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Global Investment Strategy

August 3, 2015 (Weekly Update)

Paul Christopher, CFA, Head Global Market Strategist

Weekly market insights from the Global Investment Strategy team

  • Headlines can create uncertainty that interferes with long-term investing plans.
  • Our view is that economic and earnings growth will continue to improve, and also that recent headlines are manageable and, at times, even exploitable.

What it may mean for investors

  • Investors should look beyond the headlines: make and follow an investment plan, see the long term, and diversify across markets and regions of the world.

Smart Investing When Uncertainty Creates Fear

"He burned his tongue on the soup, and now he always blows on the yogurt."--Turkish proverb

Just like the proverbial diner, investors may feel "once burned, twice shy" about investing, after a string of national and international market disappointments during the past 20 years. Recent events in Greece and China reinforce fears that the global economic recovery is ending or is at least damaged. Our view is that economic and earnings growth will continue to improve, and also that recent headlines are manageable and potentially even exploitable, if investors adopt a few strategies and, most importantly, take the right perspective.

Opportunities from recent market concerns

July was a trying month for investment sentiment around the world. The latest episode of the Greek crisis revealed mistrust between Greece and its creditors. Another political impasse over Greece is likely by year-end, but the Eurozone economy is poised to accelerate, and the region’s bond markets seem well supported by the European Central Bank, unlike five years ago.

China’s equity selloff also gripped July headlines, but investor pessimism over China seems overdone. The local equity market is not China’s main means of saving or accessing capital. Chinese investors, instead, favor the real estate market, where June land sales (a leading indicator of home prices) posted their first increase in a year, while equity prices were declining. Moreover, the selloff is inspiring government plans for new economic stimulus measures. We think the economic impact from the market decline will develop in a slow and limited way.

Worries about China caused commodity buyers to pause, leading to larger commodity inventories and lower energy and metals prices at mid-year. Demand for raw materials should still grow this year, but buyers may hesitate until China’s economy shows its resilience. Looking into 2016, we expect commodity prices to gradually stabilize, as buyers exploit low prices and suppliers limit output.

Overall, global economic growth remains below its historical average pace, but an uptrend is developing. In our view, this development still broadly supports global equities over bonds, especially in U.S. and developed international markets. The recovery is slow enough to prompt a steady stream of concerns, but we maintain that investors should continue to focus on the improving trend. Recessions have typically begun after excesses and exuberance produce incautious buying and a slowing growth trend. By contrast, we believe July’s events are unlikely to curtail the recovery, and the prevailing caution and worry are typical for the end of rallies.

How to deal with the unpredictable?

Know yourself: A starting point is to stay grounded in your tolerance for risk and your investment objectives. Self-knowledge can help you allocate savings across asset classes towards a desired return level while remaining within a comfortable risk level. Once an allocation is set, events occasionally may offer an opportunity to rebalance (i.e., take profits from one asset class to purchase another asset class that has pulled back). Having such a plan and sticking to it can help offer some freedom from worries about the events.

See the long term: The economy has been resilient to surprises. Even events with far-reaching consequences typically have presented new challenges that businesses and households have managed to overcome. Trying to time equity market entry and exit involves the risk of missing the potential for U.S. businesses and households to innovate and prevail over such negative events, as shown in the chart below.

Chart 1. The Cost of Market TimingChart 1. The Cost of Market Timing
Source: Wells Fargo Investment Institute, 8/3/15
This hypothetical illustration is based in the Standard & Poor's 500 index with dividends reinvested over the period of Jan. 2, 1994 - Jul. 30, 2015. This example does not include fees or commissions. Past performance does not guarantee future results. This chart is for illustrative purposes only and is not indicative of the performance of any specific investment. An investor cannot invest directly in an index.

Use an appropriate asset allocation strategy: Unpredictable events make it difficult to anticipate the top (or bottom) asset class performers, but allocating across asset classes can exploit the long-term tendencies across markets. Correlations between asset classes, such as stocks and bonds, historically have been much more stable than asset prices over time. There is also some consistency in the relative returns across asset classes. For example, combining stocks and bonds may create a portfolio that has less volatility than stocks alone and one that offers the opportunity for a better return than bonds alone.

Conclusion

Uncertainties from global political and economic events probably will continue to rotate into and out of the headlines, but we think the economic expansion is gaining both momentum at home and breadth across Europe and Japan. A more measured caution and a deliberate approach, "to making soup" and to investing, should help you keep perspective about recent experiences. In particular, having a plan and sticking to it can align your long-term goals with our views on the best prospects for risk and return.

Paul ChristopherAbout Paul Christopher

Paul Christopher is the head of international strategy and the co-head of real asset strategy for Wells Fargo Investment Institute (WFII), an organization that provides global manager research and investment strategy advice to Wells Fargo’s Wealth, Brokerage, and Retirement (WBR) division. WBR is comprised of Wells Fargo Private Bank, Wells Fargo Advisors, Wells Fargo Institutional Retirement, and Abbot Downing businesses, accounting for more than $1.6 trillion* in assets under administration.

Mr. Christopher focuses on the international economic outlook and offers investment advice on currencies and commodities. He is frequently quoted in the national media, including The Wall Street Journal, The New York Times, Forbes, Time, Investor's Business Daily, USA Today, Bloomberg News, ABC News, NBC News, and CNBC.

Prior to joining Wells Fargo, he developed economic strategies to trade in global financial and commodity futures markets for Eclipse Capital Management. In previous positions, Mr. Christopher supplied international economic perspectives for Wells Fargo predecessor A.G. Edwards, and advised institutional clients of Istanbul-based Global Securities on the oil-based economies of the Caucasus and Central Asia. He has consulted with the governments of Hong Kong, Egypt, Russia, Kazakhstan, and the Kyrgyz Republic on monetary policy issues.

*As of Sept. 30, 2014

Risk Factors

All investing involves some degree of risk, whether it is associated with market volatility, purchasing power or a specific security. Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments.

Investing in fixed income securities involves certain risks such as markets risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment. All fixed income investments may be worth less than original cost upon redemption or maturity.

Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.

Asset allocation does not guarantee a profit or protect against loss.

Disclaimers

Global Investment Strategy is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly-owned subsidiary of Wells Fargo & Company and provides investment advice to Wells Fargo Bank, N.A., Wells Fargo Advisors and other Wells Fargo affiliates. Wells Fargo Bank, N.A. is a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by the Global Investment Strategy division of WFII. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

This report is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon.

Wells Fargo Advisors is registered with the U.S. Securities Exchange Commission and the Financial Industry Regulatory Authority, but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors.

Brokerage products and services are offered through Wells Fargo Advisors. Wells Fargo Advisors is the trade name used by two separate registered broker-dealers: Wells Fargo Advisors, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, non-bank affiliates of Wells Fargo & Company.

 
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