Prepared by Brandon Yee and Thomas Connelly
Commentary
Japanese Equity Market Continues Run– In the month of November, developed markets recorded mixed returns. The U.S. and Japanese markets posted strong gains of 2.61% and 1.61%, respectively. Europe ex UK and the UK were down for the month. Over the past year, Europe ex UK has outperformed the U.S. market by approximately 10%; however, Europe ex UK still trades at a relative discount. A globally diversified portfolio will benefit if valuation measures converge.
Commentary
Emerging Markets Flat in November – The broader emerging markets were down 0.85% in November. India and Korea were the primary laggards. Russia posted a gain of 1.96% and Mexico was flat for the month. Emerging markets have performed similarly to international developed markets over the 1, 5, and 10 year periods. Future expected returns for emerging markets look relatively bright. Emerging market PE valuations are on average 25% lower than those of developed markets.
Commentary
Consumer Staples Record Strong Month- Telecommunications and consumer staples posted the strongest global sector returns of 3.52% and 3.51%, respectively. Materials and information technology dropped 0.76% and 0.18%, respectively. Over the past year, technology companies recorded a return of 44.71%, driving the broader markets higher. However, these high-beta names have only modestly outperformed the steadier consumer staples during the past business cycle (10-year period). The performance gap only decreases when looking at risk-adjusted returns.
Commentary
Small-Cap Companies Drift Higher- In November, large-cap domestic value indices outperformed their growth counterparts while small-cap value underperformed small-cap growth. Momentum recorded a gain of 1.31%. Given the U.S. is in the later stages of the business cycle, growth’s outperformance over the past year wasn’t entirely unexpected. Investors with longer time horizons should still expect a value premium as history suggests.
Commentary
Foreign Small-Cap Companies Build on Strong Year– In the international developed markets, large-cap growth indices outperformed value indices for the month. Small-cap value outperformed small-cap growth by 34 basis points. Momentum posted a loss of 1.80%. The outperformance of growth versus value is less drastic than the U.S. numbers, with small-cap value even outperforming small-cap growth over the past ten years.
Commentary
Money Market Yields Remain Low– Both money market funds and T-Bills returned slightly less than ten basis points in November. The CPI has increased by 1.57% YTD. Investors may expect to see higher money market yields as the Fed continues to slowly hike rates.
Commentary
Deflationary Hedges Mixed in November – The returns of deflationary hedges were mixed in November. Long-term government bonds and catastrophe bonds recorded the strongest returns of 1.77% and 1.08%, respectively. Short-term municipals and high yield bonds had the toughest month, dropping 0.73% and 0.31%, respectively. During the past three decades, bond investors were rewarded for taking on more duration, or interest rate risk. With negative real yields a reality, investors won’t have this tail wind going forward.
Commentary
Alerian MLP Dips Lower– Inflation-sensitive investment returns were mostly positive for the month. Crude oil and real estate posted strong gains. The Alerian MLP dropped 1.32% while gold was flat in November. Ten year inflation numbers have been lower relative to longer-term historical averages, which has translated to mixed returns for inflation-sensitive investments. Given many major central banks were forced to print excessive amounts of money to counteract the financial crisis, inclusion of these investments in portfolios helps reduce the risk of unexpected inflation.
Commentary
U.S. Dollar Strengthens– Over the past three months, the U.S. Dollar appreciated against most other major currencies. The U.S. Dollar climbed the most against the Australian dollar and Mexican Peso. The Pound and the Israeli Shekel appreciated against the U.S. Dollar.
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