar to trade at $1.12 per Euro and the Yen exchange rate to remain unchanged.

The US equities market is recovering from a large drop at the end of August.  However, we expect the markets to decrease slightly in the next six months due to rising interest rates.  We expect a 2% decline in the S&P 500 in the short-term.  However, in the long-term we expect a 5% increase in the S&P 500 as the US economy continues to strengthen.  We feel the most value will come from large and mid-cap companies within the consumer staples, financials, and information technology sectors while being underweight in the utilities, telecomm, and healthcare sectors.

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Finance Boot Camp Speaker Series

Todd Nelson, CFA, CPA

Vice President, Investment Banking, Capital Markets

Goldman Sachs (New York)

“How Corporations Enhance Equity Returns – The Anatomy of Corporate Leverage and a Bond Offering”

Wednesday, September 30, 2015

12:30-1:45 p.m., W401 PBB

The Finance Boot Camp speaker series brings finance and investment professionals to campus with the goal of extending traditional classroom education. Speakers focus on specific topics related to his or her role in the investment management or corporate finance process, with a strong emphasis on practical applications and real-world examples. The sessions are open to all students, who are encouraged to engage and actively participate during each sessions’ question and answer period.

Register by Sept. 29: https://uiowa.qualtrics.com/SE/?SID=SV_9sQgvO1FQ1xK7WJ