putnam capital markets outlook q1 2012

8/3/2019 Putnam Capital Markets Outlook Q1 2012

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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/


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.


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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

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12/31/10

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12/31/09

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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.


4/12


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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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


6/12


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.


7/12


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.


8/12


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


9/12


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.


10/12


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


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.


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 /

Consider these risks beore investing: Internationalinvestinginvolvescertainrisks,suchascurrencyuctuations,

economicinstability,andpoliticaldevelopmentsInvestmentsinsmalland/ormidsizecompaniesincreasetherisko

greaterpriceuctuationsFundsthatinvestinbondsaresubjecttocertainrisksincludinginterest-raterisk,creditrisk,and

inationriskAsinterestratesrise,thepricesobondsallLong-termbondsaremoreexposedtointerest-rateriskthanshort-termbondsUnlikebonds,bondundshaveongoingeesandexpensesLower-ratedbondsmayoerhigheryieldsin

returnormoreriskFundsthatinvestingovernmentsecuritiesarenotguaranteedMortgage-backedsecuritiesaresubject

toprepaymentriskCommoditiesinvolvetherisksochangesinmarket,political,regulatory,andnaturalconditions

I you are a U.S. retail investor, please request a prospectus, or a summary prospectus i available, rom your fnancial

representative or by calling Putnam at 1-800-225-1581. The prospectus includes investment objectives, risks, ees,

expenses, and other inormation that you should read and consider careully beore investing.
http://www.putnam.com/http://www.putnam.com/

putnam capital markets outlook q1 2012

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