Global Perspectives Monthly Book for June 2017

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  • Voya Global Perspectives book Table of Contents
  • Global economic growth has more than doubled in the last 11 years driven by growth in emerging and developing economies.
  • Returns for a globally diversified strategy over the last 10 years refute the notion of a “lost decade”.
  • Corporate earnings growth is the barometer for the health of the global economy.
  • Since 1999, earnings for S&P 500 companies have grown more than 200% while the price level is now only 60% higher.
  • Reported fourth quarter earnings growth for S&P 500 companies is 6% year-over-year with 60% of companies reporting.
  • The U.S. manufacturing report has rebounded after a month of contraction; the latest euro zone and emerging markets reports also indicate expansion.
  • Capital expenditures are on the upswing, and the average age of equipment has climbed to the highest level in 15 years.
  • U.S. manufacturing and industrial production reached all time highs before pulling back amid the global slowdown.
  • Global household consumption of goods and services has increased 100% in the last decade but 95% of consumers reside outside the U.S. China is now the largest auto market in the world.
  • At about 70% of GDP, the U.S. consumer is the game changer in economic growth. Consumption, income and retail sales have achieved all-time highs.
  • World GDP accelerated in the last decade, supported by the largest emerging markets, which now out-produce the largest developed economies, where generally higher debt levels hinder economic growth.
  • After two bull and two bear market cycles, the S&P 500 is now 51% above its 2007 peak.
  • It is not unusual for stocks to have prolonged periods of flat returns — sometimes punctuated by extreme volatility.
  • Sluggish fundamentals challenged equity returns until the final months of 2016 and markets have uniformly favored the growth style over value.
  • Wide variations in sector returns have generally been the norm; this year information technology and healthcare are the leaders; energy and telecommunications are the laggards.
  • Small- and mid-cap styles led the market every calendar year except 2011 and 2015.
  • Stocks look historically attractive based on their earnings yield (E/P) compared to the yield-to-maturity of 10-year Treasuries.
  • With steady improvement since 2009, operating income and operating margins have flattened out near all-time high levels; slow growth and low energy prices have been headwinds.
  • Disregarding the 2008 spike, stock dividend yields remain generally above levels seen since 1996 — and are still historically attractive relative to bond yields.
  • Mid-cap stocks have had the best U.S. equity 10-year return record.
  • Size matters in terms of growth and valuation. Smaller stocks have higher growth rates, and in terms of the price/earnings ratio, higher valuation.
  • Projected market volatility spikes in times of crisis then drops as fears subside. Current levels are below average, but the Fed’s path to normalization of rates may lead to more typical volatility levels.
  • Projected market volatility spikes in times of crisis then drops as fears subside. Current levels are below average, but the Fed’s path to normalization of rates may lead to more typical volatility levels.
  • Long-term U.S. Treasuries have been winners in periods of uncertainty but bonds of all kinds have been valuable in providing stability to a portfolio.
  • Senior loans have delivered historically competitive yield with virtually no duration risk.
  • Coupons float when LIBOR rates exceed LIBOR floors; today coupons exceed the post crisis average.
  • Secured position of senior loans has produced lower loss upon default compared to unsecured bonds.
  • Don’t bail on bonds. A broad view of markets shows that some debt instruments, notably senior loans, have historically offered protection against the threat of rising U.S. interest rates.
  • Investors seeking income may benefit from the rich opportunities for higher yield available from global bonds.
  • The Fed funds target rate and Treasury yields remain historically low, even though the Fed increased the target rate in December 2016.
  • The 10-Year U.S. Treasury yield has historically tracked closely to the change in nominal U.S. GDP.
  • Fixed income asset classes have provided better risk-adjusted returns over the last 20 years than equity. GNMA is the runaway leader when comparing returns to risk.
  • Credit spreads have declined since the 2008 crisis, yet still offer good opportunity; TED spreads are at the low end of the normal range despite debt and deficit concerns.
  • Mortgage rates and yield spreads have remained low and home loan delinquencies have continued to decline as the housing market has recovered.
  • Declining U.S. household debt should constrain growth less than in recent years. Moderate growth and low interest rates should foster increases in corporate leverage.
  • The major central banks will continue accommodative monetary policies, and even the European Central Bank has now embarked on a quantitative easing program.
  • The search for yield in a low-rate environment will support credit markets, but 2016 was oriented towards earning yield, rather than spread compression, as many sectors appeared to be fairly valued
  • Securitization increases capital available for lending, generates liquidity and enhances diversification.
  • While global growth worries have affected markets around the world, emerging markets have rebounded strongly this year.
  • World markets have posted very uneven returns based on geopolitical and slow growth concerns.
  • Results are mixed in both developed and emerging markets.
  • After years of mostly comparable returns, in recent years international stocks and global bonds have fallen behind their U.S. counterparts.
  • Economic growth fuels demand for imports, aggravating the trade deficit, which plummeted in the great recession as demand dwindled. Exports have faced headwinds even as the U.S. dollar has weakened.
  • Over 90% of the world’s consumers reside outside the U.S., making global trade imperative for growth. The global growth slowdown corresponds with an overall slowdown in trade..
  • The declining trend in U.S. global trade shows currently negative export and import growth, which reflects the global decline in world trade.
  • Despite declining import and export growth, recent GDP growth is reported at a 6.7% annual rate. China is attempting to tame excesses and sidestep a “hard landing”.
