As of June 30, 2015. 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: Bloomberg U.S. Aggregate Bond Index; Global Real Estate Investment Trusts: FTSE EPRA/NAREIT Developed Real Estate Index; Commodities: Bloomberg Commodity Index Total Return; Hypothetical balanced portfolio: 30% U.S. Equity, 20% Non-U.S. Equity, 5% EM, 35% Bonds, 5% REITs, 5% Commodities. 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.
CIO3: Key Points on Global Market Themes
We’re excited to introduce Russell’s CIO3 content: from the asset class CIO perspective, the top three market themes affecting positioning and performance every quarter. Expect to see this incorporated into these monthly market posts
going forward. All data below is as of June 30, 2015.
- Greek deal remains slippery
Prospects of a late June deal between Greece and its creditors fizzled, threatening a “Grexit."
So far, economic contagion to broader financial markets has been relatively contained. After initially falling 5% the last weekend in June, eurozone equities stabilized and remain one of the top performing markets for the first half of 2015.1
Bonds behaved themselves with the German 10-year government bond yield ending the quarter at 77 basis points.2
- Better global economic data
The U.S. economy got off to a slow start in 2015 but second quarter data, including strong consumer and housing numbers, points to a broad-based reacceleration in economic activity. This improving macro backdrop supports our view that the most likely date for U.S. Federal Reserve (the Fed) interest rate hike is still September. The European recovery also remains healthy, with business surveys reaching a four-year high in June,3
driving government bond yields significantly higher over the quarter.
- U.S. dollar modestly weakened
The U.S. dollar took a breather in the second quarter, slipping 3% against the other developed market currencies.4
Oil prices were able to hold onto gains in April and ended the quarter in positive territory.5
- Factor performance rewarded dynamic companies6
The pickup in U.S. economic growth coupled with an improved European outlook drove more dynamic parts of the market. Companies with strong recent positive sentiment, as well as small cap companies, continued to do well at the expense of those with more defensive characteristics. Value equities led marginally on an international basis while U.S. markets showed a slight preference for growth.
- Mixed bag from a sector perspective7
A turbulent quarter left a mixed bag of results from a sector perspective. Utilities were the worst performing sector, mainly driven by rising interest rates. REITS, another interest rate sensitive sector, also struggled. Looking at other sectors: energy ended slightly down while financials, telecoms and healthcare were up.
- Eurozone and China back in the spotlight8
With a “Grexit” looming, risk aversion coupled with speculation on potential consequences for the euro sent regional markets lower in local currency terms. This was mitigated by a stronger euro over the quarter. The red-hot Chinese A share market had a significant drawdown of 20% this quarter over concerns about the economy’s health. While a cut in interest rates by the People’s Bank of China is supportive, it does indicate that the economy is struggling to maintain momentum.
- Government yields higher in developed markets
Yield curves steepened broadly across developed markets over the quarter, although with intra-period volatility as a result of a tantrum in German bund yields, ‘Grexit’ concerns and mixed U.S. economic data.9
- Higher yielding sectors outperformed10
Higher credit risk sectors (emerging markets and high yield) outperformed globally as energy prices recovered modestly from lows. Investment grade corporate spreads widened across the U.S. and Europe amid elevated new issuance
- U.S. dollar finished in the middle of the pack11
Emerging market currencies were broadly lower, however steady oil prices favored currencies of oil-exporting countries, like Russia and Brazil. European currencies outperformed other currencies on continued economic improvement and with expectations for Fed interest rate hikes being delayed until September at the earliest.
- Rising interest rates
An increase in U.S. 10 year Treasury rates was a drag on listed real estate, listed infrastructure sectors of electric and multi-utilities, as well as precious and industrial metal commodities. Tactical trading hedge fund managers were challenged by intra-period swings in global interest rates and currencies.12
- Dispersion of global returns
The situation in Greece affected several hedge fund strategies.13
High yield bond spreads widened; a negative for event driven-credit. Global equity markets sold off; a negative for fundamental equity hedge and event driven equity strategies. And momentum/trends diminished; a negative for tactical trading – systematic strategies. Dispersion among regional performance affected REITs: for example, the U.S. lagged relative to Hong Kong and the UK. Whereas at the same time, for listed infrastructure, continental Europe and Japan led, while emerging markets and the UK lagged.14
- Commodities prices range-bound
After gaining 25% in April, WTI (West Texas Intermediate), crude oil closed both May and June within $0.50 of April’s $59.47 close15
. Range-bound prices of oil are driven by contrasting fundamental developments, as well as the gyrations of the U.S. dollar.