1

This Issue:

S&P Sector Performance P.2

Ccy and Cmdty Performance P.4

Important Interest Rates P.4

Glovista Global Perspectives

Monthly

Market

Newsletter

Source: MSCI & Bloomberg

Source: Bloomberg

Asset Markets Reflate in July, Boosted by Cyclical Bounce in Data

Calendar and Looser Financial Conditions; Glovista Raises

Stock/Credit Allocations while Still Retaining Defensive Exposure on

Stock Valuation and Event Risk Considerations

In July, asset prices have posted solid gains across the fixed income, equities and credit

market divide, with mixed price dynamics limited to the commodities group (Figure 1).

Within the commodities space, price action has been mixed during the month of July as

energy and agriculture commodity prices have corrected sharply while precious and

industrial metals prices have consolidated their year-to-date price gains. We credit the

July monthly asset price dynamics predominantly to two principal factors:

Figure 1. Asset Prices, excluding Crude and Agricultural Commodities, Post

Solid Gains in July (As of July 27th, 2016)

4.8%

3.4%

3.2%

3.2%

2.6%

1.6%

1.3%

1.2%

-2.9%

-13.3%

-20.0% -10.0% 0.0% 10.0%

MSCI EM Index

MSCI AC World Index

S&P 500 Index

MSCI EAFE Index

Iboxx Liquid High Yield Index

JoC Industrial Commodity Metals Price Index

Gold Spot

Iboxx Liquid Investment Grade Index

Rogers Agriculture Index

WTI Crude Oil

*As of July 27th, 2016

Country-wise Monthly Performance

in USD terms (July MTD 2016)*

-0.7%

0.6%

1.8%

3.2%

3.2%

3.3%

4.7%

4.8%

5.1%

5.4%

7.2%

-15% -5% 5% 15%

Russia

Frontier Mkts

UK

MSCI EAFE

Japan

USA

India

Emg Mkts

China

Germany

Brazil

Issue

July/16

79

- 2 -

Source: S&P

S&P500 Monthly Sector

Performance – July MTD

2016*

Sectors %

Change

FY1

PE

Ratio

Energy

Materials

Industrials

Cons Disc

Cons Stap

Technology

Healthcare

Financials

Utilities

Telecom

-2.53%

5.64%

3.58%

4.08%

-1.78%

7.30%

4.62%

3.37%

-1.72%

-0.65%

98.6

17.8

16.8

17.9

22.3

16.8

16.0

14.1

19.0

15.0

S&P500 3.32% 17.9

*As of July 27th, 2016

Stronger than expected July economic calendar for the world’s major regional blocs, as

illustrated in Figure 2. It is important to note that while the direction of economic surprises has been to the upside these past several weeks, the pace of economic momentum for the world’s major economic blocs remains soft, at below trend levels.

Figure 2. July Data Calendar Firms Up across Major Economic Regions

Source: Citigroup Global Markets

Marked loosening of financial conditions (in the USA and overseas) - illustrated in Figure 3 for the USA - as investors expect major central banks to maintain an overly loose monetary policy over the foreseeable future. Such expectations increased further this past June 10th following the victory of Japan PM Abe’s LDP party at the Upper House elections. As a result of the election, PM Abe announced a new round of fiscal policy loosening while going on record urging the Bank of Japan to sponsor a new round of monetary policy easing at the upcoming July 29th meeting.

The recent succession of strengthening activity momentum and loosening financial conditions

have combined so as to set off a near-term virtuous cycle of asset price reflation via a decline in

risk premium levels (Figure 4) as investors correlate lower prospects of economic recession with

lower macro and financial volatility.

Medium-term World Economic Outlook Constrained by Unresolved Eurozone Banking Sector Problems, Chinese Economic Slowdown, BREXIT’s Aftermath, Softening US Profits Cycle and Event Risks Including Italy’s October Referendum and USA’s November Elections While the near-term investment outlook has strengthened courtesy of the cyclical bounce in

economic indicators along with a loosening of financial conditions, it is important to

acknowledge the potential for recent developments to prove ephemeral.

