Energy edges higher as oil prices rise; interest rate risk hits portfolios

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

Developed Markets losing steam

Japanese Equity Market Rolling Along

International developed stock markets in the aggregate were up 0.78%. Japan and the U.S. recorded gains of 3.04% and 0.42%, respectively. Pacific (excluding Japan( and Europe (excluding the UK) dropped -0.66% and -0.17%, respectively. The U.S and Japanese equity markets have outperformed year-to-date. However, the benefits from U.S. fiscal stimulus and Japanese stimulus should have less of an impact on their equity markets moving forward.

Japanese Equity Market
Volatility increasing in emerging market equities

Emerging Markets Flat

Broader emerging markets recorded a loss of -0.63%. Russia and Brazil posted gains of 9.79% and 7%, respectively. India and China took a step back, recording a drop of -9.10% and -1.40%, respectively. Increased U.S. dollar strength and trade tensions have caused higher volatility, but relative valuations still strongly favor the developing nations.

emerging markets
Global Sector

Energy Edges Higher as Oil Prices Rise

Telecommunications and energy posted gains of 3.59% and 3.25%, respectively. Infrastructure and utilities lagged other sectors. Increasing energy prices may temper some of the benefits from U.S. fiscal stimulus.

Oil Prices Rise
Domestic Equity Factors

Value Underperforms Growth

Value underperformed growth in the large-cap and small-cap space. Momentum recorded a loss of -0.20%. The size premium has been mixed so far in 2018. Investing in smaller companies has historically compensated investors for taking on the added risk.

Foreign Equity Factors

Value Outperforms Growth in Foreign Markets

In the international developed markets, value outperformed growth. Momentum recorded a gain of 1.53% while small-cap emerging market stocks dropped by -2.41%. Small-cap emerging market companies have slightly underperformed their large cap counterparts so far in 2018, but have outperformed over a ten-year period.

Value Outperforms Growth in Foreign Markets
Liquidity Providers

Cash Becomes a Viable Investment Option

Money market fund and T-Bill yields have steadily risen in 2018. Rates are expected to continue to rise as the Fed just raised the federal funds rate target by a quarter of a point. 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 Consumer Price Index (CPI) increased by 2.68% year over year. Trade tensions still pose a risk of higher inflation in the U.S.

Cash Becomes a Viable Investment Option
Deflationary Hedges

Interest Rate Risk Hits Portfolios

The returns of deflationary hedges were mostly negative. Longer duration bonds were hit the hardest. The Barclays U.S. Agg Bond Index dropped by -0.64%. The traditionally higher yielding fixed income investments fared well. Emerging market bonds and leveraged loans recorded gains of 1.77% and 0.66%, respectively. Extra care must be taken in the high yield and leveraged loan space as covenants have become weaker and weaker since the recession.

Inflation Sensitive Investments

Gold Facing Short-Term Headwinds

Inflation-sensitive investment returns were mixed. Crude oil and natural gas recorded gains of 5.77% and 2.52%, respectively. Global real estate and the Alerian MLP were down. Dollar strengthening and rising rates continue to be a headwind for gold, but the metal may prove to be a valuable portfolio diversifier when the current business cycle rolls over.

World Currencies

U.S. Dollar Continues to Appreciate

Over the past three months, the U.S. dollar appreciated against most other major currencies. The Mexican peso and Swiss franc appreciated by 4.51% and 1.57%, respectively. The Indian rupee and Chinese yuan dropped -5.71% and -3.87%, respectively, relative to the U.S. dollar.

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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