INVESTMENT DIRECTIONS

Spring planting

May 29, 2018
By Christopher Dhanraj

Bloom off the rose?

The economic conditions that have supported markets over the last year are still flourishing, but this year has seen a variety of factors weighing on investor sentiment. Concerns around interest rate hikes, stock valuations (despite strong earnings), as well as potential trade disruptions and new tech regulations, all have led to higher volatility in 2018. Still, opportunities exist in this market for those with focus and discipline.

Ease on down
the road

The Federal Reserve (Fed) is continuing on its path of interest rate hikes this year. Still, although financial conditions have moderately tightened, they remain relatively easy, at least by historical standards. In this environment, the financial sector is a particularly interesting one to monitor. The prospects could brighten if the yield curve, which has flattened since the start of the year, steepens.

The best offense is a good defense

Volatility has climbed higher, but in an era of rising rates what constitutes an effective portfolio hedge is changing. Rather than high-dividend “bond proxies,” which could do more harm than good in an era of higher rates and inflation in the U.S., we would advocate an allocation to quality companies.

Emerging markets: China A-shares inclusion update

This June, an important market event occurs: MSCI will begin including China’s Shanghai-traded A-shares in its key indexes, amplifying the importance of China in key benchmarks. Economic and reform prospects have us constructive on Chinese equities, but the MSCI event has important implications for investors and the way they think about emerging markets.

Opportunities within investment grade bonds

Although we are underweight fixed income, and neutral investment grade bonds within the asset class, spreads have widened and current levels present reasonable value from an overall portfolio diversification perspective. We would consider opportunities in floating rate notes, shorter-maturity fixed rate exposure or interest rate-hedged positions.

The commodity rally

Commodities are off to a strong start to the year, outperforming the S&P 500 Index by nearly 10%1 . At this point, energy equities may have more room to run than the commodities themselves in the short term, but investors looking to diversify risk or protect against inflation might consider exposure to commodities.

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