Investment Insights: Excerpts from our latest report

Wade Balliet
Posted by Wade Balliet
Investment Strategy

The following are excerpts from the November “Investment Insights” report, produced by the Global Investment Management team. For the full report, click here.

Global economics

Four businesspeople talking in a busy plaza of a major international city.As the global economic growth trends a bit under forecast, inflation continues to be benign and commodity prices remain low. The Global Investment Management (GIM) team believes that a few major themes will play out for investment portfolios over the short term.

Emerging markets, which produce raw materials and inputs for final production, will likely continue to feel the pain from a lack of price inflation and weak global demand. This, coupled with the United States raising rates, may further propel capital out of the asset class. In our strategies, we have rebalanced to be maximum underweight to both emerging market equities and bonds.

Developed markets, which are ultimately the users of commodity products, will likely see the positive effects from a better looking income statement flow through to their consumer and corporate base. Due to this, we have an overweight to developed markets, especially to U.S. and European-focused equities. Larger capitalization equities historically provide less volatility, which would be beneficial if growth falters, while also having an opportunity to appreciate should the global economy continue to grow.

Fixed income

While the Fed somewhat surprised the markets by not raising rates earlier this year, the expectation of a December rate hike currently remains quite high. As stated earlier this year, we expect any action from the Fed to have a greater effect on the short-term part of the yield curve than on the long-term. As such, we have continued to extend duration and increase the credit quality of our portfolios by reducing bank loan debt in favor of Ginnie Mae’s and non-agency mortgage-backed securities.

Until we have a decision following the December 15-16th Fed meeting, interest rates and the bond market are likely to remain volatile, trading off each positive and negative economic data point released.

Equities

The struggles in Europe and emerging market economies create consequences for domestic markets. While typically reported as a negative, the ultimate results are likely positive for the U.S. as low commodity and energy prices translate into improving profit margins.

In our equity strategies we maintain a neutral weight to domestic markets, an underweight to emerging market allocations, and an overweight to developed international markets. For the latter, a healthy currency hedge for a portion of the international exposure could be beneficial until improvements are seen in the commodity markets. It will get bumpy as more data is revealed from Chinese authorities; a diversified global portfolio that includes domestic equities may help investors ride out some of the waves.

Click here to read more of the “Investment Insights” report from November 2015.

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Investing involves risk, including the possible loss of principal and fluctuation in value. Economic and market forecasts reflect subjective judgments and assumptions, and unexpected events may occur. Therefore, there can be no assurance that developments will transpire as forecasted. Nothing in this newsletter should be interpreted to state or imply that past results are an indication of future performance.

Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

International securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.

Diversification and asset allocation does not ensure a profit or guarantee against loss.

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