CIO3: Markets in Perspective
CIO3: Key Points on Global Market Themes
Here are the top three market themes affecting positioning and performance last month from some of our experts, including our CIOs (Chief Investment Officers) across Russell Investments. All data is as of September 30th, 2015 — for further information please see the disclosures section.
1. A less certain world
Volatility shot higher in Q3, as concerns in China and the emerging markets rippled through global markets. The U.S. Federal Reserve (“the Fed”) postponed its liftoff decision at the September meeting, leaving some residual uncertainty for investors.
2. Advanced economies chugging along
Economic activity in developed markets held up well in the face of market volatility. U.S. and European consumers continue to benefit from low energy prices and healthy domestic fundamentals.
3. Global interest rates pushed lower
Sovereign bond yields in U.S., Europe and Japan all moved lower in Q3 as investors shifted to safer investments. However, we expect rates to move higher as an improving U.S. economy is likely to prompt a Fed hike in December.
1. Defensives delivered
Given global concerns on growth and a flight to safety, defensive stocks led dynamic by a significant margin for Q3. Value stocks also lagged by a meaningful amount given their riskier composition and exposure to commodities. Small cap slightly underperformed large cap as liquidity and risk appetite impacted returns.
2. Ongoing impact of China’s weakness
Global financial markets were impacted by concerns about Chinese economic growth. Emerging markets equities and select regional equities (specifically Hong Kong, Australia and Canada) suffered the most.
3.Sector dispersion rises
Consistent with broad market themes, energy and material sectors sold off significantly. Commodity prices, leverage and overcapacity put continued pressure on energy and materials stocks. Consumer staples stocks held up the best given their more defensive profile.
1. The Fed waits again
Led by U.S. Treasuries, G7 government bonds rallied following the Fed’s announcement in September. Primarily, the intermediate- and long-term portions of the yield curve led the rally.
2. Ongoing impact of China’s weakness
Global high-yield and emerging markets spreads widened the most relative to other sectors due to volatility in commodity prices and lower energy prices. These credit concerns were related to worries around China’s growth prospects and the impact of the Chinese stock market crash.
3. The dollar dominates
The U.S. dollar was stronger relative to most other major currencies. This was due to the Fed’s more hawkish stance compared to other global central banks less insulated from the negative impacts of a Chinese slowdown.
1. Commodities sell off
Commodities fell across the board in Q3 (-14.5%). This was driven by a weakening outlook for China and other emerging markets as well as a softer environment for most risk assets. After a rally in Q2, oil slid 27.4% as the supply overhang continued. This decline contributed to the infrastructure pipelines sector falling by a similar amount to end up the biggest laggard in the benchmark. Commodities impacted high-yield spreads and hurt long-biased, credit hedge funds. However, systematic Tactical Trading managers benefited from their short-biased commodities positioning.
2. Heightened global equity volatility
REITs fell modestly (-1.6%), but performed well above global equities
(-11%). Chinese and emerging markets turmoil in August resulted in wide dispersion (some over 20%) of regional REIT returns. Reversals across global equities created a difficult trading environment for fundamental-based equity hedge funds’ strategies. However, certain factor exposures (i.e. momentum) helped boost some quantitative equity-based hedge funds’ performance.
3. The Fed waits again
The September decision to not raise rates caused intra-month fluctuations and heightened volatility across multiple asset classes. This affected interest rate and currency positions in discretionary macro hedge funds, although modest when compared to equity losses. The fall in U.S. 10 year Treasury rates helped U.S. REITs with short leases and electric utilities in the listed infrastructure rally in Q3. These were among the strongest sectors in the benchmark.
Asset Class Dashboard – September 2015
The September reading of the Asset Class Dashboard continues to show 12-month returns for most asset classes within the “Typical Range” of historical returns, albeit many are towards the lower end of that range as a result of a negative September and third quarter of 2015.
Cash, Commodities and Global Infrastructure are the largest outliers and all three are now beyond their typical historical range. Meanwhile all asset classes are below the median of their historical returns (denoted by a gray line in the center of a blue bar). In the last 12-month period, U.S. Bonds have the highest absolute return at 2.9%.
How do I read this chart?
This dashboard is intended as a tool to set context and perspective when evaluating the current state of a sample of asset classes.
The ranges of 12 month returns for each asset class are calculated from its underlying monthly index returns. The stated inception date is the first full month of an index’s history available for the dashboard calculation.
Here is how to read the graphic on this page:
FOR EACH INDICATOR, THE HORIZONTAL BAR SHOWS FOUR THINGS
A GRAY BAR shows the full range of historical rolling 12-month returns for a sample of asset classes.
