Markets In Motion, June 9th 2016

posted on
Markets In Motion, June 9th 2016

Macro Backdrop:

Far too often investors confuse politics for policies. In most cases economic and demographic forces are much more powerful than parties and politicians, and it is therefore wise to focus on those longer-term trends and not get caught up in the day-to-day mudslinging that makes up modern politics.

However, there are times when new political forces rise to challenge the established hegemonies and can upset long-term policy trends. These inflection points are important for investors to take note of and be careful not to misinterpret or misunderstand. The rise of populist politicians in the US and Europe may be one of those inflection points.

Disappointing economic growth and increasing inequality in the US and Europe following the global financial crisis have generated a rising sense of disenfranchisement amongst large portions of the population. Additionally, the erosion of manufacturing jobs in the US and the influx of African and Middle Eastern immigrants in Europe have increased political tensions.

These factors have propelled candidates who seek to overthrow the prevailing political establishment. In the US, the progressive left has blamed corporations and the wealthy, promising prosperity through regulation and redistribution. The populist right has blamed foreign foes, promising prosperity through restrictive immigration and mercantilist trade policies. In Europe, where progressive left policies have made much more headway in recent decades, it is the resurgent nationalist and populist right which primarily threatens to upset the current political order. Bureaucrats consolidating power in Brussels, and the open-borders policies they have enacted, are the targeted scapegoats.

The success or failure of these emergent political movements will have major impacts on the global economy and asset markets. As international trade and finance have become more intertwined, the erection of new borders restricting movement of capital, goods, and labor may allow politics to determine winners and losers in investors’ portfolios more so than in decades past. Join John Forlines III for a discussion of the current political environment and how to “Make Your Portfolio Great Again” on Tuesday, June 14th at 3:00 EDT.

Right-wing Eurosceptic parties in the European Parliament

Ideological distance between median members of US Congressional parties


GTA Portfolio Positioning

Our equity and fixed income exposure is globally diversified. Overall, our GTA portfolio holds 47% fixed income, 18% US equities, 28% international equities, 5% alternatives, and 2% cash. Our fixed income holdings target high quality issues, longer duration, and are globally diversified. Our equity holdings are globally diversified and our international equity exposure is not currency-hedged, enabling us to benefit from a weakening US dollar.

Our fixed income allocation provides us with global diversification through positions in long-duration US treasuries, investment grade corporate bonds, preferred stock, foreign currency denominated international high yield bonds, and dollar-denominated emerging market debt. Our allocation to international high yield bonds, 87% of which are European and have been buoyed by ECB policy, has been particularly strong for us, up 10.5% since we initiated the position on March 3rd.

Our US equity exposure is focused on conservative companies and sectors. We hold a position in low volatility US equities and have recently initiated a position in high dividend paying equities. This increases our relative exposure to companies with stable earnings, helping us navigate a volatile policy environment.

We hold a large position in low volatility equities across Europe, Australia, and Asia (EAFE). This gives us exposure to companies with stable earnings, as the policy environment abroad has also become more volatile. It also gives us significant exposure to foreign currencies, as we expect the US dollar to continue to depreciate.

We hold positions in Canadian and Australian equities. This gives us exposure to commodity-sensitive assets, which have rallied this year after their major selloff in 2014 and 2015. Additionally, both countries have recently announced substantial fiscal stimulus plans to boost their domestic economies, which will support domestic demand and corporate earnings. This is a rare tailwind in a global economy that has been deprived of positive fiscal policy measures for years.

We hold a position in emerging market low volatility equities, our first exposure to emerging market equities since 2014. After years of underperformance, emerging market equities represent good relative value, and investor sentiment has begun to improve. By allocating to low volatility equities, we are targeting conservative companies with stable earnings, and avoiding cyclical companies and sectors.

We continue to hold a position in gold, which should be supported by a weaker dollar and increased inflation, as well as elevated volatility. Additionally, as an asset with low correlations to most others, it should lower overall portfolio volatility.

*Some Emerging Markets allocation overlaps with regional allocations.

^Excluding GTA’s 54% fixed income, alternative, and cash positions.

**Individual account allocations may differ slightly from model allocations.

JFG Team
JAForlines, LLC
Investment Management

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.

| Categories: Articles | Tags: Europe, Politics | Return

Media Categories


Latest Posts

About JAForlines Global

JAForlines has been acquired by and operates through W.E. Donoghue & Co., LLC.
W.E. Donoghue is a registered investment adviser with United States Securities and Exchange Commission in accordance with the Investment Advisers Act of 1940.

Learn More

Client Relationship Summary

Download Form CRS

Latest Posts

Contact Details

W.E. Donoghue & Co., LLC
Tel: (516) 609-3370


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.