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Market Recap

Macro Update

On U.S.  

U.S. real GDP increased at an annual rate of 2.9%[1] in the third quarter of 2016, as compared to the 1.4%[2] increase rate in the second quarter. The latest U.S. inflation rate is 1.5%[3] through the 12 months ended September 2016, as published on October 18, 2016; the rate could give the Fed confidence that inflation is to reach the bank’s 2% target. Real disposable personal income increased 2.2%[4] in the third quarter, as compared to an increase of 2.1%[5] in the second quarter. Despite a slowdown in consumer spending, the U.S. economy is growing at a faster-than-expected pace, largely supported by the surge in exports and the rebound in inventory investment.

The S&P 500 Index declined -1.94% in October of 2016; it has been in a holding pattern since June. As of Oct 28, 2016, among the 58% of the companies in the S&P 500 reporting earnings for the third quarter 2016, 74%[6] of S&P 500 companies have reported earnings above the mean estimate and 58%[7] of S&P 500 companies have reported sales above the mean estimate. For the third quarter 2016, the blended earnings growth rate for the S&P 500 is 1.6%[8]; if the index reports growth in earnings for the quarter, it will mark the first time the index has seen growth year over year in earnings since the first quarter of 2015, which was up 0.5%[9].

American flag

Monetary and fiscal policy should support economic expansion, but political uncertainty may dampen capital expenditure (capex). The forward 12-month P/E ratio for the S&P 500 is 16.4[10], which is above the 5-year average (14.9)[11] and the 10-year average (14.3)[12]. Valuations remain elevated, while forward-looking guidance on margins and profitability remains weak, which is putting downward pressure on investment spending.

U.S. Companies Profit Margins

As of September 30, 2016

us-companies-profit-margins

Historical analysis suggests that markets tend to favor incumbent candidates in the months leading up to presidential elections, likely because they represent less uncertainty to investors. Political uncertainty in the U.S. gives companies more reason to hold off on investment.

On Eurozone

The eurozone economy showed renewed signs of life at the start of the fourth quarter, enjoying its strongest expansion so far this year. The Markit Flash Eurozone PMI rose to 53.7[13] in October 2016 from 52.6[14] in September, signalling the fastest monthly increase in business activity since December of 2015. The PMI is consistent with its GDP growth rate, which was up 0.4% in the third quarter.

Policymakers will be encouraged by signs of both stronger economic growth and rising price pressures. While much of the rise in prices in October could be traced to higher oil and energy prices during the month, the increased incidence of supply chain delays suggest that pricing power is being re-established. If this continues, the shift from a buyers’ to a sellers’ market should in theory push core inflation higher – a welcome development for which scant signs have been evident in recent years.

eurozone_1

The October survey saw an especially encouraging recovery in German growth, with the PMI pointing to a 0.5%[15] pace of expansion and the rate of employment growth climbing to a five-year peak. German PMI, Ifo Business Climate Index, and Gfk Consumer Confidence are consistent with the ZEW data released earlier this month which has been saying Germany is poised for a “Golden Autumn”.

Modest growth of 0.2-0.3% is being signalled for France, but there are various indicators which suggest that France will enjoy stronger growth in coming months, including a marked build-up of uncompleted work and a resurgent export growth, both of which rose at the fastest rates for over five years.

On U.K.

U.K. real GDP slowed to 0.5% in the third quarter of 2016 rom 0.7% in the second quarter. New UK Prime Minister Theresa May announced that Britain would begin the process of leaving the EU by the end of March 2017, which removed some of the uncertainty about how the country would extricate itself from the EU but had also heightened concerns about the potential ramifications of a hard Brexit. The continuing market uncertainty, however, will provide opportunities for patient long-term investors.

