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The following are excerpts from our February “Investment Insights” report, produced by the Global Investment Management team. For the full report, click here.Market strategy: All aboard!
February was a banner month for equity asset classes — as well as some fixed income and alternative assets — despite controversial political headlines continuing to pepper media outlets across the globe. As populism has grown, so has the coverage focused on elections and possible political shifts, which could produce shocks across financial markets and economies.
Each investor now has to consider not only fundamental economic data, but also must pay close attention to geopolitics in order to protect capital and position portfolios for higher returns. Euro area skepticism has percolated through markets after the Brexit vote as well as the Trump victory and will continue to be a topic to contend with as these elections occur and a potential shift from globalism arises.Equities: Stock market politics
We attribute the vast majority of the climb in U.S. stocks over the past several months to the new administration’s proposed policy changes. However, these policies remain just that — proposed. Markets have priced in promises of deregulation, tax reform, and fiscal stimulus, but will likely reassess these valuations as legislative obstacles and party opposition are revealed during the process. While the U.S. policy agenda has been a key factor to the upward trend in markets, we also believe these policies are a one of the key risks to the market. If there is a sizable disappointment in the signed legislation, particularly with infrastructure and fiscal spending, we could see some volatility along with a general repricing in the markets.
Internationally, things are looking brighter. Economic data out of the Eurozone has been on more solid footing and, as we have said previously, there seems to be a synchronization in the global recovery. Specifically looking at stocks, valuations in Europe and certain international regions appear slightly more attractive when compared to the elevated U.S. levels. We see an even more appealing bargain opportunity within emerging markets, but the risks to those developing economies seem to be higher. While the Brexit, European financial stability, and political risks persist, emerging markets seem to have much more assured risks working against them. A rising U.S. dollar, monetary policies of developed markets, the effect of increased protectionism on trade, and economic restructuring are just a few of the current risks for emerging economies.Fixed income: Credit drives the bond market bus
Despite a growing case for rising long term rates, February turned out to be a respectable month for bond markets as the Barclays U.S. Universal Index gained 77 basis points, credit-related debt performed well, and longer-term rates were mostly unchanged. The yield of the 10-year Treasury bounced throughout the month before resting just 6 basis points lower and ending the month at 2.39%. The markets stayed in wait-and-see mode for most of February as investors digested what sort of policy changes could occur over the near-term. For bond holders, the improving economy and the increasingly boisterous Federal Reserve were the key events for the month.
Click here to read more of the “Investment Insights” report from February 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.
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