-40

-30

-20

-10

0

10

20

30

40

Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16

Citi Economic Surprise Index - Major Economies

- 3 -

Figure 3. US Financial Conditions Loosen Considerably in July

Source: Bloomberg

Figure 4. Equity and Bond Volatility Indices Decline Sharply in July, Allowing for Multiples Expansion across

Asset Classes

Source: Bloomberg

-2

-1.5

-1

-0.5

0

0.5

1

Dec-15 Feb-16 Apr-16 Jun-16

Bloomberg United States Financial Conditions Index

60

65

70

75

80

85

90

95

100

10

15

20

25

30

35

40

45

50

Chicago Board Options Exchange SPX Volatility Index (LHS)

Merrill Lynch Option Volatility Estimate MOVE Index (RHS)

- 4 -

July 27th

2016

July MTD

Change

Gold 1339.95 1.3%

Silver 20.37 8.8%

Oil 41.92 -13.3%

EUR 1.1058 -0.4%

JPY 105.4 -2.1%

GBP 1.3223 -0.7%

CHF 0.9859 -1.0%

CAD 1.3189 -2.1%

AUD 0.7491 0.5%

BRL 3.2619 -1.5%

MXN 18.8259 -3.0%

Source: Bloomberg

Rates July 27th

Level

1 Yr CD 0.57%

5 Yr CD 1.21%

30 Yr Jumbo Mortgage

3.81%

5/1 Jumbo Mortgage

2.95%

US Govt. 10 Year 1.4976%

10 Yr Swap Spread -0.0938%

Source: Bloomberg

First, insofar as the activity outlook is concerned, it is important to note that despite the

recent upward surprise in economic activity indicators, global manufacturing activity

diffusion indicators remain close to three-year low levels (Figure 5). Likewise, on the demand

side, domestic demand momentum in the world’s second largest economy remains on a

multi-year decelerating trend (Figure 6).

Figure 5. Global Manufacturing PMI Levels Remain Close to 3 Year Low Levels

Source: Markit

Figure 6. China Retail Sales Year-on-Year Growth Rate on Multi-year Downtrend

Source: National Bureau of Statistics of China

50

50.5

51

51.5

52

52.5

53

Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16

JPMorgan Global Manufacturing PMI SA

5

7

9

11

13

15

17

19

21

23

25

Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15

China Retail Sales Value YoY Growth (%)

- 5 -

Second, the medium- and long-term economic outlook for the Eurozone, the world’s second largest economic bloc,

remains constrained by (a) the need to overcome an overhang of non-performing loans in its crucially important banking

system (Figure 7) as well as (b) rising political pressure emanating from anti-European Union (EU) groups, reinvigorated

by the recent BREXIT vote results, in the prelude to the highly consequential October constitutional referendum in Italy.

Figure 7. European Financial Stocks’ Depressed Valuations Limits the Sector’s Ability to Sponsor Economic

Recovery in 2017

Source: Bloomberg

Third, insofar as the economic outlook facing the world’s largest economy (USA), it is important to note the ongoing

softness evidenced across a number of leading indicators of economic activity, such as corporate profits growth/margins

(Figure 8) and capital investment (Figure 9) as well as the loss of momentum in auto sales (Figure 10).

Figure 8. US Corporate Profits’ Deceleration Likely to Linger given Tighter Labor Market and Strong US Dollar

Source: Bureau of Economic Analysis

85

90

95

100

105

110

Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15

Relative Performance between European Financial Sector ETF (EUFN) and Euro STOXX 50 ETF (FEZ)

-40

-20

0

20

40

60

US Corporate Profits with IVA & CCA YoY Growth SAAR (%)

- 6 -

Figure 9. Soft US Durable Goods New Orders Signals Economic Softness at a Juncture in which US Dollar

Strength Persists versus Main Trading Partners

Source: US Census Bureau

Figure 10. US Auto Sales Momentum Decelerates Sharply in 2016

Source: WARD’s Automotive Group

-40

-30

-20

-10

0

10

20

30

US Durable Goods New Orders Total ex Transportation YOY Growth SA (%)

10

12

14

16

18

20

US Auto Sales Total Annualized SAAR

- 7 -

Finally, the medium-term world economic outlook is subject to important uncertainty factors including (a) the

aftermath of the June 23rd BREXIT vote results, given the continued weakening of the Pound Sterling that is likely to

result in the export of economic softness to its major trading partners in the Eurozone (Figure 11), and; (b) the highly

binary policy implications stemming from the upcoming US November general elections (particularly with regards to

US trade and security policy).

