Investor Intelligence Sept 25, 2018
Investor Intelligence
Newsletter©
A bi-weekly publication from Consultiva Internacional, Inc. (Registered Investment Adviser) Sept 25, 2018
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From the Executive Desk Founder & Chief Executive Officer Global equity markets posted a positive month in August as corporate earnings continued to outpace expectations and earlier fears of inflation were overcome. Favorable equity returns were driven by the US equity market. Federal Reserve Chairman Jerome Powell appeared to reassure the markets with his commitment to gradual normalization of interest rates, acknowledging that there was little pressure to sharply increase rates. Progress in NAFTA talks also helped US stocks. Markets remained concerned about trade disputes, which spurred selling in rest of the world. In the Eurozone Italy’s heavy debt and the populist rhetoric of its new coalition government, along with uncertainty about Brexit, also weighed in on euro stocks. China’s growth continued to show signs of moderation, adversely affecting many Asian equity markets. Emerging market equities have borne the brunt of interest rate, currency and policy turbulence in 2018, but fundamentals have held strong, with stable-to-higher earnings growth estimates for 2018 and 2019. Information technology stocks resumed their market leadership in last month and remained the strongest sector for the year. Health care stocks also performed well, continuing their recent strength. Material and energy stocks lagged in the month, reflecting weaker prices and uncertainty over the global economy. |
Myrna Rivera, CIMA®|
Edmundo J. Garza Economic Perspectives President The European Commission’s 2018 Summer Outlookprojected resilient growth amid increased uncertainty. The Commission forecasts strong growth in 2018 and 2019, at 2.1% this year and 2% next year in both the EU and the euro area. However, in August, the Economic Sentiment Indicator (ESI) decreased slightly in the euro area (by 0.5 points to 111.6), and in September the consumer confidence indicator decreased compared to august. The decrease in the euro-area economic sentiment indicator resulted from a marked deterioration of confidence among consumers and a milder decrease in the services sector, which were only partly offset by increases in the retail trade and construction sectors. Confidence in the industry sector remained broadly stable. Amongst the largest euro-area economies, the ESI remained virtually unchanged in Germany (-0.1), while it decreased in France (-1.3), Italy (-0.8), Spain (-0.7) and the Netherlands (-0.5). The Business Climate Indicator (BCI) for the euro area decreased slightly (by −0.08 points to +1.22). Managers’ appraisals of their overall order books and past production worsened markedly, while their views on export order books and the stocks of finished products merely edged down. These developments might be short-lived, but investors are encouraged to be mindful of long-term effects. |
| Indicators (As of Sept 25, 2018) | |
United States:CPI: 2.7% Chg. from yr. ago Unemployment Rate: 3.9% GDP: 4.2% Comp. Annual rate of Chg. on 2018:Q2 Ind.Prod.Index: +0.4% change from previous month Source: St. Louis Fed. Res. |
Japan:CPI: 0.9% Chg. from yr. ago Unemployment Rate: 2.5% GDP: 0.7%, Comp. Annual rate of Chg. on 2018:Q2 Ind.Prod.Index: -0.1% change from previous month Source: Moody’s Analytics |
Eurozone:CPI: 2.0% Chg. from yr. ago Unemployment Rate: 8.2% GDP: 0.4%, Comp. Annual rate of Chg. on 2018:Q1 Ind.Prod.Index: -0.8% change from previous month Source: Moody’s Analytics |
Puerto Rico:CPI: 0.4% Chg. from yr. ago Unemployment Rate: 9.1% Payroll Employment: -2.3% Chg. from yr. ago GDB Econ. Act. Index: -0.3% Chg. from yr. ago |
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Market Update Chief Research & Investment Officer
Stocks: Domestic equity returns continued to dominate the headlines and financial market returns in August. The S&P 500 return of 3.26% helped produce a 6.74% 3rd quarter to date return. The current fundamentals are positive. Strong GDP growth translated into record sales, earnings and margins. Non US equity markets fell in August as both developed and emerging markets posted negative returns in August, and for the 3Q to date. The stronger US dollar, trade concerns, and individual country crisis (i.e. Turkey, South Africa, China, and Italy) led global investors to shift assets into the US Bonds: The Federal Reserve kept interest rates unchanged in August. The market bid down the yield on the 10 Year Treasury to 2.86% from 2.96% at the, end of July, but above the year end 2017 yield of 2.41%. Alternatives: The dollar index (a measure of value of the United States dollar relative to a basket of developed market currencies) reached a high of 96.845 in mid-August. The inverse correlation between precious metals and the U.S. currency weighed on many raw material prices as metals moved lower, with gold and palladium falling to new lows for 2018 and silver falling to its lowest price since 2016. Copper, plunged from a high of more than $3.30 in early June to lows of $2.5520 per pound in mid-August. |
