The U.S. Economy In late April, the Bureau of Economic Analysis (BEA) released the advance estimate for ﬁ rst quarter growth in U.S. gross domestic product (GDP). The report showed that the domestic economy gained speed during the January through March period. Real GDP growth accelerated to an annualized rate of 2.5% from 0.4% in the fourth quarter.The adverse market reaction stemmed from investor concern that China's economy may be continuing to slow despite stimulative policy efforts. While some indicators have softened of late, we believe China is in the midst of a business cycle bottoming process and expect that economic growth will continue to stabilize as last year's policy easing takes effect with a lag. This could result in choppy readings on growth going forward.
In Japan, very shortly after Haruhiko Kuroda took the helm at the Bank of Japan (BOJ) he announced plans for signiﬁ cant monetary stimulus that could lead to a doubling of Japan's monetary base within two years. The goal of the program, which mainly involves the purchase of long-term Japanese government bonds, is to defeat deﬂ ation and buoy economic growth. We expect these policies to be supportive of Japanese equities going forward, but remain of the view that the overall economic impact will be minimal. Many of the factors that are responsible for Japan's persistently weak economy remain in place. Among them are poor demographics, excessive debt levels and structural issues. Our view might be more constructive if we were to see other potential positive catalysts such as structural reform.
The headline U.S. Consumer Price Index (CPI) advanced 1.5% on a year-over-year basis through March, marking the slowest reading on domestic inﬂ ation since July of last year. Excluding food and energy prices, core CPI rose at a 1.9% rate during the past twelve months. This inﬂ ation gauge has hovered within a tight range near 2% for roughly the past seven months. As it pertains to monetary policy, through the early part of this year the market had been focused on comments from members of the Federal Open Market Committee (FOMC) suggesting that the committee was contemplating a slowdown in the current quantitative easing (QE) program. At the time, economic reports were consistently good and the committee began to express some reservations about rapid expansion in the Federal Reserve's balance sheet and the extent to which
the underlying economy continued to require policy support on such a large scale. However, given that economic data has deteriorated somewhat of late, and inﬂ ation does not appear to be accelerating, the market is incrementally less concerned about the possibility of an end to QE in the near-term.
From a global perspective, broad-based inﬂ ationary pressures remain largely absent. That being said, pockets of inﬂ ation exist in certain markets. In several instances where looser monetary policies were applied during recent quarters to spur growth, the pace of rising prices has already started to reaccelerate. For example, in Brazil, labor markets were relatively tight when policymakers began easing monetary controls in late summer 2011. This is a key contributor to the latest surge in consumer prices. The year-over-year change in Brazil's benchmark IPCA measure of inﬂ ation quickened to 6.6% during March, exceeding the upper bound of the central bank's target range. Policymakers subsequently shifted their monetary stance and raised an important policy interest rate to 7.5% from an all-time low of 7.25%.
For clients with a long time horizon and a need for growth to meet their investment objectives, we continue to focus on companies that can grow in an otherwise growth challenged global economy. In many cases the companies we ﬁ nd most attractive have a wellestablished presence in regions, sectors, or industries that are expected to expand at a pace that is multiple times quicker than the broader economy, and are trading at attractive valuations relative to that growth potential. In our view, reinvestment rate risk is the main challenge facing such investors today, and long-term investors who maintain large exposures to traditionally "safe" investments are unlikely to earn absolute returns that are sufﬁ cient to meet their investment objectives.
For ﬁ xed income investors and investors with a shorter time horizon or current income needs, our focus in bond markets is centered on spread sectors (i.e., ﬁ xed income securities that trade at attractive yield spreads relative to a similar maturity Treasury). In particular, we're seeing opportunities in investment-grade corporate bonds, however, a selective approach to the below investmentgrade corporate space is helping us ﬁ nd value there as well. We continue to hold an unfavorable view of U.S. Treasuries as yields hover around historic lows. In our view, short-term and income-oriented investors should also explore equities that display stable fundamentals and are trading at attractive valuations. We believe companies that generate strong and stable cash ﬂ ows, and pay an attractive dividend could be compelling options for these types of investors in the current environment.
Analysis: Manning & Napier Advisors, LLC (Manning & Napier).
Manning & Napier Advisors, LLC. is governed under the Securities and Exchange Commission as an Investment Advisor under the Investment Advisers Act of 1940. Sources: Bureau of Labor Statistics, Reuters, FactSet, Yahoo! Finance, Bureau of Economic Analysis, Capital Economics.
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