International Insights Podcast – Europe and Negative Interest Rates

Stuart Quint, Investment Insights PodcastStuart P. Quint, CFA, Senior Investment Manager and International Strategist

This audio podcast was recorded March 19, 2015:

Stuart’s International Insights Podcast focuses on a new and growing phenomenon in European fixed income–negative interest rates

Highlights of the discussion include:

How did we get here?:

  • ECB QE drove bond values up and yields down
  • One out of every five euros of government debt trades with a negative interest rate (0 such securities existed in the summer of last year)
  • Non-ECB banks Switzerland and Sweden cutting interest rates to dissuade capital inflows in an effort to manage exchange rate
  • Asset managers and insurance companies trying to fund longer-term liabilities but they earn lower or negative spreads without price appreciation.

Potential implications:

  • Scenario 1: Little to no economic growth
    • Near-term, stimulative to European equities
    • Potentially helpful to the U.S. dollar, but less so for export earning of large U.S. companies
  • Scenario 2: Moderate to high economic growth
    • ECB potentially steps back to review QE perhaps pushing bond yields upward
    • Fixed income globally would be most at risk

Click here to listen to the full audio recording

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, a Registered Investment Advisor.

Monthly Market and Economic Outlook: February 2015

Amy MagnottaAmy Magnotta, CFASenior Investment Manager, Brinker Capital

Weaker earnings reports weighed on U.S. equity markets in January with the S&P 500 Index falling -3% during the month. Many companies pointed to the impact of the stronger U.S. dollar as a reason for the weakness. More defensive sectors, including utilities and healthcare, were able to post positive returns, while the financials and energy sectors fared the worst, the latter impacted by the continued decline in crude oil prices. From a market cap perspective mid caps led, helped by the solid gains in REITs. Outside of mid caps, growth stocks were noticeably ahead of value stocks.

International equities led U.S. equities in January despite a stronger U.S. dollar. Euro-area markets were particularly strong, gaining more than 7% in local terms, due to the announcement of the European Central Bank’s quantitative easing program, which exceeded expectations. Switzerland equities declined more than -6% during the month as their central bank dropped the Swiss franc’s peg to the euro. Emerging markets had modest gains in both local and USD terms, led by strong performance from India.

Global sovereign yields moved lower again during January. The 10-year Treasury note ended the month 50 basis points lower at a level of 1.68%. As a result of the rate move, long-term Treasuries gained more than 8%. All sectors of the Barclays Aggregate were positive on the month. High yield credit spreads stabilized in January and the sector gained 0.7%. Even at this level, U.S. Treasury yields still look attractive relative to the sovereign debt of other developed nations.

Our macro outlook remains unchanged. When weighing the positives and the risks, we continue to believe the balance is shifted in favor of the positives over the intermediate-term and the global macro backdrop is constructive for risk assets. As a result our strategic portfolios are positioned with an overweight to overall risk. A number of factors should support the economy and markets over the intermediate term.

  • Global monetary policy accommodation: We anticipate the Fed beginning to raise rates in mid-2015, but at a measured pace as inflation remains contained. The ECB has taken even more aggressive action to support the European economy, and the Bank of Japan’s aggressive easing program continues.
  • Pickup in U.S. growth: Economic growth has improved over the last few quarters. A combination of strengthening labor markets and lower oil prices are likely to provide the stimulus for stronger-than-expected economic growth.
  • Inflation tame: Inflation in the U.S. remains below the Fed’s 2% target and inflation expectations have been falling. Outside the U.S. we see more deflationary pressures.
  • U.S. companies remain in solid shape: U.S. companies have solid balance sheets that are flush with cash. Earnings growth has been solid and margins have been resilient.
  • Less uncertainty in Washington: After serving as a major uncertainty over the last few years, Washington has done little damage so far this year. Government spending will shift to a contributor to GDP growth in 2015 after years of fiscal drag.
  • Lower energy prices help consumer: Lower energy prices should benefit the consumer who will now have more disposable income.

However, risks facing the economy and markets remain, including:

  • Timing/impact of Fed tightening: QE ended without a major impact, so concern has shifted to the timing of the Fed’s first interest rate hike. While economic growth has picked up and the labor market has shown steady improvement, inflation measures and inflation expectations remain contained, which should provide the Fed more runway.
  • Slower global growth; deflationary pressures: While growth in the U.S. has picked up, growth outside the U.S. is decidedly weaker. The Eurozone is flirting with recession and Japan is struggling to create real growth, while both are also facing deflationary pressures. Growth in emerging economies has slowed as well.
  • Geopolitical risks: The geopolitical impact of the significant drop in oil prices, as well as issues in Greece, the Middle East and Russia, could cause short-term volatility.
  • Significantly lower oil prices destabilizes global economy: While lower oil prices benefit consumers, significantly lower oil prices for a meaningful period of time are not only negative for the earnings of energy companies, but could put pressure on oil dependent countries, as well as impact the shale revolution in the U.S.

While valuations are close to long-term averages, the trend is still positive, investor sentiment is neutral, and the macro backdrop leans favorable, so we remain positive on equities. However, as we have lost the liquidity provided by the Fed, we expect higher levels of volatility in 2015. This volatility should lead to more opportunity for active management across asset classes.

Our portfolios are positioned to take advantage of continued strength in risk assets, and we continue to emphasize high conviction opportunities within asset classes, as well as strategies that can exploit market inefficiencies.

Asset Class Outlook Comments
U.S. Equity + Quality bias; overweight vs. Intl
Intl Equity + Country specific
Fixed Income +/- HY favorable after ST dislocation
Absolute Return + Benefit from higher volatility
Real Assets +/- Oil stabilizes in 2H15
Private Equity + Later in cycle

Source: Brinker Capital

Views expressed are for informational purposes only. Holdings subject to change. Not all asset classes referenced in this material may be represented in your portfolio. All investments involve risk including loss of principal. Fixed income investments are subject to interest rate and credit risk. Foreign securities involve additional risks, including foreign currency changes, political risks, foreign taxes, and different methods of accounting and financial reporting. Past performance is not a guarantee of similar future results. An investor cannot invest directly in an index.

International Insights Podcast – Implications of Major Central Bank Moves in Switzerland and India

Stuart Quint, Investment Insights PodcastStuart P. Quint, CFA, Senior Investment Manager and International Strategist

This audio podcast was recorded January 15, 2015:

Stuart’s International Insights Podcast focuses on small markets potentially creating big implications for global markets.

Highlights of the discussion include:

Switzerland:

  • Central bank cut interest rates and removed the link of the Swiss franc to the euro
  • Background discussion and what it means for global currencies
  • Losers: carry trades, mortgage holders in Eastern Europe, Austrian banks

India:

  • Central bank cut interest rates modestly, but still sent a major global signal
  • Falling inflation and government reform both key for future cuts
  • Major emerging market able to stimulate growth while others are doing the opposite

Click here to listen to the full audio recording

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, a Registered Investment Advisor.