Income Report Card | February 2017

Author: Nathan Rowader
Date: February 16, 2017
Category: Asset Allocation, Financial Planning
Tags: , , , , , , , ,

Potential Opportunities
for Income

  • Emerging Market
    Corporate Bonds
  • High-Yield Corporate Bonds
  • High-Yield Municipal Bonds

Weaker Opportunities for Income

  • International
    Sovereign Bonds
  • Treasurys


Pivoting from Monetary to Fiscal Policy

Emerging market (EM) stocks increased by 5.48% during the month of January, as measured by the MSCI Emerging Markets Index. This gain is a continuation of the strong performance in 2016 and helps bolster the case that the emerging markets may be heading toward a better return cycle relative other markets. International stocks outperformed U.S. stocks, which increased by 2.91% and 1.90% respectively. Small cap stocks, as measured by the Russell 2000 Index, took a bit of a breather in January following their post-election rally and increased by 0.39%. Global bonds, as measured by the Bloomberg Barclays Global Aggregate Bond Index, increased in January by 1.13%. However, the more credit-centric Bloomberg Barclays U.S. High Yield Corporates increased by 1.45% and Emerging Market Corporates increased by 1.17%.

Generally speaking, it appears that the market is pivoting toward an environment that is less focused on central bank action and more focused on government policy. For instance, the market reaction following the Brexit vote, Italian constitutional referendum and U.S. election. In each case, the respective stock market of each country rallied following these votes, which helped outline substantive changes in monetary policy of each government. This concept is further reinforced by the collective yawn heard from investors following the December 2016 U.S. interest rate hike.

Nowhere is fiscal policy going to be more prominent than in China. President Trump indicated that he would move forward with labeling China a currency manipulator and, to date, the president has made good on many of his campaign promises, so there is no reason to think this will be different. China has been working hard to keep the value of currency higher than a free float value by using currency reserves. As a result, the reserves fell from a high of roughly $4 trillion to a value of roughly $3 trillion at the end of December. Experts seem to agree that it isn’t a problem until those reserves fall to a minimum of $2 trillion. The drawdown in reserves has been ongoing since 2014, so China is probably on safe ground until 2018.


Bumpy Road Ahead

Most investor sentiment indicators show that there is widespread enthusiasm in the global stock markets. In the short term, this optimism could lead to a mild sell-off of risk assets, such as stocks. However, strength in the economy and general strength in stock markets don’t seem to indicate that this bull market is over. It might be wise to rebalance out of any larger-than-expected stock allocations. However, if you missed the fourth quarter rally, then maybe this is an opportunity.

The general opinions of stock investors do seem to indicate some worry, but there is an old Wall Street axiom that “stocks climb a wall of worry,” and that seems appropriate for today.


High-Yield Bonds & Emerging Markets

There are three asset classes that we believe will be relative outperformers in 2017. For stocks, the emerging market asset class offers the best relative value in terms of price-earnings ratio and, at the end 2016, many EM countries were top performers globally. This combination of value and momentum tends to provide a good indication of future returns. The month of January supported our thesis, with strong performance in the asset class relative all other regions of the world. This outperformance happened in an environment that was positive for most stock asset classes and where the political tone was somewhat negative, which helps underline the potential strength of the asset class.

High-yield corporate debt and EM corporate debt are also part of our 2017 performance thesis. Rising interest rates and a healthy global economy should put these asset classes in a place where they are relative outperformers. In January, both asset classes outperformed global bonds during a period of falling interest rates, which helps underscore our belief that as long as the economy stays healthy, these assets should be relative outperformers, regardless of the direction of interest rates.

While not directly part of our 2017 thesis, we currently believe high-yield municipal bonds can add value as they offer a current yield higher than high-yield corporate bonds (before factoring in any tax benefit). This asset class also performed better than global bonds in January. Barring any dramatic change in tax policy, now could be a good entry point into this asset class as well.


Never Before Seen

In January, scientists at Harvard University created metallic hydrogen for the first time ever. Metallic hydrogen is the rarest and potentially most valuable material on the planet. The material had only been a theory first proposed in 1935 and, if other properties turn out to be true, could revolutionize energy, transportation and electronics of all sorts. The material is believed to be an extremely efficient superconductor allowing for a dramatic reduction in the amount of energy lost during transmission. Additionally, it is believed that the material would be an extremely powerful rocket fuel, which may change the limitations of space exploration. Real world application is likely far away since the only metallic hydrogen on earth is squished between the tips of two diamond anvils.


To learn more about the methodology visit the Salient Partners Income Investing blog series Part 1 and Part 2. You can also follow us on Twitter at @nrowader and @NicMillikan for live updates on the Income Report Card.

