Markets in perspective – April 2016 in review

April 2016 Capital Markets Reutrns

Sources: U.S. Equity: Russell 3000® Index, Non-U.S. Equity: Russell Developed ex-U.S. Large Cap Index, Emerging Markets: Russell Emerging Markets Index, U.S. Bonds: Barclays U.S. Aggregate Bond Index, Global REITs: FTSE EPRA/NAREIT Developed Real Estate Index, Commodities: Bloomberg Commodity Index, Balanced: 30% U.S. Equity, 20% Non-U.S. Equity, 5% EM, 35% Bonds, 5% REITs, 5% Commodities.

The following is the Russell Investments Chief Investment Officers’ views of the key themes affecting market performance in April 2016. All data is as of April 30, 2016. Sources and indexes used to represent asset classes can be found in the disclosures at the end of this post.

ECONOMIC FACTORS

1. Global economy grinds along

The U.S. economy hit a soft patch (again) in the first quarter of 2016, but a healthy consumer sector is forecasted to push U.S. Gross Domestic Product (GDP) growth back towards 2% over the course of 2016. Meanwhile, the eurozone economy outpaced expectations, growing at a 2.2% annualized pace in the first quarter. In addition, activity in China stabilized on the back of the government’s earlier stimulus measures.

2. Central Banks do nothing

The Federal Reserve (Fed), European Central Bank (ECB) and Bank of Japan (BOJ) all left interest rate policy unchanged in April. For the Fed, this was not a surprise as they want more evidence of a second quarter rebound before embarking on the next rate hike. The BOJ’s decision not to ease policy further was a significant disappointment, however. Japanese equities retraced earlier gains, and the yen appreciated against the U.S. dollar.

3. Oil rallies again

Crude oil rallied from $38 to $46 per barrel in April. While crude oil inventories remain elevated, a weaker U.S. dollar and a modest reduction in U.S. oil production estimates helped drive more favorable pricing.

Looking forward

We expect a modest rebound in U.S. GDP growth in the second quarter. Evidence of this will be important for the Fed as it considers whether to raise interest rates in June.

EQUITIES

1. Currency appreciation drives international equity returns higher

Accommodative central bank policies, positive macro data, and increasing commodity prices led to positive market returns overall with international markets outperforming the U.S. Improving economic data in Europe, increasing oil prices and China stimulus all aided the general risk appetite for international assets. Canada was the best performing region in April (6.8%) followed by Japan (4.6%) and Developed Europe (2.52%), in USD terms respectively. Fed dovishness caused most developed currencies to strengthen further vs. the U.S. dollar. Currency appreciation was most prevalent in Japan, aided by BOJ’s inaction. In fact, the Japanese local market was one of the worst performers with the Japanese yen rally driving most of the positive returns, in USD terms. Currency appreciation, aided by increasing commodity prices, was also a factor in Canadian equity returns.

2. Risk aversion continues to subside

With global economic data showing signs of improvement and/or stabilization, the “risk on” rally that started in mid-February spread across global equity markets. Across most regions, lower capitalization and value stocks led markets in April. Within this environment, other factors with broadly positive payoff included lower quality, higher volatility and lower momentum.

3. Energy, materials, and financials outperform

Energy stocks continued to outperform as oil prices rebounded further. With the decrease in negative sentiment about the global economy, metals and mining stocks led the materials sector upward. The financial services sector joined the market rally with bank stocks leading due to better-than-expected earnings.

FIXED INCOME

1. Global growth ticks up

There was moderate global growth due to some stabilization in Chinese economic data and capital outflows and eurozone growth exceeding expectations during the first quarter. Government bond yields moved higher as a result, and credit sectors were supported globally. Lower-quality sectors and emerging market debt outperformed partly as a result of crude oil’s rally from $38 to $46 per barrel.

2. U.S. economic data softens

First quarter GDP was lackluster, coupled with a continued slowdown in corporate earnings growth. USD depreciated against most currencies, including emerging market currencies.

3. U.S. bond markets outperform Europe

European government bond yields moved higher more sharply than the U.S.’s amid positive economic performance and the ECB’s decision to leave policy rates unchanged. In addition, the U.S. (especially corporate issuers) benefited more than Europe from April’s rally in oil prices.

ALTERNATIVES

1. Equities grind along

Global listed real estate investment trusts (REITs) were flat, but still remained well ahead of equities year-to-date. April brought a partial reversal of regional performance trends seen in first quarter. Hong Kong, UK and Japanese developers and U.S. office REITs all bounced back after macro-driven weakness. Earnings announcements served as a catalyst. April REIT merger and acquisition activity in the U.S. also helped.

2. Central bank policies diverge

Policy divergence continues to be a major theme for infrastructure globally. The spread between U.S. and eurozone short-term yields continues to be close to historic highs. The U.S. 10-Year Treasury yield was up slightly in April. The performance of infrastructure utilities was strong; this was led by regulated electrics. Continued negative interest rates in Japan helped sustain the Japanese REIT sector, which continues to outperform.

3. Oil rallies again

Commodities posted strong gains; the Bloomberg Commodity Index was up +8.5%, led by energy (+13.4%), and followed by agriculture and metals. The continued, sharp rise in crude prices (up nearly 20% year-to-date) was a tailwind for the energy infrastructure sector and Canadian REITS. However, this did hurt hedge fund managers who shorted energy. Expectations for further tightening in global oil fundamentals and a more stable U.S. dollar support our positive view for commodity markets for the second half of 2016.

