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Markets in Motion - April Showers Bring May Flowers

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Markets in Motion - April Showers Bring May Flowers

It’s April, so it should surprise no one that Europe is in the news again making markets jittery—it just wouldn’t be spring without it. This time it’s about the formerly slow-moving train wreck known as BREXIT and the impact of an imminent “hard” and very fast crash out of the EU. Here’s a contrarian view: maybe a “hard” BREXIT is the very best outcome for at least two big European countries. France looks strong for not pandering to UK politicians who have screwed up the decision to leave and the exit process, while the UK gets certainty. The big loser here is Germany, who essentially loses their most aligned trading and political partner. Certainty, bringing either immediate good or bad results, is a behavioral construct deeply embedded in investors’ psyche.

2019-04-chart-1What we continue to focus on, and what has been driving risk markets higher over the last ten years, is the enormous amount of liquidity being supplied by global central banks and a negative global short-term real rate of interest. Yet given the nature of the Great Recession and the deflationary cycle we’ve found ourselves in, central banks will continue to be unsuccessful in generating the type of growth they would like. For this reason, we expect them to continue to pursue this type of policy until inflation begins to take hold. Inflation is tame in most of the developed world, giving central banks the green light to keep their foot on the pedal.

In the US, the Fed is still incredibly accommodating, promising more transparent balance sheet guidelines in June as well as effectively postponing any further rate increases until at least late 2020. It is possible that the US rate move could be a cut. The prospect of easier liquidity conditions helped make the first quarter of 2019 one of the best ever quarters for US equities.

We believe that other big winners in this environment are equities in Asian emerging markets that do not depend on Chinese commodity demand. China is a big wildcard, but there is “certainty value” to a centrally planned economy—there is little doubt that the government is working hard to stimulate growth. Tax rates on individuals and businesses have been cut and the PBOC has reduced reserve requirements by 350 bps over the past year. Despite the fact that the February credit growth print was awful, the six-month credit impulse, a leading indicator of economic growth, has turned decisively higher.

2019-04-chart-2We’ve had a solid start to the year with a neutral exposure to equities. Our sector and regional exposure both punched above their weight. We are looking for some political certainty from the BREXIT fall-out to take more exposure to Europe. In fixed income, we are being paid handsomely at the short end of the curve and continue to have good performance from our high yield and emerging market spread products. April will have its “showers,” but the feel of 2019 is decidedly sunnier than 2018.

2019-04-chart-3

Recent Portfolio Changes

  • 2019-04-chart-4We have made a classification change to one of our holdings which affects our overall asset allocation. We now classify our Ultrashort Maturity Bond position as fixed income and not a cash equivalent. While its very low-price volatility resembles a cash equivalent, its underlying holdings and characteristics warrant its inclusion in our fixed income allocation. We think this change better represents its characteristics.
  • We exited our position in US healthcare. We removed our overweight stance to healthcare. Longer term, demographics favor increased demand for facilities and services. This defensive sector will be left behind in relative performance terms in a potential blow off phase of a rapidly aging bull market.
  • We initiated a position in US Industrials. Some nascent signs of global growth bottoming justify an upgrade to this cyclical sector. When global growth re-accelerates it will reinvigorate demand for capital goods.
  • We trimmed Ultra Short-Term Duration exposure to slightly add to risk assets.

Portfolio Changes

Since December 31, 20181

Fixed Income (US)

We continued to increase our position to Ultrashort Maturity Bond. After a ~17% bounce for ACWI, the index is at strong resistance levels and has yet to break out of a sideways trend from 2018. It moved from “extreme” oversold conditions to overbought very quickly. Huge moves in interest rates have left government bonds at extreme overbought levels – reflecting a very bearish view of economic growth. High levels are warranted

We trimmed our positions in Preferred Stocks. We remain convicted in our position, and believe they have a positive tailwind in place, but trimming risk at overbought levels is prudent.

Avoiding long duration fixed income in our portfolios: We favor ultrashort duration at the expense of allocations to long-dated fixed income. Interest rates will continue to move higher leading to uninspiring total returns to duration.

