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CAPITAL MARKETS VIEW
Third Quarter 2016
EQUITY
United States
Europe
Japan
Emerging Markets
OUTLOOK
INSIGHTS
Neutral
While we are more cautious on developed market equities in our asset allocation overall, we are overweight US equities relative to other markets. The energy and materials-led earnings recession has spread broadly across market sectors and is a cause for concern. Slowing capital expenditures by large companies are worrisome since we believe capital investment made today tends to lead to future profits.
Neutral
Valuations remain attractive compared with the United States and Japan, though developed market valuations look full overall. In the wake of the Brexit vote, UK-based multinationals have fared better than domestic-facing firms, and with a materially weaker pound sterling, we expect multinationals to remain relatively attractive. Downward earnings pressure is expected in both the United Kingdom and Europe, driven by lower growth and investment associated with the uncertainty surrounding the Brexit referendum, which sidelined activity this spring. This is a condition that will likely persist for some months to come. Expect equity risk premia to remain elevated given ongoing uncertainty facing Europe amid growing populist sentiment.
Neutral
While high relative to Europe and many emerging markets, valuations are in line with those in the US. Although manufacturers are benefiting from historically low energy costs and interest rates, recent yen strength — despite additional monetary stimulus — is a growing headwind for exporters as earnings come under pressure. Faith in the Bank of Japan’s ability to weaken the currency is waning.
Favorable
Rebounding commodities prices and a likely delay in the Fed tightening cycle are tailwinds, but lack of visibility on EM growth calls the sustainability of the rebound into question. The asset class has been inclined to respond to macro factors like exchange rates, financial conditions and trade flows, and has tended to do well when the US economy avoids recession but doesn’t grow enough to prompt significant Fed tightening. Tighter financial conditions post-Brexit are a concern, if they persist.
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CAPITAL MARKETS VIEW Third Quarter 2016
FIXED INCOME
US Treasuries & Agencies
Global ex US Sovereigns
Emerging Market Sovereigns
Investment-Grade Corporates
High-Yield Corporates
OUTLOOK
INSIGHTS
Unfavorable
The lower-for-longer global interest rate backdrop highlighted by slow growth and low inflation makes the US market compelling on a relative basis given that US yields are higher than those in the eurozone and Japan but not very compelling on an absolute basis.
Unfavorable
With many market yields near or below zero owing to aggressive Bank of Japan and European Central Bank monetary policy, global sovereigns are particularly unappealing. Investors are being offered very little compensation for taking significant rate risk.
Neutral
The headwinds from weak commodities and a strong US dollar have eased in recent months, contributing to improved performance, but we do not see these turning to tailwinds for EMD in the near term. In fact, post-Brexit volatility risks tightening monetary conditions once again, prompting a more cautious outlook. Volatile but range-bound markets are seen for commodities and the dollar in the near term.
Favorable
With demand from central banks extending beyond sovereign to corporate debt markets, investment- grade credit markets have been bolstered. Against a lower-for-longer global interest rate environment of slow economic growth and subdued inflation along with fairly conservative corporate balance sheets, spreads are still at levels likely to prove attractive on a longer-term basis.
Favorable
On a risk-adjusted basis, we believe high-yield corporates offer the most compelling opportunity in fixed income markets near term and a compelling opportunity when compared to equities given stretched valuations at present. The lower-for-longer global interest rate environment is supportive for high yield in our non-recessionary base case, but we are mindful of the potential for bouts of volatility post-Brexit.
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CAPITAL MARKETS BOARD Third Quarter 2016
MARKET INSIGHTS Third Quarter 2015
We travel the world conducting our own investment research, evaluating corporate management teams and analyzing the competitive landscape. We listen to central bankers and other policymakers to put together a picture of where world economies are heading. We collaborate across our global research platform to share our best ideas. James T. Swanson, CFA
Ben Kottler, CFA
Chief Investment Strategist Joined MFS in 1985
Institutional Equity Portfolio Manager Joined MFS in 2005
William J. Adams, CFA
Benjamin R. Nastou, CFA
Chief Investment Officer, Global Fixed Income Joined MFS in 1997
Quantitative Portfolio Manager Joined MFS in 2001
Kevin Beatty
Sanjay Natarajan
Chief Investment Officer, Global Equity Joined MFS in 2002
Institutional Equity Portfolio Manager Joined MFS in 2007
Robert M. Almeida, Jr.
Robert Spector, CFA
Institutional Equity Portfolio Manager Joined MFS in 1999
Institutional Fixed Income Portfolio Manager Joined MFS in 2005
Robert M. Hall, Jr.
Erik S. Weisman, Ph.D
Institutional Fixed Income Portfolio Manager Joined MFS in 1994
Chief Economist & Fixed Income Portfolio Manager Joined MFS in 2002
CAPITAL MARKETS VIEW is our outlook on regions and asset classes, which is generated from our investment research and informed by our insights into what drives the markets.
The views expressed are those of the author(s) and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as a solicitation or investment advice from the Advisor. Unless otherwise indicated, logos and product and service names are trademarks of MFS® and its affiliates and may be registered in certain countries. Issued in the United States by MFS Institutional Advisors, Inc. (“MFSI”) and MFS Investment Management. Issued in Canada by MFS Investment Management Canada Limited. No securities commission or similar regulatory authority in Canada has reviewed this communication. Issued in the United Kingdom by MFS International (U.K.) Limited (“MIL UK”), a private limited company registered in England and Wales with the company number 03062718, and authorized and regulated in the conduct of investment business by the U.K. Financial Conduct Authority. MIL UK, an indirect subsidiary of MFS, has its registered office at One Carter Lane, London, EC4V 5ER UK and provides products and investment services to institutional investors globally. This material shall not be circulated or distributed to any person other than to professional investors (as permitted by local regulations) and should not be relied upon or distributed to persons where such reliance or distribution would be contrary to local regulation. Issued in Hong Kong by MFS International (Hong Kong) Limited (“MIL HK”), a private limited company licensed and regulated by the Hong Kong Securities and Futures Commission (the “SFC”). MIL HK is a wholly-owned, indirect subsidiary of Massachusetts Financial Services Company, a U.S.-based investment advisor and fund sponsor registered with the U.S. Securities and Exchange Commission. MIL HK is approved to engage in dealing in securities and asset management-regulated activities and may provide certain investment services to “professional investors” as defined in the Securities and Futures Ordinance (“SFO”). Issued in Singapore by MFS International Singapore Pte. Ltd., a private limited company registered in Singapore with the company number 201228809M, and further licensed and regulated by the Monetary Authority of Singapore. Issued in Latin America by MFS International Ltd. For investors in Australia: MFSI and MIL UK are exempt from the requirement to hold an Australian financial services license under the Corporations Act 2001 in respect of the financial services they provide. In Australia and New Zealand: MFSI is regulated by the U.S. Securities and Exchange Commission under U.S. laws, and MIL UK is regulated by the U.K. Financial Conduct Authority under U.K. laws, which differ from Australian and New Zealand laws. MFSE-CMV-NL-6/16 33337.7
