Themes on Our Investment Radar

by:
Chief Portfolio Strategist, MainStay Investments

As we enter a new year, three themes are on our investment radar: rising commodity prices, an uptick in inflation, and the prospect for bouts of volatility alongside a long-term, single-digit return environment for equities.

Prices have been trending upward across different commodity complexes from energy to metals to foodstuffs. With developed and emerging market economies growing and the supply and demand balance in commodity markets generally improving, we look favorably on commodity-sensitive investments to help diversify balanced portfolios.

Commodity Prices Are on the Rise

commodity-prices-on-rise-chart

Source: Thomson Reuters Datastream, as of 12/30/16. An investment cannot be made directly into an index. Past performance is no guarantee of future results.

Extending on that point, wage growth has reached seven-year highs in the United States, as the unemployment rate has fallen. When you add in the prospect of fiscal stimulus, we think positioning portfolios for an uptick in inflation and interest rates may have merit. Strategies include siding with credit over Treasurys in fixed income, including floating rate notes.

We enter 2017 with profit growth as the likely top source of equity returns in the U.S. Fortunately, earnings growth is picking up. Firms with attractive opportunity sets for growth and strong capital discipline on how to allocate free cash flow should be relatively well-positioned. Meanwhile, a more hawkish Fed could pose some headwinds on valuation multiples.

Outside the U.S., Japanese and emerging markets (EM) equities have appeal from a valuation point of view. The first chart shows the historical forward price-to-earnings (P/E) ratio of the Japanese stock market as being below its 1990-to-present average. The next chart shows a similar picture for EM equities. Valuations are also attractive for Europe, but there are some hard-to-calculate risks that require monitoring.

Forward P/E Ratio of the Japanese Stock Market since 1990

forward-pe-ratio-japanese-stock-market-chart

Source: Thomson Reuters Datastream, as of 12/26/16. An investment cannot be made directly into an index. Past performance is no guarantee of future results.

Emerging Market Equity Averages since 1990

emerging-market-equity-averages-chart

Source: Thomson Reuters Datastream, as of 12/26/16. An investment cannot be made directly into an index. Past performance is no guarantee of future results.

The U.K. will be navigating its Brexit this year, and there are elections slated in the Netherlands, Germany, France, and possibly Italy at a time when euro skepticism is on the rise.

The world will also be adapting to a new administration in the U.S., so investors should brace for occasional bouts of volatility.

Convertible bonds offer a way to participate in rising equity markets, with bond-like features that come into play during other investment environments. These and other strategies can be found in our 2017 Investment Outlook.

We wish you success with your investments in the year ahead.

The information contained herein is general in nature and is provided solely for educational and informational purposes. New York Life does not provide legal, accounting or tax advice. You should obtain advice specific to your circumstances from your own legal, accounting and tax advisors.

All investments are subject to market risk, including possible loss of principal. There is no assurance that the investment objectives mentioned will be met. Diversification cannot assure a profit or protect against loss in a declining market.

Commodities are investments in instruments and companies that are susceptible to fluctuations in certain commodity markets. Any negative changes in commodity markets (that may be due to changes in supply and demand for commodities, market S-4 events, regulatory developments or other factors) could have an adverse impact on those companies.

The risks of investing in emerging markets include the risks of illiquidity, increased price volatility, smaller market capitalizations, less government regulation, less extensive and less frequent accounting, financial and other reporting requirements, risk of loss resulting from problems in share registration and custody, substantial economic and political disruptions, and the nationalization of foreign deposits or assets.

Floating rate funds are generally considered to have speculative characteristics that involve default risk of principal and interest, collateral impairment, non-diversification, borrower industry concentration, and limited liquidity. The Funds may invest in foreign securities. U.S. dollar-denominated securities of foreign issuers can be subject to different risks than U.S. investments, including less liquid trading markets, greater price volatility, political and economic instability, less publicly available information, and changes in U.S. or foreign tax or currency laws and monetary policy.

Issuers of convertible securities may not be as financially strong as those issuing securities with higher credit ratings and may be more vulnerable to changes in the economy. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds.

The principal risk of investing in value stocks is that the price of the security may not approach its anticipated value. Investing in smaller companies involves special risks, including higher volatility and lower liquidity. Investing in mid-cap stocks may carry more risk than investing in stocks of larger, more well-established companies.

The Bloomberg Commodity Index (“BCOM” or the “Index”) is designed to be a highly liquid and diversified benchmark for commodities investments.

London Metal Exchange (LMEX) is a weighted index of six, designated, primary metals which include: Primary Aluminum, Zinc, Nickel, Lead, Copper and Tin.

The MSCI Japan Index is designed to measure the performance of the large and mid-cap segments of the Japanese market.

The MSCI Emerging Markets Index is an index created by Morgan Stanley Capital International (MSCI) designed to measure equity market performance in global emerging markets.

Credit spread is the difference in yield between a U.S. Treasury bond and a debt security with the same maturity but of lesser quality.

Yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates.

Valuation is the process of determining the current worth of an asset or a company.

The information and opinions contained herein are for general information use only. MainStay Investments does not guarantee their accuracy or completeness, nor does MainStay Investments assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. There can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Past performance is no guarantee of future results.

MainStay Investments® is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. Securities distributed by NYLIFE Distributors LLC, 30 Hudson Street, Jersey City, NJ 07302, a wholly owned subsidiary of New York Life Insurance Company. NYLIFE Distributors LLC is a Member FINRA/SIPC.

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Charlie Reinhard

Chief Portfolio Strategist, MainStay Investments

As head of portfolio strategy at New York Life’s MainStay Investments, Charlie Reinhard leads investment thought leadership and portfolio construction efforts across MainStay mutual funds and IndexIQ ETFs

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