Fixed Income (International)

We trimmed our positions in Emerging Market Bonds. We continue to maintain Emerging Market Bonds – it’s attractive yield and the current tailwinds for emerging markets will continue to provide the diversification benefits to the portfolio but trimming risk at overbought levels is prudent.

Equity (US)

We exited our positions in Healthcare and Value, as well as trimmed our position in Technology. We initiated and maintain a position in Quality Factor equities. We continued to consolidate exposure in our US equity book. Quality equities possess pricing power, exhibit strong profitability, and have additional sustainable competitive advantages which allow businesses to remain viable over time. We feel this holding is prudent in the later stages of the US credit cycle. The pace of disruption of old industries by new products and processes has continued to accelerate, and technology gives us exposure to this process of creative destruction.

Equity (International)

We added to our position in Emerging Market equities and continue to maintain it. The most important risk to emerging markets—a big Chinese growth slowdown or collapse in its currency—is unlikely. We are still watching the effects the trade war with China could have on Asia, but tensions are easing and our overall outlook is more positive. We believe that these risks are now mainly contained, and despite a strong rebound year-to-date, China’s equity markets still have plenty of headroom. This has been bolstered by evidence of China scaling back their deleveraging campaign – January credit growth data exploded. We are now overweight emerging market equities.

We exited our position in Global Consumer Staples and initiated a position in Developed Market Equities (ex-US). We removed a defensive sector tilt and added exposure to our International equity allocations. Our portfolio remains underweight Eurozone equities.

Alternatives

We exited our position in Mortgage REITs. We trimmed but maintain a position in Energy MLPs. We are concentrating our alternative exposure around our convicted view in  Energy MLPs. The oil rout that began in October appears to have run its course. Oil seems to have found a bottom, and at this point, a regime failure in Venezuela is a high probability event which poses immediate risks to global oil production – a positive for WTI & Brent prices and a tailwind for energy infrastructure.


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Please do not hesitate to contact us with any questions!
Best regards,

John A. Forlines III

Chief Investment Officer

Robert Shea

Co-Chief Investment Officer


1Information as of 4/1/2019. Individual account allocations may differ slightly from model allocations.
2Some Emerging Markets allocation overlaps with regional allocations.
3Excludes GTA’s alternative, cash, and cash equivalent positions.
4Contains international exposure

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. Some products/services may not be offered at certain broker/dealer firms.

The investment descriptions and other information contained in this Markets in Motion are based on data calculated by W.E. Donoghue & Co., LLC (W.E. Donoghue) and other sources including Morningstar Direct. This summary does not constitute an offer to sell or a solicitation of an offer to buy any securities and may not be relied upon in connection with any offer or sale of securities. This report should be read in conjunction with W.E. Donoghue’s Form ADV Part 2A and Client Service Agreement, all of which should be requested and carefully reviewed prior to investing.

The Global Tactical Allocation Composite (“Composite”) was created on July 1, 2009. The Global Tactical Conservative Composite (“Composite”) was created on February 1, 2014. The Global Tactical Income Composite (“Composite”) was created on February 1, 2014. The Global Tactical Growth Composite (“Composite”) was created on February 1, 2015. W.E. Donoghue acquired 100% of the assets of JFG on December 29, 2017.

Composite returns are calculated gross of investment management fees, net of investment trading expenses and underlying fund costs but do not reflect the effect of income taxes on the investment returns. Actual performance results will be reduced by fees including, but not limited to, investment management fees and other costs such as custodial, reporting, evaluation and advisory services. Performance reflects the reinvestment of dividends, income, and capital appreciation. Composite returns are calculated monthly, which are described in greater detail in the firm’s Form ADV Part 2A, using the time-weighted total rate of return methodology. Monthly returns are geometrically linked to calculate quarterly and annual returns. As fees are deducted quarterly, the compounding effect will be to increase or decrease their impact by an amount directly related to gross portfolio performance, and dependent on direction, magnitude, and order of returns. For example, on a portfolio with a 2% annual fee, if gross performance is 10%, and performance is equally distributed across all four quarters, the compounding effect of the fees will result in a net annual performance of 7.81%. No leverage, derivatives, or shorts are used. Past performance is not indicative of future results.

