Global Market by benbenzhou

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									                   Global Market
                   Commentary
                   August 17, 2012




Richard Golod
Director, Global   Time to Pause
Investment
Strategies

                   Executive summary
                   Statements from the heads of central banks across the globe helped move global
                   equity markets higher last month. I believe the recent rally may have created an
                   inflection point that could potentially limit the equity market’s downside. That said,
                   the market’s upside could also be constrained, at least in the near term, in my opinion.
                   This month’s commentary provides some perspective on this environment for long-
                   term investors.
                   •	Overweight US. Recent positive economic and market developments have probably
                     taken a third round of quantitative easing (QE3) off the table for now. I believe a
                     delay in additional easing could also delay the equity markets’ continued advance
                     in the short run. Although improvements in the Economic Cycle Research Institute
                     (ECRI) Weekly Leading Index and the Citi Economic Surprise Index for G10 countries
                     would suggest adding additional risk to portfolios, this trading opportunity may be
                     too brief for investors to capitalize. Rather, I believe long-term investors should con-
                     tinue to add high-quality, dividend-paying, large-cap companies to equity portfolios.
                   •	Neutral weight Europe. Supportive statements from European Central Bank (ECB)
                     President Mario Draghi and German Chancellor Angela Merkel have propelled
                     European equity markets lately. Although I believe market lows could be behind us,
                     economic data and market sentiment indicators remain in decline. This warrants
                     continued defensiveness in European equities, in my view, with a focus on high-
                     quality, dividend-paying, large-cap multinationals.
                   •	Overweight emerging markets. The asset class is likely to remain out of favor
                     with investors until there is more clarity on the European debt crisis and enough
                     time elapses for any additional policy stimulus to work through the economies.
                     However, I believe emerging market equities still have one of the most attractive
                     risk-reward profiles for investors with the appropriate risk tolerance who are seeking
                     the potential for long-term growth.

                   The following pages expand on these insights and examine the implications for global
                   equity investors.
                                   Central banks helped sustain global equity rally
                                   Global equity markets continued to rally into August as investors gained confidence
                                   about central banks’ intentions to address the global economic slowdown. Investors
                                   believed ECB President Draghi reduced the “tail” risk — that is, an extreme level of risk
                                   — in the eurozone after stating at the Global Investment Conference in London on July
                                   26 that “the ECB is ready to do whatever it takes to preserve the euro.” His comment
                                   was reiterated by Chancellor Angela Merkel and French President Francois Hollande. In
                                   August, US Federal Reserve Board Chairman Ben Bernanke intimated that additional
                                   stimulus may be forthcoming if needed, and China’s Premier Wen Jiabao said there is
                                   “growing room for monetary policy operation.”

                                   As a result, global equities (as measured by the MSCI World Index) have rallied 12%
                                   since the June 4 low, European stocks (as measured by the MSCI Europe Index) rallied
                                   17% and the S&P 500 Index is up 10% as of Aug. 15.1

                                   For US equities, the rally has reduced the extreme valuations (as measured by dividend
                                   yield spread, the difference between the dividend yield on the S&P 500 Index and the
                                   yield on 10-year Treasury bonds) and equity risk premium that existed in the S&P 500
                                   Index in June. In addition, the rally has eased the level of pessimism among other
                                   measures of investor sentiment, including the New York Stock Exchange’s (NYSE)
                                   short interest volume (as measured by the NYSE Short Interest Ratio) and the NYSE
                                   put-call ratio.2

With the recent rally, I believe   With the recent rally, I believe investors may have seen an inflection point that could
investors may have seen an         potentially limit the equity market’s downside. But is there more upside this year?
inflection point that could
potentially limit the equity
market’s downside.                 US: overweight
                                   Although the S&P 500 Index has remained in an uptrend since the index crossed
                                   above its 200-day moving average (an important technical level) on Dec. 19, 2011, it
                                   wouldn’t surprise me to see some profit taking in September as additional monetary
                                   stimulus (QE3) seems less likely. The economy isn’t weakening enough to announce
                                   another round of easing any time soon, but it’s also not strengthening enough to take
                                   the possibility off the table, in my opinion.