Figure 11. Sustained GBP Weakness Post-BREXIT: A Reminder of Uncertainty Tied to UK and Eurozone

Economic Outlook

Source: Bloomberg

Glovista Raises Equities and Credit Market Exposures while Retaining Defensive Exposure Given

Valuation and Risk Factors

The Glovista investment team responded to the recent strengthening of economic momentum and loosening

financial conditions with modest allocation increases to US and international equities as well as US intermediate-

duration high yield debt allocations. In doing so, we have retained an overall defensive stance at the portfolio level

given the set of risk factors discussed in the section immediately above, particularly the event risks looming ahead in

Italy, the USA and also the upcoming elections in France and Germany during 2017.

Within the global equities space, we have increased our overall allocations to Emerging Market equities given the

asset class’ attractive valuations, under-owned status, improved earnings momentum versus Developed peers and

positive tail-wind factors associated with strengthening currencies and terms of trade, discussed in the section

immediately below.

1

1.25

1.5

1.75

2

2.25

GBPUSD Spot Exchange Rate - Price of 1 GBP in USD

- 8 -

Glovista Emerging Markets Perspectives

EM Outperformance versus DM Peers Extends Further on Earnings Growth Dominance,

Valuation, Under-ownership Status; Glovista Raises China and Taiwan Overweight Tilts

In July, Emerging Market equities have extended their 2016 year-to-date relative return outperformance versus EAFE

peers (Figure 12). In our view, a number of factors account for such sustained relative return outperformance,

including:

Figure 12. EM Equities Extend YTD Return Outperformance versus EAFE Peers

Source: Bloomberg, MSCI and Glovista Calculation

EM equities’ attractive relative valuations versus Developed Market peers (Figure 13).

Figure 13. EM Equities’ Relative P/CE Multiple versus Developed Peers at Multi-year Low Level

Source: Bloomberg, MSCI and Glovista Calculation

85

90

95

100

105

110

Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16

MSCI Emerging Market Index Relative to MSCI EAFE Index

65

75

85

95

105

115

Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15

MSCI EM Price to Cash Earnings Relative to MSCI World Index

- 9 -

EM equities’ improved relative earnings momentum versus Developed Market peers.

EM equities’ under-owned status, as reflected via a number of institutional investor surveys and other flows based indicators.

Within the EM equities universe, the Glovista investment team has implemented a number of portfolio rebalancing

actions over the past several weeks, driven by tactical views on global macro factors. Some of those rebalancing

actions included:

Reduction in our Russia country allocation from overweight to modest underweight as we expected crude prices to decline following the outsized price rally recorded during the year’s first half;

Modest reduction in our Brazil overweight allocation owing to relative valuation considerations following the market’s strong rally these past several months, fueled primarily by improved sentiment around political governance;

Increase Taiwan country allocation to moderate overweight owing to our bullish outlook concerning the semi-conductor sector globally. Our increased Taiwan country allocation was funded partly via a further cut in our Korea country allocation;

Increase South Africa country allocation, driven primarily by our assessment that the South African Rand would record stronger price revaluation versus other EM peers during a period in which income-oriented strategies globally have gained much traction, courtesy of central banks’ heightened focus on the loosening of financial conditions;

Reduction in our Malaysia country allocation to maximum underweight owing to the market’s unattractive valuations;

Increased China country allocations to strong overweight owing to the Chinese currency’s increased attractiveness following the strong year-to-date depreciation versus the US Dollar.

- 10 -

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offer to sell or solicitation to buy, purchase or subscribe to any securities.

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3. This newsletter does not constitute a personal recommendation or take into account the particular investment

objectives, financial situations, or needs of individual clients. The securities discussed in this document may not be

suitable for all investors.

4. The price and value of investments referred to in this newsletter and the income arising from them are subject to

market risks. Past performance is not a guide for future performance

5. Certain transactions including those involving futures, options, and other derivatives as well as non-investment

grade securities give rise to substantial risk and are not suitable for all investors. Please ensure that you have

read and understood the current risk disclosure documents before entering into any derivative transactions.

6. This newsletter has been prepared by Glovista based upon publicly available information and sources, believed to

be reliable. Though utmost care has been taken to ensure its accuracy, no representation or warranty, express or

implied, is made that it is accurate or complete.

7. The opinions expressed in this newsletter are subject to change without notice and Glovista is under no obligation

to inform the clients when opinions or information in this report changes.

8. This newsletter or information contained herein does not constitute or purport to constitute investment advice and

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