picture-of-united-kingdom

[1] Bureau of Economic Analysis

[2] Bureau of Economic Analysis

[3] Bureau of Labor Statistics

[4] Bureau of Economic Analysis

[5] Bureau of Economic Analysis

[6] FactSet Earnings Insight by FactSet Research Systems Inc., October 28, 2016

[7] FactSet Earnings Insight by FactSet Research Systems Inc., October 28, 2016

[8] FactSet Earnings Insight by FactSet Research Systems Inc., October 28, 2016

[9] FactSet Earnings Insight by FactSet Research Systems Inc., October 28, 2016

[10] Bloomberg

[11] Bloomberg

[12] Bloomberg

[13] IHS Markit

[14] IHS Markit

[15] HIS Markit

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Market Recap

Macro Update

World GDP is likely to grow 2.5%-3.0% in 2017[1]. Developed markets is expected to continue with its 1.5% pace, while the growth and policy dynamics within the developed markets should diverge substantially. In emerging markets, GDP growth is likely to pick up slightly from 4.5% this year to between 4.75%-5.25% in 2017[2]; as commodity prices and the U.S. stabilize, external conditions for many emerging markets economies have improved.

On U.S.

The overall U.S. economy presents positive growth surprise, in part due to the inventory correction and a revival of business investment amid ongoing robust consumer spending. The U.S. is expected to return its 2%-2.5% growth in 2017. While daily moves between U.S. equities and bonds have become usually correlated recently, suggesting near-term diversification challenges.

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On Eurozone

The growth momentum in the Eurozone is likely to remain broadly in a 1%-1.5% range in 2017. Inflation is not expected to make much progress, markets are expecting a further round of monetary easing this December. Germany’s Leading Economic Index (LEI) continues to move sideways, showing its resilience to the Brexit vote, while the LEIs for the Eurozone, France and Italy turned downward into negative growth territory. That said, the stronger-developed economies pre-Brexit will continue to do better in the near term than the weaker-developed economies.

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On U.K.

A number of indicators of near-term economic activities have been somewhat stronger than expected. Overall these data remains consistent with the MPC’s judgement in the August Inflation Report that business spending would slow more sharply than consumer spending in response to the uncertainty association with the U.K.’s vote to leave the European Union. At its meeting ended on September 14, 2016, the MPC members judged it appropriate to leave the stance of monetary policy unchanged.”[3]

The U.K. is expected to slow down its growth into a broad 0%-1% range in 2017 as the uncertainties associated with the Brexit have worsened investment spending. Consumers are becoming extraordinary cautious.

On Asia

Attributed by its significant fiscal stimulus, Japan is expected to generate a growth of 0.5%-1.0% in 2017. With fiscal policy turning expansionary, the chances for monetary policy to find more traction have improved as well, particularly as the Bank of Japan just recalibrated its easing program with a view to minimize the negative side effects on the financial sector. On the China side, ongoing rebalancing from investment to consumption leads to a further gradual slowdown in growth.

money-1258598_960_720

Bank of Japan’s “QQE with Yield Curve Control”

Despite not exactly what the Bank of Japan (BoJ) was aiming for, the yen strengthened in the wake of the announcement. The changes include:

  • Guide 10-year JGB rate to 0%
  • Purchase JGBs with yields designated by BoJ
  • Loan funds up to 10 years
  • Purchase 6 trillion yen of ETFs per year
  • Purchase 90 billion yen of J-REIT’s per year
  • Extend monetary base until CPI ex. Fresh food year over year exceeds 2% and stabilizes

[1] Source: PIMCO September 2016 Cyclical Outlook

[2] Source: PIMCO September 2016 Cyclical Outlook

[3] Source: Bank of England, September 15, 2016

 

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Market Recap

 Macro Update

On U.S.

The U.S. job market added 151,000 jobs in August 2016. The largest gains came from several private service-providing industries, including information, financial activities, real estate rental and leasing, professional and business services, education and healthcare services, while the goods-producing industry shed 24,000 jobs. Employment Cost Index data was recently revised; compensation increased 2.3% quarter over quarter in the second quarter. Hourly earnings rose 2.5% year over year in August 2016.

