Patrick Jamins sits down to answer questions about the global market environment, attractive ETFs, and rising challenges in fixed income.

 

1.       Do you think a delayed sales tax increase and a potential stimulus package in Japan will be effective in pulling Japan out of its recession?

Japanese market has seen positive signs after the central bank's decision to expand the quantitative easing program. The Nikkei225 surged to a seven-year high and the yen reached a seven-year low against the dollar. We believe that Japan’s economy is likely to grow faster with recent fall of yen and a potential stimulus package. The weaker yen will help the Japanese export industry and increase corporate profits.  We expect the yet to continue to fall as the U.S. raises its interest rates and the Bank of Japan maintains easy monetary settings.  The central bank's efforts to boost domestic demand might be aided by a delay in the next sales tax increase.

However, we are also concerned about a potential financial crisis given the size of the QE program. Asset purchases in Japan are approaching about 60% of GDP,  more than double that of its counterparts in the U.S., European Central Bank and the Bank of England.

If bond investors take fright, a spike in yields would quickly overburden the Japanese government's ability to service its debt. Such an outcome would probably result in a financial crisis or, at the very least, a sharp contraction in GDP and a decline in the yen.

 

2.       What appeals to you about IJH in the current market environment?

It's a similar position to IVV (S&P 500 Fund) and we have a decent weight comparative to its benchmark: 9% to 14% versus 16% to 24% for IVV. Same theme overall, but we give it more consideration for non-USD revenues of large caps which can be affected  negatively by USD translation impact.

 

3.       The S&P 500 has continued to set new highs. Are there particular aspects of the rally that lead you to believe there is more upside, or could we be in for a pullback?

Our data is showing upside potential in the equity market with the U.S. economy continuing to expand.  The stronger U.S. economy is supported with the improving job market. 
  - Job market has been growing at the pace of 225,000 jobs per month, with the gains across almost all industries and regions.
  - More part time workers have found full time jobs.
  - A stronger job market together with the wage increase will be a stimulus for better consumer spending, which is an important part of GDP growth. 
 
At the same time, the U.S. economy will benefit from lower energy coast. The 25% drop in oil price will add to consumers’ purchasing power.  Better job market and low mortgage rates should be an enticement for a revival in the housing market.  Rental vacancy rates are at 20-year low.  Homebuilder sentiment has improved recently.  The National Association of Home Builder’s index has been above 50 since July this year and increased to 59 in November.  Homebuilders are also putting up smaller homes at more affordable price level to meet the demand.
 
Consumer sentiment has been improved recently.  The University of Michigan consumer sentiment index rose 2.5 points to 89.4 in November,  its highest level in more than seven years.  Consumers are optimistic about the outlook of the economy and shoppers claim they feel the best about their current finances since before the recession. The boost in sentiment over current economic conditions is partially due to the lower gas price and the added cash could be a good boost for the holiday shopping season. Meanwhile, we pay close attention to momentum and valuation variables in our model.  Our tech reversal indicators together with our fear index have moved lower this month.  Our valuation indicators have been less bullish with the recent market movement. 

 

4.       Data from Bloomberg* shows that states and cities are lining up the most new bond sales to end a year since 2011. How do you see the municipal bond market looking forward?

With tax advantage binds. there is a Tax-Exempt Yield of 2.93%, with an effective duration 6.38Y; Compare to IEF (7-10 Year Treasury) with an SEC yield of 2.07%, and effective duration 7.6Y. 

With a recovering economy in a slow growth environment, the outlook is positive. There is more issuance.  We are holding off until a better entry point. Timing versus robust issuance may provide an opportunity to purchase bonds that recently entered the secondary market at attractive levels. Temporary periods of outsized issuance could also challenge the primary market. Depending on timing and magnitude of the calendar, upcoming new issues could represent value not seen in months. Individual investors should be paying close attention and remain engaged. Also consider defensively upgrading portfolios by selling weaker credits and low-coupon structures, as the strong bond market, along with equity market gains, can mitigate and offset losses, respectively. Such transactions should be executed sooner rather than later.

*View the article here (http://www.bloomberg.com/news/2014-11-17/munis-cheapest-to-treasuries-in-nine-months-amid-november-losses.html)