After a rocky first three quarters of 2018, a diversified approach roared back in the fourth quarter of the year. Joshua Kutin, Head of Asset Allocation, North America reviews the sharp change in market dynamics and discusses the prospects for diversified asset allocation heading into 2019.
Q4 2018 did not lack for sources of fixed income turmoil — the yield curve inverted, the Fed rate raised rates, and market volatility returned. Our U.S. Fixed Income team reviews the market activity and drivers of return for the fourth quarter.
Daisuke Nomoto, Head of Japanese Equities, believes that the reforms taking place in Japan will provide a foundation for longer-term secular growth and a boost for Japanese equities. Are investors positioned to take advantage of the changing dynamics?
"We believe that the Fed is likely to be less swayed by theoretical leanings and more likely to be data dependent over the next 12 to 24 months," writes Anwiti Bahuguna, Ph.D., Head of Multi Asset Strategy. She also weighs the impacts of an escalation in the trade war, tax cuts and positive supply side surprises.
At the beginning of 2018, commodities appeared to be on the cusp of a bull market. Economic growth was strong and synchronized in both developed and emerging market countries. But trade issues, along with a strengthening U.S. dollar and increasing U.S. interest rates, have depressed commodities prices throughout the year. David Donora, Head of Commodities, weighs the possibility of a rebound in the asset class in 2019.
Should we be as optimistic as Apple CEO Tim Cook in thinking that the trade war between the U.S. and China will de-escalate soon? Or should we believe that the US-China trade war could last 20 years, as Alibaba’s Jack Ma warned? While the relationship between the two powers is obviously important for the region, Soo Nam Ng, Global Head of Asian Equities, believes that the region has buffers to weather current tensions.
Adrian Hilton, Head of Global Rates and Currency, considers how in spite of the recent rise in U.S. bond yields, they remain low by historical standards. Will bond yields ever readjust to their normal historical cycle?
Newly sworn in Vice Chairman of the U.S. Federal Reserve Board, Richard H. Clarida delivered a speech in which he shares his thinking on the current state of the U.S. economy and his views on the way forward for U.S. monetary policy.
Additional reading: Measuring the Natural Rate of Interest*. The Laubach-Williams and Holston-Laubach-Williams models provide estimates of the natural rate of interest, or r-star, and related variables. Their approach defines r-star as the real short-term interest rate expected to prevail when an economy is at full strength and inflation is stable.
Joshua Kutin, Head of Asset Allocation, North America and Anwiti Bahuguna, Head of Multi Asset Strategy, provide their views on the historically narrow market that we have seen in 2018, and on the prospects for growth as tariff rhetoric continues to escalate.
Additional reading: Our view on U.S. Equities Joshua Kutin, Head of Asset Allocation, North America, discusses the relative appeal of U.S. equities within an overall equity allocation.
Jason Callan, Senior Portfolio Manager, Head of Structured Assets, discusses the current state of the securitized bond market. In addition to new regulation, the strength of the economy has provided support for the asset class, while still allowing opportunities for active research and management to add value.
Anwiti Bahuguna, Head of Multi-Asset Strategy, considers whether the recent slowing of some of the housing market data is the end of the post-crisis housing boom, or just a temporary slowdown within the larger housing growth cycle.
For asset allocators, it is not only important to make the correct asset class decisions, but also to allocate efficiently within those asset classes. Joshua Kutin, Head of Asset Allocation, North America, looks at fixed income and the various decisions his team confronts when investing in the asset class.
The cyclical relationship between growth and value has overwhelmingly favored growth on a cumulative basis for several years. Our Quantitative Research team analyzes the reasons for this and how much longer the investing environment can support growth factor investing.
Additional reading: Factset S&P 500 Earnings Season Update: August 13, 2018 * As of August 13, 2018, 91% of the companies in the S&P 500 have reported actual results for Q2 2018. 79% of these companies have reported actual EPS above the mean EPS estimate, which is the highest percentage since FactSet began tracking this data in Q3 2008. Source: FactSet * financial data and analytics.
