putnam: capital markets outlook q2 2012
TRANSCRIPT
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8/2/2019 Putnam: Capital Markets Outlook Q2 2012
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Q2 2012 Putnam Perspectives
Capital Markets OutlookJerey L. Knight, CFAHeadoGlobalAssetAllocation
Key takeaways
A record drop in volatility does not signal imminent market reversal.
Europes lag in the rally points to a possible source o weakness.
Muted rise in bond yields may refect economic concerns.
Putnams outlook
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8/2/2019 Putnam: Capital Markets Outlook Q2 2012
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Q2 2012 | Capital Markets Outlook
Investment themes
A record drop in volatility does not signal
imminent market reversal.
Marketconditionsthusarinhaverewardedthose
whohaveembracedinvestmentriskInact,othethirteen
weeksintherstquartero,onlytwosawnegative
returnsromtheS&PChartingmarketpricesorthis
quarterisremarkablenotsomuchbecauseothemarkets
level,orevenitstrajectory,asoritsuncannysteadiness
Intruth,areturnorstocks,aspostedbytheS&P
intherstquarter,isnotterriblyuncommonOntheother
hand,therecentcollapseinvolatilityismuchmorerare
Whatdoesthismeanorthemarketsprospectsinthe
secondquarter?
Weexaminedthedatasinceorsix-monthchangesin
impliedvolatilityasmeasuredbytheVIX(CBOEVolatility
Index)Otencalledtheearindex,theVIXreectsinvestor
expectationsasmeasuredbyoptionscontractsOur
researchshowsthatthereductioninimpliedvolatilitythat
wehaveseenoverthepastsixmonthsisunprecedented
FigurepresentsdataortheninelargestVIXdeclines
since,showingjusthowunusualthepastsixmonths
havebeen
Figure 1. Stocks typically rallied ater volatility dropped.
After the largest drops in volatility over two quarters, stocks have appreciated in the following quarter
6 out of 8 times (9/30/903/31/12)
10
20
30
40
6/30/03
12/31/02
3/31/03
9/30/02
3/31/91
6/30/91 6/30/99 6/30/02 6/30/03 9/30/03 9/30/09 12/31/09 3/31/11
9/30/90
6/30/09
12/31/08
3/31/02
9/30/01
12/31/10
6/30/10
3/31/99
9/30/98
9/30/09
3/31/09
3/31/12
9/30/11
5.9%7.0% 6.0%
15.6%15.4%
2.6%
-13.4%
-0.2%
Perormance o S&P 500 in subsequent quarter
Volatility
(VIX)
Source:PutnamTheVIX(CBOEVolatilityIndex)isakeymeasureomarketexpectationsonear-termvolatilityconveyedbyS&Pstockindex
optionpricesPastperormanceisnotaguaranteeoutureresults
The reduction in implied volatility that
we have seen over the past six months
is unprecedented.
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Fromthesedata,itisclearweshouldnotautomatically
assumeaturnortheworseisnearInact,historyindi-
catesitismorecommonaterasignicantdeclinein
volatilityorthestockmarkettomovehigheroverthe
subsequentquarterthantomovelowerIndeed,inthe
absenceoanycatalysttodisruptthiscalmadvance,wearecontenttogivethedurabilityostockmarketstrength
thebenetothedoubtasthesecondquarterbegins
Still,theplungeinvolatilitypromptstwoobservations
First,wemustconcedethatwehaverarelyobserved
signicantdeclinesinvolatilitystartingromthelevelswe
seetodaySinceatleastsomeothemarketsadvance
overthepastsixmonthsmustbeattributedtodeclining
investorriskaversion,itstandstoreasonthatmuchothis
orceisbehindus,andurtherstockmarketadvancesmust
comerommoreundamentalcatalysts,suchasearnings
anddividendsAssuch,thetrajectoryomarketgains
romrecentlevelsislikelytobelowerthanthatotherst
quarterSecond,itisworthnotingthatdownsidehedging
strategieswithoptionshavebecomesignicantlymoreaordablenowthantheyweresixmonthsago,andmay
beattractiveshouldcertainriskscenariosmaterializeinthe
comingmonths
Europes lag in the rally points to a possible
source o weakness.
