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Weekly Bond Bulletin: European showdown: High yield vs. loans

By GFICC Investors
Diverging fundamentals in the European high yield and leveraged loan markets are strengthening the case for high yield, which continues to look attractive despite tight spreads.
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The Weekly Brief

US Business sentiment, as measured by the ISM manufacturing survey, continues to march upwards. September’s headline reading of 60.8 is the highest since 2004.
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Multi-Asset Solutions Weekly Strategy Report

Japan’s upcoming snap election will likely end in a victory for the ruling party, but a
small winning margin could lead to the resignation of Prime Minister Shinzō Abe,
calling into question the future of his economic reforms.
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Global Equity Views 4Q 2017

By Paul Quinsee
It remains a good environment for equity investing–although higher valuations make us more cautious. We see more upside in emerging markets, Europe & Japan vs. the U.S. Among the potential risks: the traps of investor complacency & excessive risk-taking.
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Weekly Bond Bulletin: Inflation Implications

By GFICC Investors
Strong global economic growth and tight labour markets are putting pressure on wages. Are we about to see a pick up in inflation, and if so, what will be the impact on central banks and fixed income markets?
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Emerging market debt strategy : Follow the growth

By Pierre-Yves Bareau
Emerging market (EM) debt continues to be in a sweet spot, supported by stagnating global inflation, supportive developed market (DM) growth pick-up, strong fundamentals and few external risks.
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The Weekly Brief

Investors would be forgiven for being unnerved by geopolitical events this year, but this makes it all the more important to look at the fundamentals that are driving markets around the world.
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Weekly Bond Bulletin - Looking beyond the hedges

By GFICC Investors
Rising US interest rates are contributing to a spike in US dollar hedging costs. This presents a challenge for euro and yen investors in particular, but also creates opportunities for active managers given the macro backdrop remains broadly supportive for fixed income assets.
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The Weekly Brief

This week’s chart looks at how likely investors are to make money investing in different equity markets, depending on their holding period.
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Review of markets over third quarter 2017

By Michael Bell
A summary of the factors driving global markets over last quarter.
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Weekly Bond Bulletin: Technically speaking

By GFICC Investors
With fundamentals strong and valuations looking more stretched, technicals remain a major driving force for global bond markets.
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Global Fixed Income Views 4Q 2017

By Bob Michele

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.

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Lonely at the top: Angela Merkel and the CDU/CSU win the federal election

Despite heavy losses in the popular vote, Chancellor Angela Merkel and the conservative CDU/CSU have – as expected – won the 2017 German federal election by a comfortable margin. They now have a clear mandate to form a new coalition government in the coming weeks.
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The Weekly Brief

This year, strong growth in the eurozone has supported European equities. GDP growth has reached a healthy 2.3% year on year, the Composite Purchasing Managers’ Index remains solid at 55.7 and consumer confidence is also at its highest level since pre-crisis. Consequently, the euro has risen significantly this year.
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Weekly Bond Bulletin: Debating the yield curve

By GFICC Investors
The US Treasury curve has flattened over the course of this year, with the difference between two-year and 10-year yields currently at 0.84% (as of 19 September). As we embark on the process of central bank balance sheet normalisation, we look at whether the yield curve may continue to flatten, as would be expected when rates rise, or if we could begin to see a steepening effect.
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Global Asset Allocation Views 4Q 2017

By John Bilton

Asset allocation for a world of continued global growth -  Amid a synchronized pick-up in global growth and loose financial conditions, we maintain a pro-risk tilt in our asset allocation. Rates are set to rise, but only slowly, so we maintain a small underweight to duration together with a modest overweight to stocks, diversified across regions. We remain neutral on credit.

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The Weekly Brief

US core inflation has fallen since January. Consequently, markets are now pricing in less than two US Fed rate hikes by the end of 2019.
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Weekly Bond Bulletin: EM corporates on the up

By GFICC Investors
As emerging market (EM) growth continues, a combination of favourable factors is working to the advantage of the high-yield corporates at the heart of the EM universe.
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The Weekly Brief

Estimates for S&P 500 earnings per share (EPS) for the next 12 months have been steadily increasing since the US election in 2016, helping push the US stock market higher.
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The Weekly Brief

GDP in the UK grew by 0.3% quarter on quarter, weighed down by weaker than
expected consumption growth.
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Review of markets over August 2017

By Maria Paola Toschi
A summary of the factors driving global markets over last month.
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Weekly Bond Bulletin: Comparing apples with oranges

By GFICC Investors
US and European high yield bonds have performed well year-to-date, with total returns at 5.90% and 5.09%, respectively (as of 30 August 2017). Despite these strong returns, we believe high yield remains an enticing asset class for investors—though it’s critical to understand the nuances between the US and European markets.
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The Weekly Brief