                                   Consider some of the positive economic announcements in recent months:
                                   •	Retail sales surprised on the upside in July with the first increase in four months,
                                     reflecting broad-based gains and reducing concerns that the consumer will retrench.3
                                   •	After six years of negatively affecting gross domestic product (GDP) growth,
                                     residential housing has contributed positively the past five quarters.4 The National
                                     Association of Home Builders/Wells Fargo Housing Market Index, a measure of
                                     homebuilders’ sentiment, is at a five-year high as of its August reading.5
                                   •	US building permits jumped to their highest level in four years, suggesting that the
                                     real estate and construction sector could remain strong throughout the remainder
                                     of the year.6
                                   •	Job openings are at the highest level in four years.7
                                   •	Unemployment claims are the lowest in four months.8
                                   •	The ECRI Weekly Leading Index, while still slightly negative, has improved five
                                     consecutive weeks.9
                                   •	The Citi Economic Surprise Index for G10 countries (at –19.70 on Aug. 17) has
                                     been trending higher since the July 19 low of –65.10

                                   However, not all economic announcements have been positive. Second-quarter
                                   GDP growth came in below expectations. Consensus forecasts for GDP and earnings
                                   continue to decline. Lastly, the recent increase in food and gas prices will likely
                                   temper the increase in real disposable income.

                                   Until investors gain a better sense of the direction of the economy and see reduced
                                   tension in the Middle East and further progress in Europe, it wouldn’t surprise me to
                                   see the S&P 500 Index trade in a tight range for a couple of months. At current levels,

                                   2       Global Market Commentary: Time to Pause
                                      I believe the Chicago Board Options Exchange Volatility Index (a measure of market
                                      volatility known as the VIX) suggests the S&P 500 Index may struggle to move higher.

Therefore, although some recent       Therefore, although some recent data could support adding additional risk to portfolios,
data could support adding risk        I believe investors should remain defensive, opportunistic and selective. Investors should
to portfolios, I believe investors    continue to overweight high-quality, dividend-paying, large-cap stocks in the noncyclical
should remain defensive,              sectors, in my opinion.
opportunistic and selective.

                                      Europe: neutral weight
                                      The European equity markets (as measured by the MSCI Europe Index) rallied the past
                                      10 weeks (as of Aug. 17) and are trading at the highest levels since March 2012. The
                                      Euro Stoxx 50 Index, a measure of eurozone “blue chip” stocks, is up 19% since the
                                      June 1 low, as of Aug. 17.11 Fueling these gains were factors such as UK retail sales
                                      beating forecasts, German and French GDP exceeding expectations and hedge funds
                                      covering short positions — a trading strategy employed when there is speculation that
                                      the share price could rise — at the fastest pace in three years.12

                                      That said, the eurozone economy contracted in the second quarter for the first time
                                      since 2009.13
                                      •	July was the sixth consecutive month that output in eurozone manufacturing and
                                        services declined.14
                                      •	Germany, which accounts for roughly 27% of the euro area’s output, has seen
                                        slower growth in each of the past five quarters.15
                                      •	German business confidence (as measured by the Ifo Business Climate Index) fell to
                                        the lowest point in two years in July.16
                                      •	The German ZEW Indicator of Economic Sentiment slipped in August to –25.5 from
                                        –19.6, its third decline in a row.17

                                      For the region as a whole, analysts have slashed profit forecasts at the fastest rate
                                      since 2009, and 2012 consensus earnings estimates have been reduced to 5% from
                                      19% at the beginning of the year.14

                                      Economic and profit decline in Europe is not a surprise to anyone. In my opinion,
                                      the primary drivers of the recent equity rally have been changes in the equity risk
                                      premium, which were prompted by the comments from Mr. Draghi and Ms. Merkel,
                                      and expectations for Spain to accept a bailout and for further austerity in Greece.

I suspect the saga will continue      It has been my position that the euro will survive and euro leaders will step up when a
in the eurozone, but the tail risk    crisis insists on action, but only at the eleventh hour when the euro’s survival depends
has likely been taken off the table   on it. I suspect the saga will continue in the eurozone, but the tail risk has likely been
for now. The market lows could be     taken off the table for now. The market lows could be behind us, in my opinion.
behind us, in my opinion.
                                      I believe investors with the appropriate risk profile should consider adding high-quality,
                                      large-cap, dividend-paying European multinationals to equity portfolios.


                                      Emerging markets: overweight
                                      The MSCI Emerging Markets Index has continued to underperform the S&P 500 Index
                                      year-to-date (as of Aug. 17).18 The BRIC (Brazil, Russia, India and China) economies
                                      continue to feel the strain from problems in Europe and, in the case of Russia, lower
                                      energy prices and rising inflation.

                                      China’s economic slowdown will likely extend to seven quarters as industrial production
                                      and lending fell short of expectations, and export growth collapsed in July.19 Foreign
                                      direct investment fell to the lowest level in two years.19

                                      In June, India’s PMI (purchasing managers index) fell to its lowest level in eight
                                      months.20 However, inflation fell to a 32-month low in July, leaving room for addi-
                                      tional policy stimulus, which I believe could positively affect the equity markets.21



                                      3       Global Market Commentary: Time to Pause
                                  Brazilian equities rallied 12% from the June 1 low to Aug. 17 in anticipation of addi-
                                  tional policy stimulus in China, a major export market.22 However, economic data in
                                  Brazil remain weak, with industrial production falling, disappointing exports and little
                                  improvement in loan growth. It would appear the equity market is ahead of
                                  fundamentals.

