New York, June 12th, 2015, Markets in Motion™

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New York, June 12th, 2015, Markets in Motion™

Macro Backdrop:

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. 

Portfolio Positioning:

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 

For Investment Professionals Only
Past performance is no guarantee of future results.
The material contained herein as well as any attachments is not an offer or solicitation for the purchase or sale of any financial instrument. It is presented only to provide information on investment strategies, opportunities and, on occasion, summary reviews on various portfolio performances. Returns can vary dramatically in separately managed accounts as such factors as point of entry, style range and varying execution costs at different broker/dealers can play a role. The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts are inherently limited and should not be relied upon as an indicator of future results. There is no guarantee that these investment strategies will work under all market conditions, and each advisor should evaluate their ability to invest client funds for the long-term, especially during periods of downturn in the market.

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The views expressed are current as of the date of publication and are subject to change without notice. There can be no assurance that markets, sectors or regions will perform as expected. These views are not intended as investment, legal or tax advice. Investment advice should be customized to individual investors objectives and circumstances. Legal and tax advice should be sought from qualified attorneys and tax advisers as appropriate.