Asvolatilityhasdroppedsincelate,riskassetsoall
kindshaveralliedContinuingthistrend,stocks,commodi-
ties,creditinstruments,andemerging-marketcurrencies
showedsharpgainsintherstquarterForthemostpart,theseassetshavebehavedastheorywouldpredict:The
morevolatileones,likesmall-capstocks,emerging-market
stocks,andevennancialstocks,postedthehighest
returnsHowever,oneassetclassEuropeanstocks
deservesnotice
Thegeneralcalmthathasprevailedovermarketsmight
beattributedinparttotheEuropeanCentralBanksLong-
TermRenancingOperation(LTRO),initiatedinDecember
andexpandedinFebruary,oreventothelackoturmoil
aroundGreecesdebtdeaultButinvestorsshouldbe
careulnottoinerhastilythatalliswellinEuropeWhile
theLTROmighthaveboughtEuropesometimetodeal
withitssovereigndebtproblems,ithasdonenothingto
solvetheseproblems
Thesecondquarterwilldeliverseveralnewchallengesthat
coulddisruptthenascentcalmacrossEuropeannancial
marketsFirst,importantpoliticalelectionswilloccurin
comingmonths,includingapresidentialelectioninFrance,
nationalelectionsinGreece,andascalreerendumin
IrelandSecond,severalcountriescaughtupinthecrisis
acereundingneeds,withkeybondauctionsscheduled
inthesecondquarterorItaly,Spain,andPortugalFinally,
theimpactoausteritypoliciesshouldbegintoshow
throughineconomicstatisticsduringthesecondquarter
Further stock market advances
must come from more fundamental
catalysts, such as earnings and
dividends.
While the LTRO might have bought
Europe some time to deal with its
sovereign debt problems, it has done
nothing to solve these problems.
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Q2 2012 | Capital Markets Outlook
Alongtheselines,itistroublesometonotetherecent
underperormanceoSpain,inparticular(Figure)In
,theSpanishstockmarkethasdeliverednegative
returnsevenasmarketsworldwidehavedeliveredbroad
gainsDisconnectedmarketperormancelikethisrarely
occurswithoutaundamentalcauseInvestorsmaybe
detectinggrowingstrainsinSpain
Whilewearecomortablewithmaintainingapro-risk
stanceoverallasthesecondquarterbegins,signsostress
romthestockmarketsorromcreditdeaultswaps(CDS)
oSpain,Italy,Portugal,orAustriawouldpromptusto
reducerisklevelsInthemeantime,wecontinuetoavoid
riskinperipheralEuropeanmarkets
Muted rise in bond yields may refect
economic concerns.
Withallthepositivenewscomingromthestockmarket,
investorsmighthavepaidlessattentiontoasubtlestory-
linedevelopinginbondmarketsBondyieldsroseduring
therstquarter,andbyrecentstandards,anyincreasein
bondyieldsisnoteworthyAtthesametime,wethinkthat
therst-quarterriseinyieldsraisesanimportant,gener-
allyoverlooked,question,namely,whyhaventbondyields
risenbyamuchgreateramount?
Overthepastveyears,-yearTreasuryyieldshave
generallymovedinnearlockstepwithstockprices
(Figure)Everytimestockssoldo,bondyieldsdropped
alongsidethemHowever,overthepastsixmonths,the
reversehasnotbeentrueDespiteasignicantriseinstock
prices,bondyieldshaverisenonlymodestly
Figure 2. Spain has lagged in Europes LTRO-ueled recovery.
Performance of select European stock markets since start of ECBs LTRO program, 12/21/113/31/12
95
100
105
110
115
120
Spain (IBEX 35)
Italy (FTSE MIB)
France (CAC 40)Germany (DAX)
12/21/11 3/31/12
Source:BloombergValuesrebasedtoonDecember,,thebeginningotheEuropeanCentralBanksrstLong-TermRenancingOperation
Signs of stress from the stock markets
or from credit default swaps (CDS) of
Spain, Italy, Portugal, or Austria would
prompt us to reduce risk levels.Why havent bond yields risen by a
much greater amount?
