Annual Market Update to 31 March 2011
Despite the ongoing sovereign debt crisis in peripheral European countries (those with the smallest economies), political turmoil in North Africa and the Middle East and the catastrophic events in Japan, the 12 months ending in March was positive for equity markets. Although the markets faltered in the wake of bad news, investor appetite remained resilient, signalling that the backdrop for global growth continued to be, on the whole, positive. In this environment, the MSCI AC World Index rose by ($) 14.06%.
The Barclays Capital Global Aggregate Bond Index gained ($) 7.15% in the 12 months ending in March. Returns for high-yield bonds (which are rated below investment-grade and are considered to be riskier) were exceptionally strong, followed by emerging-market debt, as the search for additional yield continued. While still in positive territory, other areas of the fixed income market experienced slightly more challenging conditions. Performance was balanced between global government and non-government bond sectors, with both performing roughly in line with the broad market for the period.
Global growth-orientated stocks outperformed value-orientated stocks during the year, and small-company stocks beat large-company stocks. In general, developed-market equities underperformed emerging-market equities during the 12 month period.
The Energy sector performed particularly well during the year, benefiting from strong demand in emerging economies and from supply disruptions, particularly in the final three months, as the political crisis in Libya helped to push oil prices higher. WTI Cushing crude oil prices (a key indicator of movements in the oil market) increased from $83.76 at the start of the period to $106.72 per barrel by the end of March. The Industrials sector also experienced strong demand during the year, and while all sectors posted positive returns, Financials, Healthcare and Utilities lagged the broader market.
The Chicago Board Options Exchange Volatility Index (VIX), a measure of implied volatility in the S&P 500 Index that is also known as the “fear index”, was largely unchanged from 17.59 to 17.74 over the year despite anxiety about the wider impact on the global economy of the peripheral European debt crisis, political tensions in North Africa and the Middle East and the Japanese earthquake. However, the Index did reach 34.54 at the end of June 2010 as investors became increasingly nervous due to events in Europe.
A gradually improving global economic outlook led to higher inflation and the prospect of interest rate hikes, which pushed yields up on both sides of the Atlantic as the year progressed. In these conditions, high-yield fixed income and emerging-market debt performed best, while other areas of fixed income faced some headwinds. Government bonds in peripheral European countries struggled in particular due to the ongoing sovereign debt crisis, and Portugal’s financial problems during the final quarter have shown that the eurozone’s problems are far from solved.
Investor demand for corporate bonds increased throughout the year and was strong during the final quarter as earnings reports and company balance sheets strengthened. Lower-quality investment-grade corporate bonds were the most successful during the year, and BBB rated debt (AAA rated are the highest; D rated are the lowest. Ratings below BBB are classified as non-investment-grade, or junk, and are considered to be riskier) performed best.
Despite market concerns and increased volatility, high-yield debt outperformed all other areas of the fixed income market in the period. The sector benefited from investor confidence due to improved earnings outlooks, as well as from the search for additional yield. Companies issued record amounts of high-yield bonds for the year, and investor demand easily absorbed them. In general, lower quality high-yield debt did best, with CCC rated bonds generating some of the strongest returns.
Emerging-market debt, another sector considered to be among the riskiest, also posted strong returns for the year, benefitting throughout most of 2010 from the view that emerging markets led the global economy out of recession. Despite regional turbulence in the final three months of the period, outflows from emerging-market debt were limited and new issuance remained strong. Returns for the asset class, were however, pushed slightly lower during this time due to inflationary concerns and country-specific downgrades by credit rating agencies (which rates bonds based on the ability of the issuer to repay the debt).
The Bank of England, European Central Bank and U.S. Federal Reserve continued to keep interest rates at record lows during the year in order to stimulate growth. However, the reality of positive, but slow growth in developed markets led to a second round of quantitative easing (QE, or expansionary efforts by central banks to help increase the supply of money in the economy) in the U.S. in November.
Inflation concerns grew throughout the year. In response to this, it is widely expected that the European Central Bank will increase the eurozone’s base interest rate from 1.00% to 1.25% - this will be the first change in nearly three years. Despite the U.K.’s Consumer Price Index (which measures inflation) running at more than double the Bank of England’s (BoE) target of 2%, their Monetary Policy Committee (MPC) voted to maintain U.K. interest rates at 0.5% for the 24th consecutive month in March. While the number of those (both in and out of the MPC) in favour of a rate hike has increased in recent months, SEI believes that the BoE will wait for first quarter gross domestic product data to be released prior to making any changes.
The U.S. dollar fell against most of the major currencies during the year, including sterling, the euro and the Japanese yen. The U.S. dollar ended the period at $1.60 against sterling, $1.42 versus the euro and at 82.88 yen.
Yields on developed-country sovereign and investment-grade debt remain very low and, in our opinion, unappealing, especially following the Japan-related flight-to-quality trade (whereby investors favour assets that are perceived to be safer). Even if inflation remains low this year and next, we believe there are better opportunities in equities and high-yield debt.
In our opinion, the odds still favour continued growth in the global economy, and a generally pro-equity investment stance. The unexpected events of the past quarter, however, underscore the need for vigilance. Equities are not yet expensive, but they are not cheap either. If political instability in North Africa and the Middle East lead to a further oil-price jump, or the central banks of the developed world join their emerging-market counterparts in significantly tightening their monetary policies, then we may begin to favour a more defensive position. At this point, however, SEI continues to maintain our exposure to riskier assets.
Past performance is not a guarantee of future performance.
Investment in the range of SEI’s Funds is intended as a long-term investment. The value of an investment and any income from it can go down as well as up. Investors may not get back the original amount invested. Additionally, this investment may not be suitable for everyone. If you should have any doubt whether it is suitable for you, you should obtain expert advice.
No offer of any security is made hereby. Recipients of this information who intend to apply for shares in any SEI Fund are reminded that any such application may be made solely on the basis of the information contained in the Prospectus. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any stock in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts.
If the investment is withdrawn in the early years it may not return the full amount invested. In addition to the normal risks associated with equity investing, international investments may involve risk of capital loss from unfavourable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Narrowly focused investments and smaller companies typically exhibit higher volatility. Products of companies in which technology funds invest may be subject to severe competition and rapid obsolescence. SEI Funds may use derivative instruments such as futures, forwards, options, swaps, contracts for differences, credit derivatives, caps, floors and currency forward contracts. These instruments may be used for hedging purposes and/or investment purposes.
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SEI sources data directly from the following vendors: Factset, MSCI Barra, Russell, TOPIX, FTSE, Barclays Capital and Merrill Lynch. Where appropriate, returns in base currencies are converted to the relevant currency using WM Reuters 4pm Spot rates.