Markets in perspective – November 2015 in review

Capital Markets Returns Nov. 2015 As of November 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.

Key points on global market themes

The global economy continued to grind slowly forward in November 2015. Global macroeconomic news was mixed for the month, resulting in an essentially flat 10-year U.S. Treasury yield and Russell 3000® Index. Central bank divergence continued as the European Central Bank approved further stimulus and the likelihood of an interest rate hike in December by the U.S. Federal Reserve becomes increasingly likely. Following is Russell Investments’ Chief Investment Officers’ views of the key themes affecting market performance in November 2015. All data is as of November 30, 2015. Sources and indexes used to represent asset classes can be found in the disclosures section.

EQUITIES

  1. Markets moved sideways
Developed markets moved little over the month with the U.S. large cap market barely producing a positive return. The dispersion across market segments was limited with value stocks underperforming growth stocks by approximately 1% on a global basis. There was little difference between dynamic and defensive stocks during the month, while small cap rose ahead of large cap and stocks with momentum continued to outperform. With the U.S. stock market trading at higher than normal valuations, our outlook is somewhat cautious.
  1. Rate sensitive sectors lagged
With the prospect of rising rates many rate sensitive sectors like utilities, REITs and telecommunications lagged the broad market while financial services stocks came to life. Information technology and industrial sectors did better as the negative outlook continued for energy and materials stocks.
  1. Emerging markets sold off
As we have come to expect with a strong dollar, emerging markets sold off close to 3% during the month and underperformed developed markets. While sentiment towards the asset class continues to be negative, we believe valuation is attractive, with the biggest opportunities in emerging Asia.

FIXED INCOME

  1. Short-term Treasury rates rose
Although the U.S. 10-year Treasury yield remained flat, short-term rates rose. This was driven by the market expectations of a Fed rate hike in December. European government bond yields were lower as the ECB delivered their stimulus, while Japan and emerging markets were broadly flat.
  1. Flight to quality
The anticipated rate hike drove investors to seek out quality assets. As a result, lower quality U.S. credit underperformed in November. Commodity-sensitive issuers were hit the hardest for the month.
  1. USD strengthened
With continued central bank monetary policy divergence and a stronger dollar, the euro weakened meaningfully after the expected ECB stimulus.

ALTERNATIVES

  1. Commodities trended lower on strong USD and weak global demand
Commodities fell 7.2%, led by oil price declines and a strong U.S. dollar. However, tactical trading hedge funds gained from currency trades and short commodities positions. Commodities sentiment remains bearish heading into year-end, with investors focused on USD strength and weak supply-side fundamentals. Infrastructure declined 4.4% as crude oil prices fell almost 10%. This also caused a decline in the pipelines sector by a similar amount. 2.     Interest rates diverged globally The spread between U.S. and Eurozone 2-year yields was the widest it’s been since 2006, reflecting ongoing global central bank divergence. Interest rate sensitive utilities sectors and listed infrastructure were down marginally, but outperformed the broader S&P Global Listed Infrastructure benchmark. Event driven and credit sensitive hedge fund managers with high yield positions were hurt. 3.     Global economy ground slowly forward REITs had negative 2.2% performance, slightly lagging overall equities. U.S. and emerging markets REITs held up well while other regions declined. We continue to see strong REIT cash flow and earnings results underpinned by solid property fundamentals; supply remains constrained for most property types, while demand is generally healthy. Some equity-oriented hedge funds were hurt by increased idiosyncratic risk in crowded equity trades. Commodities demand data may take a front seat in 2016 as markets will require a reasonable level of global economic growth to help balance markets amid continued bearish headwinds.

Asset Class Dashboard – November 2015

The November reading of the Asset Class Dashboard reflects the slow forward progress of most asset classes based on 12-month returns ending November 30, 2015. Only Commodities and Global Infrastructure have experienced performance that falls below their respective historically typical ranges. The remaining asset classes have hovered at the low end of their historically typical ranges for quite some time now. Looking ahead, Russell Investments’ strategists and portfolio managers are keeping an eye on how much of the likely upcoming Fed interest rate hike is already priced in – and its associated impact on the emerging markets and commodities outlook. Our positioning is roughly neutral on the U.S market. We continue to see opportunities in European equities and high yield. We also expect the U.S. dollar to continue its appreciation. sset Class Dashboard Nov. 2015 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.
Corresponding indexes/sources by section: Equities • Developed markets represented by Russell Developed Large Cap Index • Sectors represented by Russell 1000® Index Utilities, REITs, Telecommunications, Financials, Information Technology, Industrials, Energy and Materials sectors • Emerging markets represented by Russell Emerging Markets Index Fixed Income • Investment grade bonds represented by Barclays U.S. Corporate Investment Grade Index and Barclays Euro-Aggregate: Corporates Index Alternatives • Commodities represented by Bloomberg Commodities index • Oil represented by WTI crude prices • Hedge fund strategies data as observed across third party managers by Russell Investments • REITs represented by FTSE EPRA/NAREIT Developed Real Estate Index • Infrastructure represented by S&P Global Listed Infrastructure Index 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. 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. 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. 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. 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. 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. 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 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 Emerging Markets Index: 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. 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. RFS 16385
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