Market Review: April 2014
Continued Uncertainty in Emerging Markets
Emerging Markets (EM) continue to struggle and capture the attention of most investors. China’s debt crisis is still unwinding and, as a result, investors are hesitant to pour more money into EM. China is also seeing its first bond defaults and, so far, the efforts of the People’s Bank of China (China’s equivalent to the Federal Reserve) are proving effective. Defaults are still a rarity, in spite of the strained state of the Chinese credit market. However, many EM economies rely on exporting raw materials, and China is the largest consumer of those resources. Until investors are able to get a clearer picture of China’s economic future, they seem to be taking a wait-and-see approach to EM investments. The exception seems to be India, which mounted a tremendous recovery in the final months of 2013. Further, investors are optimistic about the upcoming elections. Consequently, the Indian rupee is trading strongly and the Indian markets are performing well.
Russia fared much worse and is clearly paying an economic price for its political stance. The current round of sanctions is mostly aimed at individuals in positions of power. However, it is expected that broader restrictions are forthcoming, if Russia does not soften its aggressive stance. In the meantime, Russia is attempting to limit the impact of these efforts by moving its holdings to nations and banks that are unlikely to enforce more oppressive sanctions. International investors are not optimistic and they are betting that the Russian economy will struggle under the weight of mounting pressure from the US and the Eurozone.
On the domestic front, the new Federal Reserve Chair, Janet Yellen, stumbled in her first press conference. At the close of her remarks, most investors were left thinking that interest rate hikes would start sooner than expected and that the end of easy money was drawing nigh. We now know that she did not intend this because she issued another statement to clarify the Fed’s position. It appears that the Fed will continue in its attempts to stimulate the economy and the job market, at least in the intermediate term.
In contrast, the European Central Bank (ECB) is considering quantitative easing of its own as pressure is growing within the Eurozone. Voters have shown that they are prepared to make difficult sacrifices to put their economies back on solid footings, but those painful choices are not producing the growth that they were promised. In response, the ECB is considering some of the policies that have been used in the UK and the US to nudge those economies towards recovery.
US economic data is still a mixed bag with key indicators posting positive figures, but failing to meet expectations. Some analysts continue to blame the weather, while others blame unrest in Ukraine or bond defaults in China, but eventually the data must either back up the positive sentiments of analysts or investors will need rein in their optimism.
Asset Categories Mar. 2014:
US Stocks 0.51% Foreign Stocks -2.03% US Bonds 0.02% Foreign Bonds 0.36%
Hard Assets -0.74% Hybrids 0.04%
The monthly performance numbers appear flat across the major investment types and major indexes. The truth is that those monthly figures do a poor job of showing the bumpy ride that investors took, and they do not show the performance of every individual asset class.As an example, US stocks flirted with record highs at several points during the last 30 days, but also found themselves negative for the year on more than one occasion. This serves as a worthwhile reminder that reacting too quickly to market movements is often unnecessary and only increases possible trading expenses and investment risk.
Foreign stocks survived the month in better condition than many analysts expected. In spite of the current global economic uncertainty, developed countries held their own, and stayed relatively flat for the month. On the other hand, Emerging Markets (EM) struggled and stocks in those countries declined by approximately five percent, but the trouble stayed confined to those EM countries. International investments remain an important component of our portfolio models, although we did effectively limit our EM exposure in anticipation of a difficult year for those economies. Both US and foreign bonds were relatively unaffected by the volatile stock markets. Investors continue to seek out higher-yielding bonds and that appetite for risk keeps interest rates low. Even Janet Yellen’s misstep and the indecision from the European Central Bank were not able to dissuade investors from pursuing these higher risk bonds. This also contributed to higher demand for preferred stocks which are providing attractive yields. Hybrids ended the month flat, as preferred stocks awoke from their slumber just in time to act as a counterbalance to the decline of convertible bonds.
Hard assets struggled during the month of March. In spite of the elevated market risk, precious metals took significant losses after their strong returns in February. It is important to remember that precious metals are volatile. These investments are prone to large swings, but they offer valuable protection during times of uncertainty and, while they struggled through the lackluster markets of March, they are positive year-to-date. The volatility across these asset classes since the beginning of the year demonstrates that our threshold-based re-balancing allows us to objectively react to large gains or losses without getting distracted by the more erratic market movements. Also, the diversification offered by our portfolio models continues to drive strong returns relative to major equity markets.
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