Economic activity in the manufacturing sector contracted in August following five consecutive months of expansion. The Institute for Supply Management (ISM)’s Manufacturing PMI decreased 3.2 percentage points to 49.4 percent in August, as compared with 52.6 percent in July. All the sub-indexes contributed to the overall decline, except new export orders, which held steady at 52.5.

Inflation data released in the last week of August from Europe and U.S. indicates inflation barely budged month over month due to the continuous suppressing impact of oil. Inflation continues to run well below each central bank’s target and therefore, increasingly challenging for the Fed and European Central Bank (ECB) to achieve their respective mandates.

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On U.K.

In fact, the U.K. data held up relatively well over the month and better than market participants had expected. The GfK survey and Markit U.K. Manufacturing PMI both rebounded in August. The GfK rose to -7 in August from -12 in July. The seasonally adjusted Markit U.K. Manufacturing PMI rebounded back into expansionary territory, recovered sharply from the 41-month low of 48.3 in July to 53.3 in August. In July the volume of retail sales gained 1.4% month over month and 5.4% year over year. Largely driven by base effects in food, fuel and alcohol, inflation rose 0.6% year over year. On a trade-weighted basis, sterling remained quite stable over August, buoyed by the better-than-expected data.

On Oil

Oil prices rebounded in August, with West Texas Intermediate (WTI) rising by 12% in USD terms over the month. Among the casual factors, speculation on a coordinated oil-freeze gained traction, short positions were covered, and earlier supply disruptions were resolved. Available indicators point toward reasonable demand for oil over the medium term, while supply remains hampered by low capital expenditure.

European Stocks May Be Cheap, But Cheap for a Reason

Forward Price to Earnings Ratio

forward-pe-ratio

Italy’s second quarter 2016 GDP was released at 0.7% year on year and its stock market, as measured by the major stock index, down 23.9% year to date, It continues to be the weakest among the developed countries. The policies of Western democracies have become a broken play in which both politicians and investors would be unwise to plant their feet. Some may remember that Silvio Berlusconi proved victorious in three separate runs for the role of Prime Minister. The U.K.’s decision to leave the European Union may simply be the beginning. Populism appears likely to remain both a political and investment theme. European stocks may be cheap, but cheap for a reason.

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Market Recap

Macro Update

On U.S.

U.S. GDP growth was a bit more sluggish than expected in the second quarter as businesses aggressively ran down stocks of unsold goods, which offsets a spurt in consumer spending. U.S. consumption and employment situation remain strong. U.S. stocks continue to gain, fueled in part by the Federal Reserve staying put and concerns about the rest of the world. Further gains require significant improvement in earnings, but earnings do not justify the valuations. Investors should continue to exploit opportunities in dividend growers and quality stocks.

On Eurozone

Growth in the eurozone manufacturing sector lost momentum in August. The Markit Eurozone Manufacturing PMI final data came in at 51.7 in August 2016 from 52 in July, a three-month low. New orders inflows rose to the weakest extent in one-and-a-half years, companies posted slower increases in new business from domestic and export sources, production expanded slower, resulting in weak job creation.The European Central Bank stimulus is supportive, but post-Brexit uncertainty challenges already poor profits. Investors should be cautious on European banks.

On U.K.

A weak pound helps U.K. exporters. Investors should remain cautious on U.K. domestic stocks. At its August 4 meeting, the Monetary Policy Committee (MPC) of the Bank of England (BOE) sparked considerable excitement when it announced a program of monetary easing via a wide variety of measures. The sharp market moves that followed indicate that the consensus did not expect the MPC to deploy such a wide array of policy options. The BOE also forecasts the U.K. economy slowing to marginally positive growth rates and inflation rising to slightly above the 2% target.

On Japan

The government’s decision to make a significant investment has been made in light of Cool Japan Fund Inc. being established in 2013, and the hosting of 2020 Tokyo Olympic and Paralympic Games, and now may be the appropriate time to reconsider the public perception of Cool Japan. The Bank of Japan is nearing the limits of monetary policy and structural reforms are needed. Attractive valuations and better corporate governance are not enough to offset a soft economy and rising yen.

