In light of the recent market volatility, we wanted to share some market performance as well as an estimate of the UUA returns for both August and the YTD period.
Index returns for the month of August are roughly as follows:
S&P 500: -10% (US Large Cap Equity)
MSCI EAFE: -10% (International Developed Equity)
MSCI EM: -14% (Emerging Market Equity)
BC Aggregate: +0.5% (US Intermediate Bonds)
UUA August: -5.8% (Estimate)
UUA YTD: -3.5% (Estimate)
Following China’s surprise devaluation of the Yuan on August 11th, volatility across currency, fixed income, and global equity markets has steadily increased. While the intent of China’s policy change can be debated, the surprise move from the central bank appears to have heightened concerns of a more dramatic economic slowdown in China. The effect has been a wave of selling in equity and currency markets that began with China and its major emerging market trading partners. China’s mainland equity market, the Shanghai Stock Exchange is down more than 35% from its June peak but amazingly is flat for the year. Broadly, the MSCI Emerging Market Index is down over 10% in August and nearly 20% in 2015. Over the last several days, selling pressure has spread to the developed world with steep declines in the S&P 500 and MSCI EAFE pushing prices down nearly 10% in August.
While any market sell-off is unwelcome, it’s important to keep the market conditions in a broader context. The S&P 500 has delivered positive returns for 10 consecutive quarters and has not experienced a double digit quarterly decline since September 2011 (height of concerns regarding US government credit downgrade and Eurozone debt concerns). From a valuation context, US equity valuations can be categorized as reasonable. With a Forward P/E ratio of 17, the S&P 500 is neither cheap nor rich. Outside of the US, developed market equity markets appear more favorable with an improving earnings outlook from Japan and Europe and significant quantitative easing support from the European Central Bank and Bank of Japan. From a macro context, the banking systems and leverage levels of both the developed and emerging world are much healthier compared to 2008 and the 1997 Asian Financial Crisis. In addition, credit markets do not appear to be exhibiting the signs of a major market crisis. While credit spreads have moved higher on the back of distress in the energy sector they remain in-line with long-term averages.
Despite the attractiveness of long-term fundamentals, emerging market risk continues to be a challenge. While EM valuations appear more than reasonable, heightened volatility is likely to persist as uncertainty surrounds the path of China’s economic slowdown, the impact of commodity market declines, and the timing of a Federal Reserve rate hike. For long-term investors, we advise maintaining market weight exposure to emerging markets with the use of benchmark agnostic emerging market equity strategies.
Expanding on our market views, we continue to view equity markets relatively favorable to credit markets. We favor international developed equities over US equities and recommend a 50% strategic currency hedge for developed market currencies. We endorse the use of benchmark-agnostic emerging market mandates and dynamic strategies, for instance, global macro and global asset allocation, to navigate macroeconomic and currency risks.