In the US, as measured by the Philadelphia Fed business survey, planned capital expenditure over the next six months has increased significantly since last year.
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Weekly Bond Bulletin: Strategies for the dog days

By GFICC Investors
When caught in the doldrums, the only strategy is to wait, and stay alert for changing winds. With most bond indices idling in these dog days of summer, the US investment grade credit market may present a near-term opportunity.  
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The Weekly Brief

Eurozone growth continues to improve. In the second quarter, GDP increased by 2.2% year on year (y/y), the fastest pace since 2011, marking the 17th consecutive quarter of economic expansion.
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Evolving expectations for infrastructure investing

By Serkan Bahceci
Infrastructure remains an attractive asset class for institutional investors given its low correlations to other asset classes, relatively high yields, and the positive outlook for investor demand.
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The Weekly Brief

Positive political results in Austria, the Netherlands and France have supported the euro in recent months. However, the next 12 months may bring more election uncertainty, with Germany heading for the polls in September and Italy by May next year.
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Looking to buy on dips

By Pierre-Yves Bareau
EM countries and companies have become more resilient to external and internal shocks and we therefore see market dips and corrections as potential opportunities to buy.
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Investing in investment: Capex and financial markets

By Michael Hood
Why has U.S business investment spending grown slowly during the current expansion vs. previous cycles, and apparently weakened on a secular basis? And does the future hold more weak capital expenditure (capex), which could weigh on productivity growth, manufacturing activity, equity markets and long-term interest rates?
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The Weekly Brief

Markets have been benefiting from the pickup in global growth. Global GDP increased by 2.6% year over year (y/y) in 2016 and the IMF is expecting further progress this year, forecasting 3.5% growth y/y.
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Weekly Bond Bulletin: China churns along

By GFICC Investors
With the outlook for the Chinese economy continuing to be a key driver of investor sentiment, we take a look at the latest Chinese data releases and examine the likely impact on global growth and on fixed income markets.
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Goldilocks and the three risks

By George Iwanicki
Emerging markets are in the early phase of their recovery cycle. When comparing cycle-adjusted P/E multiples, emerging market equity ranks as the cheapest segment of the global equity market.
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The Bank of England votes to keep rates on hold… for now

By Michael Bell
The Bank of England (BoE) voted 6—2 in favour of keeping interest rates on hold at 0.25%, but indicated that rates may have to rise faster than the two rate rises the market had been anticipating over the next three years.
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Review of markets over July 2017

By Nandini Ramakrishnan
A summary of the factors driving global markets over last month.
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The Weekly Brief

Mario Draghi has been acknowledging the strength of the eurozone economy of late – a move that has led the market to believe the ECB is becoming more hawkish. 10 year government bond yields across the single currency block have risen since the ECB Sintra meeting in late June, and the spread between the 10 year German and US bond now sits 50 bps tighter than in January.
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The Weekly Brief

Investors expecting a wobble in Chinese growth are, so far, still waiting. GDP growth is at 6.9% versus a year ago and there is further data to suggest China is still performing well.
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The Weekly Brief

Investors are becoming increasingly aware of the resilience shown by global growth. Soft data has been broadly picking up and PMIs (Purchasing Managers’ Index) have remained healthy, consistently above 50.
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The Weekly Brief

Emerging market equities have been the darling of investors so far this year
with a return in local currency of 15%. Unfortunately, many investors entered
the year underweight the asset class, and after the recent move upward in
price are wondering if it is best to accept that they missed the opportunity.
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The Weekly Brief

Recent data has shown further signs of an improvement in the eurozone economy. Consumers in the eurozone haven't felt this confident since 2001. The manufacturing sector is also experiencing a rapidly improving outlook with the manufacturing PMI rising sharply in recent months.
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Review of markets over the second quarter 2017

By Michael Bell
A summary of the factors driving global markets over the last quarter.
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The Weekly Brief

The outlook for the UK economy remains foggy as consumers digest the waves of political uncertainty that have become prominent since the Brexit referendum. As this week’s chart shows, real wage growth continues to fall and is now negative.
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China A-shares finally take their place on the world stage

By Ian Hui
As we expected, MSCI has now formally decided to include China A-shares in its benchmark indices following its latest Market Classification Review, marking an important milestone for China’s international markets.
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The Weekly Brief

2017 was supposed to be the year in which politics wrought havoc upon European markets. Thankfully, that has not come to fruition.
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An absolute majority for Macronomics

By Vincent Juvyns
As widely anticipated, Emmanuel Macron’s La Republique en Marche party has won an absolute majority in the French National Assembly after the second round of legislative elections on Sunday 18 June.
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Reactions following the June FOMC meeting