After having run on a platform of protecting America’s trade interests, President Donald Trump and his administration enacted new trade tariffs directed at China and have threatened even more. The biggest news from the region, however, may have been President Trump’s meeting with Kim Jong-un. Soo Nam Ng, Global Head of Asia Equities, assesses the shifting dynamics in Asia and the impact they will have on investors.
Eric Engstrom and Steven Sharpe at the Federal Reserve note that the “near-term forward spread” in the yield curve may be a stronger predictor of recession than the more commonly referenced long-term spread. Engstrom, Eric, and Steve Sharpe (2018). “(Don't Fear) The Yield Curve,” FEDS Notes. Washington: Board of Governors of the Federal Reserve System, June 28, 2018, https://doi.org/10.17016/2380-7172.2212.
Josh Kutin and Anwiti Bahuguna of the Columbia Global Asset Allocation Team present their views on current market conditions and their outlook for asset classes as we begin the second half of the year.
The Fed raised rates once during the quarter and 10-year U.S. Treasury bond yields cleared 3% in sustained fashion for the first time since 2011, only to fall below that level as the quarter ended. Our Fixed Income team assesses the significance of these and more in its quarterly overview of the fixed income market.
With the Federal Reserve on a clear path to higher interest rates, investors may look for ways to hedge against rising interest rate risk. Floating rate loans, which offer an adjustable coupon reset, may be an attractive option in this environment.
Rose Beale, Thematic Analyst, Responsible Investment, and Gareth Davies, Head of Responsible Investment Solutions consider the UN Sustainable Development Goals as a potential guide for investing towards a more sustainable world.
Researchers at the Federal Reserve Bank of Boston examine one possible explanation for the lack of wage inflation: The labor market is not as tight as the unemployment rate indicates. Specifically, they investigate the possibility that informal “gig” work embodies an economically significant amount of labor market slack that is not captured in the U-3 unemployment rate and other standard estimates of slack.
In an interview with Pensions and Investments, Dara White, CFA, Global Head of Emerging Markets Equity, discusses his 2018 outlook for the asset class, where he sees opportunity, and how he finds worthy emerging markets investments.
Additional reading: Emerging Markets: Valuations Are Still Attractive The MSCI Emerging Markets Index gained 37.5% in 2017, but emerging markets still have a relative valuation advantage over developed markets on a forward price to earnings ratio basis.
Ilan Furman, Portfolio Manager, Global Emerging Markets Equities, looks at the current state of the Latin American equity markets and sees the possibility of long-term improvement beyond any short-term uncertainty.
Dara White, CFA, Global Head of Emerging Markets Equity, sees a clear path for emerging markets’ continued good performance, as perennial caveats, dollar strength and China weakness, stay largely in check. Earnings is the key driver going forward.
Additional Reading: Emerging Markets: Outperforming the World The MSCI Emerging Markets Index gained 37.5% in 2017, outperforming the MSCI World Index (developed markets), which rose 23.1% during the same period.
Daisuke Nomoto, CMA (SAAJ), Head of Japanese Equities and Senior Portfolio Manager, concludes that Japan’s equity market, supported by the inflationary goals of the current government, reasonable valuations and favorable economic backdrop, can continue its upward trend.
Colin Lundgren, Global Head of Fixed Income, looks at the success fixed income markets have had over the last two years and questions whether the environment can support a third successive year of good performance.
Toby Nangle, Head of Global Asset Allocation and Anthony Yates, Former Professor of Economics, Birmingham University; former Senior Advisor, Bank of England, evaluate the quantitative easing program of the Bank of Japan, which stands out for its size and scope.
Thomas Egan Jr., FSA, EA, CFP; Actuary, Liability Driven Investments, examines the impact the new IRS mortality table has on plan liability for minimum funding, lump sum pension payments and PBGC variable premiums for underfunded plans.
Daisuke Nomoto, CMA (SAAJ), Head of Japanese Equities, Senior Portfolio Manager, assesses the current state of the Japan equity market and concludes that some long-sought economic goals and reforms are finally taking hold.