On China

PBOC started supplementing those 7-day repos with pricier 14-day repos, a move that decreases the amount of cheap, short-term credit available in the financial system and guides demand toward longer-term borrowing. Financial sector reform and rising current account surpluses are encouraging. China’s economic transition is ongoing, but the lower growth rates are priced in.

“China is on the verge of changing from an economy where prices keep dropping to one in which deflation is expected to dwindle to almost nothing. That is a dramatic departure from the past 50 months, when deflation dragged down not only prices in China but in most of the world, thanks to exports of ever cheaper manufactured goods, as well as falling commodity prices.”[1]

On Real Assets

Commodity markets are oversupplied. Oil fundamentals have improved but much of this is priced in. The strongest performing major asset class so far this year is gold, partially because 2016 has been marked by political turmoil, causing investors to seek safe-haven assets, and the delay of further interest rate hikes by the Fed. While inflation is expected to remain low for now, investing in natural resources has historically provided an effective hedge against inflation and deflation.

The Monetary Policy Committee’s Actions

The BOE’s MPC sets monetary policy to meet the 2% inflation target, and in a way that helps to sustain growth and employment. At its meeting ended August 3, 2016, the MPC voted for a package of measures designed to provide additional support to growth and to achieve a sustainable return of inflation to the target. This package comprises:

  • Cut the policy rate by 25 basis points to 0.25%, and indicate that the MPC expects to ease further towards but remain above zero, at which point the MPC will cease further interest rate reductions.
  • Restart the quantitative easing program by buying 60 billion pounds of nominal UK sovereign bonds over a six-month period, which equates to 120%[2] of gross nominal issuance.
  • Restart term financing for UK banks via a four-year Term Funding Scheme with interest rates close to the policy rate.
  • Initiate a corporate bond buying program by purchasing 10 billion pounds in sterling-denominated corporate bonds in the secondary market, out of an eligible universe of 150 billion pounds[3].

The Dynamics of Investment Spending

To analyze the dynamics of investment spending is critical in understanding economic growth and expected investment returns. Inefficient capital spending typically leads to weaker returns in certain markets, while capital discipline helps establish a foundation for profitability improvement. The recent softness in U.S. productivity suggests that the weakness in investment spending could be to blame:

  1. It may be difficult to measure productivity from a capital base increasingly skewed toward intellectual property, and the productive outcomes from R&D could potentially take longer to come to fruition, temporarily depressing productivity.
  2. The slow growth of capex elements has led to an aging capital stock, which may negatively affect productivity.
  3. Sluggish rates of investment in equipment and structures could point to a lack of capital per unit of labor, further weakening productivity.

Investment Implications

Lower rates and a flatter yield curve certainly put pressure on banks’ profitability; however, the other policy measures, such as term financing operations and easing of capital requirements, were designed to cushion the potential reductions in profitability. The underlying commercial banking business of the UK banks are still highly profitable, and as such the new monetary policy measures should not seriously hamper the functioning of the banking system.

Natural resource equity performance historically has run somewhat counter to overall equity performance, so the sector can be a hedge against secular weak performance in overall global equities. Investing in natural resources has also provided an effective hedge against inflation and deflation. It makes sense to keep some allocation to natural resources for their diversification benefits. Gold continues to be a portfolio diversifier. , which is particularly important as we see volatility remaining high. Commodities in general have had a negative correlation with the dollar, providing currency diversification as well.

[1] Source: Financial Times, August, 15, 2016

[2] PIMCO calculations

[3] Source: Bank of England

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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.

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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-ultimate-example-of-Leverage

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.

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[1] PIMCO Forecast

[2] Bureau of Labor Statistics

[3] CIPS/Markit

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Uncertainties Present Opportunities for Long-Term Investors

Macro Update

On U.S. The solid employment growth continues to support consumer spending. Inflation pressures are rising. On the other hand, the weakness in commodities has led U.S. energy and mining firms to cut back investment in plant and equipment spending.