A BLUE COLOR BAND represents the typical range (one standard deviation away from the mean, i.e. 68% of historical observations) of rolling 12-month returns for these asset classes.
AN ORANGE MARKER represents the most recent 12-month return of the asset classes.
A WHITE LINE within the blue bar represents the mean of the historical observations.
All data is as of September 30, 2015.
Corresponding indexes/sources by section:
• Volatility represented by VIX Index
• Volatility represented by VIX Index
• Global equities represented by Russell Global Equity Index
• Sectors represented by Russell 1000® Index Energy, Materials, and Consumer Staples sectors
• Hong Kong represented by Russell Hong Kong Index
• Australia represented by Russell Australia Index
• Canada represented by Russell Canada Index
• G7 consists of Canada, France, Germany, Italy, Japan, the United Kingdom, and the U.S.
• Investment grade bonds represented by Barclays U.S. Corporate Investment Grade Index and Barclays Euro-Aggregate: Corporates Index
• High yield represented by Barclays U.S. High Yield Index and Barclays Global High Yield Index
• Emerging market debt represented by Barclays EM USD Aggregate Index
• Commodities represented by Bloomberg Commodities index
• Oil represented by WTI crude prices
• Infrastructure represented by S&P Global Listed Infrastructure Index
• REITs represented by FTSE EPRA/NAREIT Developed Real Estate Index
• Hedge fund strategies data as observed across third party managers by Russell Investments
Investing involves risk and principal loss is possible.
The Russell Global Index measures the performance of the global equity market based on all investable equity securities. The index includes approximately 10,000 securities in 63 countries and covers 98% of the investable global market. All securities in the Russell Global Index are classified according to size, region, country, and sector, as a result the Index can be segmented into more than 300 distinct benchmarks.
The Russell Global Large Cap Index measures the performance of the largest securities in the Russell Global Index, based on market capitalization. The index includes approximately 3,000 securities and covers 86% of the investable global market.
Barclays Emerging Market Bonds Index includes fixed-and floating-rate USD-denominated debt from emerging markets in the following regions: Americas, Europe, Middle East Africa, and Asia. For the index, an emerging market is defined as any country that has a long term foreign currency debt sovereign rating of Baa1/BBB+/BBB+ or below, using the middle rating of Moody’s, S&P, and Fitch.
Barclays U.S. Aggregate Bond Index is an index, with income reinvested, generally representative of intermediate-term government bonds, investment grade corporate debt securities, and mortgage-backed securities.
VIX is an index calculated by the Chicago Board Options Exchange (CBOE). The VIX represents one measure of the market’s expectation of stock market volatility over the next 30-day period.
Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.
Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.
The S&P 500® Index is a free-float capitalization-weighted index published since 1957 of the prices of 500 large-cap common stocks actively traded in the United States. The stocks included in the S&P 500® are those of large publicly held companies that trade on either of the two largest American stock market exchanges: the New York Stock Exchange and the NASDAQ.
Bloomberg Commodity Index Total Return: Composed of futures contracts on physical commodities. Unlike equities, which typically entitle the holder to a continuing stake in a corporation, commodity futures contracts normally specify a certain date for the delivery of the underlying physical commodity. In order to avoid the delivery process and maintain a long futures position, nearby contracts must be sold and contracts that have not yet reached the delivery period must be purchased. This process is known as “rolling” a futures position.
FTSE EPRA/NAREIT Developed Real Estate Index is a global market capitalization weighted index composed of listed real estate securities in the North American, European and Asian real estate markets.
Barclays U.S. Aggregate Bond Index: with income reinvested, generally representative of intermediate-term government bonds, investment-grade corporate debt securities and mortgage-backed securities.
The Russell 1000® Index measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000® Index and includes approximately 1000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000® represents approximately 92% of the U.S. market.
The Russell 2000® Index measures the performance of the small-cap segment of the U.S. equity universe. It is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.
The Russell 3000® Index: Measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market.
The Russell Developed ex-US Large Cap Index offers investors access to the large-cap segment of the developed equity universe, excluding securities classified in the US, representing approximately 40% of the global equity market. This index includes the largest securities in the Russell Developed ex-US Index.
Russell Emerging Markets Index: Index measures the performance of the largest investable securities in emerging countries globally, based on market capitalization. The index covers 21% of the investable global market.
Russell Investments is a trade name and registered trademark of Frank Russell Company, a Washington USA corporation, which operates through subsidiaries worldwide and is part of London Stock Exchange Group.
Copyright © Russell Investments 2015. All rights reserved.
This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an “as is” basis without warranty.