  • Ongoing debt woes are straining the euro zone economy; growing global export demand is a welcome offset, but more central bank stimulus may be needed to achieve sustainable growth.
  • Euro zone growth has teetered close to zero for three years. Meager growth coupled with ultra low inflation has sparked repeated rounds of European Central Bank stimulus.
  • Europe is a tale of two markets: the peripheral economies — Spain, Portugal, Italy and Greece — have total debt around 100% of GDP and those with much stronger economic fundamentals such as Germany
  • Frontier countries are emerging markets with lower capitalizations and less liquidity. Although volatile, they offer high growth potential and are fueling global growth as they evolve and mature.
  • The strength of the dollar has moderated, although the British Pound remains weak post-Brexit.
  • The dollar has depreciated against most Emerging Market currencies over the last year with notable exceptions against the Mexican Peso and Chinese Renminbi.
  • China and India are growing rapidly, and China is second only to the U.S. in total economic output, while Germany’s export-driven economy is the runaway euro zone leader.
  • Although EPS growth rates have faltered, emerging market equities still offer competitive profitability and balance sheet strength with valuations at or below those of S&P 500 and EAFE stocks.
  • U.S. consumer confidence hit a five-year high but is still off pre-crisis levels.
  • Lower personal savings rates and household net worth tend to increase the burden on future savings to fund retirement security; rising stock and housing markets have driven household net worth upwards.
  • Core and headline inflation remain subdued with the Fed’s preferred measure of inflation, Core PCE, remaining slightly below target.
  • Gold is regarded as a safe haven and inflation hedge, yet gold actually sells for less today in real — inflation-adjusted — terms than in 1980.
  • Crude oil prices have rebounded to over $50/barrel, and gasoline prices have followed suit. Nevertheless, oil consumed per unit of GDP in the U.S. (oil intensity) has declined for many years.
  • Total payrolls, including all non-farm employment, have inched steadily upward with private job creation leading the way.
  • The unemployment rate has slowly improved in line with economic growth; recent reports and news of job growth and payrolls have continued the favorable trend.
  • Average hourly wages have climbed unevenly higher, and productivity gains have been inconsistent.
  • Home values are still 6% below 2006 levels, but the 20 City Composite Index has shown signs of a sustainable recovery after promising year-over-year price increases.
  • Housing has turned the corner; housing starts are advancing fitfully, existing home sales have surged and the supply of existing homes for sale has moderated.
  • U.S. Leading Indicators have been consistently positive — in fact, for 17 of the last 24 months.
  • New durable goods orders have made upward progress with surges and slumps along the way.
  • The U.S. has more than recovered the output level lost in the Great Recession and has reached new highs. Expansions historically last about five years.
  • Over the past 20 years the average asset allocation investor has significantly underperformed stock and bond markets and barely kept pace with inflation.
  • Total federal public debt exceeds 100% of GDP, and the U.S. deficit is less than 3% of GDP. A definitive plan to tame the deficit remains elusive but sequestration contributed to a reduction.
  • Troubling projected budget deficits are driven by large mandatory entitlement programs, defense spending and interest payments, making it difficult to reduce government spending.
  • Taxes matter. High U.S. corporate income taxes have spawned a recent wave of tax inversion deals.
  • Abundant natural gas in North America and the ability to extract oil from shale are changing the global energy landscape. The IEA recently forecast that the U.S. will be the world’s largest oil producer by 2020.
  • The shale oil and gas revolution has made energy cheaper for U.S. manufacturers and spawned many high paying jobs. The recent drop in oil prices has caused the energy sector to cut back.
  • Over the past 20 years the average asset allocation investor has significantly underperformed stock and bond markets and barely kept pace with inflation.
  • Return correlations below 1.0 indicate ways to combine investments and reduce overall risk; negative or near zero correlations offer the best diversification benefits.
  • Weekly fund flows continued their mixed trend; cumulative equity flows, despite a multi year bull market, have yet to turn positive.
  • Alternative Asset Class returns, YTD through 10 year
  • Global REITS have consistently provided higher dividend yields than large cap stocks across almost all time periods — and better liquidity than most alternative investments.
  • A broadly diversified global strategy produced better performance — with lower risk — than a common mix of U.S. large-cap and EAFE equities plus corporate bonds.
  • Over 20 years, regular rebalancing increased returns and reduced risk compared to a buy and hold approach, which allows allocations to drift away from the intended targets.
  • Asset class returns vary widely over time, making allocation decisions difficult and market timing success unlikely. Equal-weighted global asset allocation returns (“Global AA”) are shown for illustration.
  • The excess of M2 over M1 money supply data shows record levels of cash on the sidelines, while equity mutual fund flows show extreme swings that highlight investors’ reactions to stock market performance.
  • To fund retirements lasting many years, today’s workers expect to rely more on personal sources of retirement income, such as their savings plan and IRA, than is presently the case for those over 65.
  • To fund retirements lasting many years, today’s workers expect to rely more on personal sources of retirement income, such as their savings plan and IRA, than is presently the case for those over 65.
  • Declining funding and sponsorship of pension plans is shifting the burden of retirement savings to participants in defined contribution plans.
  • Among workers who reported, total savings and investments — not including their personal residence or defined benefit plans — are far below what they will need to retire.
  • Two scenarios of Returns
  • As participants age, declining equity and increasing fixed income allocations may increase the risk of outliving assets, particularly in an ultra-low interest rate environment.
  • Index Definitions, page 1
  • Index Definitions, page 2
  • Index Definitions, page 3

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