By Dr. David Kelly
In this bulletin, Dr. Kelly reacts to the FOMC's decision, at their latest meeting, to raise the target range for the federal funds rate.
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The Weekly Brief

The case for Japanese equities is gaining further macroeconomic support. The unemployment rate has continued to fall, and is currently at 2.8% - staggeringly low compared to many other economies.
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The Weekly Brief

The eurozone economy is continuing to show signs of improvement. Last week, unemployment fell further to 9.3% and consumer confidence rose to a new postcrisis high.
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Review of markets over May 2017

By Nandini Ramakrishnan
A summary of the factors driving global markets over last month.
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The Weekly Brief

With some of the European political clouds dissipating this summer, a few rays of sunshine have pierced through the fog. Business confidence in Germany, measured by the Ifo business climate index, rose to an all-time high (inception 1991).
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Moody's cuts its China rating

By Tai Hui
On 24 May, Moody’s downgraded China’s sovereign rating to A1 from Aa3 and changed its outlook from negative to stable. This places China’s sovereign rating by Moody’s on par with Japan, Saudi Arabia, Israel and Czech Republic.
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What if May falls in June?

By Michael Bell
The market is currently assuming that the Conservatives will win a large majority and eventually deliver a relatively hard Brexit, but that the election will make it easier for them to agree to a transitional arrangement, prolonging single market access for two or three more years after March 2019.
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The Weekly Brief

Business surveys in Europe, such as the composite purchasing managers’ indices (PMI) are flagging a significant improvement in the business outlook (readings above 50 indicate expansion). It is particularly encouraging that improvement is being seen broadly across the region's major economies.
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Political risk in Europe has fallen

By Michael Bell, Vincent Juvyns, Tilmann Galler
2017 was billed as a year of potential political turmoil for the eurozone. Investors feared that elections in the Netherlands, France and Germany could lead to a victory for an anti-euro party plunging the very future of the eurozone into doubt
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Political uncertainty and market turmoil in Brazil

By Gabriela Santos
After a report was published late Wednesday night implicating interim President Temer in a bribery scandal related to Operation Car Wash, opposition politicians called for his impeachment or resignation, resulting in Brazilian markets opening starkly down on Wednesday.
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The Weekly Brief

The US dollar rally that many had predicted to continue this year has generally taken a pause. Over the past 30 days, the greenback has fallen against the euro and against sterling.
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Rethinking income investing amid rising rates

By Michael Schoenhaut, Talib Sheikh, Leon Goldfeld
This paper, written by Michael  Schoenhaut, Talib Sheikh, Leon Goldfeld and Yuejue Jin, analyzes how an active and flexible approach to income investing, which balances risk with return, can serve investors well amid rising interest rates.
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Macron conquers, but France remains deeply divided

By Vincent Juvyns, Stephanie Flanders
Vincent Juvyns, Global Market Strategist, gives us the latest update on the French Presidential Elections and impact this has on investors.
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The Weekly Brief

During the last European Central Bank (ECB) press conference on 27 April, Draghi noted that while the eurozone growth outlook is improving, “underlying inflation remained subdued.” The next day, the flash CPI estimate showed that service inflation in the eurozone rising by 1.8% year-on-year.
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Review of markets over April 2017

A summary of the factors driving global markets over last month.
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The Weekly Brief

Last week the markets rejoiced following the result of the first round of the French presidential election. Before focus turns to the second round, investors will receive plenty of reminders about how well the Eurozone economy is performing.
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The Weekly Brief

Safe haven assets look to be back in fashion over the last few months. Gold has risen to its highest level since the US Presidential election, while US 10-year Treasury yields have retraced nearly two-thirds of their post-election increase.
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The two-horse race that the polls predicted

By Vincent Juvyns, Stephanie Flanders
The 2017 French presidential election has been the most uncertain in the history of the Fifth Republic. But on this occasion, the opinion polls turned out to be right, with centrist Emmanuel Macron and Front National leader, Marine le Pen, both proceeding to the second round.
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May calls for June election

Theresa May announced her intention to call an early general election for Thursday 8 June. She made it clear that this election would be about her approach to Brexit, saying current divisions within Westminster jeopardise the UK’s negotiating position with the EU, which she wants to strengthen.
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The Weekly Brief

While US equity valuations no longer look particularly inexpensive, historically, valuations have been of little use in identifying market inflection points. Monitoring turns in economic momentum has been far more important for equity investors hoping to protect portfolios against bear markets.
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The Weekly Brief

The political headlines and firming economic data that dominated 1Q 2017 led risk assets to outperform, relative to fixed income, over the course of the quarter. Emerging market (EM) equities, on the back of better economic data and trade prospects for EM countries, significantly outperformed other asset classes, up 10% through the end of March.
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Emerging Market Debt Q2 2017: Reflation takes root

