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8/3/2019 Putnam Capital Markets Outlook Q1 2012
1/12
Q1 2012 Putnam Perspectives
Capital Markets OutlookJerey L. Knight, CFAHeadoGlobalAssetAllocation
Key takeaways
In 2011, safe assets led while crisis-sensitive
assets crashed. In 2012, opportunity lies in the
middle of these extremes.
The U.S. economy could surprise with better
performance.
Asset allocation choices in 2012 should focus
on geography.
Putnams outlook
http://www.putnam.com/8/3/2019 Putnam Capital Markets Outlook Q1 2012
2/12
Q1 2012 | Capital Markets Outlook
Investment themes
In 2011, sae assets led while crisis-sensitive
assets crashed. In 2012, opportunity lies in the
middle o these extremes.
ForUSinvestors,delivereddeceptivelybenignhead-linereturnsTheS&PIndex,orexample,delivered
TheBarclaysCapitalUSAggregateBondIndex,
astandardmeasureoinvestment-gradebondperor-
mance,returnedasolidCommodities,asmeasured
bytheGoldmanSachsCommodityIndex,nishedtheyear
withanunremarkable-lossClearly,tojudgebyindex
returns,neithershoweredinvestorswithrichesnor
inictedsignicantdamage
Tomanyinvestors,though,wasanythingbutbenign
Forthosewhoventuredawayromtheseiconicbenchmarks,theyeareltmorelikeanIndianaJonesadventure,satisying
tosurvivebutraughtwithdramaticperiloranycareless
stepIntruth,therewereveryewinvestmentopportuni-
tiesthatpaidowithimpressivegainsOntheotherhand,
thereweremany,manywaystolosebigin,romGreek
sovereignbonds(-)toUSnancialstocks(-)
tocopper(-)(Source:Bloomberg)
InvestorswereunderstandablyjitterylastyearThree
signicantrisksposedgenuineundamentaldownsideto
theintrinsicvalueotheirinvestments:sovereigndeault
inEurope,adouble-diprecessionintheUnitedStates,
andasignicantslowdowninChineseeconomicgrowth
Inresponsetotheserisks,Europeanstocksandbondso
peripheralmarketsweremarkeddownsharply,deensive
stocksintheUnitedStates(thehealth-care,consumer
staples,andutilitiessectors)outperormeddramatically,
andstocksacrosspartsoAsiaellbyormoreAdding
insulttoinjury,though,wastheactthatnoneotheserisk
scenariosactuallytranspired!
Ocourse,wemustacknowledgethatthesescenariosto
somedegreeremainrelevantin,andthatdownsiderisk
stillexistsorthesecrisis-sensitiveinvestmentsInEurope,
orexample,itislikelythatGreece,ataminimum,willeec-
tivelydeaultduringLesslikely,inourview,isaUS
recessionin,orahardlandingorChinaseconomyWe
are,then,intriguedbysomeolastyearslosersassources
orpotentialrewardin,albeitwithelevatedrisks
Perhapsthemostinterestingopportunities,though,lie
betweentheultrasaeassetsthatoutperormedin
andthecrisis-sensitiveinvestmentsthatellsosharply
TwoideasstandoutinthisregardTherstishigh-yield
bonds,whichdeliveredpositivereturnsin,butonly
becausethepositivecarryosetpricedeclinesacrossthecategoryIndeed,evenascreditundamentalsimproved
bymanymeasuresin,high-yieldspreadswidened
Asbegins,thesespreadsareabove,asignicant
premiumoverTreasuriesthatyieldabout
WealsoseeopportunityinUSlarge-capstocksFor
reasonswedetailbelow,wethinkthattheoverallUS
economycouldsurpriseontheupsidein,andUS
stocksarelikelytoappearveryattractiveinaglobal
contextWithintheoveralluniverseoUSstocks,tech-
nologystocks,orexample,deliveredverymildreturns
indespiteverystrongcorporateundamentalsThe
technologysectorhascontinuedtogrowrevenueand
standsoutinbothitsabilitytogeneratecashowaswell
asitsnancialexibility,thankstobalancesheetstrength
The U.S. economy could surprise with better
perormance
Everyweek,weupdateourindexoeconomicsurprise
Essentially,wecomparedatareleaseswithexpectations
oundthroughsurveystogaugewhether,acrossabroad
samplingodatareleases,theactualeconomictrajectory
isbetterorworsethaneconomistsexpectedInterestingly,
inthecontextothenegativemarkettoneothesecond
halo,theUSeconomybeganaconsistentpattern
opositivesurprisesaroundJulyProessionaleconomists
spentmuchothelatterhalolastyearorecastinga
recessionthatnevercameWethinktheresilienceothe
USeconomyisimportant,andthatthepatternoupside
surprisecouldcontinuein
Even as credit fundamentals
improved by many measures in
2011, high-yield spreads widened.
