Recent releases are showing some signs of a pick-up in U.S. growth from the weak summer, except in manufacturing, which is slowing. Europe remains in apparent recession, yet we detect hints that efforts in its periphery nations to reduce costs and increase competitiveness are beginning to bear fruit. Emerging markets remain in an economic downshift.

Meanwhile central bankers are increasing their drum beat, signaling further stimulus. The U.S. Federal Reserve just announced plans to purchase $40 billion of mortgage-backed bonds every month – without a defined deadline – and other measures.

Athough the long-term trajectory for economic growth remains shallower than normal, we feel that central bank actions could have a meaningful analgesic effect on a painful recovery.

Tony Caxide

North America

Tony M. Caxide, CFA®

Chairman - Senior Investment Council

Over the next five years we continue to expect a below-normal pace of recovery as deleveraging continues and various excesses are cleansed from the system. Further, many risks remain, including the U.S. federal government fiscal challenges. Nevertheless, we’ve been disinclined to fight the Fed and other central banks when they are earnest about stimulating demand, hence our fully invested posture to date. The most likely factors that could change our posture are a meaningful shift in valuations (e.g., sharp increases in some markets that could make future expected returns less appealing) and/or a disappointing earnings growth outlook.

Jeffrey G, Wilkins


Jeffrey G. Wilkins,

Deputy Chief Investment Officer

Japan’s economy is struggling, recently growing at only a 0.7% annualized rate. Deflation remains a major challenge, as does the strong yen for exporters. Greater energy imports, as a result of earthquake and tsunami-related power plant shut-downs, have also hurt the trade balance. Further, a promising domestic demand increase in the first half of the year may have been temporary. Hopes of additional exports from stimulus in the U.S. and China are key, as Bank of Japan’s own actions may be insufficient.


Jeffrey G. Wilkins,

Deputy Chief Investment Officer

Policy actions remain paramount as some eurozone countries are showing the weight of both fiscal austerity measures and higher bond yields. To help ease interest rates (and help keep the eurozone intact) the European Central Bank recently communicated its “unlimited” bond-purchase stimulus program. In a separate although related situation, the German constitutional court approved the legality of Germany’s funding of its portion of the eurozone’s European Stability Mechanism.

As a result, investor confidence rose and Spanish and Italian yields have come down sharply while the euro currency rallied. Issues still remain, however, as several indicators imply another possible contraction in the third-quarter GDP report. If that comes to pass, these would be the first back-to-back negative quarters since 2009 and the third down quarter in the last four.


Jeff (Shengde) Liu, CFA®

Managing Director, Portfolio Management

The UK is struggling to emerge from a double-dip recession as the debt crisis continues in the euro area. The revised drop of 0.5 percent in the second quarter of 2012 is the third consecutive quarterly contraction in GDP. In most recent months, however, there have been several pleasant data surprises: upbeat retail sales, a resilient labor market, rising industrial production, a narrowing trade deficit and a stabilizing housing market.

Several factors are helping: 1) a larger asset purchase target by the UK Monetary Policy Committee; 2) demand from the Summer Olympic Games; and 3) some stability in the euro. Given improving valuations based on both historical P/E and the P/E spread between U.S. and UK markets, UK equity market valuation could be shifting to modestly attractive.

Emerging Markets

Jeff (Shengde) Liu, CFA®

Managing Director, Portfolio Management

Emerging economies across the globe are experiencing different levels of growth. Smaller economies like Mexico, Indonesia and the Philippines have enjoyed good growth despite global headwinds. South Africa did well in the first half of the year, but has since shown signs of slowing due to rising inflation and prolonged strikes. India and Brazil are mired in high inflation (10% and 8%, respectively). Recent rises in agricultural prices are putting more pressure on policymakers. China successfully controlled inflation (now near 2%), but the slowing economy is worrying investors. The Shanghai Composite Index is approaching the low levels seen around the 2008 collapse of Lehman Brothers. However, the slowdown prompted the Chinese government to cut interest rates twice and take other measures.

Since emerging markets are still cyclically tied to developed countries, the new wave of loosening monetary policy in developed countries may benefit the emerging economies, which, with lower stock prices, may make us more optimistic on this asset class.