Focused On You. - Enterprise Wealth

SECOND QUARTER 2015 REPORT
Focused On You.
IN THIS ISSUE
Market Distraction
Yeat-to-Date Total Returns
Key Developments
Financial Market Review
SECOND QUARTER 2015 REPORT
Market Distraction
Market fundamentals improved in
the second quarter of 2015, with
the United States reaccelerating out
of yet another harsh winter and the
European Central Bank’s quantitative
easing program helping to stave
off deflation in Europe. But all of
these constructive developments
were overshadowed by the market
distraction that is Greece. For most
of the quarter, investors assumed
a “kick the can down the road”
approach would be applied to the
situation. This was never viewed as
the optimal solution, but sufficient to
allow the markets to focus on broader
global economic fundamentals.
However, as negotiations neared the
deadline, Greek creditors (primarily
the International Monetary Fund,
the European Central Bank and the
European Commission) dug in
their heels. The Greek government
is looking for concessions (most
importantly, more leeway on
public pension payments) that
the Greek creditors do not believe
are compatible with long-term
solvency. As it became clear that
negotiations were at a stand-still,
the Greek government hastily called
a referendum wherein the Greek
populace will basically be asked
whether or not they are willing to
SECOND QUARTER 2015 REPORT
accept the creditors’ terms. The
results of this referendum were
unknown at the time this newsletter
went to print. However, regardless
of a “Yes” or “No” vote by the Greek
populace, confusion surrounding
Greece’s fate as a European Union
member—and fears of contagion
should Greece leave the euro—are
likely to keep market volatility high.
Up until the Greek saga heated up,
financial markets were doing quite
well; global equity markets were up
nearly 5% in mid-May while natural
resources were up near double-digits.
Increases in global interest rates, as
the Federal Reserve (Fed) firmed
its expected September “liftoff” and
European deflation fears subsided,
had been taken mostly in stride
(with the exception of interest-ratesensitive global real estate, which
sold off notably in the quarter). As the
quarter ended, global equity markets
still squeaked out a modest 0.5% gain
and have now gained 3% for the year.
Valuations in global equity markets
remain something to watch, as they
have continued to edge higher and
currently sit notably above long-term
historical averages. Specific attention
will be paid to the valuations of China
A shares, which reached 28 times
trailing earnings before falling back
to around 22 times as the Chinese
government took measures to halt
the rise. Most of the near-term focus,
however, will likely be on Greece.
SECOND QUARTER & YEAR-TO-DATE TOTAL RETURNS
6
Return (percent)
4
2
0
-2
-4
-6
Cash
Investment
Grade
0.1
0.0
-0.1
-1.7
TIPS
High
Yield
Emerging
Markets
United
States
2.5
0.0
-4.5
-1.0
1.7
0.3
Fixed Income
YTD
2Q15
0.3
-1.1
SECOND QUARTER 2015 REPORT
Developed Emerging
Natural
ex-U.S.
Markets Resources
Equity
4.7
0.7
Global
REITS
Global
Listed
Infra.
Gold
-2.6
-1.8
-1.0
-1.0
Real Assets
3.1
0.8
-3.6
-0.4
-1.9
-5.7
Key Developments
BIG FAT GREEK DIVORCE?
40
35
25
20
15
Yield (percent)
30
10
5
n
6/30/15
5/31/15
4/30/15
3/31/15
0
After months of political wrangling, Greek bailout negotiations came
to a head. The Greek government and Greek creditors (mainly public
entities) could not come to terms on how future bailouts would be
paid for (tax increases versus spending cuts); so now the vote goes
to the people, with a “Yes” vote meaning a willingness to accept
creditor demands. Reflecting the uncertainty, Greek 2-year debt now
yields 39%.
Greek 2-Year Government Bond
WHAT GOES UP...
40
35
25
20
15
Return (percent)
30
10
5
n
MSCI China A Index
n
6/30/15
5/31/15
4/30/15
3/31/15
0
China A shares (historically reserved for Chinese citizens) went into
bubble territory, with valuations reaching 28 times earnings. The
driving forces were a switch from real estate to stocks, margin account
funding and greater access outside China’s boundaries. Meanwhile,
China H shares (the shares most U.S. investors hold) saw less
volatility, and have more reasonable valuations (12 times earnings).