On Europe. Although the Brexit has complicated the outlook on Europe, its growth is benefiting from monetary stimulus and low commodity prices. Additionally, relative to its recent history, the growth in domestic demand in Europe appears buoyant.

On China. As the recent fiscal stimulus fades and the country turns to deleveraging, and the Chinese growth in recent months is largely the result of a more expansionary fiscal stance and an unsustainable acceleration in the pace of credit expansion, the problems for China are likely to return to the forefront.

On Brazil. The ongoing corruption investigation involving Petrobras presents a challenge. Additionally, Brazil’s fiscal deficit reached more than 10% of GDP as of the end of 2015, and gross debt stood at 74% of GDP[1]; however, the country is benefiting from stabilizing commodity prices, and the new government aims to achieve significant steps toward structural reforms, particularly the adoption of budget reforms.

Third Quarter 2016 Will Depend on Stabilization

How the financial and economic environment will develop in the third quarter of 2016 will depend heavily on several factors:

  • The Brexit settlement. Markets are expecting a settlement on the relationship between the U.K. and the European Union (EU) and on the future of the EU itself. Uncertainty will weigh on investor sentiment and economic activities.
  • Energy price stability. Oil prices rebounded to $45 a barrel as of early July[2]. A sharp reversal of the recovery could trigger financial volatility, and further large gains would be negative for global consumers. Oil prices in the range of $40-$60 would support equities.
  • Global economic growth. Despite the uncertainties associated with the Brexit, the U.S. economic expansion appears intact, although still subdued. U.S. monetary policy should remain supportive, and domestic consumption is in good shape. On the other hand, the presidential election may negatively impact investor sentiment. In China, growth continues to muddle down, but the reduced pressure on the U.S. Federal Reserve to raise rates should support China’s renminbi.

Looking to Capitalize on Volatility

In this prolonged low-yield environment, investors should identify countries where yields are relatively high and may have potential to decline due to disinflation and subdued growth.

Sharp Turnaround in Risk Appetite across Credit Markets in Early 2016

As of June 30, 2016

Sharp Turnaround in Risk Appetite across Credit Markets in Early 2016

Source: Barclays, J.P. Morgan

Among higher-yielding markets, decelerating inflation in Indonesia affords its central bank flexibility to further ease policy to stimulate growth. Brazilian bonds, which offers double-digit yield at the front of the curve, could generate price gains, assuming an effective structural reform that allows for less restrictive monetary policy.

Investment Implications

Investors should be prepared for additional bouts of volatility. The uncertainties, however, associated with these factors present risks, but also opportunities, for long-term investors.

  • With yields low across major sovereign markets, investors should look for countries with healthier yields and the potential for rate cuts while being careful with currency exposures. If cost is reasonable, investors can employ exchange rate hedges to protect against the currency depreciation, which often accompanies rate cuts.
  • Selectivity and caution will be critical for navigating in such environment, as investors will need to distinguish between the short-term price effects of market volatility and underlying fundamental values.
  • Markets are expecting the Fed to take advantage of below-target inflation and proceed with unprecedented caution, taking time to assess the impact of each step in the process of normalizing the stance of monetary policy.

[1] International Monetary Fund (IMF)

[2] Bloomberg

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Market Weekly Recap

Economic Update

Growth. Largely driven by less weakness in net exports and nonresidential fixed income, growth is expanding. Sub-trend growth and inflation are what markets will be pricing in over the next three to six months.

Jobs. Total nonfarm payroll employment increased by 287,000 in June[1], after changing little in May (+11,000), massively topping analyst expectations, and the participation rate rose to 62.7%[2]. Job growth occurred in leisure and hospitality, health care and social assistance, financial activities, as well as information. While the unemployment rate rose to 4.9 percent[3].

Profits. Most U.S. companies continued to struggle with low oil price and a strong dollar.

Inflation. The latest inflation rate for the U.S. is 1.0%[4] through the 12 months ended May 2016, which firmed further. Headline and core prices both increased 0.2% on the month.

