Markets in perspective – January 2016 in review

2016-Capital-Markets-Returns-V2 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 Following is Russell Investments’ Chief Investment Officers’ views of the key themes affecting market performance in January 2016. All data is as of January 31, 2016. Sources and indexes used to represent asset classes can be found in the disclosures.

Equity markets

  1. Flight to quality
As fears about Chinese and global growth were re-stoked, equity markets sold off aggressively. In turn, investors took a more risk averse approach, resulting in strong performance for defensive stocks as compared to dynamic ones (average spread of 400 basis points globally). Value vs. growth was not a significant driver of equities while small cap typically underperformed.
  1. Central bank policies
Regional returns responded to increasingly divergent central bank policies and the expectation of slower growth. The U.S. had the highest monthly hedged return of -5%. Europe and Japan were down more, -7% and -8%, respectively. Despite a weak global outlook, emerging markets returned on par with developed markets, returning -6.8% hedged.
  1. Defensive sectors outperform while oil declines
In January, defensives fared the best relatively, particularly consumer staples and utilities, which trumped cyclicals (e.g. financials, materials) where concerns were escalating. Despite oil’s price volatility, the broader energy sector performed better than expected.

Fixed income markets

  1. Flight to quality
In January, the continued oil price decline and renewed concerns in China’s growth drove a credit sell-off. Corporate bonds suffered the most while asset-backed securities, traditionally considered a ‘safe haven,’ outperformed. High yield and energy bonds led the decline once again. Regionally, U.S. bonds underperformed European bonds.
  1. Central bank policies
Given divergent central bank activity, we saw rates fall lower across the globe in January. Drivers included a slowdown in U.S. growth in the fourth quarter of 2015, a surprise rate cut by the Bank of Japan, and its suggestion of further stimulus. In the U.S., yields fell for all but the shortest-dated Treasuries, suggesting lower longer-term growth and inflation expectations. All developed market rates followed suit.
  1. USD near post-Global Financial Crisis highs
The U.S. dollar strengthened moderately in January. Overseas policy easing, weak energy prices, and fears about China put pressure on a number of emerging and developed market currencies. The Japanese yen weakened significantly after the surprise rate cut, while the euro was down only slightly given the European Central Bank’s anticipated dovish comments.

Alternative markets

  1. Volatility continues
Volatility heightened across asset classes allowing for favorable trading opportunities for long/short equity hedge fund managers. China’s weakness weighed on Hong Kong property stocks while lower sovereign bond yields contributed to global Real Estate Investment Trust (REIT) outperformance relative to broader equities.
  1. Central bank policies
Policy divergence continues to be a major theme globally: the European Central Bank and Bank of Japan are committed to monetary easing, while the Federal Reserve seems poised to raise rates further this year although probably not as much as originally expected. In January, the 10-Year U.S. Treasury yield fell by over 30 basis points to below 2%. Not surprisingly, utilities rallied with electric utilities up 3.2% and multi-utilities up 1.5%.
  1. Oil continues decline
In January, crude prices continued to trend lower, down over 9%, although there was a short-covering rally late in the month as speculation that OPEC producers and Russia might agree to cut crude oil production. Interestingly, the pipelines sector within listed infrastructure, which had been highly correlated to oil last year, diverged and returned 1.6% for the month.

Asset Class Dashboard – January 2016

The January reading of the Asset Class Dashboard shows that despite the market volatility in the first trading days of 2016, nine out of the 14 asset classes tracked on the Asset Class Dashboard had historically typical returns for the one year period ending January 2016. U.S. Small Cap, Commodities, Global Infrastructure and U.S. Bonds stand out for falling below their historical typical range of returns for the 12 months ending January 2016. Asset Class Dashboard Jan 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.
All data is as of January 29, 2016. Corresponding indexes/sources by section: Equities
  • S. represented by the Russell 1000® Index
  • Defensive represented by Russell U.S. Defensive Index
  • Defensive represented by Russell U.S. Dynamic Index
  • Value represented by Russell Global Value Index
  • Growth represented by Russell Global Growth Index
  • Emerging markets represented by the Russell Emerging Markets Index
  • Developed markets represented by the Russell Developed Markets Index
  • Europe represented by Russell Developed Europe ex UK Index
  • Japanese equities represented by the Russell Japan Index
  • Sectors represented by Russell 1000® Index sectors: Consumer Staples, Utilities, Financials, Materials, and Energy
Fixed Income
  • Investment grade bonds represented by Barclays U.S. Corporate Investment Grade Index
  • High yield represented by high yield sector of the Barclays U.S. Aggregate Bond Index
  • Asset-backed securities and energy represented by sectors of the Barclays U.S. Aggregate Bond Index
  • Broad fixed income and U.S. bonds represented by the Barclays U.S. Aggregate Bond Index
  • European bonds represented by the Bloomberg Eurozone Sovereign Bond Index
  • Hedge fund strategies data as observed across third party managers by Russell Investments
  • Broad market represented by the Russell 1000® Index
  • Utilities represented by Russell 1000® Index sector
  • REITs represented by FTSE EPRA/NAREIT Developed Real Estate Index
  • Infrastructure represented by S&P Global Listed Infrastructure Index
  • Commodities represented by Bloomberg Commodities Index Total Return
  • Oil represented by WTI crude prices
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 3000® Index: Measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. The Russell Developed ex-US Small Cap Growth Index meaures the growth segment of the smallest securities in the global developed market, excluding companies assigned to the US. It includes smaller companies with higher growth earning potential as defined by Russell’s leading style methodology. 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. 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. The BofA Merrill Lynch Global High Yield Index tracks the performance of USD, CAD, GBP and EUR denominated below investment grade corporate debt publicly issued in the major domestic or eurobond markets. Qualifying securities must have a below investment grade rating (based on an average of Moody’s, S&P and Fitch), at least 18 months to final maturity at the time of issuance, at least one year remaining term to final maturity as of the rebalancing date, a fixed coupon schedule and a minimum amount outstanding of USD 100 million, EUR 100 million, GBP 50 million, or CAD 100 million. The Citigroup 1-3 Month T-Bill Index is an unmanaged index that tracks shortterm U.S. government debt instruments. 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 J.P. Morgan Emerging Markets Bond Index Plus (EMBI+) tracks total returns for traded external debt instruments in the emerging markets. Included in the index are U.S. dollar?and other external?currency?denominated Brady bonds, loans, Eurobonds, and local markets instruments. The Russell Developed ex-US Large Cap Index offers investors access to the large-cap segment of the developed equity universe, excluding securities classified in the US, representing approximately 40% of the global equity market. This index includes the largest securities in the Russell Developed ex-US Index. 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. 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. The S&P 500® Index is a free-float capitalization-weighted index published since 1957 of the prices of 500 large-cap common stocks actively traded in the United States. The stocks included in the S&P 500® are those of large publicly held companies that trade on either of the two largest American stock market exchanges: the New York Stock Exchange and the NASDAQ. 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. 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. 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