As of August 31, 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: Barclays U.S. Aggregate Bond Index; Global REITs: 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
Russell’s Chief Investment Officers (CIOs) highlight key market and economic drivers impacting positioning and performance over the previous month and weigh in on opportunities and risks for the coming months. All data is as of August 31, 2015. For longer-term asset class performance please see the Asset Class Dashboard
1. China weakness dominates
Concerns about economic growth in China and emerging markets drove a 6.7% decline in global equities for the month. We do not think these developments warrant a significant downgrade to our outlook for developed markets and considered the selloff to be a potential buying opportunity.
2. U.S. Federal Reserve policy remains opaque
Despite elevated market volatility in August, global government bond yields (include the U.S., Germany and Japan) ended the month relatively flat. The Fed faces a difficult decision at its upcoming meeting given strong domestic growth, low current inflation and an uncertain global backdrop. We still think rates will be raised this year but the likelihood of September liftoff has faded somewhat.
3. Oil’s wild ride
After being down nearly 20% month-to-date on August 24th, crude oil prices rebounded strongly and ended the month up 2.1%. A modest decline in reported U.S. oil production along with some conciliatory language from OPEC were the primary catalysts for the rebound.
1. Defensives did their job
Given a global flight to safety, defensive led dynamic for the month. In this volatile environment, growth vs. value and large cap vs. small cap did not differ significantly in returns.
2. China weakness dominates
World financial markets were impacted by concerns about Chinese economic growth. Emerging equities and some regional equities suffered the most, including Hong Kong and Australia.
3. Not a lot of sector protection
Overall, non-cyclical performed better this month but all sectors declined over the period. Financials and Materials were among the worst performers, while Utilities and Telecoms were down the least.
1. Global government bond yields relatively flat
Despite significant intra-month volatility, developed sovereign debt yields ended the month broadly flat for most countries. This came amid further commodity price weakness, China growth concerns, and delayed Fed rate hike expectations.
2. Credit spreads widened globally
Spreads widened across European and U.S. investment grade bonds, high yield credit, and emerging market debt. Due to greater oil price sensitivity, U.S. credit underperformed Europe.
3. Currency markets were rattled
Emerging market and commodity producer’s currencies (Canada, Australia) fared worst due to weakness in Chinese trade and manufacturing as well as their surprise currency devaluation. The U.S. dollar weakened vs. developed market currencies as expectations for rate hikes were pushed out.
1. Oil’s wild ride
Commodities fell -0.92%, even though oil ended August up 2.1% after rallying over 20% in the last few days of the month. Intra-month volatility seemed to be driven by sentiment and inventory positioning, as fundamentals for the physical market showed no major developments. In spite of the oil rally, the pipeline sector was the worst performer among major listed infrastructure sectors (-7.8%).
2. Volatility returns in a big way
Reversals across most asset classes affected alternatives indexes of REITS (- 6%), listed infrastructure (-5.5%) and hedge fund strategies (-2.2%) although all were above broader equities. This reflects the benefits of diversification. Gold rallied moderately as a “safe haven” due to turbulence in global equity markets and falling interest rates in the U.S.
3. China weakness dominates
Deterioration in China-led a sell-off in emerging market equities, which spread globally and created a difficult market environment. Some equity-oriented hedge funds were down, although on a relative basis the majority were able to preserve capital and some losses. In REITs, Europe ex-UK and the U.S. posted above average results, although nearly all major markets posted negative performance. For listed infrastructure, the UK led all regions with a -2.2% return.
The bottom line
Volatility returned, China weakness dominated markets, and a flight to safety resulted in a downer of a month for major asset classes. A hypothetical balanced index portfolio, with its diversification, was spared some of the extreme negative results, and provided a good reminder of how quickly asset classes can swing from positive to negative over short timeframs.