CIO3: Markets in Perspective

Cap Market Returns 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.

INVESTMENT STRATEGISTS

Erik Ristuben

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.

EQUITIES

James Barber

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.

FIXED INCOME

Gerard Fitzpatrick

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.

ALTERNATIVES

Vic Leverett

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.
All data is as of August 31, 2015. Corresponding indexes/sources by section: Investment Strategists
  • Global equities represented by Russell Global Equity Index
  • Oil represented by WTI crude prices
Multi-Asset
  • Volatility represented by VIX Index
  • Global equities represented by Russell Global Equity Index
Equities
  • Sectors represented by Russell 1000® Index Financials, Materials, Utilities and Telecomm sectors
  • Hong Kong represented by Russell Hong Kong Index
  • Australia represented by Russell Australia Index
Fixed Income
  • 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
Alternatives
  • 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
These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity. 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 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. 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 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. First Use: September 2015 RFS 15861
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