Well, it’s almost half way through 2014 and to everyone’s surprise; stock returns in the US are flattish with value outperforming growth. In Europe, equity returns are mildly positive with those most embattled countries over the last few years leading the way. Asian equity markets, especially Japan, are struggling returning a negative 12.3% through April 30. Remember Japanese equities were a sure thing in 2014 as a result of “Abenomics”, the economic revitalization plan of Prime Minister Shinzou Abe. Of course, Russia, which has been a focus for investors, has witnessed its equity market decline by 13.3%.
The “had its day in the sun” fixed income market continues to roar thus far in 2014. The US 10-year Treasury, which began 2013 with a 3% yield, has a current yield of 2.65%, certainly a surprise to most. Mutual fund money flows have continued to move into the credit space, including high yield and medium duration credit products. Emerging market debt, which had a very difficult year in 2013 has even benefitted from some money flows into their space and has generated a positive return of 3.7% thus far through April 30.
So what to do? Globally, developed market economies are improving. The US, which reported disappointing 1st quarter GDP of an anemic 0.1%, appears to have been affected by severe winter weather during the quarter. Growth is coming. Data from the UK, Germany as well as southern European nations are also encouraging as is rhetoric from financial leaders that have pledged their support. Forward looking measurements, like the PMI or purchasing manager’s index all portend growing economies. Despite concerns, China will post encouraging growth numbers in the 7% area and continues to benefit from the urbanization of a country with more than 1.3 billion people. This is a force to be watched.
Given the financial turmoil over the last few years and the resulting uncertainty around government policies, regulations and procedures, consumers and companies alike resisted the urge to consume. As a result, pent up demand is evident on a global basis for all sorts of goods and services, software, autos, housing, machinery and of course, human capital, etc. Company balance sheets are in good shape with high levels of cash. Equity market valuations on the whole remain acceptable. The recent increase in merger and acquisition activity appear to not only be justifying equity market levels, but give support to the notion that certain sectors may be attractive. The need for income from an aging population is also increasing. Demand will remain strong for income producing securities including those that pay dividends as well as interest.
With default rates for corporations expected to remain near their historical lows for the next few years, products that provide a premium over government securities will continue to benefit from demand that exceeds supply.