Hot Topics with Julia Zhu, Senior Vice President & Portfolio Management Team Member

The global macroeconomic expert provides insight to international growth concerns and the impact on equity and fixed income securities.

How healthy do you think the high-yield and corporate bond markets are right now?

Despite the recent widening of credit spreads (What are credit spreads?) and increased volatility across financial markets, we believe the slowdown of the U.S. economy should prove to be temporary, which ultimately benefits the high-yield and corporate bond investors.

The U.S. economy should benefit from increasing consumer spending, which received a big boost from rising household wealth. When combined with lower debt loads, household net worth—the difference between what households own and owe - has increased to a record 6.4 times household disposable income. Underpinning the spending gains is the steadily improving job market. Job growth has slowed in recent months, but even at the slower pace, the economy is fast approaching full employment. These factors paint a positive outlook for U.S. fixed income.

When you consider the Eurozone (EZU), what are one or two factors that you find most promising right now?

The valuation signal in our Global Tactical Asset Allocation (GTAA) model demonstrates that current valuation for EZU is relatively attractive when compared to equities in other regions. Business sentiment remained optimistic in the Eurozone area. Additionally, the economic surprise index has been in positive territory since the end of July. These are all positive signs for the region.

For extra benefit, the European Central Bank (ECB) is still supporting an accommodative monetary policy. The ECB kept its interest rate and balance sheet policies unchanged. It has also been suggested the ECB is gearing up to ease policy further, possibly as soon as December.

What is your outlook on emerging market bond investments right now (e.g., EMHY, EEM)?

Our Global Tactical Asset Allocation (GTAA) program (NorthCoast’s proprietary market outlook model for ETF portfolio construction) shows a slightly weaker outlook for emerging market bonds, largely due to decreasing macroeconomic signals. Uncertainty surrounding the outlook for emerging market bonds has increased as emerging market countries struggle to cope with China's slowdown and higher borrowing costs associated with the eventual liftoff in U.S policy rates.

Commodity-exporting economies face an extended period of lower prices as China rebalances its economy toward less commodity-intensive production. Further, Latin American countries with high corporate debt will become more vulnerable to sudden reversals in capital flows. The risk is especially high if markets overreact to the gradual normalization of U.S monetary policy and global liquidity suddenly evaporates.

How concerned are you about slowing exports or a recession in Japan (EWJ)?

Weak macroeconomic data in Japan, including the slowing of exports, is concerning and should be monitored closely. In September, total export growth hit a 13-month low of 0.6% year-over-year, well below the expected consensus gain of 3.4%. China’s slowdown is also hurting Japan's export growth on a number of fronts.

However, we believe that recent economic data suggest the Bank of Japan (BoJ) will need to do more to spur the recovery, evidenced by the 11% rally in EWJ during October. The BoJ has gone too far down the quantitative easing road to stop now, and further easing is likely needed to boost domestic demand. We will closely monitor the equity market and economic data in Japan. Our combined score for EWJ is positive and currently a "hold" with negative macro and technical signals, but stronger positive indicators from valuation and sentiment data points.

Ms. Julia Zhu joined NorthCoast Asset Management as a Senior Vice President in the Portfolio Management and Research group in 2013. Previously, she worked as a Vice President at Research Affiliates, LLC, where she was responsible for quantitative research in both equity strategies (RAFI Fundamental Index strategies) and global tactical asset allocation products (All Asset Fund). Prior to that, Julia worked as an Associate in First Quadrant, LP and conducted research projects on GTAA and tactical currency allocation products. Julia earned her Master of Economics from Yale University and MBA with concentration in Finance from University of Southern California. She also holds a Bachelor’s Degree in Economics from the Institute of International Relations from Beijing, China. Julia is a CFA® charter holder and a certified Financial Risk Manager (FRM).