Soo Nam Ng, Head of Asian Equities, compares the relative low level of volatility in the U.S. to the current environment in China and sees the shift in emphasis from fast growth to sustainable growth as beneficial to the long-term equity market prospects in the country.
The Global Asset Allocation Team performs its semi-annual review of market expectations. This helps the team set strategic asset allocations and design portfolios with diverse investment goals. Maintaining long-term forecasts provides helpful context for responding thoughtfully to daily swings in market prices.
New York University Professor, Menachem Brenner, who pioneered the VIX index, is currently working on a measurement for "ambiguity", or uncertainty, as distinct from risk, in an attempt to explain why markets are demonstrating historically low volatility readings. Read his interview with the Nikkei Asian Review.
Mark Burgess, Deputy Global Chief Investment Officer, assesses the next phase of global monetary tightening. The U.S. Federal Reserve has raised rates several times since December 2015 and has signaled the beginning of the end of QE. Will other central banks follow?
Thomas Egan Jr., FSA, EA, CFP, Actuary, discusses how the latest change to FASB rules should encourage plans to move toward de-risking strategies. With less emphasis on Expected Return on Pension Assets, the objection to Liability Driven Investing, as well as a larger allocation to fixed income in general, has been removed.
Natasha Ebtehadj, Portfolio Manager, Asian Equities, looks at Prime Minister Narendra Modi's reform program and suggests that efforts to modernize the financial system will have lasting benefits for the country.
Additional Reading: Argentina: The "Emerging" Emerging Market Ilan Furman, Portfolio Manager, Global Emerging Markets, discusses Argentina’s efforts to reform its economic health and what its reinstatement to the MSCI Emerging Markets index will mean in symbolic and practical terms.
With the Federal Reserve having changed its tack from accommodative to one of normalization, investors will look for ways to hedge against rising interest rate risk. With their adjustable coupon, floating rate loans have the potential to hedge risk in a rising rate environment.
Bill Landes, PhD., Head of Global Investment Solutions, examines the use of alternative betas as a strategy for increasing portfolio diversification and improving risk-adjusted returns. Alternative betas have minimal market directionality, and are less correlated with traditional markets, making them good portfolio diversification tools.
In sharp contrast to 2013, when the suggestion of higher rates by the Fed was enough to disrupt emerging currency markets and convince investors to significantly reallocate out of emerging markets, Asian bond markets have shown resilience in response to rising U.S. interest rates and the new administration, as several of the region’s central banks continue to reflate in order to maintain a trend of stronger economic growth.
Additional reading: Emerging Markets' Cloud Receding Krishan Selva, CFA, Client Portfolio Manager, Global Emerging Markets, discusses the improving outlook for emerging markets equities as the new U.S. administration softens its rhetoric and adopts a more pragmatic approach.
We've entered a new global economic environment, where fiscal policy supplants monetary policy as an engine of economic growth. China will be watched as it shifts from an export production orientation economy to a domestic consumption oriented one.
Natasha Ebtehadj, Portfolio Manager, Asian Equities takes a look at Asian markets and their ability to withstand any potential changes to global trade dynamics that may result from the policies of the new American administration. She believes that, while not immune, Asian economies possess enough diversity to provide investment opportunities should significant changes be enacted.
* This hyperlink is provided for informational purposes only and is not an indication of endorsement of the content therein or affiliation with respect to the linked site. Be aware that the linked site will be subject to rules, regulation, and privacy and security provisions that are separate, and may differ, from Columbia Threadneedle Investments. Columbia Threadneedle Investments is not liable for any of the content at such site or any direct or indirect technical or system issues or consequences arising out of your access to or use of third party technologies or programs available through this site.
The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Management Investment Advisers, LLC (CMIA) associates or affiliates. Actual investments or investment decisions made by CMIA and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that any forecasts are accurate. Information provided by third parties is deemed to be reliable but may be derived using methodologies or techniques that are proprietary or specific to the third-party source.