Report Card: Stocks

Report Card: Bonds

Complete Income
Report Card
U.S. Treasurys Bloomberg Barclays U.S. Treasury
U.S. Investment Grade Credit Bloomberg Barclays U.S. Credit
Municipal Bonds Bloomberg Barclays Municipal Bond
High-Yield Municipal Bloomberg Barclays Muni High Yield
U.S. High-Yield Corporate Bloomberg Barclays U.S. Corp High Yield
Emerging Market Corporate CS Emerging Markets Corporate Bond
Emerging Market Sovereign Bloomberg Barclays EM Sovereign
International Sovereign Bloomberg Barclays Global Treasury ex USD
Mortgages Bloomberg Barclays U.S. MBS
Short Term Treasurys (Cash Proxy) Bloomberg Barclays US Treasury 1-3 yr
U.S. Stocks S&P 500 Index
International Stocks MSCI EAFE
Emerging Market Stocks MSCI Emerging Markets
US Real Estate Dow Jones US Real Estate
MLPs Alerian MLP Infrastructure
Preferred Stocks BofA Merrill Lynch Fixed Rate Preferred Securities
Utilities S&P 500 Utilities Sector
International Real Estate Dow Jones Global Select ex US Real Estate Securities
EM Infrastructure MSCI EM Infrastructure

Investing involves risk, including possible loss of principal. The value of any financial instruments or markets mentioned herein can fall as well as rise. Past performance does not guarantee future results.

This material is distributed for informational purposes only and should not be considered as investment advice, a recommendation of any particular security, strategy or investment product, or as an offer or solicitation with respect to the purchase or sale of any investment. Statistics, prices, estimates, forward-looking statements, and other information contained herein have been obtained from sources believed to be reliable, but no guarantee is given as to their accuracy or completeness. All expressions of opinion are subject to change without notice.

Nathan J. Rowader is a registered representative of ALPS Distributors, Inc.


Alerian MLP Index is the leading gauge of large- and mid-cap energy master limited partnerships (MLPs). The float- adjusted, capitalization-weighted index includes some of the most prominent companies and captures approximately 75% of available market capitalization.

Bloomberg Barclays EM Sovereign is a rules-based market- value weighted index engineered to measure the fixed-rate local currency sovereign bonds issued in emerging markets as identified by Bloomberg.

Bloomberg Barclays Global Treasury ex USD is an unmanaged index composed of those securities included in the Bloomberg Barclays Global Aggregate Bond Index that are Treasury securities, with the US excluded while hedging the currency back to the US dollar.

Bloomberg Barclays Municipal Bond covers the USD- denominated, long-term tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds and pre-refunded bonds.

Bloomberg Barclays U.S. Aggregate Bond Index represents securities that are U.S. domestic, taxable and dollar denominated. The index covers the U.S. investment-grade, fixed-rate bond market, with index components for government and corporate securities, mortgage pass- through securities and asset-backed securities.

Bloomberg Barclays U.S. Corporate High-Yield Bond Index covers the USD-denominated, noninvestment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch and S&P is Ba1/BB+/BB+ or below.

Bloomberg Barclays U.S. Credit is an index composed of corporate and non-corporate debt issues that are rated investment grade (Baa3/BBB) or higher.

Bloomberg Barclays U.S. MBS tracks the mortgage-backed pass-through securities of Ginnie Mae (GNMA), Fannie Mae (FNMA) and Freddie Mac (FHLMC).

Bloomberg Barclays U.S. Municipal Bond covers the USD-denominated, long-term tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds and pre-refunded bonds.

Bloomberg Barclays U.S. Treasury is an unmanaged index of public obligations of the U.S. Treasury with a remaining maturity of one year or more.

Bloomberg Barclays 1-3 Year U.S. Treasury Index is an unmanaged index of public obligations of the U.S. Treasury with a maturity between one and up to (but not including) three years.

BofA Merrill Lynch U.S. Preferred Stock Fixed Rate Index consists of investment-grade, fixed and fixed-to-floating rate U.S. dollar-denominated preferred securities.

Credit Suisse Emerging Market Corporate Bond Index consists of U.S. dollar-denominated fixed-income issues from Latin America, Eastern Europe and Asia.

Dow Jones Global ex-U.S. Select REIT Index measures the performance of equity real estate investment trusts (REITs) and real estate operating companies (REOCs) traded globally, excluding the U.S.

Dow Jones U.S. Real Estate Index measures the performance of the real estate industry of the U.S. equity market.

Emerging market is a country that has some characteristics of a developed market but does not meet all of the standards to be a developed market.

JPMorgan Global Manufacturing Purchasing Managers Index is a composite index that serves as a global economic indicator by measuring different business conditions in 24 countries, including global manufacturing output, new orders and employment across the global manufacturing sector.

Max drawdown is the percentage of loss that an asset incurs from its peak net asset value to its lowest value.

MSCI EAFE (Europe, Australasia and Far East) Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. and Canada.

MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.

MSCI Emerging Markets Infrastructure Index captures the global opportunity set of companies that are owners or operators of infrastructure assets.

MSCI World Index is a free float-adjusted market capitalization index designed to measure equity market performance in the global developed markets.

S&P 500 Index is an unmanaged index of 500 common stocks chosen to reflect the industries in the U.S. economy.

Sharpe ratio is a ratio developed by Nobel laureate William F. Sharpe to measure how a fund performs relative to the risk it takes.

Standard deviation measures the degree to which a fund’s return varies from its previous returns or from the average of all similar funds.

Yield is the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment’s cost or on the U.S. government’s debt obligations.

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