While in the midst of the “summer doldrums” we spoke of in recent editions, we’re also seeing evidence that policymakers are committed to doing what it takes to claw back onto the path of growth.

Central banks in the U.S. (Twist 2), the UK (additional asset purchases), Europe (interest rate cuts) and China (interest rate cuts and other actions) are all easing monetary policy further. Also, it appears that Greece, Spain and Ireland may get additional time from the EU to hit their deficit targets, more money for banks and/or more attractive rescue conditions, easing the fiscal brake on the economy. Meanwhile, commodity prices have fallen sharply.

Although all this does not provide an easy exit from the global economic malaise, it does relieve pressures somewhat relative to low expectations.

Tony Caxide

North America

Tony M. Caxide, CFA®

Chairman - Senior Investment Council

Economic releases have been a source of uncertainty, as a very strong winter was followed by weaker data across many segments of the economy. This appears to be driven by temporary factors: seasonal adjustment factors appear distorted; an unusually warm winter accelerated economic activity that normally would not begin until spring; and government incentives to invest in durable goods became much less attractive January 1, shifting purchases to late last year.

That said, slowing demand in Europe and emerging markets is also having a more “real” impact. This has contributed to a more muted environment for corporate revenues and earnings. Profits, albeit just below all-time records, will likely ease, which could further buffet investor confidence.

Jeffrey G, Wilkins


Jeffrey G. Wilkins,

Deputy Chief Investment Officer

It appears that deflation in Japan has yet to be beat, as core consumer prices have again retreated into negative territory. While long-term improvements in retail sales and employment led to some hope for growth, the three-month run rate for retail sales has turned negative, and household spending and income hint at a consumer who’s struggling to keep up. Industrial production, machine orders and trade all appear to be suffering under the weight of a historically strong yen.


Jeffrey G. Wilkins,

Deputy Chief Investment Officer

The European economy remains saddled with both internal and external pressures. Austerity measures and uncertainty around the periphery countries have restrained internal growth. Stimulus from the central bank and the currently economically stronger countries has proved helpful – at times. However, deficits exacerbated by high interest rates on sovereign debt, a weak banking sector and historically lax fiscal policies have, thus far, been too much to overcome.

As a result, policy (i.e., political actions) has taken center stage, and with recent elections behind them, there seems to be a renewed dedication to repairing the economy. In addition to the actions of Europe’s politicians and the European Central Bank, we are closely following shifts in Italy and Spain’s government bond market yields and company results for the second quarter for hints of improvement in the European markets.


Jeff (Shengde) Liu, CFA®

Managing Director, Portfolio Management

In 2010, the Cameron-led coalition government initiated a five-year austerity program, later extended to 2017 because of slower-than-expected economic growth and a deepening of the eurozone crisis. To ease the recession, authorities implemented two counter measures: 1) the government pledged to reduce the corporate tax rate to 23%; and 2) repeatedly increasing the Bank of England’s asset purchase program.

The impact of these actions is yet to be seen. UK first-quarter GDP registered a contraction. Recent service sector indicators suggest a slower expansion, and manufacturing has been contracting for some time. June production and trade releases did, however, offer hope of a turnaround, and the 2012 Summer Olympics may bring additional revenues to the economy at a time of depressed equity market valuations.

Emerging Markets

Jeff (Shengde) Liu, CFA®

Managing Director, Portfolio Management

Since winter 2010, most emerging central banks tightened monetary policy to curb inflation. However, the policy adjustments came at an unfortunate time: during a eurozone crisis and a world economic slowdown. Inflation cooled in most EM countries, aided by collapsing commodity prices. The latter, however, also harmed these economies, as “resource” sectors make up 25% of the EM Index and more than 33% of the BRICS Index. The resulting downward revisions to growth have not been kind to emerging-market equities (MSCI index down 18% peak to trough, year to date).

This setback prompted a reversal in monetary policy and paved the way for a series of stimulus packages to encourage economic growth. But challenges still remain, including the well-known drop in demand from Europe and the uncertainty in both Chinese growth and EM consumers. So despite tepid equity market performance in the first half of 2012, EM valuation is still not compelling.