Slow GDP Growth Likely to Lengthen Expansion, Potentially Aiding Stocks
U.S. Economy a Standout in Uncertain World
Strong Quarter for Dividend Stocks
U.S. Equities Remain Positive Despite Brexit
High Yield Income Continues to Pay Off
Fundamental Outlook Improves for Asian Emerging Markets


From the Desk of


The surprising news of the UK’s decision to leave the European Union was as much a rejection of the EU’s governance out of Brussels as it was of the cumulative effect of decisions that have altered the experience of life once known and cherished by the British. The global experience of free trade and open borders may bring benefits in the aggregate (according to economists), but as is often the case there are winners and losers from global trade. The losers have increased in numbers in Europe, the UK, and the U.S. They also have become more vocal in their distaste for, and perhaps distrust of, elected governments when it comes to managing their countries in a manner that provides a better living standard for all citizens, not just the winners.

For investors, focusing on risk management takes precedence over trying to predict the implications of Brexit well before any new agreements for economic cooperation between the UK and EU are finalized. Due to many factors, including the lack of clear leadership and competitiveness across Europe, City National Rochdale has not held more than 5% of our equity and fixed income allocations in the region for over one and a half years (despite those markets representing about 22% of the MSCI global stock value). That decision, while prescient, gives us confidence that whatever results from the coming UK-EU negotiations, our clients will remain observers since only a modest amount of our capital is allocated to that region.

It is important to note that while the impact of the Brexit vote was transitory on equities, it was rather dramatic on fixed income. Conservative investors in fixed income seek a reasonable return with a high degree of predictability. Political uncertainty leads to the pursuit of investments away from the areas of uncertainty. The UK’s vote to exit the EU altered both the returns available and their predictability. As a result, investors looked across the Atlantic for better yields and a more predictable government and social foundation. They are now investing in U.S. government bonds in preference to Eurozone bonds, driving U.S. yields to current record lows – and likely even lower in the near term. This interrelationship is bothersome because it means our interest rates are somewhat dependent on factors outside the U.S., which also means that our economy is somewhat captive to events occurring in the EU and the UK.

Lower yields are seriously unhealthy for capital lenders, insurance companies, pension funds, and all other investors that have material amounts allocated to U.S. fixed income securities. We believe these very low rates will not produce beneficial effects over the long term for our economy, and we note that yields this low could potentially create risks for investors were inflation to rise.

Equities remain near record highs while yields are near record lows. These low rates were caused largely by the uncertainty abroad and now bring financial uncertainty to U.S. fixed income investors. It has altered the Fed’s freedom to act solely on what is best based on U.S. economic activity and is, in our view, a situation that requires rigorous risk management.

We value your relationship and welcome hearing from you. If there is something you would like to discuss, please contact your advisor or portfolio manager. If I can be of assistance to you, please contact me directly at garrett.dalessandro@cnr.com.


Important Disclosures

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein.

Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources and, although believed to be reliable, it has not been independently verified, and its accuracy or completeness cannot be guaranteed.

Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as on the date of this document and are subject to change.

There are inherent risks with equity investing. These risks include, but are not limited to, stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity.  Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.

Concentrating assets in the real estate sector or REITs may disproportionately subject a portfolio to the risks of that industry, including the loss of value because of adverse developments affecting the real estate industry and real property values. Investments in REITs may be subject to increased price volatility and liquidity risk; concentration risk is high.

There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors’ incomes may be subject to the Federal Alternative Minimum Tax (AMT) and taxable gains are also possible. Investments in below-investment-grade debt securities and unrated securities of similar credit quality, commonly known as “junk bonds” or “high-yield securities,” may be subject to increased interest, credit, and liquidity risks.

Investments in emerging markets bonds may be substantially more volatile, and substantially less liquid, than the bonds of governments, government agencies, and government-owned corporations located in more developed foreign markets.  Emerging markets bonds can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.

As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money.

Returns include the reinvestment of interest and dividends.

Investing involves risk, including the loss of principal. Diversification may not protect against market loss or risk.

Past performance is no guarantee of future performance.

Index Definitions

The Standard and Poor’s 500 Index (S&P 500) is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance.

The U.S. Treasury 10 year note is a debt obligation issued by the United States government that matures in 10 years. A 10 year Treasury note pays interest at a fixed rate once every six months and pays the face value to the holder at maturity.

The MSCI World Index captures large and mid-cap representation across 23 Developed Markets countries.

The Barclays U.S. Corporate High-Yield Index covers the U.S. dollar denominated, non-investment grade, fixed rate, taxable corporate bond market and includes securities with ratings by Moody’s, Fitch and S&P of Ba1/BB+/BB+ or below.

The Barclays Emerging Markets USD Aggregate Bond Index is a flagship hard currency Emerging Markets debt benchmark that includes fixed and floating-rate U.S. dollar denominated debt issued from sovereign, quasi-sovereign, and corporate EM issuers.

The Bloomberg CFETS RMB Index is an index replica of the trade weighted CFETS RMB Index, which tracks the yuan against 13 currencies.

The U.S. Dollar Index is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies.

Indices are unmanaged, and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.