8/3/2019 Putnam Capital Markets Outlook Q1 2012
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PUTNAM INVESTMENTS | putnam.com
Unmistakably,theUSeconomyhasbeenacingahead-
windintheormodeleveragingorseveralyearsWe
mustremember,though,thatthisdeleveragingdoesnot
aectallsectorsotheeconomyIndeed,itispossibleto
disaggregatetheoveralleconomyintothosesectorsthat
areacedwithdeleveragingandthosethatarenotGener-
ally,thedeleveragingindustriesarerealestate,nancials,
andmorerecently,industriesinuencedbygovernment
spendingorregulation
Therestotheeconomyispredominantlyunencumbered
bytheorcesodeleveragingImportantly,iwetrackthe
growthrateothesenon-deleveragingsectors,theyhave
beenexpandingatabriskpaceTheyhaveevenbeen
addingjobsonaconsistentandsignicantbasisWhats
more,anequallyweightedportolioostocksromnon-
deleveragingsectorsmadenearthemarketpeako
wouldhavedeliveredpositivereturnsthroughtheendo
(Figure)Weseenoreasonwhythesetrendsshould
reversein
ThemajorriskstotheUSeconomy,then,resideinthe
deleveragingsectorsWhilethenewsisnotgreatorthese
sectors,thereissomereasontosuggestthat,atworst,the
headwindsareeasingInthecaseorealestate,webelieve
thathomepricesareapproachingbottomFortherst
timeinyears,buyingahomeislessexpensivethanrenting
oneWithmortgagerateshittingrecordlows,home
aordabilityhasreturnedtotraditionallevelsWhileevery
regionhasuniqueconditions,webelieveatanationallevel
itisimportantthattheratioothemeanhomepricetothe
meanincomehasreturnedtopre-housing-bubblelevels
Homepricesarelikelytoallarther,butthecombination
oseveralyearsoconstrainednewsupplyandrecord-low
levelsonewhouseholdormationsuggestthatupside
surpriseispossible,especiallyinthetimingowhenhome
pricesreachtheirlowsorthiscycle
Inthecaseonancialstocks,thereisnodoubtthatthe
sectorbecametoolargeasaproportionotheoverall
economyThereislikewisenodoubtthatthesectorhas
beenmassivelyrebalancingAsaproportionotheS&P
,themarketcapitalizationonancialstocksdropped
rominDecembertoinDecember
(Sources:BloombergandPutnam)
Figure 1. Sectors o the U.S. economy ree rom deleveraging have outperormed since 2008 and
continue to oer opportunities.
20
40
60
80
100
120
12/31/11
9/30/11
6/30/11
3/31/11
12/31/10
9/30/10
6/30/10
3/31/10
12/31/09
9/30/09
6/30/09
3/31/09
12/31/08
9/30/08
6/30/08
3/31/08
12/31/07
Source:PutnamThetwohypotheticalportoliosrepresentsectorsotheRussellIndex,withstocksgivenequalweightsandinitialportolio
valuessetequaltoorcomparisonpurposesThedeleveragingportoliorepresentsprimarilyrealestate,nancial,andcertainhealth-careand
deenseindustriesconsideredtobeinuencedtoasignicantdegreebygovernmentspendingorregulationThenon-deleveragingportoliorepre-
sentsallothersectors,suchasconsumer,technology,basicmaterials,capitalgoods,utilities,telecommunications,andenergy
Non-deleveraging sectors
Deleveraging sectors
This deleveraging does
not affect all sectors of
the economy.
