|September 20, 2019||
What is your outlook in Emerging Markets?
Our outlook for Emerging Markets has decreased slightly compared with the end of last quarter, but we are still on the positive side with strong macroeconomic and sentiment signals. Areas of concern include China’s August industrial production figures, fixed asset investment, exports, and retail trade, which all weakened. The recent spike in oil prices might also have adverse consequences on China's economy. Higher fuel prices might dent already-weakened consumers’ discretionary spending and add input costs in an already-weakened demand environment.
|September 20, 2019||
How are you expecting U.S. equities to finish out the year?
Our global tactical asset allocation model still indicates a cautiously bullish outlook for the U.S stock market in the near-term. However, the long-term signals have decreased recently. The short-term targeted equity level at the moment is around 90% while the long-term signals indicates a target level of about 70%. An area of concern is that the probability of a recession has slightly grown. We monitor a number of data points to help determine the probability of a recession. For example the yield curve, which went into a deeper inversion, contributed to the elevated odds.
However, we don’t expect a recession to occur in the near future since the macroeconomic data points we monitor are still relatively upbeat. Industrial production rose 0.6% in August, its third increase in the last four months. The total capacity utilization also rose 0.4%. Some macroeconomic and sentiment figures are less optimistic including the labor market and PMI data. The labor market moderated further in August. Payrolls increased by 130,000 jobs, bringing average growth to 158,000 per month this year, far below the 2018 pace, confirming suspicions that the pace of hiring has cooled. Also, U.S. PMI data has been decreasing every month since March this year. In August, the PMI data indicated that the U.S. manufacturing sector is contracting for the first time since the end of the energy rout. The ISM manufacturing index fell from 51.2 in July to 49.1 in August, the lowest reading since January 2016 and below the neutral threshold level of 50.
|September 20, 2019||
What appeals to you about Pacific region, specifically Australia, going forward?
Our model indicated a relatively strong score for the Pacific region with three of the sub-group of signals (valuation, macro and sentiment) all in positive territory (Technical indicators make up the 4th sub-group). Although Australia’s GDP growth hit a decade low in Q2, the almost 30-year uninterrupted growth track record isn't under material threat. The exports sector of Australia was of particularly important strength. Both the buoyant demand and high prices for hard commodities and the weak Australian dollar are important drivers of the export. Australia saw a current account surplus of $5.9 billion in the June quarter, the first surplus since mid-1975.
|January 1, 2019||
What is your outlook for the U.S. equity market (IVV) for 2019?
Our global tactical asset allocation (GTAA) model still signals a relatively bullish outlook for the U.S. equities. Strong readings in sentiment and valuation indicators outweigh weaker technicals and recent price pullbacks.
In 2018, the U.S. economy enjoyed a banner year with real GDP annual growth rate on track to increase by close to 3%, which is the strongest gain of the nearly decade-long expansion. We believe the deficit-financed tax cuts and government spending increases will continue to help the economy grow much of next year. We also expect the labor market to continue to grow and unemployment to stay low by historical standards.
Despite these positive signals, we do recognize some possibilities of weakness moving forward. The stimulus effect might fade and put downward pressure on the market in the longer term and diminishing labor supply might result in gradually decreasing prices. The ceasefire between the U.S. and China may indicate that the worst of the escalations are behind us. However, the trade tension remains and might contribute to equity volatility. We do expect some market volatility to continue through 2019 despite our model indicating that the odds of a near-term recession remain relatively low.
|December 30, 2018||
What do you make of the recent volatility in the market and how has it, or hasn’t it, impacted your outlook and investment decisions for the portfolios?
