Amid strong growth and modest inflation, it’s a good environment for taking risk. But it is late cycle-no time for complacency. We take U.S. high yield down to neutral, keep a broad regional diversification in equities and a small underweight to duration.
Don’t fight the Feds. For the near term, aggregate central bank balance sheet expansion remains a tailwind. With real rates compressed and asset classes fully priced, we seek relative value: U.S. high yield, European bank capital & EM local currency debt.
1 Source: Morningstar, data as of 18 May 2016.
2 Source: Morningstar, data as of 18 May 2016.
China’s economic transition from investment-driven growth towards a more sustainable market-based model focused on services and consumption appears to be well underway. However, achieving a smooth transition is being made more challenging by several structural obstacles.
In this paper, we look at some of these structural issues, focusing on how excessive levels of leverage and industrial overcapacity have the potential to derail China’s economic transition. We also examine how China’s capital account is coming under pressure as the country embarks on a programme to liberalise its exchange rate regime.
This week's report is authored by a guest contributor, Benjamin Mandel, Executive Director Global Strategist Multi-Asset Solutions.
Roberts Grava and Rafael Silveira define the prerequisites for successful long-term investing and review its unique opportunity set. Long-term institutional investing, as practiced by the leading sovereign wealth funds, enjoys large strategic advantages and a decisive tactical edge over investing with a shorter time horizon:
James Liu discusses three simple principles that can help investors maintain this balance: keeping market volatility in perspective, focusing on longer investment time horizons and maintaining portfolio discipline:
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.
Bond yields remain at or near historic lows around the world, leading to a substantial increase in the value of plan liabilities. Expected asset returns have also been falling, affecting both corporate earnings and the value of public pension liabilities. Even as plans seek to de-risk over time, new mortality tables—taking into account people's longer life spans—are also boosting the value of liabilities. Together, these trends have resulted in a deterioration in funded status experienced by many defined benefit (DB) pensions globally.
In this article, we discuss the long-term trend for growth across asset classes and the implications, as well as potential solutions, for pension funds. Michael Cembalest, Chairman of Market and Investment Strategy, looks forward at global growth, productivity and demographic trends and examines the consequences for long-term interest rates.
Lisa Coleman, Portfolio Manager, Head of Global Investment Grade Corporate Credit in the U.S., discusses the challenges facing credit managers and the benefits of a multi-sector approach in this video from August 2014.
Senior portfolio manager Deepa Majmudar analyzes why effective inflation protection requires a flexible approach across a range of inflation-sensitive assets in this video from May 2014. She answers these two questions: 1) why not just invest in TIPs when inflation is looming? And 2) why take a diversified approach to inflation protection?
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