MSCI China H Index
INTEREST RATE VOLATILITY
40
35
25
20
15
Yield (percent)
30
10
5
German bond yields have pulled back from the brink. After flirting with
negative yields at the quarter’s start, 10-year German bunds pushed
towards 1% as deflation fears subsided. Higher European yields have
taken pressure off U.S. yields with the U.S. 10-year Treasury yield
back at 2.5%. U.S. government yields continue to be the highest
amongst major developed economies with the exception of Australia.
n
U.S. 10-Year Treasury Yield
n
Jun 15
May 15
Apr 15
Mar 15
0
German 10-Year Bond Yield
COMMENCING FED “LIFTOFF”
4.5
3.5
3.0
2.5
2.0
1.5
1.0
Fed Funds Target Rate (%)
4.0
0.5
Year-End 2015
Year-End 2016
Year-End 2017
n
0.0
3/18/15 SEP n 6/17/15 SEP n Median
Chart sources: Northern Trust Asset Management, Bloomberg,
Federal Reserve, Federal Open Market Committee (FOMC) Summary
of Economic Projections (SEP).
SECOND QUARTER 2015 REPORT
With each Federal Open Market Committee (FOMC) meeting, the Fed
provides more clarity on “liftoff” and becomes more generous with its
trajectory of rate hikes thereafter. The June meeting was no exception.
Most recent FOMC member forecasts (the individual green and yellow
dots) have coalesced on one (possibly two) rate hikes this year, while
2016/2017 median expectations have come down slightly.
Financial Market Review
INTEREST RATES
3.5
3.0
2.0
1.5
Yield (percent)
2.5
1.0
0.5
0.0
n
30YR
10YR
3/31/15 UST Yield Curve
7YR
5YR
3YR
2YR
1YR
6M
3M
1M
n
Interest rates on longer-dated U.S. Treasury securities moved notably
higher during the quarter. Two primary forces were at play: 1) further
confirmation by the Fed that “liftoff” will begin in September; and
2) reduced concerns of deflation in Europe, which pushed German
bund (and other European) yields higher, lessening the downward
pressure on rates coming from abroad. In concert, the dollar
fell modestly.
6/30/15 UST Yield Curve
480
120
440
110
400
100
n
n
U.S. Investment Grade (RHS)
Both investment-grade and high-yield credit spreads modestly
tightened through the first half of the period before getting caught up
in the aversion to risk assets. For the quarter, investment grade fixed
income lost 1.7% while high yield fixed income was flat. The income
cushion provided by high yield has helped the asset class outpace
United States equities on a year-to-date basis (2.5% vs. 1.7 %).
6/30/15
130
5/31/15
520
4/30/15
140
3/31/15
560
Option-Adjusted Spread (bps)
CREDIT SPREADS
U.S. High Yield (LHS)
EQUITIES
12
8
6
4
2
Return (percent)
10
0
n
U.S.
n
Develped Ex-U.S.
n
6/30/15
5/31/15
4/30/15
3/31/15
-2
Global equity returns took a bit of a ride in the second quarter.
Encouraging signs that U.S. economic growth was reaccelerating
and Europe’s quantitative easing program was effectively preventing
deflation gave way to fears over unintended consequences of “Grexit”.
In the end, equity markets managed a slight gain. Emerging market
equities gained the most, but also fell the furthest from their
intra-period high.
Emerging Markets
REAL ASSETS
10
8
4
2
0
-2
-4
-6
n
n
Global Natural Resources
Global LIsted Infra.
n
Global Real Estate
SECOND QUARTER 2015 REPORT
6/30/15
5/31/15
4/30/15
3/31/15
-8
Return (percent)
6
Similar to equities, real assets started the quarter off strong but faded
in the back half. Global natural resources benefitted from oil price
stabilization: Futures-based approaches gained for the quarter (4.7%);
but equity-based approaches were exposed to the period-end stock
selloff, losing 0.4% overall. Global real estate suffered the most; the
asset class fell prey to rising interest rates, losing 5.7% for the quarter.
Meet a Member of the
Enterprise Investment Advisors Team
Amanda DeMarco
Client Associate
Amanda DeMarco is a Client
Associate with Enterprise Investment
Advisors. Amanda graduated from
Merrimack College with a Bachelor’s
degree in Finance and Mathematics.
She is currently studying for her
MBA and MS in Financial Planning at
Bentley University. Prior to Enterprise
Investment Advisors, Amanda was
a participant in Enterprise Bank’s
Leadership Development program.
During the program, Amanda
completed an integrated rotation
through key profit centers within
the organization.
(978) 656-5786
[email protected]
222 Merrimack Street
2nd Floor
Lowell, MA 01852
Phone: 877-325-3778
Fax: 978-656-5879
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SECOND QUARTER 2015 REPORT