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Identifying Ideas For A Low-Growth, Low-Rate Environment

Summary Our strategy looks across asset classes, currencies, geographies and sectors to identify good long-term ideas wherever they may be. This piece highlights five themes that we believe will likely prevail over the next two to three years. In the shorter-term, we believe that 2016 could potentially bring with it some significant changes across financial markets. 2016 investment outlook: Multi-asset strategies By David Millar, Head of Multi Asset, Invesco Perpetual Divergence in economic growth and monetary policy around the world has led to an increasingly volatile market environment in 2015. Specifically, while the United States (U.S.) and the United Kingdom (U.K.) have been preparing to raise interest rates from rock-bottom levels, Europe and Japan have continued to employ quantitative easing measures. China also stepped up monetary easing policies during the year through several interest rate cuts and a surprise devaluation of its currency. What is important to know about our team’s investment process is that we take a two- to three-year view of the world, which helps us avoid some of the short-term noise in the markets, looking across asset classes, currencies, geographies and sectors to identify good long-term ideas 1 wherever they may be. Going forward, we believe the following themes will likely prevail over the next two to three years: Low, but positive, global economic growth We believe that structural economic growth will remain subdued on a global basis. However, regional differences could continue, with inventory and capital expenditure concerns acting as a potential drag on consumption-led U.S. growth, and the economic slowdown in China posing a potential risk to Europe’s cyclical recovery. Interest rates to remain low At the beginning of 2015, we acknowledged that interest rates could start to rise in the U.S. and the U.K., and that impacted our appetite for having duration in the portfolio. Given the modest economic outlook, we expect interest rates to remain low over the next few years even if rates do tentatively start to rise in the US and U.K. We believe the outstanding question is whether the monetary policies that are driving these changes will be effective in sustaining a healthy economic recovery. Low inflation to continue globally We expect low inflation to continue globally, exacerbated by ongoing competitive currency devaluation. We believe underlying inflation will remain low in the face of structural factors, such as debt overhang, and that implied inflation priced into forward interest rates will remain high. Select opportunities in risk assets We believe that select opportunities exist in risk assets, but current equity valuations must be navigated with care as earnings trends show differences between regions. Within fixed income, the search for yield appears to be distorting valuations, although U.S. corporate bonds look, in our view, more fairly priced. Higher levels of market volatility to persist Volatility has risen in 2015, but we believe that divergent economic policy globally, as well as non-market forces such as political interference, could underpin persistently higher levels of absolute volatility over the coming years. Given this two- to three-year outlook of the market, in the shorter-term we believe that 2016 could potentially bring with it some significant changes across financial markets. The beginning of a rate-tightening cycle could lead to a very different landscape for investing, as compared to the past few years which were defined by very loose monetary policy. This is important for a multi-asset portfolio like ours. For example, if interest rates rise, bonds may not provide the diversification 2 investors need. Another general theme, which extends through 2016 and beyond, is the use of different policy tools around the world. Ongoing competitive currency devaluation is a theme that may dominate across Asia in particular as economies fight for their share of global trade. In this environment, taking views on individual countries rather than broad-based regions makes sense as individual countries are responding to global economic pressures in very different ways, in our view. As policy and economic factors diverge across regions, this typically underpins higher asset class volatility than we have experienced over the past few years. Learn more about Invesco Global Targeted Returns Fund (MUTF: GLTAX ). Important information The opinions of the ideas expressed are those of Invesco Multi-Asset Team and are based on current market conditions which are subject to change without notice. These opinions may differ from those of other investment professionals. Diversification does not guarantee a profit or eliminate