A one-page snapshot of market performance, statistics and trends.
Everything’s a proxy for QE - we favor European bank capital (Alternative Tier 1), leveraged loans, U.S. high yield bonds and emerging market local currency bonds.
Asset allocation for a world of trend-like growth - As broad-based growth and favorable financial conditions combine to create a supportive backdrop for risky assets, we remain overweight equities, acknowledge the full valuations of U.S. stocks while keeping a small overweight, downgrade credit from overweight to neutral, and underweight duration.
American people have now suffered through their own marathon…a thoroughly dispiriting election campaign, dominated by insults and scandal rather than any serious discussion of the issues that are supposed to divide Republicans and Democrats. From an investment perspective, it has been a perpetual distraction and the two weeks left in the campaign feel a bit like the last two miles of a marathon. However, for investors, it is important to think past the finish line and consider the investment environment after the election.
This bulletin explores how nascent but encouraging political changes in the region may present opportunities for investors.
Global debt trends are important to understand. Are currently elevated debt levels healthy, supporting growth, or are they creating a drag—even a potential solvency crisis on the horizon? Explore how we consider debt dynamics in developed and emerging markets, and how investors can take action.
This bulletin, written by Stephanie Flanders, examines the investment implications of a potential Brexit from the EU.
Following the 2015 decline, companies beat earnings estimates but missed revenue estimates. We believe earnings growth is in the process of bottoming and should gradually recover over the remainder of this year.
In our base case scenario of muddle-through growth, with a gradual recovery of EM growth alpha and moderately tighter financial conditions, we prefer to base our core exposures on higher quality credit names with stronger balance sheets and fiscally prudent positions. This reflects our more cautious longer-term view, given the still- considerable downside structural risks from commodities, China and U.S. monetary policy normalisation. For the second quarter, however, the prospect of lower market volatility and a cyclical stabilisation leads us to favour tactical positions in idiosyncratic high yield stories.
From a sector perspective, we remain constructive on duration, as the challenging growth backdrop, global easing bias, currency stability and generally moderate inflation dynamics should continue to support local currency rates. While yields have rallied this past quarter, we still believe there is further room for compression.
While we do not believe an EM crisis is under way or inevitable, we believe emerging markets equities are still range-bound, constrained by the triumvirate of headwinds. Valuations are not sufficiently cheap to prompt a tactical "buy today" mentality. However, they are cheap enough (including consideration of the EM currency de-rating) to encourage investors to be setting valuation or fundamental "guideposts" to add to the asset class rather than run from it because of the news flow and worries that have overtaken investors.
The millennial generation (individuals born between 1982 and 2000) is the subject of intense scrutiny: their likes and dislikes, social media inclinations and digital footprints, fashion sense, dining habits, reproductive trends, political and religious views, workplace objectives, etc. This year, millennials will overtake the baby boomers as the largest living generation in the United States, so there are plenty of reasons to study them. This is the abbreviated version of the study.
In an environment of lower returns and higher volatility, equity approaches that straddle both actively and passively managed strategies can help investors generate higher returns or minimize volatility.
In a lower-return environment, the contribution from any excess return is a more meaningful contributor to overall return. But because finding consistently outperforming active managers can be difficult, many investors have gravitated toward benchmark-oriented solutions.
Investors who have adopted a core-and-satellite approach for their core equity allocation should consider substituting some or all of their passively managed equity allocations for incremental return-enhancing or risk-reducing strategies. Doing so should result in better risk-adjusted returns.
Mark Snyder, Head of Institutional Strategy & Analytics, explains how SMAs have led to a wide dispersion in results, large deviations from standard benchmark returns, and in many cases underperformance.
For U.S. property and casualty (P&C) insurers, public equity investments diversify risk in income-oriented portfolios, typically offer higher expected returns than fixed income securities and provide a ready source of liquidity. They have regularly made up the second-largest allocation in P&C portfolios after fixed income and currently account for nearly 10% of total non-affiliated investments.* P&C insurers hold most of their equity investments in separately managed accounts (SMAs). The low-turnover, buy-and-hold strategies of many SMAs, while allowing for precise control of the timing of realized gains and losses for tax purposes, have led to a wide dispersion in results and large deviations from standard benchmark returns—with substantial under performance in many cases, as our analysis shows.
