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2013 Outlook:
Second Quarter (Q2) Update
S
omewhat fondly recalling the days when the U.S. Federal Reserve (the
Fed) played its cards close to the vest, during the last month or so, we
have witnessed the impact of the Fed’s new “transparency” as U.S. and
global markets react (or overreact?) to what the Fed said or meant to say
or should have said. Nonetheless, the problem for the U.S. is unchanged: a
tortoise economy unable to stand on the pillars of corporate investment and
consumption, with a Fed torn by the need to be supportive yet cognizant of
the long-term effect of continuing the printing presses, as well as the potential to choke even slow recovery if interest rates rapidly increase. It is difficult
to tell if the best descriptor for this economy is “cautiously optimistic” or
“nervously positive,” but we can certainly say it is uncertain and investors
are skittish. Although for every favorable indicator there appears to be an
offsetting negative and a resulting weakness in most measures of Americans’ sentiment, the U.S. is still the proverbial hare compared to many other
developed economies.
Europe, by contrast, has pulled its head and legs into its shell and seems
This is the second quarterly update to
content to let time pass by in hopes of a safer environment before continuing.
Segal Rogerscasey’s 2013 Investment
This approach, austerity, may have merit eventually, but in the meantime,
Outlook, which can be accessed by
Segal Rogerscasey is concerned about rising discord as the spread beclicking on the image above or the
tween the have and have-not eurozone economies widens. There will be
following link: http://www.segalrc.com/
bright spots, as there are a number of strong and attractive companies in
pubs/outlook/2013.pdf
the eurozone, some of which may be cheaper due to the overall perception of the region, but, on average, the more attractive valuations could be
occurring with good reason. In Japan, the first two arrows of “Abenomics”1
had seemingly convinced the markets that performance-enhancing drugs
injected into the tortoise would cause a magical transformation to Gamera, the iconic flying turtle of sci-fi fame. More
recently there has been a significant pullback, as the depth of the issues and caution about the unknown result of the
pending third injection have combined to blunt the previous unbridled optimism.
The much-anticipated global winner of the race, emerging markets, has stopped to take a nap, at least as far as
investors are concerned, and suddenly went from everyone’s favorite to an apparent long shot. Segal Rogerscasey continues to believe that the truth lies somewhere in between (neither unbridled speed nor sleeping in the tall grass)
and structural change accompanied by currency stability is likely to favor these economies over the long term even
though this hare is prone to unpredictability and inconsistency with the resulting impact from investors who quickly back
other contestants whenever these characteristics manifest.
1
This term refers to Prime Minister Shinzo Abe’s three-pronged plan for improving the economy, which includes monetary policy, fiscal stimulus and structural
economic reforms.
Updated Equity, Interest Rate and Fixed-Income Graphs
Segal Rogerscasey has updated many of the equity, interest rate and fixed-income graphs from the 2013
Investment Outlook to include data as of June 30, 2013. Those graphs are available on the following page
of the Segal Rogerscasey website: http://www.segalrc.com/pubs/outlook/Q22013updatesupp.pdf
Q2 Update to 2013 Investment Outlook
This update to Segal Rogerscasey’s 2013 Investment Outlook includes a summary of the
global environment and a revised summary of views. It also includes observations on the investment outlook for Canada, contributed by experts at Segal Rogerscasey Canada, and for
Australia, contributed by Frontier Advisors Pty Ltd, Melbourne, Australia. We want to welcome
Fiona Trafford-Walker, Director of Consulting, Frontier Advisors, to the team of senior professionals that develops this Investment Outlook. Frontier Advisors joins Segal Rogerscasey as
part of the recently formed Global Investment Research Alliance. (Information about the Alliance
can be found on the following pages of the Segal Rogerscasey and Frontier websites: http://
www.segalrc.com/news-and-events/press-releases/?id=896 and http://www.frontieradvisors.
com.au/documents/GIRAPressReleaseMay2013.pdf.)
The material contained herein is intended as a general market commentary for distribution
to investment professionals and fiduciaries only. This is not intended for retail use or distribution. It is for informational purposes only and is intended solely for the person to
whom it is delivered by Segal Rogerscasey. Opinions expressed herein are those of the
Segal Rogerscasey Investment Committee as of July 2013, when this update to the 2013
Investment Outlook was written. These opinions are subject to change and may differ from
those of other Segal Rogerscasey employees and affiliates. Past performance is not a guarantee of future results. Not all investment ideas referenced are suitable for all investors and
each investor must consider their specific goals, objectives, liquidity, and risk preferences in
making decisions regarding the applicability of these ideas to their own circumstances.