8/3/2019 Putnam Capital Markets Outlook Q1 2012
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Q1 2012 | Capital Markets Outlook
Regulation,intheormoDodd-Frankingeneral,andthe
Volckerruleinparticular,hassubduedtheprotabilityo
modernbankingactivitiesInturn,thishasledtomoney
centerbanksexitingbusinesslines,andlayingothou-
sandsandthousandsoemployeesWhileitishardtotell
exactlyhowmuchrebalancingisrequired,webelieveitisreasonabletosaythatasignicantportionothisadjust-
menthasalreadybeenmade
Thedeleveragingothegovernmentsectorbeganin
Thisdeleveragingprocessmustcontinueorsometime
torestorenationalsolvencyThatsaid,thepublicsector
hasluxuriesthattheprivatesectordoesnot,namely,the
powertotaxandthepowertoprintmoneyThisexibility
permitsthepublicsectortoimposeadjustmentsmuch
moregraduallythantheprivatesector
In,theAmericanpeoplewillelectthenextpresidential
administrationTheoutcomeothisvotewilldetermine,
inalllikelihood,whethernationalnancesareaddressed
primarilythroughtaxhikesorthroughspendingcutsEither
way,theadjustmentprocessisunlikelytobegininearnest
untilthenewadministrationassumespowerin
Inanutshellthen,wethinktheexpandingsectorsothe
USeconomycancontinuetogrow,whilethedelever-
agingsectorsmayseepotentialupsidein
Asset allocation choices in 2012 should ocus
on geography
Assetallocationstrategycanbeorganizedacrossseveral
importantdimensionsassetclass,sector,investment
style,marketcapitalization,andgeographyInmyexperi-
ence,theefcacyotheserespectiveanalyticalstrategies
ebbsandowsForexample,thevalue-versus-growth
dimensionhascometomeanarlesstodaythanitdida
decadeago
Asbegins,wendthedimensionogeography
themostintriguingLately,ithasbecomeashionableto
describeworldequitymarketsasperectlycorrelatedand
linkedbythepresenceorabsenceoriskappetiteThis
descriptiontsthedatawhenviewedonaday-to-day
basisHowever,alonger-termviewrevealsaardierentpictureCumulativeperormancedierencesacrossstock
marketshavebeenstrikinglydissimilar,despitehighday-
to-daycorrelationIn,orexample,theMSCIWorld
Indexdeclinedby-ButonlytheUnitedStates,the
UnitedKingdom,Ireland,andNewZealandperormedat
orabovethatlevelTheremainderothecountriesin
thatindexdeclined,somebysignicantmargins(Figure)
Thisreectsourbeliethateconomicortunesaroundthe
worldvaryconsiderablybyregionAsurtherevidence,at
theoutsetoEuropeisacingarecessionwhileAsiancountriesappearreadytoreaccelerate
Wethinkthatgeographyislikelytobequitemeaningul
againinEuropewillcontinuetostruggleagainstan
intensiyingdebtcrisis,andstepstakentoaddressthe
debtcrisiswillnecessarilysubdueeconomicactivitythereasresourcesaredirectedawayrommoreproductive
usesMeanwhile,Asiancountriesingeneral,andChina
inparticular,appearpoisedorstrongergrowthEquity
marketperormancecouldollow,withleadership
returningtoemergingmarketsandtheUnitedStatesas
capitaliswithdrawnromEuropeanddeployedinthese
moreattractiveareas
Europe is facing a recession
while Asian countries appear
ready to reaccelerate.
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PUTNAM INVESTMENTS | putnam.com
Asset class views
Equity
U.S. equity USstockpricesandearningsdiverged
sharplyheadinginto,withstocksupmodestlyor
theyearbutwithearningsupThemoreconserva-
tivesectorswithintheS&PIndexutilities,health
care,andconsumerstaples,orexampleattractedthe
lionsshareoinvestorsandsawsomeexpansionoprice
multiplesasaresultIndustriestiedmoredirectlytothe
economiccycle,includingindustrials,energy,andnancial
stocks,sawvaluationsdeclinebyasmuchasAllo
thissuggeststhat,orthemomentatleast,macroissues
arecontinuingtodominatethelandscapeorUSstocks
Giventhatoverthelongrunstockpricestendtoollow
earnings,therearetwowaysthisdivergencecanberecon-
ciledTherstisthatwhateverthemarketisworriedabout
comestoruition,andearningscomeunderaairamount
opressureThatscenariowouldnotbegoodorstocks,butinsomesectorsthatoutcomemayalreadybereected
incurrentvaluationsTheotherscenarioisthatthemacro
concernsstarttoadeandthatstockpricescatchupto
whatappearstobetrulydynamicandpowerulearnings
growthThe$consensusestimateoearningsper
shareortheS&PIndex,arecord,isoutpacedonlyby
consensusestimatesorastunning$pershare
Figure 2. Global market perormance diverged signifcantly or 2011 as a whole, though markets moved
together on volatile days.
-60
-40
-20
0
20%
Greece
Austria
FinlandIs
raelIta
ly
Portugal
Japan
Singapore
HongKo
ng
Germany
Sweden
France
Denmark
Australia
Canada
Nethe
rlands
Spain
Belgium
Norway
Switz
erland
MSC
IWorldU
.K.
