Global Investment Strategy Report
Global Investment Strategy
Global Investment Strategy Report June 12, 2017 Peter Donisanu Investment Strategy Analyst
Weekly market insights from the Global Investment Strategy team » Risk assets such as global stocks and high-yield bonds moved higher during the first half of the year, likely leaving them susceptible to unfavorable market-related developments. » We review a few key risks that that may negatively influence market sentiment and performance during the second half of this year. What it may mean for investors » In light of the potential for heightened volatility, we outline four best practices that investors can implement in their portfolios to help weather future market uncertainty.
Remain Vigilant in Light of the Risks During the first half of this year, equity prices in the U.S. and abroad have generally moved higher while demand for higher-yielding bonds also has increased as investors (to a certain extent) have become desensitized to market-related risks. In this week’s report, we highlight potential volatility-inducing events percolating under the surface calm of financial markets and encourage investors to maintain prudent portfolio-management practices. Chart 1: Year-to-Date Global Equity and High-Yield Bond Market Performance 120
12/31/2016 = 100
115 110 105 100 95 U.S. Stocks Emerging Market Stocks
International Developed Market Stocks Global High Yield Bonds
90
Sources: Wells Fargo Investment Institute, Bloomberg; 6/7/17. Note: U.S. Stocks = MSCI U.S. Index, International Developed Market Stocks = MSCI EAFE Index, Emerging Market Stocks = MSCI Emerging Markets Index, Global High-Yield Bonds = Bloomberg Barclays Global High Yield Index. Past performance is no guarantee of future results.
© 2017 Wells Fargo Investment Institute. All rights reserved.
Page 1 of 4
Global Investment Strategy—|— Remain Vigilant in Light of the Risks—|—June 12, 2017
Minding the Risks Domestic/Foreign Policy Uncertainty —Policy proposals and implementation (or a lack thereof) by the presidential administration and Congress could act as drag on financial markets this year. Over the past six months, U.S. equity-market performance has been influenced— at least in part—by the potential for meaningful tax reform and other fiscal policies announced by the Trump administration. Today, the timing and implementation of these pro-growth policies has become less certain. This development has weighed on U.S. equity-market sentiment, particularly in the small-cap sector. As a result, we believe that U.S. equity prices are likely to end the year at current levels. Additionally, the president is expected to appoint three new governors to the Federal Reserve (Fed), including potentially replacing current Fed chairperson Janet Yellen. We believe that uncertainty related to future U.S. monetary policy could arise if Fed Chair Yellen is replaced by an individual who believes that interest rates should move higher sooner rather than later. Such a development could weigh on complacency in certain parts of the bond market, particularly in the high-yield space. Central Bank Missteps —We believe that the trajectory of future Fed and European Central Bank (ECB) policies remains a silent risk to financial markets. We expect the Fed to raise rates twice more this year. We believe that the pace of rate hikes reflects steady improvement in the U.S. economy and signs of rising wage inflation. Yet, the Fed could act as a drag on financial-market sentiment if policy becomes disconnected from economic reality or inflationary pressures remain subdued. This is not our base-case scenario, but we believe that it remains an underlying risk to financial markets. We believe that the ECB could introduce volatility into financial markets if it communicates an ambiguous message on the tapering of its asset-purchase program and its intent to move away from its negative interest-rate policy. Policymakers at the ECB have stood by their easy-money policies as inflationary pressures in the Eurozone remain subdued. Nonetheless, there is a risk that the ECB may muddle its policy messaging surrounding monetary policy in an effort to appease increasingly louder cries for a tapering timetable from different corners of the markets, and from institutions. China-related Slowing of Global Growth —Concerns about China’s economy have returned to investors’ minds this year as policymakers there have implemented policies to curb excess lending in certain parts of its credit markets. These policies are well-intentioned and likely long-term beneficial to the Chinese economy. A key risk from these policies, we believe, lies in abruptly tightening access to the broader economy that could lead to slower-than-expected growth in the country’s economy. We believe that this risk is limited as policymakers have demonstrated over the years an ability to quickly turn on and off the credit-related growth spigot. Further, we expect growth in the country’s economy to slow to around 6.5 percent by year-end from 6.9 percent in the fourth quarter. That said, we continue to monitor the potential for a policy misstep from Beijing, especially given the potential impact it may have on the fragile global economic recovery that is currently underway. Remaining Vigilant In light of the potential for heightened volatility, we outline four best practices that investors can implement in their portfolios to help weather future market uncertainty:
Commit to an investment plan—indecision and market volatility do not make good bedfellows. Employ prudent portfolio-management strategies that include aligning a strategic asset allocation with your long-term investment goals. Rebalance frequently, particularly ahead of uncertain market events, by bringing portfolio allocations in line with strategic objectives. Exploit price drops in markets as entry points for favored investments—while also trimming allocations as favorable market conditions present themselves.
