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.
The following is the Russell Investments Chief Investment Officers’ views of the key themes affecting market performance in April 2016. All data is as of April 30, 2016. Sources and indexes used to represent asset classes can be found in the disclosures at the end of this post.
1. Global economy grinds along
The U.S. economy hit a soft patch (again) in the first quarter of 2016, but a healthy consumer sector is forecasted to push U.S. Gross Domestic Product (GDP) growth back towards 2% over the course of 2016. Meanwhile, the eurozone economy outpaced expectations, growing at a 2.2% annualized pace in the first quarter. In addition, activity in China stabilized on the back of the government’s earlier stimulus measures.
2. Central Banks do nothing
The Federal Reserve (Fed), European Central Bank (ECB) and Bank of Japan (BOJ) all left interest rate policy unchanged in April. For the Fed, this was not a surprise as they want more evidence of a second quarter rebound before embarking on the next rate hike. The BOJ’s decision not to ease policy further was a significant disappointment, however. Japanese equities retraced earlier gains, and the yen appreciated against the U.S. dollar.
3. Oil rallies again
Crude oil rallied from $38 to $46 per barrel in April. While crude oil inventories remain elevated, a weaker U.S. dollar and a modest reduction in U.S. oil production estimates helped drive more favorable pricing.
We expect a modest rebound in U.S. GDP growth in the second quarter. Evidence of this will be important for the Fed as it considers whether to raise interest rates in June.
1. Currency appreciation drives international equity returns higher
Accommodative central bank policies, positive macro data, and increasing commodity prices led to positive market returns overall with international markets outperforming the U.S. Improving economic data in Europe, increasing oil prices and China stimulus all aided the general risk appetite for international assets. Canada was the best performing region in April (6.8%) followed by Japan (4.6%) and Developed Europe (2.52%), in USD terms respectively. Fed dovishness caused most developed currencies to strengthen further vs. the U.S. dollar. Currency appreciation was most prevalent in Japan, aided by BOJ’s inaction. In fact, the Japanese local market was one of the worst performers with the Japanese yen rally driving most of the positive returns, in USD terms. Currency appreciation, aided by increasing commodity prices, was also a factor in Canadian equity returns.
2. Risk aversion continues to subside
With global economic data showing signs of improvement and/or stabilization, the “risk on” rally that started in mid-February spread across global equity markets. Across most regions, lower capitalization and value stocks led markets in April. Within this environment, other factors with broadly positive payoff included lower quality, higher volatility and lower momentum.
3. Energy, materials, and financials outperform
Energy stocks continued to outperform as oil prices rebounded further. With the decrease in negative sentiment about the global economy, metals and mining stocks led the materials sector upward. The financial services sector joined the market rally with bank stocks leading due to better-than-expected earnings.
1. Global growth ticks up
There was moderate global growth due to some stabilization in Chinese economic data and capital outflows and eurozone growth exceeding expectations during the first quarter. Government bond yields moved higher as a result, and credit sectors were supported globally. Lower-quality sectors and emerging market debt outperformed partly as a result of crude oil’s rally from $38 to $46 per barrel.
2. U.S. economic data softens
First quarter GDP was lackluster, coupled with a continued slowdown in corporate earnings growth. USD depreciated against most currencies, including emerging market currencies.
3. U.S. bond markets outperform Europe
European government bond yields moved higher more sharply than the U.S.’s amid positive economic performance and the ECB’s decision to leave policy rates unchanged. In addition, the U.S. (especially corporate issuers) benefited more than Europe from April’s rally in oil prices.
1. Equities grind along
Global listed real estate investment trusts (REITs) were flat, but still remained well ahead of equities year-to-date. April brought a partial reversal of regional performance trends seen in first quarter. Hong Kong, UK and Japanese developers and U.S. office REITs all bounced back after macro-driven weakness. Earnings announcements served as a catalyst. April REIT merger and acquisition activity in the U.S. also helped.
2. Central bank policies diverge
Policy divergence continues to be a major theme for infrastructure globally. The spread between U.S. and eurozone short-term yields continues to be close to historic highs. The U.S. 10-Year Treasury yield was up slightly in April. The performance of infrastructure utilities was strong; this was led by regulated electrics. Continued negative interest rates in Japan helped sustain the Japanese REIT sector, which continues to outperform.
3. Oil rallies again
Commodities posted strong gains; the Bloomberg Commodity Index was up +8.5%, led by energy (+13.4%), and followed by agriculture and metals. The continued, sharp rise in crude prices (up nearly 20% year-to-date) was a tailwind for the energy infrastructure sector and Canadian REITS. However, this did hurt hedge fund managers who shorted energy. Expectations for further tightening in global oil fundamentals and a more stable U.S. dollar support our positive view for commodity markets for the second half of 2016.
Asset Class Dashboard – April 2016
The April reading of the Asset Class Dashboard improved again with half of the asset classes now showing a positive return over the past 12 months. Small Cap equities returned to their historical typical range, meaning now only commodities and cash have 12 month returns that are below their respective historical typical ranges. Emerging Markets Debt and Large Cap Defensive equities continue to lead the way over the last 12 months, with Emerging Markets Equities and Commodities lagging the group.
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.
The bottom line
Markets moved higher again in April as positive economic data helped ease investors’ global recession concerns. U.S. equities posted small gains despite lackluster GDP results, however improving economic data in Europe, Chinese stimulus, a weak dollar and increasing oil prices all lead to non-U.S. equities outperforming the US for the month. Real assets continue to have a strong year as Infrastructure remained the top asset class year to date, followed closely by commodities after another rally in the price of oil during the month. Going forward, we expect to see a rebound in U.S. GDP in the 2nd quarter, however continue to favor regions with more attractive valuations, such as the Eurozone and Japan.