By Pierre-Yves Bareau, Derek Traynor
Given the risks posed by protectionism, we are more cautious on open economies and those more dependent on external funding. Overall, we have shifted our focus from market beta to carry this quarter, coming off of solid first quarter performance, tighter valuations and the little market premium attached to the risks we have identified. We place an emphasis on short-end names and those idiosyncratic stories that we identify as having positive event skew.
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The Weekly Brief

Since the US presidential election soft survey data such as manufacturing PMIs, consumer confidence and business sentiment have surprised dramatically to upside. Overall, soft survey data has been beating expectations by some of largest amounts on record due to renewed optimism in the US economic recovery.
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Inflation's next phase

By Benjamin Mandel, Michael Hood
For investors, the recovery of inflation and inflation risk premia, against the backdrop of anchored inflation expectations, imply a supportive environment for risk assets. Our outlook suggests continued upward pressure on the market pricing of inflation, manifesting in higher bond yields and a widening spread between nominal and inflation-protected bonds.
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The Weekly Brief

This time last year, income investors were becoming increasingly concerned about the low, or even negative yields, that were spreading throughout fixed income markets. Recently, improving growth prospects, rising inflation and tighter monetary policy have driven global bond yields higher.
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The Weekly Brief

As expected, the Federal Reserve (Fed) raised interest rates last week, but some market participants had been expecting an upward revision to their expected path for future rate rises, given the fall in the dollar and bond yields which followed the announcement. The median Fed expectation continues to be for two more rate rises this year and then three next year.
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European politics update: Stopping populism in its tracks?

By Vincent Juvyns
The Centre-right victory in the Netherlands and the rise of Emmanuel Macron in the polls for the French presidential elections both give some reassurance to investors that populist forces are not about to reignite the eurozone crisis, nor derail the recovery under way in European markets.
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The Weekly Brief

Last week, the current S&P 500 bull run celebrated its eighth birthday. Since it closed at a low on March 9, 2009 the S&P 500 has returned 320% on a total return basis.
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The Weekly Brief

Despite the politics dominating investors’ discussion, markets have made a calm start to the year. Year-to-date, the S&P 500 has only had one day where it has closed up or down 1%, the most tranquil start to a year since 1966.
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Review of markets over February 2017

By Nandini Ramakrishnan
A summary of the factors driving global markets over the last month
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The Weekly Brief

The relatively higher valuation of US stocks has many investors looking for opportunities in Europe. Last week the S&P 500 closed at a forward P/E ratio of 17.7x, 11% above its 25-year average.
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The Weekly Brief

US Federal Reserve Chair Janet Yellen’s testimony before the US Congress last week provided markets with a bit more insight into the Fed’s current thinking. More hawkish than before, Chair Yellen acknowledged rising inflationary pressures and strong US labour market.
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The Weekly Brief

Investors are beginning to show signs of fiscal frustration as the new administration has provided very little clarity over any future tax cuts or infrastructure spending. With the US budget deficit at 3.2% of GDP and net debt at 78% of GDP (the highest level since the Second World War), the scope for fiscal stimulus is somewhat limited.
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New challenges for Emerging Markets: Risk or opportunity?

By George Iwanicki
The unexpected election of Donald Trump as U.S. President sparked dramatic change across the global investing landscape - and Emerging Markets were hardly immune.
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The Weekly Brief

While the ECB is expected to remain supportive this year, Mario Draghi and team have reason to be pleased with recent growth figures. Eurozone GDP posted a higher than expected 1.8% year on year growth rate for the fourth quarter of 2016.
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BoE keeps rates on hold and options open

By Nandini Ramakrishnan
The Bank of England (BoE) leaves monetary policy unchanged, increases UK growth for the year and will monitor rising inflation.
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The Weekly Brief

The promise of increased fiscal stimulus was one of the major forces that drove financial market performance in the fourth quarter of 2016. However, in the first month of 2017, hope is beginning to wane. Although the new US administration is only a few days old, rhetoric has initially been focused on trade and healthcare reform and there has been little mention of any incoming fiscal policy stimulus.
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UK GDP: Continued strong growth numbers 

By Alex Dryden
With the economy growing at 2% and inflation hitting a 30-month high in December, the Bank of England is in a tough spot. In normal times, strong economic growth and higher inflation would lead to tighter monetary policy.
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The Weekly Brief

Last week’s UK inflation print reached 1.6% (y/y), the highest rate of price increases since mid-2014. Rebounding inflation is a product of rising oil prices, which rose to nearly 60% in 2016, and the weaker currency, which fell 14% on a trade-weighted basis last year.
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The Weekly Brief

