Investment Insights: Excerpts from our Q1 review

Wade Balliet
Posted by Wade Balliet
Investment Strategy

The following are excerpts from the “Investment Insights” report reviewing the first quarter of 2016, produced by the Global Investment Management team. For the full report, click here.

Asset allocation: Does the emperor have new clothes?

Young man in corporate setting, reviewing paperwork about his portfolio, with sunlight streaming in from a window near his right shoulder.The rhetoric from central banks is continuing to be a major focal point for investors, and any misstep or confirmation of policy impacts markets across the globe. The market has largely traded upward when central banks leave policy open-ended and, conversely, balks when tightening is merely whispered. The trouble is we believe that the Fed is starting to become ignored in certain instances and the message (clothing) of old is beginning to lose its meaning.

A real life example is the Fed Governors’ rate dot plot. The Federal Reserve publishes the plot giving the public an inside look at where each governor thinks rates will be in the next few years. Unfortunately, the market isn’t buying it. Just looking at the most dovish of expectations, one can see that the market is severely discounting the Fed’s ability to raise rates. This creates a bit of an issue – a market that was overly reliant on an easy Fed policy has almost come to expect it and truly doesn’t believe that the central bank has any room to raise rates. Ultimately this disbelief, or the market crying, “The Fed has no clothes,” will create a shock to the markets. Expectations need to align with the Fed predictions.

Fixed income: Fed steps back as foreign markets fluctuate

The fixed-income markets were off to a great start in the first quarter of 2016. Investors saw interest rates fall across the maturity spectrum following a December “lift-off,” where the Federal Reserve began their much anticipated rate hikes. This move, combined with a narrowing of credit spreads in investment grade bonds, lead to returns of over 2% for most fixed-income sectors. The Barclays U.S. Universal Bond Index gained 3.07% for the quarter. In contrast to calendar year returns in 2015 of just above zero, this is a welcome surprise for bond investors.

Equity management: GDP growth & stock markets diverge in emerging markets

Typically a country’s GDP growth and stock market are fairly intertwined and experience the same ups and downs; this was not the case in the first quarter. 2016 was off to a rocky start as equities around the world began a rapid decline at the start of the new year with only a few select markets showing signs of recovery by mid-February. At the end of the three-month period, the MSCI All Country World Index ended up just 39 basis points as foreign developed markets continued to drag on performance. Those equity markets that were able to recuperate after January losses were the “plow horse” U.S. market and, more surprisingly, emerging markets.

A false dawn or real recovery in commodities?

Commodities may be on the mend after a two-year slide in oil and mixed returns in agriculture and metals. The Bloomberg Commodity Index scraped by with a positive return in the first quarter of 2016, returning 34 basis points despite varied returns in the underlying commodities. Janet Yellen’s words on delaying interest rate hikes and a new set of data-dependent criteria for rate movements boosted optimism that interest rates will stay lower for longer; the MSCI World Real Estate Index rallied 5.07% in the first three months of the year. Despite some good news on the economic front, hedge funds, specifically those focusing on fund of funds and equity, declined during the period even as other strategies appreciated. The HFRX Global Hedge Fund Index dropped 1.87% in the first quarter with a notable positive return for commodity hedge funds.

Click here to read the full “Investment Insights” report.

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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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