P&C companies have allocated a much smaller portion of equity investments to funds and exchange-traded funds (ETFs). These allocations trade the ability to manage tax outcomes for the SMA’s ability to track a benchmark at low cost or gain access to skilled managers who can potentially outperform a benchmark. We believe insurers should give this trade-off serious consideration, weighing the advantages of a buy-and-hold strategy against the drag it can impose on returns that chronically lag an established benchmark.
This bulletin, written by Dr. David Kelly, discusses factors affecting the lack of wage growth in the U.S.:
Dr. Kelly's Commentary for August 2015:
The July U.S. jobs report was solid and mostly in line with expectations. However, it is notable that, in a steadily improving job market, both labor force growth and wage growth remained weak. We have argued in the past that most of the labor force problem is structural rather than cyclical. That is to say, it is largely due to the retirement of babyboomers, a surge in disability benefits and a growing number of Americans who are essentially excluded from the job market due to prior felony convictions, educational deficiencies and issues with addiction. All of these are important issues and deserve the urgent attention of the government.
However, unlike a general lack of economic demand, they cannot be fixed by monetary or fiscal stimulus. Wage growth also remains very weak with wages of production and nonsupervisory workers up just 0.1% in July compared to June and up just 1.8% year-over-year. This is remarkably different from the last three economic expansions. The July jobs report showed only a marginal drop in the unemployment rate from 5.28% to 5.26%. However, the last three times the unemployment rate hit 5.3% on the way down, wage growth was much stronger, achieving year-over-year gains of 3.3% in November of 1988, 3.4% in June 1996 and 2.6% in January 2005.
So why are wages so weak, this time around? A full explanation is elusive. However, statistical analysis suggests that, as is in the case of labor force participation, the problems are largely structural or else due to factors that are mostly independent of demand in the economy.
Market reaction to the Modi government’s reform program has cooled. After a strong 2014, India’s equities market have grown only moderately this year, with the MSCI India gaining 4.5% in dollar terms (USD) and 5.6% in local currency.
While we believe India’s reform agenda is progressing at a steady pace, clearly more remains to be done—and to judge from the market’s reaction, more will be expected in 2H 2015.
Dr. David Kelly's commentary for July 2015:
He warns that it is only prudent to consider both careful monitoring and a prescriptiont to make exact predictions of long-term outcomes for U.S. stock and bond investors. The most effective monitors are market prices and the monthly employment report. If stock prices continue to rise and longterm yields remain low, even as the employment report shows a tightening job market and anemic labor supply, then the eventual risks to both bond and stock markets will rise.
As for a prescription, it is relatively simple at this stage. Given the super-low yields on cash, it still makes sense for long-term investors to be in long-term assets. However, this should also be a time to be a little underweight fixed income overall, while looking at global opportunities in both equities and fixed income. It also makes sense to have a broad and active approach in asset allocation across stocks, bonds and alternative assets and in hiring managers who can focus on what is still good value in markets that, after a very long run, are no longer so cheap.
Get Stephanie Flanders' reaction to the unfolding events in Greece. In this interview on Bloomberg Business, she discusses impact of the referendum, the weakened government, political change in Greece and the IMF memo leak.
Have a refresher course on how investors have learned that unexpected threats and volatility can quickly erase their hard-won equity gains in the market.
This paper from February 2014 provides a broad overview of these equity hedging strategies and insight on what to consider when evaluating different types of equity hedges, as well as an examination of the roles these strategies can play in asset allocation and investor portfolios. Successful equity hedging strategies start with an effective stock valuation and investment process. In addition, the complexities of managing options and short positions also require a set of unique and robust operational capabilities, as well as a portfolio team with the skills and experience in shorting and managing derivatives- and options-based strategies.
Equity hedging strategies, which can include hedged equity or long/short strategies, help investors stay in the market during bouts of volatility. They do this, in part, by capturing gains when the markets are rallying and cushioning the falls when the markets are dropping. Given the variety of approaches to hedging equities, investors need to consider their objectives, risk profile and desired beta exposure when selecting an appropriate strategy.
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