As of September 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: 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
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%
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: Dow Jones – UBS Commodity Total Return 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.
A WHITE LINE within the blue bar represents the mean of the historical observations.
The bottom line
Volatility has returned to the capital markets and risk assets were punished in September over uncertainty regarding U.S. Fed lift-off and evidence of further weakness in the Chinese economy. The third quarter, including September, was a good reminder to clients about the vital role bonds continue to play in a total asset-allocated portfolios.