U.S.Ne
wZealand
Ireland
Source:MSCI
2011 global market perormance, in local currencies
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Q1 2012 | Capital Markets Outlook
Asweenter,itiscleartheUSeconomyhassurprised
somebybeingmoresupportivethannotEconomists
wereearulthatgrowthwoulddeceleraterapidlyaterthe
S&PdowngradeoUSdebtinAugustButthatdidnot
happen,andeconomicdatahavegenerallysurprisedon
theupsideeversinceHousing,jobs,consumercondence,
andspendinghaveallimprovedCorporateprotabilityas
measuredbymarginsisquitehighAndwhilemarginstend
tohavemean-revertingcharacteristicslateinthecycleo
mosteconomicexpansionsascapacityutilizationtightens
andcompaniescompetetheirmarginslowerthereareno
signsthesepressuresareonthehorizontodayTheeconomy
shouldremainsupportiveandsel-sustaininginthecoming
quarter,evenigrowthisslowerthanmanywouldlike
Thereareocourseahandulowell-knownexternal
variablestowatch,includingEuropescleareconomic
decelerationandChinasmoremeasuredslowdownThat
said,apartromabrieperiodinearly,USstocks
havenotbeenthischeapsincethesandmaynow
reectahistoricentrypointorlong-terminvestors
Non-U.S. equity Intherstquartero,weexpect
non-USequitymarketstocontinuetobebuetedbyrisks
outoEurope,includingheavysovereignundingsched-
ulesandcontinuedelevatedborrowingcostsorcountries
suchasPortugal,Italy,Ireland,Greece,andSpainOur
basecaseisthattheEuropeanUnionislikelytomusterthepoliticalwillandleveragethebackingotheInterna-
tionalMonetaryFundinordertoremainintactthrough
thisperiodomacroeconomicinstabilityHavingsaidthat,
deterioratingeconomicconditionsinEuropeexacer-
batedbyEuropesneedorausteritywillhitperipheral
Europeancountriesrelativelyhardandmayputdownward
pressureonglobalgrowthEuropeisChinaslargestexport
market,orexample,soEuropeanweaknesswouldnega-
tivelyaectChinasexportgrowthInaddition,market
observersmaycontinuetoretoverhowmuchaEuropeanrecessionwhichmanyorecastersnowbelieveisallbut
inevitablewillaectrecoveryintheUnitedStates
Japan,bycontrast,isnotasstronglytiedtotheateo
Europeasitistothecombinationoeconomicdevelopments
intheUnitedStatesandChinaNevertheless,Japanese
equitymarketswillaceimportantrisksasprogresses,includingthegradualadingothepost-earthquakerebound
andthelonger-termproblemomassivegovernmentdebt
combinedwithpoordemographics
Figure 3. Equities appear undervalued relative to robust corporate earnings.
0
500
1,000
1,500
2,000
12/31/1112/31/0512/31/0012/31/9512/31/9012/31/8512/31/8012/31/7512/31/7012/31/6512/31/601/31/54
$94.98
1,257.61
Sources:S&PandPutnam,aso// Pastperormanceisnotindicativeoutureresults
Earnings per share ($), trailing 12 months
S&P 500 Index values
Corporate profitability as measured
by margins is quite high.
The European Union is likely to muster
the political will to remain intact.
8/3/2019 Putnam Capital Markets Outlook Q1 2012
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PUTNAM INVESTMENTS | putnam.com
Intheemergingmarkets,wehaveseengovernmentpolicy
turnincreasinglysupportiveogrowth,particularlyasthe
Europe-basedthreattoexport-ledgrowthhaswaxed
strongerEurope,webelieve,willnotderailthelong-term
growthoemergingmarkets,theireconomicrebalancing
throughthedevelopmentodomesticconsumption,ortheirseculartrendsourbanizationandwealthcreation
amongarisingmiddleclass
Intheinterim,weexpectpoliticaldevelopmentswilldrive
Europeanmarkets,withhope-ueledralliesollowedby
ear-inducedsell-osEarningswillbeunderpressure,and
stockswilllikelybechallengedtomakegainsHowever,
giventheprobabilityolimitedgrowthintheeurozone,we
believethosecompaniesthatprovecapableooering
sustainablegrowthwilllikelytradeatapremiumInaddi-
tion,weexpectmonetaryeasinganddownward-trending
valuationsincertainareastoprovidedownsidesupport
toaggingmarketsWhatsmore,giventherightpolitical
outcome,theEuropeanCentralBankcouldachievea
reductioninsovereignborrowingcosts,whichwouldbe
aorceultailwindorEuropeanequitiesandinternational
riskassetsmoregenerallyNevertheless,theriskstothis
morepositivescenarioarereal,andausteritywillbedif-
culttobearbysomeeurozonecountries,justaswealthier
countriesmayndthelevelosupporttheyneedto