Amidst the headlines from US political speeches last week, one data release made waves from across the globe. China’s producer price index (PPI) rose at the fastest pace in more than five years for the month of December, much stronger than expected at 5.5% y/y compared to consensus of 4.6%, mainly due to a pick-up in mining and materials.
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Weekly Bond Bulletin: An eye on supply

By Nick Gartside, Travis Spence, Marika Dysenchuk
The robust improvement in growth dynamics that began in the US at the end of last year now appears to have taken hold globally—but government bond yields have barely moved. A look at supply helps us understand why this might be the case.
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Entering the reflation era

By Pierre-Yves Bareau
We are entering a new investment paradigm: the era of "lower for longer" and "search for yield" has now been replaced by an era shaped by higher growth, inflation and rates.
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The Weekly Brief

Emerging markets (EM) was one of the surprising asset classes of 2016. Both EM equities and EM debt returned over 10% last year (USD). However, investor sentiment towards EM began to sour in the fourth quarter.
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The Weekly Brief

As 2017 begins, investors reflecting upon a politically tumultuous 2016 should actually be fairly pleased by the returns that global asset markets have delivered. Global equities rose around 10% (with small caps far exceeding that) and global bonds eked out a modest return.
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The Weekly Brief

Central bank policy divergence lives on. Last week, the US Federal Reserve raised its policy rate by 0.25% and indicated more increases could be in store for 2017. Yet in the same week, the Bank of England and Swiss National Bank (SNB) maintained their current levels of low and negative interest rates, and accompanying asset purchases (both) and intervention in currency markets (SNB).
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Weekly Bond Bulletin: Making growth and inflation great again

By Bob Michele, Nick Gartside, Travis Spence
Donald Trump’s US election victory has dramatically altered the outlook for growth and inflation and, ultimately, for global fixed income. Which sectors will feel the pressure—and which stand to benefit?
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2017 Outlook

By Stephanie Flanders
New year, new challenges OR a change in the economic weather: What will 2017 bring for global investors?
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The Weekly Brief

Last month’s OPEC agreement to cut oil production by 1.2m barrels per day sent the Brent crude oil price soaring to over $54 per barrel, its highest value since July 2015. This week’s chart highlights the historic inverse relationship between the value of oil and the US dollar.
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Weekly Bond Bulletin: Searching for the European spark

By Bob Michele, Nick Gartside, Travis Spence
Uncertainty around the Italian referendum and the European Central Bank (ECB) meeting served as a reminder that political and policy uncertainty are holding back eurozone assets.
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The Weekly Brief

The prospect of tax cuts and infrastructure spending in the US have increased expectations of higher US inflation and a slightly faster pace of US Federal Reserve rate rises.
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The Weekly Brief

Investors are continuing to decipher what a Trump presidency means for markets but one of the clear messages is that growth looks to be moving from monetary policy to fiscal policy in Trump's time in office. As this week's chart shows, the changeover has led to a divergence in performance between equities and fixed income.
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Rising inflation: Options to help protect your portfolio

Inflation rates are set to rise across the developed world. Rising inflation raises the bar for investment managers as clients require better returns just to stand still.
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The Weekly Brief

Last week, the UK saw a mix of data points: the Consumer Price Index (CPI) inflation fell to 0.9% year on year, from 1% in September, which was below expectations given the drop in the pound (GBP). While this was a small slowdown in the rate of inflation, we still expect prices to start ramping up as we enter the new year.
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Political headwinds continue to trouble Europe

By Maria Paola Toschi
The impact on Europe of the UK’s vote to leave the European Union (EU) remains unclear, and other landmark events are now looming large on the political horizon. Italy’s major Constitutional referendum, scheduled for 4 December, could have a direct impact on the country’s political future.
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The Weekly Brief

As investors continue to digest the results of the US presidential election, the political focus is now back on Europe towards the end of 2016 and into 2017. As this week’s chart highlights, countries representing 41% of the European Union’s (EU) GDP are due to hold elections in the next 12 months and this number does not include political events such as the start of UK exit negotiations, the Italian referendum in December and Switzerland’s negotiations with the EU.
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A guide to US government

By Nandini Ramakrishnan
As the US headed to the polls on 8 November 2016, markets were expecting a Hillary Clinton (Democrat) victory. Instead, on 9 November, Donald Trump (Republican) was elected to serve as the 45th US President of the United States.
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The Weekly Brief

This Tuesday, the Americans will head to the polls to elect state representatives and the president. While it is difficult to isolate the election’s effect on asset classes, there are two currencies which have been bearing the brunt of investor jitters: the Mexican peso and the Japanese yen.
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Bank of England Inflation Report: A brighter outlook for the UK economy, but post-Brexit policy fog lingers

Reflecting the solid economic data of recent months, the Bank of England (BoE) has raised its short-term forecast for GDP growth and inflation.
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The Weekly Brief

The Bank of Japan (BoJ) is widely considered to be the world’s most adventurous central bank when it comes to exploring the depths of unconventional monetary policy.
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The Weekly Brief

Last week, UK inflation was released as 1% year on year, the highest rate of change in prices since 2014. But prices are likely to continue to rise sharply in the coming months.
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The Weekly Brief

The UK saw big declines in many indicators released in July and August after the referendum. But now, some of the same survey data appears to be turning up. Last week, the UK manufacturing Purchasing Managers’ Index (PMI) for August showed a surprisingly strong gain over the previous month, with the overall index rising from 48.3 to 53.3.
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Are the tides turning for UK equities?