There can be no assurance that the purchase of the securities in this portfolio will be profitable, either individually or in the aggregate, or that such purchases will be more profitable than alternative investments. Investment in any Global Tactical Portfolio, or any other investment or investment strategy involves risk, including the loss of principal; and there is no guarantee that investment in W.E. Donoghue’s Portfolios or any other investment strategy will be profitable for a client’s or prospective client’s portfolio. Investments in W.E. Donoghue’s Portfolios, or any other investment or investment strategy, are not deposits of a bank, savings, and loan or credit union; are not issued by, guaranteed by, or obligations of a bank, savings, and loan, or credit union; and are not insured or guaranteed by the FDIC, SIPC, NCUSIF or any other agency. The composite strategy provides diversified exposure to various asset classes such as equities, fixed income, and alternatives utilizing liquid exchange-traded products. Diversification does not guarantee a profit or protect against a loss.

The Blended Benchmark Growth is a benchmark comprised of 65% MSCI ACWI, 25% FTSE World Government Bond Index, and 10% S&P GSCI, rebalanced monthly. The MSCI ACWI Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The FTSE Government Bond Index (WGBI) measures the performance of fixed-rate, local currency, investment-grade sovereign bonds. The S&P GSCI® is a composite index of commodity sector returns representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities. The returns are calculated on a fully collateralized basis with full reinvestment. The Blended Benchmark Growth returns do not include fees or expenses that are associated with managed accounts. You cannot invest directly in an index. A more detailed description of the benchmark's constituents is available upon request.

The Blended Benchmark Moderate is a benchmark comprised of 50% MSCI ACWI, 40% FTSE World Government Bond Index, and 10% S&P GSCI, rebalanced monthly. The MSCI ACWI Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The FTSE Government Bond Index (WGBI) measures the performance of fixed-rate, local currency, investment-grade sovereign bonds. The S&P GSCI® is a composite index of commodity sector returns representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities. The returns are calculated on a fully collateralized basis with full reinvestment. The Blended Benchmark Moderate returns do not include fees or expenses that are associated with managed accounts. You cannot invest directly in an index. A more detailed description of the benchmark’s constituents is available upon request.

The Blended Benchmark Conservative is a benchmark comprised of 35% MSCI ACWI, 55% FTSE World Government Bond Index, and 10% S&P GSCI, rebalanced monthly. The MSCI ACWI Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The FTSE Government Bond Index (WGBI) measures the performance of fixed-rate, local currency, investment-grade sovereign bonds. The S&P GSCI® is a composite index of commodity sector returns representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities. The returns are calculated on a fully collateralized basis with full reinvestment. The Blended Benchmark Moderate returns do not include fees or expenses that are associated with managed accounts. You cannot invest directly in an index. A more detailed description of the benchmark’s constituents is available upon request.

The Blended Benchmark Income is a benchmark comprised of 90% Bloomberg Barclays Global Aggregate Bond Index, and 10% MSCI ACWI, rebalanced monthly. The Bloomberg Barclays Global Aggregate Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. There are four regional aggregate benchmarks that largely comprise the Global Aggregate Index: the US Aggregate (USD300mn), the Pan-European Aggregate, the Asian-Pacific Aggregate, and the Canadian Aggregate Indices. The Global Aggregate Index also includes Eurodollar, Euro-Yen, and 144A Index-eligible securities, and debt from five local currency markets not tracked by the regional aggregate benchmarks (CLP, MXN, ZAR, ILS and TRY). A component of the Multiverse Index, the Global Aggregate Index was created in 2000, with index history backfilled to January 1, 1990. The MSCI ACWI Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The Blended Benchmark Income returns do not include fees or expenses that are associated with managed accounts. You cannot invest directly in an index. A more detailed description of the benchmark's constituents is available upon request.

The information contained in this presentation related to JAForlines represents the strategies and performance achieved prior to the acquisition.

W.E. Donoghue & Co., LLC is a registered investment advisor with the United States Securities and Exchange Commission in accordance with the Investment Advisors Act of 1940.

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