After gradually gaining confidence, investors have been shaken somewhat early in 2014 by a roughly 5% stock market pullback in the U.S. Emerging markets have experienced even more turbulence.

After a 30% gain in prices, this stock volatility is unremarkable. And, although some of the factors driving turbulence in some emerging markets definitely merit watching (i.e., currency weakness, rising inflation and interest rates), most developing economies appear to be in fundamentally much stronger shape than during past crises (from the late 1990s in Asia and Russia to the debt crises of Latin America before that).

Most other global macro-economic factors point to a modest pace of recovery, perhaps even an improvement. U.S. profits are at record levels, though their growth rate has moderated. And policymakers seem to be standing firm in their determination to support growth and bring inflation back up toward normal levels near 2%, from uncomfortably lower levels.

Tony Caxide

North America

Tony M. Caxide, CFA®

Chairman - Senior Investment Council

Though the economy seems to be improving modestly, markets have wobbled early this year. As we write this, much of the loss has been reversed. However, some remain on edge, what with headlines of record high levels of margin debt and the continuing drumbeat of warnings from some pundits – many dating back years.

As the government spending equation becomes a smaller negative to growth, and hopes for higher capital investment increase, the U.S. may be leading the world in a somewhat better, but still tepid, recovery. This moderate pace could also translate into sustained growth. Where most recoveries are typically fueled by strong credit growth, this one has occurred in an environment where the private sector has viewed credit with disdain. So this time is indeed different.

Jeffrey G, Wilkins


Jeffrey G. Wilkins,

Deputy Chief Investment Officer

Japan’s economy continues to show many positive signs of growth. Perhaps most importantly for markets, corporate earnings growth has been robust, due in part to a lower yen. The currency’s weakness is a direct result of Prime Minister Abe’s stimulative monetary policies. Jobs are growing more plentiful and unemployment is almost as low as it was in 2006 and 2007, at 3.7%. Industrial production has improved. Retail sales also look positive, but some of this growth is no doubt in anticipation of the nearing sales tax hike. Inflation, finally, is positive and improving (meaning rising), though not yet at the target of 2%. This suggests there is room for additional stimulus, which would also help offset the effective tightening of the sales tax increase in April.


Srinath Sampath, CFA®, PhD

Managing Director, Portfolio Management

Europe continues to show signs of recovery despite lingering weakness in the periphery. Consumer demand remains tepid and loan growth remains negative. Unlike their U.S. counterparts, European banks have not yet fully deleveraged. And unemployment has not improved.

That said, Q4 GDP growth of near 1% exceeded expectations, manufacturing has gained traction, and the trade balance is very strong. European Central Bank (ECB) president Mario Draghi has successfully instilled market confidence. While interest rates are at a historic low of 0.25%, with inflation only at 0.7%, Draghi has little room before he must act. If commodity prices moderate, the ECB may have to resort to unconventional policies to fight disinflation. That’s why we’re following the inflation story closely in our European portfolio positioning.


Jeff (Shengde) Liu, CFA®

Managing Director, Portfolio Management

The UK economy grew at nearly 3% in 2013 and the recovery continues into the new year. The Bank of England signed up for the full package: interest rate policy near zero, quantitative easing and forward guidance. The unemployment rate fell to 7.1% – the lowest in 5 years. Although wage growth is still lagging (at less than 1%), inflation is also subdued, down to 2%. Retail sales are running strong, at about a 7% annualized rate. Car sales are at their best levels in two years and housing has been booming. The manufacturing sector is robust and other indicators also suggest higher corporate sales and profits. This usually sets the stage for a robust equity market.

Emerging Markets

Jeff (Shengde) Liu, CFA®

Managing Director, Portfolio Management

Emerging markets (EM) continued to slide early in 2014. Capital flowed out particularly from countries with poor trade account balances, as weaker currencies, rising inflation and interest rates triggered concerns of slower growth.

Many indicators point to a slower economic environment as these economies shift away from their dependence on a combination of commodity and other exports and heavy investment. This is occurring in a setting where stock market valuation is quite attractive relative to history. We believe that the chance of EMs repeating a 1998 currency crisis is low. Presently, EM public debt and external debt levels remain low, exchange regimes are far more flexible and their large foreign reserves serve as strong cushions to more egregious effects of capital flight. But it may take some time for stock prices to reflect these fundamentals.