Global equity markets have declined in recent weeks, giving up some of the gains posted during the first 4 to 5 months of the year. Nevertheless, global equities remain solidly in positive territory for the year, with currency-hedged European and Japanese equities leading the way. It is also worth noting that despite the recent declines, equity market volatility has remained relatively low.
This lack of equity market volatility contrasts with the high levels of volatility we’ve witnessed in currency, fixed income, and commodity markets this year. The trend of increasing volatility in these markets should be worrisome to all investors. It reflects uncertainty and a lack of confidence in economic policy in many parts of the world, which may bode poorly for future economic growth.
Business confidence is a very important factor in maintaining strong economic growth. Exchange rates, interest rates, and commodity input costs are some of the most important factors considered by businesses making long-term capital investments, and heightened uncertainty surrounding their future levels makes it more difficult to make long-term capital commitments. It is not surprising then, that US core capital expenditures have declined by 8% since peaking last September (St. Louis Fed, Manufacturer’s New Orders: Nondefense Capital Goods Excluding Aircraft). On the other hand, monetary policy remains very accommodative, and credit conditions are supportive of growth. This has enabled the US economy to maintain its expansion despite these headwinds.
We will discuss the global currency and interest rate environment in greater detail in our upcoming Webinar, Currencies and Fixed Income: The New Volatility, hosted by John Forlines III on Thursday June 18th, which we encourage you to attend.
We hold a large position in developed market equities and have relatively lower exposure to fixed income. Overall, our GTA portfolio holds 32% dollar denominated fixed income, 24% US equities, 34% international equities, 8% alternatives, and 2% cash and equivalents. We favor equities to fixed income, and have limited our foreign currency and commodity exposure.
Our exposure in fixed income is limited to dollar denominated securities. We hold positions in high yield bonds, preferred stock, Build America Bonds, and dollar denominated emerging market debt. This gives us exposure to spread product and the long end of the interest rate curve while avoiding treasuries and foreign currencies.
International equities have been hit especially hard in the recent selloff, but have still outperformed their US peers year-to-date. We expect this outperformance to continue in the second half of the year, and have maintained our large foreign equity allocation.
The ECB’s quantitative easing program has driven a strong rally in European stocks, and we expect that to continue. We have split our European equity exposure evenly between hedged and unhedged with respect to the Euro in order to minimize the impact of high currency volatility. Spanish equities in particular are attractive after underperforming in recent years, and provide very good relative value to other Eurozone equities.
We hold positions in Japanese equities, in both yen- hedged and unhedged forms. Favorable policy will continue to support Japanese equities, and we expect them maintain their outperformance. We have recently added to our hedged-yen Japanese equity position.
We hold a position in mortgage REITS. We do not expect the interest rate curve to flatten too severely in the intermediate term, which should support mortgage REITS.
*Emerging Markets allocation overlaps with regional allocations**Excluding GTA’s 42% fixed income, alternative, and cash positions
JFG Team JAForlines, LLC Investment Management AdvisorRelations@jaforlines.com www.jaforlines.com
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