Cash a viable investment option; U.S. real estate climbing

Prepared by Brandon Yee, CFA, CAIA, and Thomas Connelly, CFA

Developed Markets losing steam

Developed markets losing steam

Most international developed stock markets took a step back. The U.S. and Japan recorded gains of 3.24% and 0.22%, respectively. Europe ex UK and the UK equity markets dropped 2.26% and 4.19%, respectively. Investors should take care to not extrapolate recent U.S. outperformance. The declining benefits from fiscal stimulus and quantitative tightening should moderate expectations.

Developed markets periodic performance
Volatility increasing in emerging market equities

Volatility increasing in emerging market equities

Broader emerging markets recorded a loss of 3.38%. Korea and India posted gains of 1.87% and 0.96%, respectively. Brazil and Russia fell by 11.34% and 6.99%, respectively. Increased US dollar strength and trade tensions have caused higher volatility since many emerging markets are export-oriented. However, relative valuations still strongly favor the developing nations.

Emerging Market Equities
Global Sector

Healthcare sector shines

Information technology and healthcare posted gains of 5.70% and 2.86%, respectively. Materials and energy lagged other sectors. Year-to-date returns still favor the more growth-oriented sectors such as information technology.

Global Sector Shines
Domestic Equity Factors

Value underperforms growth

Value underperformed growth in the large-cap and small-cap space. Momentum recorded a gain of 4.71%. The size premium has been positive so far in 2018. Investing in smaller companies has historically compensated investors for taking on the added risk.

Global Growth Domestic Equity
Foreign Equity Factors

Growth outperforming in late part of the business cycle

In the international developed markets, value underperformed growth for the month. Momentum was flat for the month while small-cap emerging market stocks dropped by -2.10%. Small-cap emerging market companies have slightly underperformed their large cap counterparts so far in 2018.

Global Growth Foreign Equity
Liquidity Providers

Cash becomes a viable investment option

Money market fund and T-Bill yields have steadily risen as the Fed continues to raise rates. With the U.S. equity market near a historically high valuation and tight spreads in the fixed market, investors can finally turn to cash and get paid to wait. The CPI increased by 2.89% year over year, above the Fed’s target rate of 2%. Increasing trade tensions could bring more inflation to the U.S.

Liquidity Providers
Deflationary Hedges

Fixed income mixed

The returns of deflationary hedges were mixed. Long-term government bonds and high-yield municipal bonds recorded gains of 1.57% and 0.80%, respectively. Emerging market bonds dropped by 1.92%. Catastrophe bonds, which have become more popular as traditional fixed income face headwinds from quantitative tightening, rose 0.35%. Alternative sources of income with short durations can provide a measure of protection against interest rate risk.

Deflationary Hedges
Inflation Sensitive Investments

U.S. real estate steadily climbing

Inflation-sensitive investment returns were mixed. U.S. Natural Gas and U.S. Real Estate recorded gains of 4.45% and 2.98%, respectively. Global infrastructure and gold bullion were down. Dollar strengthening and rising rates has been a short-term headwind to gold’s return, but the metal may prove to be a valuable portfolio diversifier as the fiscal positions of many developed countries deteriorate.

Inflation-Sensitive Investments
World Currencies

U.S. dollar continues to appreciate

Over the past three months, the U.S. dollar appreciated against most other major currencies except for the Mexican peso and Swiss franc. The Chinese yuan and Australian dollar dropped 6.32% and 4.11%, respectively, relative to the U.S. dollar. Over the past year, only the British pound has appreciated against the U.S. dollar.

World Currencies

Brandon Yee, CFA, CAIA – Research Analyst

Brandon conducts investment due diligence for Versant Capital Management, and designs and implements tools and processes to support the firm’s research. His background in biology and finance help him to look at challenges from multiple angles, resulting in unique and well-rounded approaches and solutions.


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