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Evangeline Dávila, CIMA®Eileen Rivera, CFA®
The Advisor’s Corner Due Diligence Officer & Managing Director
Undoubtedly, 2017 was an extraordinary year in the global capital markets. Almost every asset class, except a small minority (such as energy), had high single-or-double-digit returns.To date, 2018 has proven to be a year where the synchronization of global capital market returns has come unhinged. As shown in the tables below, as of September 17, 2018, non-US developed countries and emerging markets are struggling and delivering negative returns. On the other hand, US equity markets are performing strongly, led by small capitalization stocks and the technology and consumer discretionary sectors. In the fixed income markets, most global sectors have negative performance (with the notable exception of US high-yield bonds). Emerging market bonds are not faring well, with a -4.2% return year-to-date
Source: Blackrock Investment Institute Weekly Commentary, September 17, 2018
There are several reasons for this year-to-date performance, including:
- Two interest rate hikes in the US so far in 2018, which have put pressure on the fixed income markets and exposed portfolios to duration risk.
- The global tariff war, particularly between the US and China, which continues to escalate and has put economic pressure on many countries, specifically on many emerging markets.
- The strength of the US dollar and the weakness of many foreign currencies, such as the Turkish lira, the Argentinian peso, the Brazil real, and the Mexican peso.
- A strong US consumer sentiment, record corporate earnings and full employment environment, which make US equity assets more attractive in comparison to other developed countries.
- A fear of global contagion of the woes being experienced by emerging markets.
- Leftist election results and growing anti-immigrant sentiment in many developed countries outside the US, for example in Germany, Sweden and Italy.
- Fears and uncertainty regarding Trump administration policies.
So, what are investors to do in such a global environment? At the beginning of the year, Consultiva’s global asset allocation (GAA) model called for a slight overweight to non-US equity markets (at 28% vs, 25% for US), given the brighter economic and growth prospects for non-US economies. Although stronger long-term growth prospects and metrics reside outside the US, and US equity markets have had a long bull run, risk averse investors might want to tactically tilt their allocation weights towards US assets during the rest of the year. If you are a client of Consultiva, please contact your advisor at Consultiva if you would like to this discuss these issues further or wish to adjustyour investment portfolio.
DISCLAIMER:
Consultiva is a Registered Investment Adviser. The registration with the Securities and Exchange Commission does not imply a certain level of skill or training. Consultiva has compiled the information for this report from sources Consultiva believes to be reliable. Sources include: investment manager(s); mutual fund(s); exchange traded fund(s); third party data vendors and other outside sources. Consultiva assumes no responsibility for the accuracy, reliability, completeness or timeliness of the information provided, or methodologies employed, by any information providers external to Consultiva. Conclusions reflect the judgement of Consultiva Investment Strategy Committee at this time and is subject to change without prior notice. There also can be no guarantee that using this information will lead to any particular result. Past performance results are not necessarily indicative of future performance. Diversification does not guarantee a profit or protection against loss. This document is for informational purposes only and is not intended to be an offer, solicitation, recommendation with respect to the purchase or sale of any financial investment/ security or a recommendation of the services supplied by any money management organization neither an investment advice or legal opinion. Investment advice can be provided only after the delivery of Consultiva’s Brochure and Brochure Supplement (ADV Part 2A and 2B) once a properly executed investment advisory agreement has been entered into by a client and Consultiva. This is not a solicitation to become a client of Consultiva. There are risks involved with investing including the possible loss of principal. All investments are subject to risk. Investors should make investment decisions based on their specific investment objectives, risk tolerance and financial circumstances. Global and international investments may carry additional risks that are generally not associated with U.S. investments, such as currency fluctuations, political instability, economic conditions and varying accounting standards. Annual, cumulative, and annualized total returns are calculated assuming reinvestment of dividends and income plus capital appreciation.