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Outlook
Investment Insights
July 2016
Look for
Opportunity
Through the Fog
of Uncertainty
No doubt, the worlds markets spent the first half of 2016 on rocky ground. Investors have been confronted
with the British vote to leave the European Union (Brexit), a growth scare in the U.S., the economic
deceleration in China, and the introduction of negative interest rates in some markets. Nevertheless, the global
economy is expected to remain on a path to growth albeit very slow growth.
Looking ahead to the second half of 2016, market volatility is likely to remain elevated. What are the longer
term implications of the Brexit vote? Can the resilient U.S. economy continue on its growth path? Will Chinese
consumption remain healthy as the worlds second-largest economy continues to slow? Potential opportunity
will likely arise for disciplined, active investors who can look past the near-term macroeconomic clouds toward
individual companies with bright prospects.
Global Growth
I need my portfolio to grow
but worry about world events.
North America
International
Emerging Markets
Dividends
Interest Rates
Bonds
Sustainable Income
With stock and bond yields so
low, how should investors think
about income in todays market?
Some areas of the global economy have slowed while others are getting less bad
TAILWINDS
HEADWINDS
U.S.
Brazil
Europe
China
Investors encouraged by
move to impeach president
3.8% +0.0%
India
Canada
Russia
Japan
Slow recovery
against backdrop of
slow global growth
+1.5% +1.9%
+7.5% +7.5%
+1.5% +1.6%
+6.5% +6.2%
+2.4% +2.5%
MIXED WINDS
1.8% +0.8%
+0.5% 0.1%
2,000
U.S. wages,
a key to home
buying, are
on the rise
+2.5%
U.S. construction
employment at
highest levels
since 2008
6.6
million
U.S. housing is
helping to
lift U.S.
industrials
61%
year-overyear income
growth
1,500
1,000
500
0
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
people
employed
of industries
report
expansion
2015
Housing can generate jobs and activity not only in construction, but in a
wide range of industries, including
durable goods makers and financial
companies. Possible beneficiaries
could include companies such as
Wells Fargo, Newell Rubbermaid, Inc.,
Waste Management, Inc., The Home
Depot, Whirlpool Corporation and
the makers of large pickup trucks,
whose sales have been highly correlated with home construction.
Services are now majority of GDP and some firms are benefiting
80%
70
42%
31%
28%
Alibaba
Tencent
60
Ctrip
50.5%
50
49.5%
Services
40
30
92
94
96
98
00
02
04
06
hyper growth, and the countrys leadership has pledged to keep the economy
growing at a steady, albeit slower, rate.
Recently, policymakers have sought to
stimulate growth by easing restrictions
on property purchases, freeing up bank
lending and funding new infrastructure
projects. It appears these measures are
helping to sustain the economy. China
reported first-quarter GDP growth of
6.7%, in line with the governments plan
to grow the economy between 6.5% and
7% over the longer term.
08
10
12
14
U.S. equities have outpaced international markets since the 200809 financial crisis.
40% MSCI EAFE Index vs. the S&P 500 Index rolling 3-year returns, 12/31/725/31/2016
20
21 months
51 months
50 months
75 months
13 months
78 months
20
12/31/72
12/31/82
12/31/92
remains clouded by high debt, stubbornly slow growth and political uncertainty. To jumpstart the economy the
European Central Bank has launched
aggressive stimulus measures, including the deployment of negative interest
rates and a massive new bond-buying
program.
12/31/02
12/31/12
Nestl
Roche
HSBC
Novo Nordisk
Bayer
24%
Sano
23%
24%
6%
49%
7%
22%
8%
60%
33%
35%
8%
8%
3%
36%
52%
9%
GlaxoSmithKline
25%
39%
32%
5%
13%
25%
21%
8%
40%
30%
32%
8%
35%
30%
25%
9%
28%
27%
30%
Asia-Pacic
30%
41%
24%
Novartis
North America
36%
25%
Top 10 largest
Topcompanies
10 Europe
European
Anheuser-Busch InBev
Emerging markets
30%
37%
9%
Going Up
Mobile banking transactions in India
87%
80
U.S.
Increase from
previous year
250
60
49%
40
200
74%
150
86%
100
20
18%
India
0
50
132%
0
94
113%
300
China
96
98
00
02
04
06
08
10
12
14
11
12
13
14
15
Sustainable income
In a reversal from 2015, higher dividend payers have outpaced nonpayers and the broader market
-1
-3
-5
4
2
Total return %
3
Andrew Suzman, Capital
Group
Portfolio Manager1
2015
2016 through 5/31/16
0
Last years laggards
(companies with the highest
dividend yields) have been
among this year's leaders ...
-2
-4
-7
-6
Higher yields
Lower yields
-8
1st
2nd
3rd
MSCI World Index quintiles
Thus far in 2016, however, dividendpaying companies have come back into
favour amid a growth scare in the U.S.
The chart shows that during the first
quarter of 2016, companies with the
highest dividend yields produced a
6.3% total return, whereas companies
with the lowest dividend yields and
nonpayers posted a 0.9% return.
The sharp reversal may suggest that
4th
5th
Sustainable income
With sovereign yields below or near zero elsewhere, Canada and the U.S. are relative high-rate havens
3.5
3.0
2.5
2.0
1.84%
1.5
1.32%
1.0
0.5
0.0
0.14%
-0.5
0.12%
0.36%
2016 Midyear Outlook: Look for Opportunity Through the Fog of Uncertainty
Headwinds
North America
International
Emerging Markets
Structural underemployment
Tailwinds
Key
takeaways
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