WILLIAM RIEGEL, CHIEF INVESTMENT OFFICER, TIAA ASSET MANAGEMENT
December 12, 2014
European equities fared even worse, plummeting more than 6% for the week. In addition to global growth fears, the Greek prime minister’s decision to call for an early presidential election on December 17 spawned worries over political and economic instability in one of the Eurozone’s weakest economies.
In Japan, the yen strengthened as investors flocked to safe-haven assets in the wake of moves to curb risk in China’s debt markets and the potential political unrest in Greece. The Nikkei 225 Index, which recently closed at its highest level in more than seven years, dropped about 3% for the week, but rose on Friday ahead of the country’s December 14 snap elections. Valuations remain attractive, but future equity gains may be limited unless Prime Minister Shinzo Abe’s structural reforms are enacted.
Elsewhere in Asia, China’s tighter lending rules drove stock prices down 8% before rebounding. For the year, Chinese equities are up more than 35%, bolstered by effective reforms, expectations of additional central bank stimulus, and increasing retail demand. We believe the substance of the reforms will help stocks in China move higher into 2015.
U. S. Treasuries rallied strongly amid equity weakness and investor unease. The yield on the 10-year U.S. Treasury, which moves in the opposite direction of its price, began the week at 2.31% but then fell to about 2.10% on December 12. Concerns of global deflationary pressures make U.S. Treasuries look attractive relative to other sovereign bonds, in spite of falling yields. High-yield corporate bonds posted losses, with companies in the energy sector especially hard hit as oil prices dipped below $58 per barrel. Commercial mortgage-backed and asset-backed securities performed relatively well given their general lack of exposure to energy companies.
In European markets, uncertainty over the upcoming elections in Greece pushed yields on 10-year Greek sovereign bonds above 9% in the past week. While Greek bond yields could rise further, we believe the political risks there have already been priced in.
Recent reports, including those released during the week, provide additional evidence of the economy’s positive momentum and spotlight the diverging outlooks between the U.S. and most of the developed world:
Speculation continues that the European Central Bank (ECB) will implement full-blown quantitative easing next month. Even if this occurs, we are not convinced that adding more liquidity into the Eurozone economy will solve the region’s struggle with deflation and stagnant (or negative) growth. Much-needed economic reforms, especially in Italy and France, have been slow in coming. Additionally, there is little-to-no demand for loans, as evidenced by weak response to the ECB’s latest round of low-cost credit offered during the past week. Nevertheless, we view European stocks favorably. Shares are attractively priced, there are some signs of improving economic activity, and any unrest in Greece is not likely to spread.
In fixed-income markets, we believe that most of the oil market’s slide has been priced into bond spreads, and solid buying opportunities exist in high-yield corporate and emerging-markets debt. In particular, select B-rated and BB-rated corporate bonds offer good value. Emerging-markets debt should benefit as long as interest rates in the U.S. remain low, since rising rates stateside often lead investors to withdraw capital from the developing world.
TIAA-CREF Asset Management provides investment advice and portfolio management services to the TIAA-CREF group of companies through the following entities: Teachers Advisors, Inc., TIAA-CREF Investment Management, LLC, and Teachers Insurance and Annuity Association® (TIAA®). Teachers Advisors, Inc. is a registered investment advisor and wholly owned subsidiary of Teachers Insurance and Annuity Association (TIAA). Past performance is no guarantee of future results.
Foreign stock market returns are stated in U.S. dollars unless noted otherwise.
Please note that equity and fixed income investing involve risk.
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