Asset Class Dashboard – April 2016

The April reading of the Asset Class Dashboard improved again with half of the asset classes now showing a positive return over the past 12 months. Small Cap equities returned to their historical typical range, meaning now only commodities and cash have 12 month returns that are below their respective historical typical ranges. Emerging Markets Debt and Large Cap Defensive equities continue to lead the way over the last 12 months, with Emerging Markets Equities and Commodities lagging the group.

Asset Class Dashboard April 2016

Large cap U.S. equity: Russell 1000® Index, Large cap Defensive U.S. equity: Russell 1000 Defensive Index, Large cap dynamic U.S. equity: Russell 1000 Dynamic Index, Small cap U.S. equity: Russell 2000 Index, Non-U.S. Equity: Russell Developed ex-U.S. Large Cap Index, Global equity: Russell Developed Large Cap Index, Emerging markets: Russell Emerging Markets Index, Commodities: Bloomberg Commodity Index, Global infrastructure: S&P Global Infrastructure Index, Global real estate: FTSE EPRA/NAREIT Developed Index, Cash: Citigroup 3-Month U.S. Treasury Bill Index, Global high yield bonds: Bank of America Merrill Lynch (BofAML) Global High Yield Index, Emerging markets debt: JP Morgan Emerging Markets Bond Index Plus, U.S. bonds: Barclays U.S. Aggregate Bond Index.

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.

The bottom line

Markets moved higher again in April as positive economic data helped ease investors’ global recession concerns. U.S. equities posted small gains despite lackluster GDP results, however improving economic data in Europe, Chinese stimulus, a weak dollar and increasing oil prices all lead to non-U.S. equities outperforming the US for the month. Real assets continue to have a strong year as Infrastructure remained the top asset class year to date, followed closely by commodities after another rally in the price of oil during the month. Going forward, we expect to see a rebound in U.S. GDP in the 2nd quarter, however continue to favor regions with more attractive valuations, such as the Eurozone and Japan.

Corresponding indexes/sources by section:
Economic factors
• Oil represented by WTI crude prices

Equities
• Oil represented by WTI crude prices
• Emerging markets represented by the Russell Emerging Markets Index
• Sectors represented by Russell 1000® Index sectors: Utilities, Financials, Biotechnology, and Energy
• Currency returns source: Bloomberg
• Non-U.S. represented by Russell Global ex-US Index
• Defensive represented by Russell 1000® Defensive Index
• Dynamic represented by Russell 1000® Dynamic Index

Fixed Income
• Broad fixed income represented by the Barclays U.S. Aggregate Bond Index
• Government bonds represented by Barclays U.S. Treasury Index
• Emerging market bonds represented by EM USD Aggregate Bond Index
• Investment grade bonds (credit)represented by Barclays U.S. Corporate Investment Grade Index
• High yield represented by high yield sector of the Barclays U.S. Aggregate Bond Index
• Japanese bonds represented by the Bloomberg Japan Sovereign Bond Index
• European bonds represented by the Bloomberg Eurozone Sovereign Bond Index

Alternatives
• Commodities represented by Bloomberg Commodities Index Total Return
• REITs represented by FTSE EPRA/NAREIT Developed Real Estate Index
• Infrastructure represented by S&P Global Listed Infrastructure Index
• Oil represented by WTI crude prices
• Hedge fund strategies data as observed across third party managers by Russell Investments

Investing involves risk and principal loss is possible.

Bond investors should carefully consider risks such as interest rate, credit, default and duration risks. Greater risk, such as increased volatility, limited liquidity, prepayment, non-payment and increased default risk, is inherent in portfolios that invest in high yield (“junk”) bonds or mortgage-backed securities, especially mortgage-backed securities with exposure to sub-prime mortgages. Generally, when interest rates rise, prices of fixed income securities fall. Interest rates in the United States are at, or near, historic lows, which may increase exposure to risks associated with rising rates. Investment in non-U.S. and emerging market securities is subject to the risk of currency fluctuations and to economic and political risks associated with such foreign countries.

In general, alternative investments involve a high degree of risk, including potential loss of principal; can be highly illiquid and can charge higher fees than other investments. Hedge strategies and private equity investments are not subject to the same regulatory requirements as registered investment products. Hedge strategies often engage in leveraging and other speculative investment practices that may increase the risk of investment loss.

Investments in emerging or developing markets involve exposure to economic structures that are generally less diverse and mature, and to political systems which can be expected to have less stability than those of more developed countries. Securities may be less liquid and more volatile than US and longer-established non-US markets.

Indexes and/or benchmarks 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 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 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.

Russell Developed Large Cap Index offers investors access to the large-cap segment of the developed equity universe. It is constructed to provide a comprehensive and unbiased barometer for the large-cap segment of this market, and is reconstituted annually to accurately reflect the changes in the market over time.

The Russell Emerging Markets 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.

Barclays U.S. Corporate Investment Grade Index: an unmanaged index consisting of publicly issued US Corporate and specified foreign debentures and secured notes that are rated investment grade (Baa3/BBB- or higher) by at least two ratings agencies, have at least one year to final maturity and have at least $250 million par amount outstanding.

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.

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.

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.

The S&P Global Infrastructure Index provides liquid and tradable exposure to 75 companies from around the world that represent the listed infrastructure universe. To create diversified exposure across the global listed infrastructure market, the index has balanced weights across three distinct infrastructure clusters: Utilities, Transportation, and Energy.

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.

Past performance does not guarantee future performance.

This material is not an offer, solicitation or recommendation to purchase any security.

Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type.

Russell Investments is the owner of the trademarks, service marks and copyrights related to its indexes.

Russell Investments is a trade name and registered trademark of Frank Russell Company, a Washington USA corporation, which operates through subsidiaries worldwide and is a subsidiary of London Stock Exchange Group.

Copyright © Russell Investments 2016. 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.

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