Expectations Diverge

Practical considerations

• Transition to a range-trading environment
  Over recent months, we have highlighted a return to long-run levels of market volatility rather than the muted levels seen for much of the past 10 years. This indicates that we have entered a new volatility regime. We believed that a change of mindset might be required as markets transition from a momentum-driven to a range-trading environment.
  
  
• Some central banks may not be able to do much
  Most major economies are struggling to generate adequate levels of inflation, but some central banks are more constrained than others in the policy action they can take. The ECB is particularly constrained at this time as Mario Draghi moves toward the end of his term as ECB President and the search for his successor highlights differences of opinion between key nations in the currency union.
  
  
• Bonds remain expensive generally
  We continue to view sovereign bond yields as depressed, reflecting the demographics of an aging population and the demand for matching assets from pension plans. The decline in recent months has been accompanied by a reduction in the term premium to multi-decade lows, reflecting fresh demand for bonds even at these low levels.

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal. The positioning of a specific portfolio may differ from the information presented herein due to various factors, including, but not limited to, allocations from the core portfolio and specific investment objectives, guidelines, strategy and restrictions of a portfolio. There is no assurance any forecast, projection or estimate will be realized. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as the prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in emerging markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are magnified in frontier markets. Derivatives, including currency management strategies, involve costs and can create economic leverage in a portfolio which may result in significant volatility and cause the portfolio to participate in losses (as well as enable gains) on an amount that exceeds the portfolio’s initial investment. A strategy may not achieve the anticipated benefits, and may realize losses, when a counterparty fails to perform as promised. Currency rates may fluctuate significantly over short periods of time and can reduce returns. Investing in the natural resources sector involves special risks, including increased susceptibility to adverse economic and regulatory developments affecting the sector—prices of such securities can be volatile, particularly over the short term.