Additional disclosures are provided at the bottom of the last page of this publication.
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Summar y of the
Global Environment
The shaded cells in the table below indicate changes or additional information since the
publication of the Q1 update to 2013 Investment Outlook, which included a similar table.
2013 Outlook
Q2 Update
United States
Substantial uncertainty in economic direction
Interest rates low, but future increases expected
Federal Reserve seeking to lower unemployment
U.S. housing market recovering
College debt increasing
Positive developments in North American energy
Principally unchanged with marginal progress
Unchanged, recent rapid rise and subsequent decline viewed as
short term
Unchanged, marginal progress and markets react poorly to Fed’s
trial balloon of probing an exit to “quantitative easing2 infinity”
Continues, issues outstanding, rate increases unfavorable
to progress
Continues to be long term concern especially due to recent
rate increases
Unchanged, environmental questions persist; some renewed focus
on fracking
Low inflation
Unchanged, with even longer horizon
Deleveraging with stronger balance sheet
Most may be behind us now
Some signs of uptick in autos and other consumer durables, but
still modest
Issues continue although some brightening in current accounts
from sequester
Consumption and spending muted
Fiscal issues of budgets, debt ceiling, and taxes
Developed Non-U.S.
Europe problematic
Chronic unemployment and concern for unrest, austerity vs.
growth issues
Overhang for European banks
Unchanged
New leadership in Japan
Favorable stimulus, more expected, falling yen has commodity
price impact
Long-term growth prospects for Japan
Fundamental issues are unchanged
Developing
Global slowdown impacts growth
Unchanged
Domestic consumption takes time
Unchanged
Growing middle class also long-term positive
Unchanged
China as the growth engine but has slowed
Unchanged
Additional Influences
Rising level of instability in the Middle East
Civil unrest and generational issues related to youth unemployment
2
Quantitative easing is a government monetary policy that increases the money supply to stimulate the economy.
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Summar y of Views
The shaded cells in the table below indicate changes or additional information since the
publication of the 2013 Investment Outlook, which included a similar table.
Broad Asset
Class
Sub Asset Class
Absolute
Relative
Equities
U.S.
Slightly Favorable
Favorable vs. Non-U.S. Developed
Equities
Non-U.S. Developed
Slightly Favorable
Unfavorable vs. U.S. Equity
Equities
Emerging
Favorable
Slightly Favorable vs. Developed
Fixed Income
U.S. Core
Neutral
Strongly Favor Active Management
Fixed Income
Non-U.S. Core
Slightly Unfavorable
Strongly Favor Active Management
Fixed Income
Emerging Market Debt
Slightly Favorable
Favor Local over External Debt
Fixed Income
High Yield
Slightly Favorable
Strongly Favor Active Management
Fixed Income
Bank Loans
Slightly Favorable
Strongly Favor Active Management
Fixed Income
TIPS
Appropriate for Longer-Term
Inflation Hedge
Fixed Income
Alternative Fixed Income
Favorable
Favor Direct Lending and
Structured Credit
Fixed Income
Long Bonds
Appropriate for
Liability Hedging
Support for Hedging Purposes
Alternatives
Hedge Funds
Support Allocation
to Best in Class
Hedge Funds
Favor Discretionary Global Macro/
Multi-Strategy
Alternatives
Private Equity
Support Allocation
to Best in Class
Private Equity
Favor Middle Market, U.S., Growth Equity
and Emerging
Alternatives
Real Estate
Support Real Estate
over the Long Term
Favor Value Added and Opportunistic
Alternatives
Other Hard Assets Infrastructure
Cautiously Positive
over the Long Term
Global, Favor High Quality
Core Managers
Alternatives
Other Hard Assets - Timber
Positive
Global
Alternatives
Other Hard Assets - Farmland
Positive
Cautious of U.S. Centric Approach
Alternatives
Energy
Positive
Favor Infrastructure, MLPs and
Exploration and Production Assets
Alternatives
Commodities
Consider Role
in Portfolio for
Inflation Protection
Active Management, but Hard to be
Positive in the Near Term
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Outlook for Canada
Canada has been one of the world’s strongest economies in recent years, largely due to the
boom in commodities and the country’s healthy financial condition relative to other countries. It
escaped many of the ravages of the financial crisis of 2008-2009 due to its sound fiscal situation and the relative absence of toxic investments on the balance sheets of its major financial
institutions. This strength has led the Bank of Canada to maintain its target for the overnight rate
at 1 percent since January 2009, higher than the key interest rates of leading economies, such
as the U.S. and the eurozone.