By Alex Dryden
  • A falling pound and a stabilisation in commodity prices are changing the dynamics for UK equity investors. So far this year, only 21% of active fund managers have outperformed the FTSE All-Share Index, compared to 79% in 2015.1
  • Top decile UK fund managers in 2015 had, on average, a 75% allocation to mid and small cap stocks. To put this in perspective, the FTSE All Share has just a 20% weighting to mid and small cap.2
  • Given the potential for a turnaround in large cap stocks, investors should assess whether they are comfortable with taking on such a heavy overweight to mid and small cap stocks.

1 Source: Morningstar, data as of 18 May 2016.
2 Source: Morningstar, data as of 18 May 2016.

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A bullish outlook for high yield

By Peter Aspbury, Michalis Ditsas
  • Supported by strong fundamentals, low default rates and attractive valuations, the European market looks set to continue its recent run and produce significant positive performance by the end of the year.

  • From a fundamental perspective, European high yield is benefiting from improving credit dynamics, very low default rates and rising corporate earnings. The European market also has minimal exposure to the troubled energy and mining sectors, while technical factors are stacked in Europe’s favour thanks to limited supply and strong demand driven by investors’ thirst for yield.

  • Valuations remain attractive, particularly given the strong fundamentals supporting the market. Spreads are cheap compared to history and yields are very attractive compared to government bonds. Europe high yield also looks cheap compared to the US when the European market’s higher credit quality, lower risk free yields and shorter average duration are taken into account.

  • These strong fundamentals and attractive valuations make European high yield one of the brightest spots in the global credit universe. Critically, however, current market conditions underscore the importance of security selection and active management to drive returns from the asset class. The benchmark will never avoid the losers, be it sectors or individual issuers, which is the key to long-term outperformance in high yield credit funds.
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Time to revisit emerging markets

By Pierre-Yves Bareau

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.

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China at the crossroads

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, Emerging Market Debt portfolio managers Ai Ling Ngiam and Derek Traynor 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.

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Weekly Strategy Report

This week's report is authored by a guest contributor, Benjamin Mandel, Executive Director Global Strategist Multi-Asset Solutions.

  • With the Fed's initial rate hike in the rear view mirror, we refocus on the key debates that will shape U.S. monetary policy over the next 12-18 months.
  • The path of inflation is difficult to predict but is not a total wildcard; core inflation is poised to slowly rise. Terminal policy rates have been falling and central bank balance sheet policies are becoming the new norm; both of these complicate the interpretation of yield curve dynamics.
  • From the perspective of a multi-asset investor, we see the initial rate hike, combined with the Fed’s commitment to gradualism, as an important anchor insofar as rising short-term rates will continue for the foreseeable future. In contrast, given the relative murkiness of medium-term factors affecting monetary policy and the long end of the yield curve, we remain leery about taking directional views on duration. We also caution against taking the flattening yield curve as evidence of an imminent end to the business cycle.
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Retailers facing significant competition from internet sales

As written in this week's Thought of the Week, over the past few weeks, questions about the strength of the U.S. consumer have arisen from disappointing department store earnings announcements and an October retail sales number that came in below consensus expectations. Although the outlook for consumer discretionary was weakened by several retailers reporting worse than expected earnings, it is important to recognize, when gauging the current and future strength of the consumer, that the majority of consumer spending has shifted from a typical trip to the mall toward experiences and services.
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Skirting the hard landing

By George Iwanicki

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.

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The Weekly Brief

One page snapshot of market performance and key economic releases for the coming week.
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Surprise! Economic data on the upside

As written in this week's Thought of the Week, Eurozone economic data is surprising positively relative to expectations but US data, having been worse than expected all year, is no longer disappointing. Even Chinese data, which has been consistently missing the mark since April and has been a major cause of the weakness in stock markets since then, is now closer to forecasts.