providetotheirweakerneighborsabitterpilltoswallow
Fixed income
U.S. fxed income Uncertaintyremainedhighinthe
ourthquarterasthelargemacroeconomicchallengesthat
dominatedheadlinesthroughoutcontinuedtoweigh
oninvestorcondenceTreasuryratesintheUnitedStates
declinedslightlyamidsoliddemand,whilediscussions
overreducingthesizeotheederaldecitcontinuedto
takecenterstageheadingintoelectionyearOutsidethe
UnitedStates,littleprogressappearedtobemadeinthe
Europeansovereigndebtsituationdespiteongoingnego-
tiationsNon-Treasurybondmarketsintheourthquarter
generallycontinuedtodecline,withmortgage-backed
securitiesinparticularstrugglingtoreversecourseater
theirsignicantsell-ointhethirdquarterOnebrightspot
wasoundwithincorporatedebt,particularlyhigh-yield
bonds,whichralliedtocloseouttheyearateradifcult
thirdquarter
Aswehavestatedbeore,webelievetheundamentals
acrossarangeoxed-incomesectorsremainattractive,
themacroeconomicchallengesacingUSmarketsnotwith-
standingDeaultsincorporatedebtarewellbelowthe
long-termaverage,andwebelievethatthedeaultrateis
likelytoremainlow,eveninarelativelyweakeconomicenvi-ronmentMeanwhile,corporateearnings,asmeasured
bytheS&P,mayhitanall-timehigh,andwebelieve
thecombinationmakesacompellinginvestmentcase
Withinthemortgage-backedsector,wecontinuetond
opportunitiesbothinnon-agencyresidentialmortgage-
backedsecuritiesandininterest-onlycollateralized
mortgageobligationsWebelievethatbothstrategiescan
perormwellinanenvironmentoweakhousingprices;
interest-onlyCMOsbenetromhomeownerstaking
longertopaydownmortgagesandromrenancing
ratesremainingslowAlthoughrecentmodicationsto
thegovernment-sponsoredHARP(HomeAordable
RenanceProgram)havepavedthewayoranincrease
inrenancings,weavorsecuritiestiedtolowerratesand
moreseasonedmortgages,whicharethereorelesslikely
toberenanced
Non-agencysecurities,meanwhile,shouldgenerate
attractivecashowsevenihousingpricescontinueto
struggle,ouranalysissuggestsThemainconcern,we
believe,isnotoneoundamentals,butotechnicals:
TheUSFederalReserveandEuropeanbanksbothhave
sizableexposurestonon-agencyRMBS,andshouldthe
marketsupplyincreasedramaticallyastheseentitiessell
theirpositions,itcouldunderminepricesItisasituation
wearemonitoringclosely
The fundamentals across a
range of fixed-income sectors
remain attractive.
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Q1 2012 | Capital Markets Outlook
Withregardtointerestrates,wecontinuetoavorlimitedexposuretointerest-raterisk,whichwebelieveoersvery
limitedupsideWithinterestratesinanumberomarkets
nearhistoriclows,webelievethepotentialrewardsrom
along-durationstanceareminimalThatsaid,webelieve
thereareopportunitiestotaketacticalpositionsatthe
longendotheyieldcurve,whichwebelievewillcontinue
toexhibitvolatilityWhilecentralbankshaveanchored
theshortendothecurve,thelongendrepresented
bybondswithmaturitiesooryearsmaybe
orcedtoabsorballothepolicyuncertaintyoranyaddi-
tionalshockstotheglobalnancialsystemWecontinue
tomonitorthegloballandscapeorshort-termtactical
opportunities
U.S. tax exempt Atthistimeoneyearago,headlines
predictingawaveodeaultsinthemunicipalbondmarket
werecommonClearly,thosedeaultshaveailedtomate-
rializeWecontinuetoviewA-andBaa-ratedessential
servicerevenuebondsinsectorssuchashighereducation
andutilitiesasattractiveopportunitiesWhiletechnical
actorsinthemarkethavebeenpositivespecically,lightersupplyandstabledemanduncertaintyremains
Webelievethatstateswillcontinuetoacenancialchal-lengesastheeconomystrugglestonditsootingFor
themostpart,however,webelievethatthescalcondi-
tionsostatesandmunicipalitiesareshowingsignso
improvementTaxreceiptsarebeginningtoimprove,albeit
slowly,andwebelievedeaultswillremainrelativelylow
Wewouldnotethatlocalgeneralobligationbondsremain
vulnerabletothelageectsodecliningpropertytaxes
Ourprimaryconcernsremainocusedontheeconomy
andCongresssplanstoreducethedecitHigherederal
incometaxrates,achangeinthetaxstatusomunicipal
bonds,orsignicantcutsinstateundingallwouldhave
consequencesorthemunicipalbondmarket
States will continue to
face financial challenges
as the economy struggles
to find its footing.