                                  Russia is going through a real estate boom, with housing prices up 18.2% (seasonally
                                  adjusted) in the second quarter.23 This, in turn, has spurred consumer spending and
                                  threatens to overheat the economy. Monetary policy is likely to remain in favor of
                                  higher interest rates.

                                  The fact is, according to research by Goldman Sachs, the global business cycle entered
                                  a contraction phase in April and has remained there.24 I believe emerging market equi-
                                  ties are likely to continue to underperform in such an environment, especially when
                                  investors are reducing risk assets in portfolios. Investors are unlikely to meaningfully
                                  add to riskier assets such as emerging market equities until any additional policy stimu-
                                  lus is given time to work through these economies and more progress is seen in Europe.

I believe emerging market         As mentioned in last month’s commentary, relatively cheap emerging market equity
equities still have one of the    valuations have limited the downside.25 Additional policy stimulus is in the offing, in
most attractive risk-reward       my opinion, and could be constructive for higher equity prices. I believe investors with
profiles for investors with the   the patience to hold emerging market equities for the long term should continue to
                                  add to the asset class while it appears undervalued. I believe emerging market equities
appropriate risk tolerance who
                                  still have one of the most attractive risk-reward profiles for investors with the appropri-
are seeking long-term growth.     ate risk tolerance who are seeking the potential for long-term growth.


                                  Final thoughts
                                  The global economy is growing at a paltry pace, but recent data announcements indi-
                                  cate the slowdown may be behind us. If the Citi Economic Surprise Index and the ECRI
                                  Weekly Leading Index continue to improve, these conditions could support a case for
                                  higher equity prices and justify adding more risk assets to portfolios, in my opinion.

                                  Although the global equity markets have been in an uptrend, I am concerned investors
                                  could be temporarily disappointed by waning expectations for QE3, a lack of detail in
                                  solving Europe’s sovereign debt crisis and continued economic weakness in the emerg-
                                  ing markets. Therefore, I would forego adding additional risk to portfolios and instead
                                  remain opportunistic and selective and continue to add high-quality, large-cap, divi-
                                  dend-paying, multinational stocks from around the world.


                                  Important information
                                  The opinions referenced above are those of Richard Golod as of August 17, 2012, and
                                  are subject to change at any time due to changes in market or economic conditions and
                                  may not necessarily come to pass. These comments are not necessarily representative
                                  of the opinions and views of other Invesco investment professionals. The comments
                                  should not be construed as recommendations, but as an illustration of broader themes.
                                  Past performance is no guarantee of future results.

                                  All investing involves risk including the risk of loss. Diversification does not eliminate
                                  this risk. Investments in foreign markets entail special risks such as currency, political,
                                  economic and market risks. The risks of investing in emerging market countries are
                                  greater than the risks generally associated with foreign investments. Small- and mid-
                                  cap stocks carry special risks, such as limited product lines, markets and financial
                                  resources, and greater market volatility than securities of larger, more established
                                  companies. Common stocks do not assure dividend payments. Dividends are paid only
                                  when declared by an issuer’s board of directors and the amount of any dividend may
                                  vary over time based on the business prospects of the company.

                                  This material is for educational purposes only and does not contend to address the
                                  financial objectives, situation or specific needs of any individual investor. It is not a
                                  solicitation or an offer to buy or sell any security or investment product.