However, the Canadian economy has slowed in recent months due to a decline in the general
price and demand for commodities. This slowdown is reflected in local equity indices, which
have been some of the worst-performing globally this year. In addition, while the Canadian dollar
had traded above par with the U.S. dollar for much of the past several years, it is now questionable whether it can remain significantly above 90 cents in the next 12 months.
Canada is a major oil producer, but the prospect of the U.S. also becoming a major player in the
energy market in a few years will pose some difficulty for Canadian oil exporters. They will need
to sell their oil to more distant markets, such as Asia.
Like Australia (see “Outlook for Australia” on page 6), Canada has other industries that are
not resource-driven — manufacturing, for instance — but its heavy concentration in the resources
sector makes the economy susceptible to global swings that are dependent upon growth
and expansion.
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Outlook for Australia
The Australian equity market, as measured by the industry standard S&P/ASX 300 Index,
returned a total of 21.9 percent over the year ending June 30, 2013. As investors continued to
favor quality or high-yielding stocks, three sectors led the gains: Financials, Telecommunications
and Health Care. The market was also boosted by three separate cuts to official interest rates,
totaling 0.75 percent, as the Reserve Bank of Australia sought to encourage other sectors of the
economy to fill the gap left by the drop in resources-related capital expenditure.
The Materials sector was the most notable underperformer over the 12-month period. It was the
only sector to go backward over the past year. This underperformance characterized concerns
regarding falling prices for bulk commodities, iron ore and coking coal in particular, and uncertainty surrounding the future likely path of Chinese economic growth. Toward the end of the
12-month period, concerns over the timing of a tapering in the U.S. Fed’s quantitative easing
program and further uncertainty over China’s economy erased some of the market’s gains for
the year.
Looking to the year ahead, these current themes are likely to be key drivers of market performance. The timing, execution and circumstances surrounding any slowdown in the Fed’s
quantitative easing program will likely play an outsized role in determining overall market performance. At the sector level, those sectors that have benefitted most from investors’ preference
for yield over growth may be susceptible if this trend reverses. Moreover, the degree to which
consumers and businesses respond to the multiple interest rate cuts is expected to drive the
performance of domestic cyclical stocks. Investor confidence in the outlook for the Chinese
economy is also expected to play a key role in determining the performance of mining and
mining-related sectors.
Q2 Update to 2013 Investment Outlook
Questions? Contact Us.
For more information about the market commentary discussed in this update to the 2013
Investment Outlook and how our views may help you to revise your investment strategy,
contact your investment consultant, the nearest Segal Rogerscasey office (http://www.
segalrc.com/about-us/contact-us-locations) or Tim Barron, Chief Investment Officer, at
203.621.3633 or [email protected]
To receive each year’s Investment Outlook, quarterly updates and other Segal Rogerscasey
publications as soon as they are available online, register your e-mail address via
http://www.segalrc.com/register/
Segal Rogerscasey is a member of The Segal Group (www.segalgroup.net).
Segal Rogerscasey provides consulting advice on asset allocation, investment strategy,
manager searches, performance measurement and related issues. The information and opinions herein provided by third parties have been obtained from sources believed to be
reliable, but accuracy and completeness cannot be guaranteed. Segal Rogerscasey’s
second quarter update to the 2013 Investment Outlook and the data and analysis herein is
intended for general education only and not as investment advice. It is not intended for use
as a basis for investment decisions, nor should it be construed as advice designed to meet
the needs of any particular investor. Please contact Segal Rogerscasey or another qualified investment professional for advice regarding the evaluation of any specific information,
opinion, advice, or other content. Of course, on all matters involving legal interpretations
and regulatory issues, plan sponsors should consult legal counsel.
Copyright © 2013 by The Segal Group, Inc. All rights reserved.
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