Figure 4. U.S. Treasury yields have remained at low levels amid economic worries.
yrs
yrs
yrs
yrs
yrs
yrs
yrs
yr
Source:USDepartmentotheTreasury,aso//Pastperormanceisnotindicativeoutureresults
6/30/11
9/30/11
12/31/11
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PUTNAM INVESTMENTS | putnam.com
Non-U.S. fxed income Europecontinuedtosetthetone
orglobalmarketsintheourthquarterItisunlikelythata
simplesolutionexistsoraddressingthepolicychallenges
Europeacesgiventhedisparityotheneedsandgoalso
thepartiesinvolved,andinmanywaysmarketscurrently
reectthisrealityForexample,thespreadbetweenItalianandGermaninterestratestodaycloselymatches
thedierenceswesawinthepre-EuropeanMonetary
UnioneraInthes,thosedierencesweretheresult
primarilyocurrencyrisks,whiletodaythosedierences
aredrivenbycreditrisks,andweconsideritunlikelytosee
ItalyborrowatGermanratesanytimeintheoreseeable
utureGiventhatoutlook,itisunclearwhattheincentive
isorsouthernEuropeancountrieslikeGreeceandItalyto
remaincommittedtoasingleEuropeancurrency,which
limitstheirpolicyoptionsordealingwiththeirdebtloadsWhilewebelievetheundingarrangementsputinplace
havelikelyhelpedtheEuropeanUnionavoidacrisisover
theshortterm,long-termscalchallengesremain,andthe
outcomeappearsanythingbutcertain
Withinemerging-marketdebt,webelieveinvestorsneedtobecognizantothedownsideriskspresentinthe
comingmonthsOverthepastseveralyears,wehave
seendeleveragingrstinthehousingmarketandbanking
sectorsin,andthenagaininsovereignEuropein
,andwebelievethereisasignicantriskthatcapital
outowsinemergingmarketscouldgainsteamin
Throughmostothepastyears,emergingmarkets
benetedromlowination,balancedbudgetsorlow
decits,consistentpolicies,stablegovernments,and,
ultimately,easyaccesstothecapitalmarketsSince,wehaveseenamuchmorevolatileanddiverselandscape
intheglobalbondmarkets,withabroaderrangeopolicy
needsaroundtheworld:Somecountriesacetherisk
ooverheatingeconomicallyandareraisingrates,while
othersareseekingtowardorecessionbyloosening
theirmonetarypoliciesThatbackdropmaycreatesome
instabilityoremergingmarketsgenerally,asinternational
investorscouldpullcapitaloutothesesmallandopen
economies,challengingemerging-marketcentralbanks
andpolicymakersinawaytheyhavenotbeenchallenged
inyearsormoreWeremainbullishonthelong-term
undamentalstoryinemergingmarkets,andbelievethe
near-termuncertaintyunderscorestheimportanceothe
kindoundamentalresearchandactivemanagementPutnamoers
Commodities
Investorsrelyinguponcommoditiesordiversicationo
stock-marketriskhavebeendisappointedinrecentyears
Overthepastthreeyears,orexample,thecorrelation
betweentheS&PandtheGoldmanSachsCommodity
Index(GSCI)hasmeasuredroughly,makingcommodi-
tiesaairlyweakdiversierItisnotunreasonable,then,to
beginouranalysisocommoditiesbyconsideringthem
tobejustanotherriskassetDoingsoallowsustorene
ourorecastbaseduponuniquecircumstancesacing
commoditiesrelativetootherriskassets
Wendthisapproachtobeparticularlyinstructiveas
beginsTherearekeydisadvantagesacingcommodities
Firstistheongoingissueonegativerollyield,whichin
costthoseinvestedintheGSCImorethanotheir
totalreturnWhilethenegativecarryocommoditieshas
becomelesssevereoverthepastyear,itremainsadistinct
disadvantagerelativetootherriskassetsAnotherpoten-tialheadwindorcommoditiesisthedevelopingtrend
oUSdollarstrengthAsmostcommoditiesarepriced
inUSdollars,commodityperormancetendstohavea
negativecorrelationtotheUSdollarOverallthen,we
avoranunderweighttocommodities
Withincommodities,weavorenergyandpreciousmetals
asahedgeagainstgeopoliticalriskintheMiddleEastAny
disruptiontooildistributionwouldtriggerrisingoilprices
andlikelyadeclineinriskappetite,whichcould,atleast
temporarily,supportgoldprices
We remain bullish on the
long-term fundamental story
in emerging markets.
Another potential headwind for
commodities is the developing
trend of U.S. dollar strength.
