Investment Insights: Excerpts from our August report

Wade Balliet
Posted by Wade Balliet
Investment Strategy

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

Market strategy: Volatility revival

Wide shot of plaza in North Korea dominated by two huge statues for former leaders, with nearby soldiers dwarfed on the ground.Most major indices and markets finished slightly in the green for the month of August after faltering in the first half. Financial markets seemed confused, caught in the middle of a myriad of positive news which was overshadowed by negative events throughout the world.

For the first time all year the Barclays U.S. Universal Bond Index beat global equity markets, as represented by the MSCI All Country World Index. This could be a sign that the queasiness of a roiling investment and geopolitical market may be catching up to seafarers and that lower-risk assets, such as bonds, might be the haven of choice for market participants.

On a positive note, most of the second quarter’s earnings had closed and showed solid growth for U.S., Japan, and Eurozone companies; however, geopolitical risks continued to spark headlines – most notably from the Korean Peninsula. After the North Korean regime had threatened the U.S. with a missile strike, the VIX Index, which is considered a barometer for volatility, dropped only slightly and stayed stagnant in the mid 9 to 10 range. This was a head-shaker for many. If the threat of a nuclear strike couldn’t shake the fortitude of the market, then what could? Enter hurricane season. Storms that seemed to punctuate the end of August finally pushed the VIX up above 14 and even into the 15 range before coming back down to 10.59 by the end of the month as uncertainty settled in once again.

Equities: The Donald versus…

The lag in European equities can mostly be attributed to the appreciating euro versus other major currencies. As earnings have risen, GDP has firmed and unemployment has shown positive trends. The local currency has also moved higher, appreciating more than 10% versus the U.S. dollar, which may end up putting a damper on exports, but may also slow the upcoming tightening by the ECB. The earnings trend that the Eurozone experienced in the first half of the year ultimately could falter if the euro doesn’t decline back to beneficial levels – a trend we are keeping a keen eye on due to our overweight in the region.

After a solid 2016, emerging and frontier markets have taken 2017 by storm, up over 28% and 22%, respectively, according to MSCI data, mostly due to beneficial earnings revisions stemming from global trade partner economies seeing rebounds. However, these economies may face longer term struggles like rising interest rates, appreciating currencies in developed countries, poor debt levels, lack of investment in productivity, and lackluster corporate governance, which could have a significant influence on their financial markets.

Fixed income: Yellen the soothsayer

The Global Investment Management team continues to believe the Fed’s unwinding will likely shift yields higher across the curve. In addition, it is possible that other central banks will initiate further tightening policy in tandem with the Fed, like the ECB announcing an unwinding of its own stimulus program, or the Bank of England raising its key rate. Our strategies remain underweight duration, which means they will be less sensitive to these rate increases; however, we are monitoring valuations in the shorter part of the yield curve. We are evaluating opportunities in the market and may make additional allocation shifts to spread products.

Click here to read more of the “Investment Insights” report from August 2017.
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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