© 2017 Wells Fargo Investment Institute. All rights reserved.
Page 2 of 4
Global Investment Strategy—|— Remain Vigilant in Light of the Risks—|—June 12, 2017
We believe that investors can avoid getting caught flat-footed by the markets by not trying to time financial markets themselves. This particularly relates to investors fearing too much market calm—as being out of the markets at the wrong time can be costly.
Risk Factors Forecasts are not guaranteed and are subject to change. All investing involves some degree of risk, whether it is associated with market volatility, purchasing power or a specific security. Equity securities are subject to market risk which means their value may fluctuate in response to general economic and market conditions and the perception of individual issuers. Investments in equity securities are generally more volatile than other types of securities. The prices of small-cap company stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions. Investments in fixed-income securities are subject to market, interest rate, credit/default, liquidity, inflation and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. Credit risk is the risk that an issuer will default on payments of interest and principal. This risk is higher when investing in high yield bonds, also known as junk bonds, which have lower ratings and are subject to greater volatility. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity. Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.
Definitions The Bloomberg Barclays Global High Yield Index is a multi-currency flagship measure of the global high yield debt market. The index represents the union of the U.S. High Yield, the Pan-European High Yield, and Emerging Markets (EM) Hard Currency High Yield Indices. The high yield and emerging markets sub-components are mutually exclusive. MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The Index consists of the following 21 developed market country indexes: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Index consists of the following 23 emerging market country indexes: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates. The MSCI U.S. Index is designed to measure the performance of the large and mid-cap segments of the U.S. market. With 624 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in the U.S. An index is unmanaged and not available for direct investment.
Disclaimers Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly-owned subsidiary of Wells Fargo & Company. The information in this report was prepared by the GIS division of WFII. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.
© 2017 Wells Fargo Investment Institute. All rights reserved.
Page 3 of 4
Global Investment Strategy—|— Remain Vigilant in Light of the Risks—|—June 12, 2017 The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Wells Fargo Advisors is registered with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority, but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors. Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company. CAR 0617-01905
© 2017 Wells Fargo Investment Institute. All rights reserved.
Page 4 of 4
Global Investment Strategy Report June 12, 2017 Peter Donisanu Investment Strategy Analyst
Weekly market insights from the Global Investment Strategy team » Risk assets such as global stocks and high-yield bonds moved higher during the first half of the year, likely leaving them susceptible to unfavorable market-related developments. » We review a few key risks that that may negatively influence market sentiment and performance during the second half of this year. What it may mean for investors » In light of the potential for heightened volatility, we outline four best practices that investors can implement in their portfolios to help weather future market uncertainty.
Remain Vigilant in Light of the Risks During the first half of this year, equity prices in the U.S. and abroad have generally moved higher while demand for higher-yielding bonds also has increased as investors (to a certain extent) have become desensitized to market-related risks. In this week’s report, we highlight potential volatility-inducing events percolating under the surface calm of financial markets and encourage investors to maintain prudent portfolio-management practices. Chart 1: Year-to-Date Global Equity and High-Yield Bond Market Performance 120
12/31/2016 = 100
115 110 105 100 95 U.S. Stocks Emerging Market Stocks
International Developed Market Stocks Global High Yield Bonds
90
Sources: Wells Fargo Investment Institute, Bloomberg; 6/7/17. Note: U.S. Stocks = MSCI U.S. Index, International Developed Market Stocks = MSCI EAFE Index, Emerging Market Stocks = MSCI Emerging Markets Index, Global High-Yield Bonds = Bloomberg Barclays Global High Yield Index. Past performance is no guarantee of future results.
© 2017 Wells Fargo Investment Institute. All rights reserved.