Rates. The Federal Reserve kept policy on hold at its June 2016 meeting, leaving the Federal funds rate target range of 0.25%-0.50%. The Fed also lowered its long-term expectations for the Federal funds rate, leading market expectations for the rate hikes even lower; the market currently only expects one further rate hike this year.

Manufacturing ISM. Economic activity in the manufacturing sector expanded in June for the fourth consecutive month. The June PMI registered 53.2 percent, an increase of 1.9 percentage points from the May reading of 51.3 percent[5].

At the same time, leverage is rising. In the developed markets, it is government debt; in the emerging markets, it is corporate debt. The increased leverage, when combined with weak nominal growth, may result in a headwind, as debt affordability will eventually reach the breaking point. Additionally, U.S. durable goods orders are improving while inventory growth is not keeping up and consumers’ spending on services are weaker than expected.

Significant Currency Moves Occurred

China’s Yuan Hits Fresh 5-1/2-Year Low on Weaker PBOC Fixing, Dollar Strength

China’s yuan hit a fresh 5-1/2-year low against the dollar in early trading on July 6, 2016, after the central bank sets its official yuan/dollar midpoint rate at 6.6857[6], which was its lowest level since November 2010.

Yuan hits 5-1-2-Year Low on Weaker PBOC Fixing

Source: Strategas Research Partners, LLC

Pound Skids to New 31-year Low as BOE Expected to Cut Rates

The British pound slumped to a new 31-year low on July 6, 2016, as expectations that the Bank of England compounded fears about the possible economic fallout from the Brexit. The Bank of England (BOE) on July 5, 2016 announced measures to stabilize the U.K. economy and warned that the outlook for the financial system has become challenging. BOE Gov. Mark Carney warned that further monetary easing is likely this summer, sparking another leg lower in the pound, which has shed 14%[7] of its value against the dollar since the June 23 vote.

Pound Skids to New 31-year Low as BOE Expected to Cut Rates

Source: Strategas Research Partners, LLC

Yields Keep Declining to New Lows after Brexit

Yields Keep Declining to New Lows after Brexit

Source: Strategas Research Partners, LLC

Swiss Bond Yields Now Negative Out to 50 years

Swiss government bonds yields all the way out to 50-year maturities have now all turned negative, as the global bonds rally powers ahead amid deep economic uncertainty. The 10-year Gilt yield has dropped to 0.8 per cent, a whisker away from the record low 0.78 per cent it hit last week.

Japan’s 20-Year bond yield turns negative

The rally in government bonds broke new ground on July 6, 2016 as the yield on 20-year Japanese debt fell below zero for the first time[8]. This unease, exacerbated most recently by the Brexit, has led investors in ever-greater numbers to seek havens such as sovereign debt, driving prices up and yields down.

Investment Implications

In an environment where a slow upward trend in earnings despite the temporary drag from cheap oil and a high dollar, coupled with low interest rates, still make stocks look attractive in relative terms. In fixed income investing, to reduce volatility and increase liquidity during economic and market uncertainty, I favor “up in quality” assets. Furthermore, a diversified approach with a global exposure is appropriate given Fed tightening and the growth prospects abroad:

  • High quality, long-duration government debt benefits in the near term from central bank’s response and potential easing. It provides stability during periods of risk-off.
  • High quality U.S. high yield, while no longer cheap, continues to be supported by strong retail flows, and modestly weaker fundamentals should improve through the year-end.
  • Leveraged loans, which is higher quality and can also provide an element of defensive positioning.
  • European high yield, adjusted for sector, ratings and duration, remains cheap to U.S. high yield. Europe is experiencing above-trend growth and is earlier in its recovery, providing the opportunity for credit improvement and potential ratings upgrades. Supply remains muted.
  • Cash and the perceived safe haven of gold can be sources of liquidity during periods of market correction.

[1] U.S. Bureau of Labor Statistics

[2] U.S. Bureau of Labor Statistics

[3] U.S. Bureau of Labor Statistics

[4] U.S. Government

[5] Institute for Supply Management

[6] Strategas Research Partners, LLC

[7] Bloomberg

[8] The Wall Street Journal