Intelligent Investor September 15 2015

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2The Intelligent Investor


A bi-weekly publication from Consultiva Internacional, Inc. (Registered Investment Adviser)                                                       September 15, 2015


From the Executive Desk

In August, U.S. markets finally experienced the correction that some financial analysts have been predicting for years. Volatility spiked after the Chinese government decided to devalue its currency on August 11th. The move caused a chain reaction in emerging markets leading to a downturn in global equities that wiped $5 trillion in value from investor portfolios. Nearly every world index experienced its worst decline for the year, and even with mostly positive domestic economic indicators, U.S. stocks could not escape the gravitational pull of their global counterparts.

China’s government had a hand in igniting the volatility and was unsuccessful in its attempts to stop it. The decision to devalue the yuan led to similar actions from other emerging-market governments, sparking a sell-off in risky assets. Numerous intervention measures, including a cut in interest rates from the central bank, could not stem the descent. Bourses in Europe also tumbled towards their worst monthly performance since 2011. The euro and yen each strengthened 2%, as investors flocked away from emerging market currencies to perceived “safe harbors.”

Economic news in the U.S. was more encouraging, as 2nd quarter GDP growth was revised to 3.7%, well above the previously reported 2.5%. Employment data was also strong, as the non-farm payroll report showed a 215,000 job increase. Despite the economic optimism, stocks in the U.S. sold off. The S&P 500 fell 6.0% with all ten sectors finishing in the red. The Dow also slid 6.6%, the sharpest monthly decline since 2011. The regional governors of the U.S. Federal Reserve met recently to discuss the economy, and while the group’s intentions in regards to monetary policy remain unchanged, Vice Chairman Stanley Fischer stated that they had not ruled out an interest rate hike this month.

Evangeline Dávila, CIMA ©, Chief Research & Investment Officer

Economic Perspectives

While emerging markets-focused funds reported sizable losses in the wake of the surprise devaluation of the yuan, International Monetary Fund analysts predict that emerging economies will surpass developed economies in terms of GDP growth in the not too distant future. A Nationwide Financial white paper published a year-ago on the topic pointed out that emerging market economies have experienced faster population and economic growth than developed markets in the past 10 years, and that the trend is expected to continue (see the graph below). 

The term Emerging Markets originated in the early 1980’s, coined by World Bank economist Antoine van Agtmael. Inclusion in emerging markets indexes are based primarily on per capita GDP. However, there are other factors to consider, particularly for investors and asset managers in selecting investments. These factors differentiate the emerging markets from developed markets, and less developed frontier economies. For example, demographic changes that support the growth in domestic consumer demand and the development of a middle class. Also, the maturation of financial systems, which can bring about improvements in capital flows within each country and across borders. This in turn improves economic and market volatility.

As the emerging market economies have matured, and the global marketplace has become more integrated, the growth disparity between emerging and developed economies has increased, as has the correlation of returns. Between 1994 and 2013, emerging economies grew at an average rate of 8%, 4% faster than the average rate of developed economies, and according to the International Monetary Fund (IMF), the growth gap is expected to be 3% over the next five years. As a result, the growth and diversification benefit of investing in emerging markets has diminished, but the emerging markets still have faster growth and lower correlation with domestic equity markets than the developed markets. While the returns have been weak over the last three years, emerging markets index have performed well over the long term, and should continue to be considered part of a well-diversified portfolio.

Source: Nationwide Financial

Gross Domestic Product Growth — Emerging vs. Developed

1994-2013 (actual); 2014-2019 (IMF estimate)



(As of September 11, 2015)

United States:

CPI: +0.2% Chg. from yr. ago

Unemployment Rate: 5.1%

Real GDP: +3.7%, Comp. Annual rate of Chg. on 2015:Q2

Ind.Prod.Index: +0.6% Chg.

Source: St. Louis Fed. Res.


CPI: 0.2% Chg. from yr. ago

Unemployment Rate: 10.9%

GDP: 0.4%, Comp. Annual rate of Chg. on 2015:Q1

Ind.Prod.Index: -0.4% Chg.

Source: Moody’s Analytics


CPI: 0.0% Chg. from yr. ago

Unemployment Rate: 3.3%

Real GDP: -0.3%, Comp. Annual rate of Chg. on 2015:Q2

Ind.Prod.Index: -0.6% Chg.

Source: Moody’s Analytics

Puerto Rico:

CPI: 1.4% Chg. from yr. ago

Unemployment Rate: 11.9%

Payroll Employment: +0.5% Chg. from yr. ago

GDB Econ. Act. Index: -1.6% Chg. from yr. ago

Source: P.R. GDB



Markets in Brief

  1. In August the S&P 500 fell 6.0% with all ten sectors finishing in the red, with the health care and financial sectors leading the losses. The Dow slid 6.6%, the sharpest monthly decline since 2011. The NASDAQ trailed its domestic counterparts, ceding 6.8% of its value as momentum stocks hit an August wall. Small cap stocks, which have less international exposure, were more
  2. The yield on the benchmark 10-year Treasury note dipped below 2% on August 24, as a decidedly “risk off” trade took hold. Yields climbed back, however, after various Fed speakers signaled that the global volatility may not trigger a delay in interest rate hikes.
  3. A late month spike buoyed commodities as oil prices experienced outsized volatility. Crude oil had dipped below $40/barrel to the lowest levels since 2009 before closing the month off with a three-day 27% rally. Declining inventories in the U.S. and accommodative language from OPEC spurned the late ascent, with prices settling 4.4% higher to $49.20/barrel. In the metals complex gold climbed 3.4% and copper prices moved 1.1% lower.

Evangeline Dávila, CIMA ©, Chief Research & Investment Officer

Capital Markets – Performance Updates


Source: Callan Associates Inc.


What to Do?

Despite the turmoil caused by China’s currency devaluation, the U.S. Dept. of Labor reported that unemployment insurance claims fell by 6,000 to 275,000 in the week ended Sept. 5. Federal Reserve policy makers have noted the strides being made, and continue to consider raising interest rates this year in their next meeting later this month. Hence, we continue to recommend prudent asset allocation and risk assessment, based on future capital needs for plan sponsors, institutions and individual investors. We believe that due diligence reviews and an adherence to a well-developed investment policy remains the most prudent long-term course for investors. This includes evaluating portfolios from the Impact Investing perspective, in order to dampen the effect of environmental, social and governance risk factors.



Consultiva Internacional Inc. (“Consultiva”) has compiled the information for this report from sources Consultiva believes to be reliable. Sources include: investment manager(s); mutual fund(s); exchange traded fund(s); third party data vendors and other outside sources. Consultiva assumes no responsibility for the accuracy, reliability, completeness or timeliness of the information provided, or methodologies employed, by any information providers external to Consultiva. There also can be no guarantee that using this information will lead to any particular result. Past performance results are not necessarily indicative of future performance. Diversification does not guarantee a profit or protection against loss. This document is for informational purposes only and is not intended to be an offer, solicitation, recommendation with respect to the purchase or sale of any financial investment/ security or a recommendation of the services supplied by any money management organization neitheran investment advice or legal opinion. This is not a solicitation to become a client of Consultiva.



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