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Q1 2012 | Capital Markets Outlook
Currency
Theourthquarterbeganwithriskaversionatlevelsthat
dominatedallotheractorsincurrencymarketsThe
promiseoprogressinEurope,coupledwithpositive
economicdatasurprisesinmostotheG-countries
outsidetheeurozone,helpedtheriskenvironmentrevert
tomoreneutrallevelsLiquidityprovisionsviaFederal
ReserveUSdollarswaplinesandaEuropeanCentral
Bank(ECB)acilityalsohelpedboostriskappetites
WebelievetheUSdollarissupportedbyequityows,
interest-ratemomentum(compressionoglobalratesto
USrates),andthecurrentphaseotheglobalgrowth
cycleDespiteanimprovementinUSeconomicgrowth,theFedhassignaledthatitwillevaluateurthermeasures
ithegrowthsituationworsensFortheoreignexchange
market,thelackourtherextensionotheFedbalance
sheetentailsastrongerdollaragainstmarketswhererates
areexpectedtoconvergewithUSrates
Weavorthedollarovertheeuroasnancialrisksarethe
mostacuteintheeurozone,whichmayalreadybeina
recessionTheECBremainsinthemidstopoliticalbrink-
manshipThisshouldkeeppressureonthesinglecurrency
WeavorthedollaroverthepoundastheUKeconomy
mayalsobeheadingintoarecessionduetostrong
tieswiththeeurozoneTheBankoEnglandcontinues
toincreaseitsquantitativeeasing,whichshouldkeep
pressureonthepound
Bycomparison,weareneutralontheyenTheJapanese
haveintervenedinmarketstoweakentheyenversusthe
dollar,buttheUnitedStatessubsequentlyadmonished
theinterventionIntheseconditions,weavortactical
exibilitywiththesecurrencies
MARKET TRENDS
Index name (returns in USD) 4Q11 12 months ended 12/31/11
EQUITIES
Dow Jones Industrial Average 12.44% 7.95%
S&P 500 Index 11.82 2.11
Nasdaq Composite Index 7.86 -1.80
Russell 2000 Index 15.47 -4.18
MSCI World Index (ND) 7.59 -5.54
MSCI EAFE Index (ND) 3.33 -12.14
MSCI Europe Index (ND) 5.39 -11.06
Tokyo TOPIX Index -5.61 -10.49
MSCI Emerging Markets Index (ND) 4.42 -18.42
FIXED INCOME
Barclays Capital U.S. Aggregate Bond Index 1.12% 7.84%
Barclays Capital 10-Year Bellwether Index 1.23 17.18
Barclays Capital Global Aggregate Bond Index ex-U.S. (unhedged) -0.36 4.36
JPMorgan Global High Yield Index 6.43 5.73
JPMorgan Emerging Markets Global Diversied Index 4.65 7.35
COMMODITIES
Goldman Sachs Commodities Index 8.96% -1.18%
ItisnotpossibletoinvestdirectlyinanindexPastperormanceisnotindicativeoutureresults
8/3/2019 Putnam Capital Markets Outlook Q1 2012
11/12
Putnams veteran senior market
strategists review opportunities
and risks across global asset classe
The Investment Themes o Capital Markets Outlook
are developed by Putnams Global Asset Allocation
Team, one o the industrys largest and longest-tenure
groups dedicated to multi-asset strategies. The team
monitors global markets on an ongoing basis and each
quarter produces a comprehensive review o invest-
ment potential and risks. This rigorous research proces
guides the teams management o Putnam Global Asse
Allocation Funds, Putnam RetirementReady Funds,
Putnam Retirement Income Liestyle Funds, and PutnaAbsolute Return 500 Fund and 700 Fund.
Jefrey L. Knight, CFA
Head o Global Asset Allocation
James A. Fetch
Portolio Manager
Robert J. Kea, CFA
Portolio Manager
Joshua B. Kutin, CFA
Portolio Manager
Robert J. Schoen
Portolio Manager
Jason R. Vaillancourt, C
Portolio Manager
The Asset Class Views reect the thinking o Putnamssector research experts across global equity and fxed-
income markets, distilled through senior investment
leaders and portolio managers across Putnam.
U.S. Equities
Robert D. Ewing, CFA
Co-Head o U.S. Equities
International Equities
Shep Perkins, CFA
Co-Head o International
Equities
Fixed Income
D. William Kohli
Co-Head o Fixed Income
Commodities
Jefrey L. Knight, CFA
Head o Global Asset Alloc
Currency
Robert L. Davis, CFA
Analyst
The Barclays Capital 10-Year U.S. Treasury Bellwether Index is an unmanaged
index o U.S. Treasury bonds with 10 years maturity.