the risk of loss. Volatility measures the amount of fluctuation in the price of a security or portfolio. About risk There is a risk that the Federal Reserve Board (NYSE: FRB ) and central banks may raise the federal funds and equivalent foreign rates. This risk is heightened due to the potential “tapering” of the FRB’s quantitative easing program and other similar foreign central bank actions, which may expose fixed income investments to heightened volatility and reduced liquidity, particularly those with longer maturities. As a result, the value of the Fund’s investments and share price may decline. Changes in central bank policies could also increase shareholder redemptions, which may increase portfolio turnover and fund transaction costs. Derivatives may be more volatile and less liquid than traditional investments and are subject to market, interest rate, credit, leverage, counterparty and management risks. An investment in a derivative could lose more than the cash amount invested. These risks are greater for the Fund than most other funds because its investment strategy is implemented primarily through derivatives rather than direct investments in more traditional securities. The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues. The Fund is subject to the risks of the underlying funds. Market fluctuations may change the target weightings in the underlying funds and certain factors may cause the Fund to withdraw its investments therein at a disadvantageous time. Leverage created from borrowing or certain types of transactions or instruments may impair liquidity, cause positions to be liquidated at an unfavorable time, lose more than the amount invested, or increase volatility. The Fund is non-diversified and may experience greater volatility than a more diversified investment. Short sales may cause an investor to repurchase a security at a higher price, causing a loss. As there is no limit on how much the price of the security can increase, exposure to potential loss is unlimited. The Fund may invest in derivatives either directly or, in certain instances, indirectly through Invesco Cayman Commodity Fund VII Ltd., a wholly owned subsidiary of the Fund organized under the laws of the Cayman Islands (Subsidiary). Because the Subsidiary is not registered under the Investment Company Act of 1940, as amended (1940 Act), the Fund, as the sole investor in the Subsidiary, will not have the protections offered to investors in U.S. registered investment companies. Commodities may subject an investor to greater volatility than traditional securities such as stocks and bonds and can fluctuate significantly based on weather, political, tax, and other regulatory and market developments. Debt securities are affected by changing interest rates and changes in their effective maturities and credit quality. Underlying investments may appreciate or decrease significantly in value over short periods of time and cause share values to experience significant volatility over short periods of time. The Fund is subject to certain other risks. Please see the current prospectus for more information regarding the risks associated with an investment in the Fund. Before investing, carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the products, visit invesco.com/fundprospectus for a prospectus/summary prospectus. The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE All data provided by Invesco unless otherwise noted. Invesco Distributors, Inc. is the U.S. distributor for Invesco Ltd.’s retail products and collective trust funds. Invesco Advisers, Inc. and other affiliated investment advisers mentioned provide investment advisory services and do not sell securities. Invesco Unit Investment Trusts are distributed by the sponsor, Invesco Capital Markets, Inc., and broker-dealers including Invesco Distributors, Inc. PowerShares® is a registered trademark of Invesco PowerShares Capital Management LLC (Invesco PowerShares). Each entity is an indirect, wholly owned subsidiary of Invesco Ltd. ©2015 Invesco Ltd. All rights reserved. Identifying ideas for a low-growth, low-rate environment by Invesco Blog

Market Strategies For 2015 And 2016