This is a familiar pattern: after a period of disappointment, economic data often surprise on the upside because expectations are lower. Periods when surprise indices rise together are often good for equities. If US economic releases follow the positive trend in the Eurozone it may only require Chinese data to be less negative for stocks to continue rallying. This shouldn’t be hard given how gloomy everyone is about China and the stimuli that are now supporting the economy.
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A brave new world: the deep de-carbonization of electricity grids

By Michael Cembalest
Previously we analyzed the individual components of the electricity grid: coal, nuclear, natural gas, wind, solar and energy storage. This year, we look at how everything fits together in a stytem dominated by renewable engergy, with a focus on cost and CO2 emissions. The importance of understanding such systems is amplified by President Obama's "Clean Power Plan", a by-product of which will likely be greater use of renewable energy for electricity generation.
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The Weekly Brief

One page snapshot of market performance and key economic releases for the coming week.
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The start of a year end Rudolph Rally

As written in this week's Thought of the Week, October was a good month for equities but most markets outside the US remain some way below their highs for the year. We think that this is probably the start of a year end "Rudolph Rally" and that the opportunity to add to equities hasn’t been missed. The latest Eurozone PMIs have shown no sign of a slowdown in European growth.

The US ISM surveys have rebounded with the non-manufacturing new orders component bouncing back strongly to 62, suggesting US growth remains robust. The IMF forecast that Chinese growth will slow next year but still remain healthy at over 6% and that global growth will actually accelerate to 3.6%. Furthermore the ECB have made clear that they could deliver an early Christmas present in the form of additional stimulus, whilst a Fed rate rise would signal US economic strength.

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The Weekly Brief

One page snapshot of market performance and key economic releases for the coming week.
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Central bank week and unconventional monetary policy

As written in this week's Thought of the Week, last week was central bank week – The US Fed, the Bank of Japan, and the oldest central bank in the world: the Sveriges Riksbank. On Wednesday, Sweden’s central bank left rates unchanged but added more (from SEK 135bn to SEK 200bn) to its quantitative easing (QE) programme. The extra six months of purchases will run from January to June 2016.

While central banks often see their currency depreciate after an easing announcement, the Swedish krona actually rose versus its major peers. Perhaps because policy makers didn’t increase the probability of a rate cut by year-end and inflation in the country is actually starting to come through. Bond markets did react in the expected way: 2-year bond yields in Sweden, France, Finland and Belgium fell during the week. The era of unconventional monetary policy continues.

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The Weekly Brief

One page snapshot of market performance and key economic releases for the coming week.
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Gradual improvement in Eurozone credit demand

As written in this week's Thought of the Week, the latest ECB Bank lending survey highlighted a gradual improvement in Eurozone credit demand despite the rising global headwinds. As we can see in this week's chart taken from page 18 of the Guide to the Markets, total credit demand has declined from last quarter's results but the overall trend is encouraging.

The latest results also highlighted significant improvement in credit demand in Italy and Spain, additional evidence that the periphery is beginning to drive economic momentum in the Eurozone. Overall, we continue to remain constructive on the growth prospects for the region especially, if sustainable drivers of the economy such as credit conditions, continue to pick up speed.

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Investing with composure in volatile markets

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:

  • Market volatility has begun to increase after several years of calm. Investors should stay focused on long-term market fundamentals instead of short-term news.
  • The volatile and asymmetric returns that are experienced on a daily basis are smoothed over during monthly and annual periods. Expanding the investment holding period over years and decades has historically improved the risk/return profile of an investor's portfolio.
  • Diversified, regularly rebalanced portfolios have typically resulted in higher Sharpe ratios than other equity asset classes over 10-, 15- and 20-year horizons.
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Recent Market Events: Regarding the Chinese Renminbi and recent market corrections

By Richard Titherington
Comments from Richard Titherington, CIO Emerging Markets and Asia Pacific Equities, regarding the Chinese Renminbi and recent market corrections.
 
Panic selling can create opportunities for long-term managers with discipline and stock selection expertise to buy stocks that they previously thought were too expensive. Our Emerging Markets Equity team is revisiting their portfolios and looking to add to high conviction ideas whose share prices have corrected to attractive levels.
 
Historical analysis suggests that investors can potentially enjoy significant upside when entering the markets at low Price to Book levels.
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Chinese yuan devalued — Reform not stimulus

By Tai Hui
This bulletin, written by Tai Hui, Chief Market Strategist — Asia, discusses the PBoC’s move to devalue the Chinese currency and how this decision will impact economic growth in region.
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Dr. David's August 2015 Commentary: The wage puzzle (short version)

By Dr. David Kelly

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.

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What if we live in a low-return world? Implications for pension funds

By Michael Cembalest

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.

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The benefits of multi sector credit investing

By Lisa Coleman

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.

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Target Date Fund Flexibility

See how TDFs offer the flexibility critical for today's pension savers. Today's pensions market never stands still, and defined contribution funds need to be flexible enough to keep up.