Page 1 of 4
Global Investment Strategy—|— Remain Vigilant in Light of the Risks—|—June 12, 2017
Minding the Risks Domestic/Foreign Policy Uncertainty —Policy proposals and implementation (or a lack thereof) by the presidential administration and Congress could act as drag on financial markets this year. Over the past six months, U.S. equity-market performance has been influenced— at least in part—by the potential for meaningful tax reform and other fiscal policies announced by the Trump administration. Today, the timing and implementation of these pro-growth policies has become less certain. This development has weighed on U.S. equity-market sentiment, particularly in the small-cap sector. As a result, we believe that U.S. equity prices are likely to end the year at current levels. Additionally, the president is expected to appoint three new governors to the Federal Reserve (Fed), including potentially replacing current Fed chairperson Janet Yellen. We believe that uncertainty related to future U.S. monetary policy could arise if Fed Chair Yellen is replaced by an individual who believes that interest rates should move higher sooner rather than later. Such a development could weigh on complacency in certain parts of the bond market, particularly in the high-yield space. Central Bank Missteps —We believe that the trajectory of future Fed and European Central Bank (ECB) policies remains a silent risk to financial markets. We expect the Fed to raise rates twice more this year. We believe that the pace of rate hikes reflects steady improvement in the U.S. economy and signs of rising wage inflation. Yet, the Fed could act as a drag on financial-market sentiment if policy becomes disconnected from economic reality or inflationary pressures remain subdued. This is not our base-case scenario, but we believe that it remains an underlying risk to financial markets. We believe that the ECB could introduce volatility into financial markets if it communicates an ambiguous message on the tapering of its asset-purchase program and its intent to move away from its negative interest-rate policy. Policymakers at the ECB have stood by their easy-money policies as inflationary pressures in the Eurozone remain subdued. Nonetheless, there is a risk that the ECB may muddle its policy messaging surrounding monetary policy in an effort to appease increasingly louder cries for a tapering timetable from different corners of the markets, and from institutions. China-related Slowing of Global Growth —Concerns about China’s economy have returned to investors’ minds this year as policymakers there have implemented policies to curb excess lending in certain parts of its credit markets. These policies are well-intentioned and likely long-term beneficial to the Chinese economy. A key risk from these policies, we believe, lies in abruptly tightening access to the broader economy that could lead to slower-than-expected growth in the country’s economy. We believe that this risk is limited as policymakers have demonstrated over the years an ability to quickly turn on and off the credit-related growth spigot. Further, we expect growth in the country’s economy to slow to around 6.5 percent by year-end from 6.9 percent in the fourth quarter. That said, we continue to monitor the potential for a policy misstep from Beijing, especially given the potential impact it may have on the fragile global economic recovery that is currently underway. Remaining Vigilant In light of the potential for heightened volatility, we outline four best practices that investors can implement in their portfolios to help weather future market uncertainty:
Commit to an investment plan—indecision and market volatility do not make good bedfellows. Employ prudent portfolio-management strategies that include aligning a strategic asset allocation with your long-term investment goals. Rebalance frequently, particularly ahead of uncertain market events, by bringing portfolio allocations in line with strategic objectives. Exploit price drops in markets as entry points for favored investments—while also trimming allocations as favorable market conditions present themselves.
© 2017 Wells Fargo Investment Institute. All rights reserved.
Page 2 of 4
Global Investment Strategy—|— Remain Vigilant in Light of the Risks—|—June 12, 2017
We believe that investors can avoid getting caught flat-footed by the markets by not trying to time financial markets themselves. This particularly relates to investors fearing too much market calm—as being out of the markets at the wrong time can be costly.
Risk Factors Forecasts are not guaranteed and are subject to change. All investing involves some degree of risk, whether it is associated with market volatility, purchasing power or a specific security. Equity securities are subject to market risk which means their value may fluctuate in response to general economic and market conditions and the perception of individual issuers. Investments in equity securities are generally more volatile than other types of securities. The prices of small-cap company stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions. Investments in fixed-income securities are subject to market, interest rate, credit/default, liquidity, inflation and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. Credit risk is the risk that an issuer will default on payments of interest and principal. This risk is higher when investing in high yield bonds, also known as junk bonds, which have lower ratings and are subject to greater volatility. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity. Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.
Definitions The Bloomberg Barclays Global High Yield Index is a multi-currency flagship measure of the global high yield debt market. The index represents the union of the U.S. High Yield, the Pan-European High Yield, and Emerging Markets (EM) Hard Currency High Yield Indices. The high yield and emerging markets sub-components are mutually exclusive. MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The Index consists of the following 21 developed market country indexes: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Index consists of the following 23 emerging market country indexes: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates. The MSCI U.S. Index is designed to measure the performance of the large and mid-cap segments of the U.S. market. With 624 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in the U.S. An index is unmanaged and not available for direct investment.
Disclaimers Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly-owned subsidiary of Wells Fargo & Company. The information in this report was prepared by the GIS division of WFII. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.
© 2017 Wells Fargo Investment Institute. All rights reserved.
Page 3 of 4
Global Investment Strategy—|— Remain Vigilant in Light of the Risks—|—June 12, 2017 The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Wells Fargo Advisors is registered with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority, but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors. Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company. CAR 0617-01905
© 2017 Wells Fargo Investment Institute. All rights reserved.
Page 4 of 4