Market Strategies For 2015 And 2016 | Seeking Alpha Seeking Alpha ‘ + ”; $(‘header’).insert({ before: element }); _bindEvents(); Effect.BlindDown(‘ipad_beta_promo_container’, { duration: 0.5 }); } } function _bindEvents() { var closeBtn = document.querySelector(‘#ipad_beta_promo_container #close_promo_ipad’); if (closeBtn) { closeBtn.addEventListener(‘click’, function () { createCookie(‘hide_ipad_promo’, 1, 1); Effect.BlindUp(‘ipad_beta_promo_container’, {duration: 0.5}); Effect.BlindUp(‘keep_fixed’, {duration: 0.5}); Effect.BlindUp(‘close_promo_ipad’, {duration: 0.5}); }); } } add_ipad_promo_if_needed(); })(); 1. Market outlook for rest of the year; expectations for 2016; what were the main surprises in 2015? Expect a dive on 16th December, when the Fed announces its rate hike. The Bank of New York Mellon (NYSE: BK ) reckons that during Fed tightening cycles since 1946, every time the Fed has raised rates, the market has gained three per cent over the following 12 months after this “lift-off”. ( Financial Times , 10th December, 2015, p. 21). Then expect a year-end rally on account of portfolio managers wanting to improve their annual performance. Surprises: The market crash of September AND the way that the Chinese government tried to halt it with its interventionist policies. 2. Investment strategy; where to find opportunities; how to separate winners from losers How to separate winners from losers: use our Economic Clock®! Winners where there is an excess supply of money, or outlook of an excess supply of money. Losers: where there is an excess demand for money, or outlook of an excess demand for money. INVESTMENT STRATEGY The winners are Europe, Japan, the US and China: the first two have an excess supply of money; the US has a tiny excess supply of money and an improved earnings outlook (courtesy of an excess demand for goods). China will have an excess supply of money once the Central Bank loosens. This is not happening currently: indeed, when the Central Bank supports the RMB exchange rate, it buys RMB and sells dollars. But it then removes these RMB from circulation, so they are not part of money supply any more. SECTOR WINNERS are clearly soft commodities on account of a bad weather outlook. SECTOR LOSERS remain the industrial commodities: over-investment based on China euphoria are at the root of these losses. 3. Japan outlook; Abenomics and BOJ policy A winner – for all the wrong reasons. Her Economic Time® will continue being that of an excess supply of money and an excess supply of goods. Abenomics is dead in the water: that’s because the third arrow got bent by politicians unwilling to reform. Thus, like everywhere else, the Central Bank is left to pick up the pieces. 4. China markets; weak data signalling stimulus soon? Policy response is likely in the first quarter of next year . Indeed, the weaker RMB will help importers raise margins; but I remain doubtful whether the weak RMB can lift increasingly sophisticated exports. 5. Commodity rout; how long will it go? Oil prices See the Investment Strategy of question two above. Industrial commodities will continue suffering on account of a global excess supply of goods. Oil prices: Have nothing to do with our beloved demand/supply approach. Instead, they are all driven by politics of Saudi Arabia not wanting to accommodate Iran’s desire to produce 1 million barrels of oil/day. My guess is that everyone will scramble for market share, meaning that that excess supply of oil gets exacerbated. The good news is that this represents a massive tax cut for the consumer. 6. A Fed rate hike seems more likely this month. What’s your take? I guess “yes”; but this really depends on what the FOMC decides to focus on. If it is the US economy, then a rate hike is probable. But if it switches the floorboards again and decides to focus on China and on what the World Bank as well as the IMF are pronouncing, then all bets are off. I’ll believe that future rate hikes will take place gingerly, a bit like walking on egg shells.

Why These Funds Are Happy When Energy Players Are Sad

If you believe that breaking a record is always a good thing, you’re actually wrong. For instance, the price of crude has been on a record-breaking mode since mid-June last year. However, every record has been for the worse as oil prices could set only new lows. Last Wednesday, U.S. crude prices fell below the psychologically-resistant level of $40 for the first time since late August. The downward pressure intensified when last Friday the Organization of the Petroleum Exporting Countries (OPEC) – the international cartel of oil producers – decided not to cut oil production especially in the already over-supplied crude market. Obviously, this has spelled doom for investors who chose to hold on to their energy funds or stocks. For example Zacks Mutual Fund Rank #5 (Strong Sell) energy funds such as BlackRock Energy & Resources Inv A (MUTF: SSGRX ) and RS Global Natural Resources A (MUTF: RSNRX ) have nosedived 30.1% and 41.4% over the last one year, respectively. The agony is such that none of the energy funds under our coverage has a positive year-to-date or 1-year return. The least loss has come from Fidelity Select Energy Portfolio (MUTF: FSENX ), which is down 13.4% year to date and 17.7% over the last one year. However, we don’t want to sound too pessimistic as you gear up for your year-end celebrations. Losses in the energy sector can actually translate into gains for some other