Contributed by Doug Walters
The U.S. is blazing its own monetary trail, pursuing tightening, while most of the developed world is still (necessarily) focused on easing.
With the overhang of the first rate rise in over nine years removed, we expect a renewed focus on what really matters; economic growth.
- The U.S. consumer holds the key to growth, accounting for ~70% of GDP
- Shrinking unemployment should benefit wages (and hopefully consumer spend)
- However, the strengthening dollar may disadvantage U.S. production and secondarily pressure wages.
Developed International markets remain behind the U.S. on the path to recovery. Growth remains anemic, and we do not see a quick resolution. But…
- Monetary easing continues
- Lower oil prices should be benefiting consumer spend
- Weakening exchange rates (relative to the U.S. dollar) are a tailwind
Emerging Markets had a difficult 2015. However, we find the asset class more compelling than Developed when valuation and future growth potential are weighed.
- China is still growing, but at an ever slower rate, which has hit commodity prices globally. Yet, growth is still positive and valuation has improved.
- India has been a notable outperformer, and is expected to offset some of China’s decline.
- Brazil has been hit by weak commodity prices and political strife, but this is reflected in valuation.
In 2015, U.S. Equities faced significant headwinds in the form of:
- Deceleration in China,
- Large commodity price declines,
- Geopolitical turmoil (eg. ISIS attacks),
- The first Fed rate rise in over nine years,
- Full valuations; and
- A strong U.S. dollar
Yet, in spite of this, it was a decidedly boring year for equities, with the S&P500 ending the year virtually unchanged.
Valuations are generally not cheap despite the lackluster performance this year. Earnings growth is needed to justify the next leg up.
Our focus remains steadfast on Quality and Value, with an eye on prudent rebalancing into any market dislocation.
Core Fixed Income
Contributed by Max Berkovich
The Fed finally began interest rate normalization, with the first raise of 0.25% in December. The market was well prepped for the move. We expect at least 2 more, well-telegraphed, increases in 2016.
- The U.S. has begun to normalize rates, but the rest of the world is not quite there. This will keep market-set rates from moving much higher.
- The 10-year U.S. Treasury ended 2015 around 2.27%, slightly higher than where it started the year.
- The 2yr/10 yrspread continues to flatten, implying a lack of confidence in economic growth.
- Quality was rewarded in 2015 as Investment Grade outperformed High Yield bonds notably.
We continue to focus on the highest credit and most liquid bonds, and taking advantage of any value disconnects across bond sectors.
Contributed by David Lemire
In a year of notable uncertainty, many asset classes ended the year in the negative column. Amongst a weak field, quality and safety were marginally favored,
- Emerging markets lagged, courtesy of weakness in China and Brazil; and commodities have been squeezed as EM demand falters. The standout amongst them was India.
- The flight to quality favored U.S. Large Cap Equities and Core Bonds, which managed to just barely squeeze out positive performance for the year.
With much of the developed world still in recovery mode, 2016 could be a volatile year. We still favor the quality of U.S. Equities, but do see interesting value opening up in International Markets.
- Proper diversification can capitalize on both of these themes, through regular rebalancing.
- Disciplined long-term investors should embrace any short-term market weakness as a chance to increase exposure to emerging valuation opportunities.
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