The recent volatility has not significantly impacted our outlook as our model has been indicating that the fundamentals of the U.S. economy are still relatively sound. As a result, the market volatility has served as an opportunity to tactically add some U.S. equity exposure at lower prices. We see this volatility as a reaction to uncertainty. However, the uncertainty has not materialized into impactful changes to fundamentals.
|September 30, 2018||
Despite some unease in the U.S. stock market, it has performed significantly better than other major international equity markets. The divergence this year has been largest between U.S. and emerging market equities, which have lost roughly 10% YTD due to trade tensions and a rising U.S. dollar. U.S. small-cap stocks (IJR) have outperformed their large (IVV) and mid-cap (IJH) peers this year and our outlook remains more bullish for small-caps relative to these peers. Earnings have been one of the main drivers of the impressive U.S. equity market performance. Our outlook remains cautiously bullish with relatively strong technical, sentiment and macroeconomic signals. New economic data has also been solid recently. Payroll growth, initial jobless claims, retail sales, industrial production and consumer and credit sentiment have all been moving in positive directions.
|June 29, 2018||
What appeals to you about U.S. large-cap equities (IVV) heading into the second-half of the year?
The U.S. economy is still fundamentally strong with job growth accelerating since September 2017 and unemployment rates reaching new lows. Wage growth, as measured by the employment cost index for private wages, has also been rising which is generally consistent with the tightening labor market and a narrowing in the unemployment rate gap. Manufacturing has become one of the stronger components of the U.S. economy with almost all of the regional economies picking up steam in recent months. As a result of this positive economic data our market timing model shows a slightly more bullish outlook for the U.S. equity market compared with the first quarter’s outlook.
Sentiment remains optimistic as the U.S. consumer is feeling more upbeat about its current financial situation. However, the Trump administration’s formal announcement of additional tariffs on Chinese imports has raised concerns about trade tension between the two largest economies in the world. These tariffs could increase uncertainty and weigh heavily on financial market conditions and the collective sentiment.
|January 3, 2018||
What drove the additional allocation to U.S. equities in the global growth portfolios and how do you like the asset class heading into 2018?
We increased exposure to IVV (iShares Core S&P 500 ETF) as our model indicated a relatively bullish outlook for the U.S. equity market with stronger sentiment and macroeconomic signals. Leading sentiment indicators climbed or stayed at high levels in 2017 and producer sentiment recently strengthened. The ISM manufacturing index remained solid the last three months driven by the belief that the U.S. manufacturing conditions are improving as the global economy has strengthened and the U.S. dollar has depreciated. The homebuilder sentiment index also climbed steadily this quarter hitting 74 in December, the highest level since July 1999, indicating that the housing market is well positioned for growth in the coming months. Macroeconomic data became more bullish with the labor market continuing to tighten. Weekly initial jobless claims fell four consecutive weeks in late November and early December while industrial production posted steady gains for the last three months of the year.
We remain cautiously optimistic heading into 2018, seeing both strong growth indications as well as some cautious signals. The steady pace of economic growth is likely to be among the most significant drivers for the domestic equity market going forward. With the tightening labor market, wage growth, and surging stock and housing prices, consumers were one of the strongest sources of growth and will be looked upon to continue driving the economy moving forward. However, with the winding down of quantitative easing and possibly higher interest rates, risks remain for U.S. equity prices. We monitor these risks daily, especially as stock market valuations remain stretched.
For more commentary from CIO Patrick Jamin on the final quarter of 2017, Click Here
|October 4, 2017||
What led to the trimming of United Kingdom equities (EWU)?
Our model showed relatively weaker valuation, technical and sentiment indicators for EWU. UK’s economic leading indicator was not as optimistic as the Eurozone or other regions and countries. Economists forecasted U.K.’s GDP projection for the year to be 1.6%, down from 1.8% last year.
The industrial sector, which continued to expand but failed to recoup losses from earlier in the year, was another negative signal. This confirms our view that factory growth will fail to offset 2017’s consumer-led slowdown in the service sector despite the pound’s sharp depreciation. We are also cautious about the long-term outlook of UK’s economy and equity market.
The fallout from departing the EU may have ripple effects on the economy and too many questions still remain before a clear picture of the post-Brexit U.K. emerges.
To view more comments, check out a recent article published in the Investor's Business Daily, click here.
|September 20, 2017||
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