sectors. While auto and transportation are the direct beneficiaries, sectors such as retail, consumer discretionary and consumer staples also gain from low oil prices. So, investing in and profiting from favourably ranked mutual funds that focus on these sectors will make December merrier. The Recent Headwinds for Oil Last Wednesday, the U.S. government data revealed a 10th straight weekly increase in U.S. oil supplies. The federal government’s Energy Information Administration (EIA) report revealed that crude inventories increased by 1.2 million barrels for the week ending Nov. 27, 2015. U.S. crude inventories are now at the highest level witnessed around this time of the year for the first time in 80 years. As a result, U.S. crude oil prices settled below $40 for the first time since August, while Brent crude oil plummeted to an almost 7-year low. A curb in production from the OPEC was most wanted to lift the already-low crude price. However before the meeting, OPEC decided to raise the ceiling of daily production from the prior level of 30 million barrels to 31.5 million barrels. The cartel was considering an output cut during the 7-hour meeting last Friday, but found that lowering of output only by the OPEC members will not be enough to lift oil prices. Crude plunged to settle below the $40 per barrel mark post meeting. WTI crude slipped nearly 3% to $39.97 per barrel. Oil Price to Move Further South? The slide in the price of crude has been quite dramatic given that it was hovering above $100 around a year ago. Several factors suggest that the end of the slump is nowhere near to be seen. Oversupply has distressed the industry for a long time now. This is due to two factors – the U.S. shale boom and OPEC’s decision to keep output unchanged despite the slump in prices. Lower consumption across the world is the reason for lower demand. Europe and Japan continue to struggle even as they make vigorous efforts to boost their flagging economies. But the biggest worry on this front is China. The world’s second largest economy may never again experience the pace of growth it witnessed until recently, leading to falling demand even in the long term. Funds to Enjoy Crude’s Loss Auto & Transportation: Fuel cost accounts for a considerable portion of expenses of the trucking companies. The U.S. trucking industry is currently poised to benefit in two ways. Lower oil prices will reduce their operating expenditure, thereby boosting the bottom line. On the other hand, capacity constraint in the form of driver shortage and new government regulations will drive top-line growth. A decline in oil prices is probably even more crucial for airlines. Lower jet fuel prices have been a boon for the airline industry given the inversely proportional relation between crude prices and the value of aviation stocks. Fidelity Select Automotive Portfolio (MUTF: FSAVX ) invests a majority of its assets in companies that manufacture, market and sell automobiles, trucks, specialty vehicles, parts, tires, and related services. The non-diversified fund invests in both US and non-US companies, primarily in common stocks. This Fidelity fund currently carries a Zacks Mutual Fund Rank #2 (Buy). Year-to-date, FSAVX has gained just 1.8%, but it is showing an increasing trend since late September. The 3- and 5-year annualized returns are 18.9% and 8.2%, respectively. Consumer Funds: Another class of stocks gaining from this phenomenon is consumer staples. The Federal Reserve has expressed satisfaction over an improvement in the labor market situation. However, its inflation target of 2% still seems some way off. This is again a result of lower oil prices. Lower inflation has led to a considerable fall in input costs. This again would cushion the bottom line. Fidelity Select Consumer Discretionary Portfolio (MUTF: FSCPX ) invests a lion’s share of its assets in securities of companies mostly involved in the consumer discretionary sector. FSCPX primarily invests in common stocks of companies all over the globe. Factors including financial strength and economic condition are considered before investing in a company. FSCPX currently carries a Zacks Mutual Fund Rank #1 (Strong Buy). FSCPX has gained 7.7% and 9.3% over year-to-date and 1-year period, respectively. The 3- and 5-year annualized returns are 18.6% and 14.7%, respectively. Putnam Global Consumer A (MUTF: PGCOX ) invests in mid-to-large companies that are involved in the manufacture, sale or distribution of consumer staples and consumer discretionary products and services. PGCOX uses the “blend” strategy to invest in common stocks of companies. PGCOX currently carries a Zacks Mutual Fund Rank #1. PGCOX has gained respectively 6.3% and 5.3% in the year-to-date and 1-year period. The 3- and 5-year annualized returns are 13.9% and 11%, respectively. Original Post