1. 2015 Investment Outlook Yuntaek Pae, PhD, CFA Associate Professor of Finance, Lewis University

2. Content Economy Equity market Bond market International market Strategy

3. Issues to consider Labor market Oil price Strong $ QE of Japan and EU Federal reserve bank Inflation Yield curve

4. Economy

5. GDP US GDP growth rate will be near 3% in 2015 due to improved labor market and lower oil prices. However, the forecasts are widely ranged because of uncertainty from EU and Japan. FOMC minutes, 2014/12

6. Strong Dollar Reasons Higher interest rate Strong labor market Narrowing budget deficit Rising trend would be moderate but may last two to three years

7. Fiscal policy Budget deficit is no problem Maximum Capital gains tax: 23.8% -> 28% Maximum Dividend income tax: 28% Minimum wage increase

8. Labor Market Low initial claim Low layoffs Low unemployment rate; 6.6%(2014/1)  5.6%(2014/12) High job growth; best since 1999 2014 layoffs lowest since 90’s, BOA 2015 capital outlook

9. Wage growth

10. Inflation Below 2% in 2014 Upside pressure: labor market, fiscal policy Downside pressure: oil price, us dollar, fed rate hike, etc. FOMC minutes, 2014/12

11. Federal reserve bank End of QE Interest rate hike Tightening liquidity  Increased volatility  Short-term yield rise  Yield curve flatten FOMC minutes, 2014/12

12. Yield curve will be flatten in 2015

13. Volatility US QE provided liquidity and suppressed volatility Current volatility is historical low level It depends on Fed interest rate hike, EU and Japan QE Most likely it will be higher in 2015 in US.

14. Oil price GDP impact of oilOil price may stay at round $50

15. Gold price Vs. dollarInvestment demand stays low

16. Equity market Moderate return is expectedCurrent PE 18x

17. Equity market Cyclicals are betterVolatility is picking up WSJ market data

18. Equity market strategy Improved labor market will drive demand on goods Corporate earnings will improve due to lower oil prices and strong dollar. But tightening liquidity will increase market volatility. We should control risk and shall not over invest. Stop loss must be applied. Buy cyclical consumer stocks when there is correction. Oil miners or gold miners could be used as insurance.

19. Bond market strategy Fed rate hike will drive short-term yield higher. Demand on long-term yield is still high due to risk in EU and Japan. Yield curve will be flatten in 2015. Credit risk spread will decrease due to improved economic condition. Historical low yield makes bond investment less attractive. High yield corporate bond price would increase due to narrower credit spread.

20. International market

21. International equity strategy QE will help Japan and EU stock market. In general QE drives up stock market and reduce volatility. Japanese central bank and pension fund is buying stock market. Japanese companies are increasing dividend. But it is making a huge bet, so make short-term investment only. Strong dollar is negative for US investors. EM exporting companies to US will be benefited from strong US demand and appreciating US dollar. China is transforming to domestic consumption economy. Reforms are positive.

22. Fund flow to EM is negative BOA 2015 capital outlook

23. International bond strategy Countries with high debt burden could be in trouble if Fed raise rates fast. Yield on Greek and Spain bond will be lower due to QE in EU.

24. Debt burden could be a problem BOA 2015 capital outlook

25. Summary Avoid US bond and buy US cyclical stocks when there is correction. Investment horizon shall not be too long because there will be high volatility. (it also implies higher option premium) Commodity prices would stay low due to lower demand from China and EU. EM are not attractive due to their high debt burden.