Quarterly Performance Update
Global Backdrop Favored Non-U.S. Stocks, U.S. Bonds
First Quarter 2015
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As the Federal Reserve (Fed) moved closer to tightening monetary policy, other leading central banks maintained aggressive stimulus plans to spark growth and inflation in their regions. This dynamic drove non-U.S. stock returns higher and continued to keep U.S. bonds among the world’s favored fixed-income securities.
"Global divergence" remained the predominant theme in the world’s financial markets. While the U.S. economy continued to demonstrate modest gains, including 2.2% annualized growth in the fourth quarter of 2014, other leading economies remained slow or stagnant. The eurozone economy barely remained in expansionary mode, in contrast to the U.K., where growth was relatively robust. Elsewhere, fractional growth in Japan pulled that nation out of its fourth recession since 2008, while China and most emerging markets faced slowing growth rates. Against this backdrop, the Fed and Bank of England remained the only leading central banks scaling back their stimulus programs and contemplating interest rate increases. Other central banks remained in aggressive-stimulus mode, including the European Central Bank, which finally launched its long-anticipated quantitative easing (QE).
In this environment, non-U.S. stocks rallied. Investors generally overlooked continued signs of global economic weakness, including additional commodity price declines, and focused on central bank-driven optimism. U.S. stocks overcame a sharp bout of volatility, triggered by slowing growth and earnings concerns, to post modest gains. But U.S. stocks, which gained 0.95% (S&P 500® Index), lagged their non-U.S. developed and emerging market counterparts, which advanced 4.88% and 2.24%, respectively, in U.S. dollar terms, according to MSCI. The relative strength of the U.S. dollar (which rallied versus most major currencies and put additional pressure on already-weak commodity prices) reduced non-U.S. returns for U.S.-based investors.
Against a global backdrop of slow growth, muted inflation, and central bank stimulus, U.S. bond returns remained robust. In particular, the relative yield advantages of U.S. Treasuries versus other government securities, which faced plunging yields due to central bank actions, sparked demand for U.S. bonds. This factor, combined with weak inflation, helped the broad U.S. bond market (Barclays U.S. Aggregate Bond Index) gain 1.61% for the quarter. Non-U.S. bond returns also were strong in local currency terms, driven by slow growth, falling interest rates, and central bank stimulus. Overall, investor demand for yield helped non-government bonds outpace government bonds.
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Source: Barclays Indices
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