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Market Recap with Jiazi

Economic Update

Growth: The 2016 forecast for global growth remains in the 2.0%-2.5% range. The U.S. is expected to experience above-trend economic growth in the 1.75%-2.25% range[1].

U.S. employment: Nonfarm payroll rose 255,000 in July 2016. Significant job gains occurred in professional and business services, healthcare, financial activities, leisure and hospitality, and government sectors. June and May data were revised upwards. The unemployment rate remained at 4.9%. Average hourly earnings growth in July 2016 was up to 2.64% year over year[2].

Japan stimulus: Japanese Prime Minister Shinzo Abe loosened fiscal policy and approved a ¥28 trillion, or $274 billion, stimulus package on July 26, 2016. Monetary policy alone would not be able to revive Japan’s economy; Abe also postponed planned sales-tax increase for two and half years. The stimulus package has been Japan’s biggest since the global financial crisis; however, over 70 percent of the stated value comprises targeted low-interest loans from government and state-owned companies, and new and direct spending will total only about ¥7.5 trillion.

UK deterioration: U.K. Mfg PMI dropped to 48.2 in July 2016 from 52.4 in June[3], which was the lowest level since February 2013. U.K. Services PMI fell to 47.4 in July from 52.3 in June; this is very concerning as services comprise a significant portion of the U.K.’s economic activity. The impact remains intact to Euro area; Euro area PMIs are still expanding.

Gold and silver: After consolidating much for June 2016, gold and silver responded convincingly following Federal Open Market Committee (FOMC)’s statement on July 27, 2016.


Leverage: Living on Borrowed Time

The elevated global debt levels remain a persistent concern. Developed market debt levels have increased significantly over the last several decades as 30 years of falling interest rates have made it more sensible and less costly to incur debt. While the debt has grown, the cost to service each unit of the debt has fallen substantially. There are other drivers of increasing debt levels such as general optimism about future growth prospects and encouragement from the rapid technological innovations that were emerging.

The issue is more nuanced for emerging market, of which the financial systems are less mature, the banking system and bond markets are less developed, and access to credit has historically been limited and informal. As these economies reach mature, debt should increase. However, debt levels have recently been growing too quickly, as the global search for yield and the boom and bust of the commodity cycle encourage debt issuance in emerging market.


The Rise in LIBOR

The long-anticipated money market reform leads to increase in the London Interbank Offered Rate (LIBOR). Normally, rise in LIBOR is associated with Federal Reserve (Fed) policy rates and expectations or concerns over bank credit quality. On the asset side, bank loans represent the most broadly held asset with exposure to LIBOR. Most increases in LIBOR to date would have no impact on loan yields, given the LBOR floors found across loan marketplace today. Once LIBOR go above the floor levels, loan investors can anticipate increases in coupon income, though small, from these increases in LIBOR and Fed policy actions.

Investment Implications

High government debt levels are likely to remain a drag on growth. Lower global growth and anchored rates will persist, which will have an impact on asset class returns. The solution for investors is not to wait in cash for a debt collapse. Investors should think about ways that still allow them to meet their investment goals proactively, such as searching for yield in flexible ways, being nimble in asset allocation to avoid pitfalls, and taking advantage of tax-efficient investment strategies in light of the fact that taxes may rise.


[1] PIMCO Forecast

[2] Bureau of Labor Statistics

[3] CIPS/Markit


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