                                  4        Global Market Commentary: Time to Pause
1    Source: Bloomberg L.P., Aug. 15, 2012
2    Source: Bloomberg L.P. and Invesco research, Aug. 15, 2012; Bloomberg L.P., July 31, 2012; and
     Bank of America/Merrill Lynch, Aug. 14, 2012. The New York Stock Exchange (NYSE) Short Interest
     Ratio is a monthly measure of the amount of shares sold short on the exchange divided by the average
     daily volume of the NYSE for the past month. The indicator is used as a gauge of investor sentiment.
     A high short interest ratio indicates bearishness among traders, while a low short interest ratio
     indicates bullishness. The put-call ratio measures the trading volume of put options to call options and
     is considered an indicator of investor sentiment. When traded call options exceed traded put options,
     market sentiment is considered bullish. When put options exceed call options, sentiment is considered
     bearish.
3    Source: Bloomberg L.P., July 31, 2012
4    Source: Ned Davis Research, Inc., Aug. 8, 2012
5    Source: Bloomberg L.P., August 2012
6    Source: Ned Davis Research, Inc., Aug. 8, 2012. Data as of June 30, 2012.
7    Source: Bloomberg L.P., June 30, 2012. Job Openings and Labor Turnover Survey, or JOLTS, is
     compiled by the Bureau of Labor Statistics from a monthly survey of nonfarm business establishments
     in both the public and private sectors about total employment, job openings, hires, quits, layoffs and
     other discharges and separations.
8    Source: Bloomberg L.P., Aug. 10, 2012
9    Source: Wolfe Trahan & Co., Aug. 7, 2012
10   Source: Bloomberg L.P., Aug. 17, 2012
11   Source: Bloomberg L.P., Aug. 17, 2012
12   Source: Bloomberg L.P., Aug. 17, 2012; “European Stocks Climb to Highest Since March; Novozymes
     Advances,” Bloomberg News, Aug. 16, 2012; “Hedge Funds Capitulate on European Shorts Fastest
     Since 2009,” Bloomberg News, Aug. 13, 2012; and Gluskin Sheff, Aug. 15, 2012
13   Source: Bloomberg L.P., June 30, 2012
14   Source: “Hedge Funds Capitulate on European Shorts Fastest Since 2009,” Bloomberg News,
     Aug. 13, 2012
15   Source: “Hedge Funds Capitulate on European Shorts Fastest Since 2009,” Bloomberg News, Aug. 13,
     2012, and Bloomberg L.P., June 30, 2012
16   Source: Bloomberg L.P., July 31, 2012
17   Source: Bloomberg L.P., August 2012
18   Source: Bloomberg L.P., Aug. 17, 2012
19   Source: “Investment in China Slides as Wen Sees Room for Easing,” Bloomberg News, Aug. 16, 2012
20   Source: Gluskin Sheff, Aug. 1, 2012
21   Source: “Retail Sales in US Jumped More Than Forecast,” Bloomberg News, Aug. 14, 2012
22   Source: Bloomberg L.P., Aug. 17, 2012
23   Source: J.P.Morgan Chase, Aug. 3, 2012
24   Source: Goldman Sachs, Aug. 10, 2012
25   Source: “BRICs Priced for Economic Meltdown as Value-to-GDP Gap Grows,” Bloomberg News,
     July 3, 2012




5          Global Market Commentary: Time to Pause
The Economic Cycle Research Institute (ECRI) Weekly Leading Index is an economic indicator used to forecast turning points in the economic cycle, similar to
the Conference Board Leading Economic Index (LEI) but updated more frequently. The Citi Economic Surprise Index for G10 countries measures how a variety of
macro indicators “surprise” relative to expectations for the countries included in the Group of 10 (Belgium, Canada, France, Germany, Italy, Japan, the Netherlands,
Sweden, Switzerland, the UK and the US). The MSCI World Index is a free-float-adjusted market-capitalization-weighted index designed to measure the equity
market performance of developed markets. The MSCI World Index consists of the following 24 developed market country indexes: Australia, Austria, Belgium,
Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain,
Sweden, Switzerland, the UK and the US (as of May 31, 2011). The MSCI Europe Index is a free-float-adjusted market-capitalization-weighted index designed
to measure the equity market performance of the developed markets in Europe. The MSCI Europe Index consists of the following 16 developed market country
indexes: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the
UK (as of May 30, 2011). The S&P 500® Index is an unmanaged index considered representative of the US stock market. The National Association of Home
Builders/Wells Fargo Housing Market Index measures homebuilders’ sentiment about the sales conditions for single-family homes, based on surveys conducted
by the National Association of Home Builders. The Chicago Board Options Exchange (CBOE) Volatility Index, or VIX, shows the market’s expectation of 30-
day volatility. The VIX is a widely used measure of market risk and is often referred to as the “investor fear gauge.” The Euro Stoxx 50 Index, considered the
eurozone’s “blue chip” index, measures the performance of 50 stocks from 12 eurozone countries: Austria, Belgium, Finland, France, Germany, Greece, Ireland,
Italy, Luxembourg, the Netherlands, Portugal and Spain. The Ifo Business Climate Index is a commonly cited early indicator of economic development in Germany.
The ZEW Indicator of Economic Sentiment is based on a monthly survey of financial experts and reflects the difference between the number of analysts who are
optimistic and pessimistic about their expectations for the Germany economy in coming six months. The MSCI Emerging Markets Index is a free-float-adjusted
market-capitalization index designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Index consists of the following
21 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru,
Philippines, Poland, Russia, South Africa, Taiwan, Thailand and Turkey (as of May 30, 2011). PMI (formerly Purchasing Managers Index) is a commonly cited
indicator of the manufacturing sector’s economic health calculated by the Institute of Supply Management. An investment cannot be made in an index.

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