The Barclays Capital U.S. Aggregate Bond Index is an unmanaged index used as a
general measure o U.S. xed-income securities.
The Barclays Capital Global Aggregate Bond Index ex-U.S. (unhedged) is an
unmanaged index use d as a broad measure o the investment-grade bond index,
excluding U.S. securities.
The Dow Jones Industrial Average Index (DJIA) is an unmanaged index composedo 30 blue-chip stocks whose one binding similarity is their hugeness each has
sales per year that exceed $7 billion. The DJIA has been price-weighted since its
inception on May 26, 1896, refects large-cap companies representative o U.S.
industr y, and historically has moved in tandem with other major market indexes
such as the S&P 500.
The Goldman Sachs Commodity Index is a composite index o commodity sector
returns that represents a broadly diversied, unleveraged, long- only position in
commodity utures.
The JPMorgan Global High Yield Index is an unmanaged index that is designed
to mirror the investable universe o the U.S. dollar global high-yield corporate
debt market, including domestic (U.S.) and international (non-U.S.) issues.
International issues are composed o both developed and emerging markets.
The JPMorgan Emerging Markets Global Diversifed Index is composed o U.S.
dollar-denominated Brady bonds, eurobonds, traded loans, and local market debt
instruments issued by sovereign and quasi-sovereign entities.
The MSCI EAFE Index is an unmanaged list o equity securitie s rom Europe and
Australasia, with all values expressed in U.S. dollars.
The MSCI Emerging Markets Index is a ree-foat-adjusted market-capitalization-
weighted index that is designed to measure equity market perormance in the
global emerging markets.
The MSCI Europe Index is an unmanaged list o equity securities originating in any
o 15 European countries, with all values expressed in U.S. dollars.
The MSCI World Index is an unmanaged list o securities rom developed and
emerging markets, with all values expressed in U.S. dollars.
The Nasdaq Composite Index is a widely recognized, market-capitalization-
weighted index that is designed to represent the perormance o Nasdaq securities
and includes over 3,000 stocks.
The Russell 2000 Index is an unmanaged list o common stocks that is requently
used as a general perormance measure o U.S. stocks o small and/or midsizecompanies.
The Russell 3000 Index is an unmanaged index o the 3,000 largest U.S . compa-
nies. You cannot invest directly in an index.
The S&P 500 Index is an unmanaged list o common stocks that is requently used
as a general measure o U.S. stock market perormance.
The Tokyo Stock Exchange Index (TOPIX) is a market-capitalization-weighted
index o over 1,100 stocks traded on the Japanese market.
8/3/2019 Putnam Capital Markets Outlook Q1 2012
12/12
NOTES
The opinions expressed in this article represent the current, good-
aith views o the author(s) at the time o publication and are
provided or limited purposes, are not denitive investment advice,
and should not be relied on as such. The inormation presented in
this article has been developed internally and/or obtained rom
sources believed to be reliable; however, Putnam Investmentsdoes not guarantee the accuracy, adequacy, or completeness o
such inormation. Predictions, opinions, and other inormation
contained in this article are subject to change continually and
without notice o any kind and may no longer be true ater the
date indicated. Any orward-looking statements speak only as o
the date they are made, and Putnam assumes no duty to and does
not undertake to update orward-looking statements. Forward-
looking statements are subject to numerous assumptions, risks,
and uncertainties, which change over time. Actual results could
dier materially rom those anticipated in orward-looking state-
ments. Past perormance is not a guarantee o uture results. As
with any investment, there is a potential or prot as well as the
possibility o loss.
The inormation provided relates to Putnam Investments and its
afliates, which include The Putnam Advisory Company, LLC and
Putnam Investments Limited.
Prepared or use in Canada by Putnam Investments Inc.
[Investissements Putnam Inc.] (o/a Putnam Management in
Manitoba). Where permitted, advisory services are provided in
Canada by Putnam Investments Inc. [Investissements Putnam
Inc.] (o/a Putnam Management in Manitoba) and its afliate, The
Putnam Advisory Company, LLC.
Diversication does not assure a prot or protect against loss. It is
possible to lose money in a diversied portolio.
In the United States, mutual unds are distributed by Putnam Retail Management.
putnam.com CM /
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inationriskAsinterestratesrise,thepricesobondsallLong-termbondsaremoreexposedtointerest-rateriskthanshort-termbondsUnlikebonds,bondundshaveongoingeesandexpensesLower-ratedbondsmayoerhigheryieldsin
returnormoreriskFundsthatinvestingovernmentsecuritiesarenotguaranteedMortgage-backedsecuritiesaresubject
toprepaymentriskCommoditiesinvolvetherisksochangesinmarket,political,regulatory,andnaturalconditions
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