The pensions landscape is evolving, with new government legislation, changes in the behaviour of plan members and ongoing market uncertainty. The 2014 Budget announcement meant pension savers no longer have to buy an annuity at retirement. This is a radical shift that will have a significant impact on defined contribution pension plans. DC plans need to be able to adapt quickly and efficiently to this dramatic change so that members can benefit from the new opportunities that it creates. Target date funds flexibly adjust their asset allocation over time, ensuring members always have an appropriate mix of assets in their portfolios as they move towards retirement.

Our handy guide and short video show how TDFs deliver this flexibility by adapting quickly and efficiently to plan members' needs, market trends, regulatory change and new investment opportunities.

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Emerging Markets Debt Outlook: Will the horse outrun the snake?

By Pierre-Yves Bareau
Last year was challenging for the emerging market asset class, both debt and equities, as investors priced in a withdrawal of liquidity from the US Federal Reserve. True to its Chinese zodiac interpretation as the year of the snake, 2013 turned out to be a slithery, precarious year for the emerging markets:
  • With tapering concerns likely to remain at the forefront of investor thoughts in
  • 2014, we consider the outlook for emerging market debt investors, analysing the key drivers of performance over the coming year
  • Overall, we retain a cautious bias and believe that a tactical allocation to risk assets will be more appropriate for 2014
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Inflation protection for a variety of market environments

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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The European Banking Union: A three-legged stool

By David Lebovitz, Kerry Craig, Alex Dryden
The impact and depth of the recession due to Europe's sovereign debt crisis would have been mitigated had a banking union been in place; one establishing more stringent supervision and regulation:
  • However, implementation of a banking union is proving challenging, as governments are reluctant to relinquish control over their respective banking systems
  • The current 3-pillar framework is a severely watered down version of the initial proposal.
  • The ECB is due to carry out a quality review of banking assets in the first quarter of 2014, and if the outcome is positive, this review has the potential to restore investor faith in the region’s financial sector
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Building a Global Real Assets Portfolio

By Bernie McNamara
How does one implement the realization—to add private real assets to pension plan allocations? J.P. Morgan's Global Real Assets Omni framework highlights four steps to reliably fund a pension's long-term obligations with consolidated on-boarding, client service, and reporting.

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Japan: Is this a hiccup?

By Dr. David Kelly
In response to today's plunge in the Japanese equity market, Dr. David Kelly looks at the severe decline:
  • The sharp decline in the Japanese stock market today should be seen as a healthy correction because ‘Abenomics’ could be positive
  • The Abe administration's high approval rate should accelerate structural reforms, such as deregulations, free trade agreements, and lower corporate taxes
  • There are two hurdles ahead: 1) Bank of Japan’s open market operations, which have failed in keeping the Japanese government bond yields at a lower level and 2) the decision on whether to go ahead and raise the consumption tax to 8% from the current 5% in April 2014
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Accessing Asia: Investing in the infrastructure imperative

By Pulkit Sharma
Our Global Real Assets expert Pulkit Sharma, with Real Asset Strategist Michael Hudgins, discusses the infrastructure opportunity in Developing Asiaone of the world’s fastest growing regional economies, in this video from September 2014.
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1Q15 Earnings season recap: The value of a dollar

We estimate that 2Q 2015 earnings-per-share (EPS) for S&P 500 companies declined by 6.9% on a year-over-year (y/y) basis. Lower oil prices and the stronger U.S. dollar have dragged down earnings growth since 4Q 2014.

Fortunately, because these factors are transitory in nature, downward
revisions to earnings estimates have stabilized and there are high hopes for EPS to rebound by 4Q and in 2016.

Excluding the energy sector, S&P 500 EPS grew by 4.1%, below historical
trends. This is because the stronger dollar resulted in an average EPS decline of 5% for the most dollar-sensitive companies.

While share buybacks have boosted EPS over this market cycle, they have been of secondary importance at best. The primary drivers of earnings have been sales and margin growth.

We continue to favor U.S. equities despite the recent slowdown in EPS growth. Our base case for 2015 still calls for a single-digit return for the S&P 500, which we believe is attractive for most portfolios in this market environment.
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Are tailwinds the new headwinds for bonds?

By William Eigen
Bill Eigen, CIO of Absolute Return and Opportunistic Fixed Income Investing, explains today's fixed income markets in this video from August 2014.
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Deeper dive on infrastructure investing

By Michael Cembalest
This video from May 2014 takes the infrastructure conversation deeper with Michael Cembalest, and discusses what surprised him about this research and where he sees opportunities going forward.
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Sovereign Client experience

By Patrick Thomson
From May 2014: in this video, Patrick Thomson discusses what sovereign clients can expect from their partnership with JPMAM.
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