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Investment Insights: Excerpts from our Q2 report

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: No take backs

London plaza outside Thomson Reuters building with scrolling stock ticker and people walking in front.As the U.S. celebrated 4th of July weekend, the Bank of England (BOE) began its endeavor to curb woes over its financial future after the Brexit. Governor of the U.K.’s central bank, Mark Carney, acknowledged, “There is the prospect of a material slowing of the economy.” It follows that the risk of a recession in the U.K. has grown alongside other hazards emanating from the ongoing Brexit turmoil.

Unsurprisingly, the BOE has taken its first action to assuage investors by increasing liquidity via lowering the countercyclical capital buffer, a capital requirement for the U.K.’s financial institutions, from 0.5 percent to 0 percent. The move is expected to free up lending capacity by almost 150 billion pounds, according to Bloomberg. Other measures will also be considered, including cutting the BOE’s key interest rate and boosting its quantitative easing program.

Bond strategy update: Brexit, Brexit, Brexit

With the shock of the Brexit continuing to ripple through markets and raising questions over growth forecasts, monetary policymakers will likely be extremely cautious with any moves and may remain in easing mode even longer — even as the employment picture becomes more robust. Additionally, the diminishing payoff of monetary stimulus may push some governments to increase fiscal stimulus, possibly through government spending projects, in the hope of spurring growth.

We expect interest rates to remain lower for longer in the current environment, but continue to expect modest positive growth. Based on the near-term uncertainties, we advocate for higher quality credits as well as increased weightings to sectors like governments, mortgages, and investment grade corporates. The outlook for bonds over the next few years is anything but certain; however, crucial factors for the fixed income markets will revolve around economic growth and monetary or even fiscal policy.

Commodities shrug off the Brexit

The second quarter turned out to be a strong period for alternatives as commodities rallied on production cuts, while real estate and hedge funds rose modestly. The Bloomberg Commodity Index gained 12.71 percent in the second quarter of 2016 on improving growth prospects and inflation expectations. Real estate fluctuated between positive and negative performance throughout the quarter before climbing in the final week, ending the period up 3.83 percent according to the MSCI World Real Estate Index. Hedge funds were similarly conflicted during the three-month period, but also gained in the last few days ending up 1.07 percent per the HFRX Global Hedge Fund Index. Even as broader commodities gained, one turned out to be the real star of the show.

The U.K.’s vote to exit the European Union roiled markets, but commodities were barely phased. Soy meal led a broad group of commodities that rallied during the quarter. Soybean meal, which is used most often as an ingredient in animal feed, gained due to flooded fields in South America and dry weather in the U.S., which reduced overall production. Of the 22 different commodities included in the Bloomberg Commodity Index, 11 of the constituents advanced over 10 percent during the quarter while only 4 declined. For the most part, commodities have increased in value as growth expectations improve and as supply and demand seek to balance regionally.

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