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AswithEuropeanstocks,thedisconnectedperormance
obondsisnoteworthy,inouropinionOcourse,parto
theexplanationorlowTreasuryyieldsisthattheFedhas
beenpurchasingTreasurieswiththegoalokeepingrates
lowBeyondthis,however,wesurmisethatbondinves-
torsmaybedetectingagradualslowingineconomicdata,
basedoncertainkeydevelopmentsintherstquarter
Forexample,therateoeconomicsurpriseisdeteriorating
sharplyintheUnitedStatesandaroundtheworld,rising
oilpricesareeatingintodisposableincome,andmanuac-turingsurveyshaverespondedonlymildlytotheeconomic
recoveryInlightothesedevelopments,andrecognizing
thatbondsarelessovervaluedtodaythanatthebeginning
otheyear,webelieveitremainsprudenttomaintainsome
exposuretointerest-raterisk,whichmayalsobehelpul
giventhepotentialthreatswehaveoutlined
Overall,wearecontenttogiveriskassetsthebeneto
thedoubtasthesecondquarterbeginsHowever,we
regardthetwomarketnonconormiststhebehavior
oEuropeanstocksandTreasurybondyieldstobe
remindersthatrisksremain,andthatwehavenotescaped
thesecularpressuresbroughtonbythestill-deating
globaldebtbubble
Figure 3. Bucking recent history, Treasury yields have not ollowed stock prices higher.
Comparison of S&P 500 Index and yields of 10-year Treasuries, 3/31/073/31/12
1%
4%
7%
600
1100
1600
S&P
level Y
ield
3/07 3/08 3/09 3/10 3/11 3/12
Source:Bloomberg
S&P 500 Index
10-year U.S. Treasury yield
We surmise that bond investors may
be detecting a gradual slowing in
economic data, based on certain key
developments in the first quarter.
We have not escaped the secular
pressures brought on by the still-
deflating global debt bubble.
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Q2 2012 | Capital Markets Outlook
Asset class views
U.S. equity
Stocksralliedsharply,postingtheirstrongestrst-quarter
gainsinoveradecadeandreversingsomeotheear-
basedvaluationanomalieswesawinFinancials,
anextremelyundervaluedsectorattheendo,was
thebest-perormingS&Psectorinthemostrecent
quarterUtilities,asaehavenorinvestorsinwhenit
advanced,wastheonlysectorwithnegativeresults
intherstquarter(Source:Putnam)Small-capandlarge-
capstocksappreciatedatroughlythesamepace
Thequartersstunninggainscanpartlybecharacterized
asarelierallyUSeconomicgrowthcontinuedtosurprise
ontheupside,andinvestorsappeartohaveconcludedthe
recoveryhasbecomesustainableTheGDPgrowthreportedortheourthquarterwasnotparticularlyrobust,
butitwassufcienttoalleviateinvestorconcernsEurope
alsoprovedtobemorestableandalittlestrongerthan
earedGreeceunderwentanorderlydeaultwithout
muchincidenceagainstthebackdropotheECBinjecting
liquidityintothenancialsystem
Corporateearningsweretheotherenginedrivingstock
pricesAtover$pershare,theS&Psprojected
earningsareatall-timehighs,continuingonatrajectory
thatstartedinEarningsgrowthisnowbeginning
toshowsignsoatigueTheourthquarterssingle-digit
protgrowthmarkedadeclineromgrowthinthethird
quarter,andourexpectationisorsingle-digitearnings
growthinWhilethisdoesnotyettranslateintoan
expensivemarket,inourview,thedaysoeverycompany
beatingexpectationsareprobablyover
ThenearrallysinceOctobernecessarilyguresinto
ourviewotheopportunitysetWebelievevaluations
remaincompellinginmanyareasothemarket,butno
longerreecttheextremeswesawintheallo
Opportunitiesexistinstocksthathaveglobaleconomic
sensitivity,areinthenancialssector,orhavesomemacroconcern,inourviewAcrosstheeconomy,cash
onbalancesheetscontinuestogrow,soweexpectto
seeacontinuationothetrendoestablishingorraising
dividendsAtattheendoMarch,theS&Ps
dividendyieldisnowroughlyequivalenttotheyield
ona-yearTreasury(Sources:PutnamandUSFederal
Reserve)
Insum,ouroutlookisconstructiveandpro-cyclicalWe
believecorporateundamentalssupportthecontinuation
othecurrentrallybutthattherewillbeincreasingbenet
tocareulstockselectiongoingorwardAshasbeenthe
caseorthepasttwoyears,macroriskswhetherthe
concernisahardlandinginChina,aspikeinoilprices,or
economicdeteriorationinEuropemayreassertthem-selvesatanytime
Non-U.S. equity
Inthesecondhalo,internationalstocksgenerally
sueredintheaceocompoundingsovereignrisksin
EuropeButasmacroeconomicearsgraduallylosttheir
griponmarketsinDecemberandJanuary,
investorsexpressedincreasingenthusiasmaboutabroad
varietyointernationalstocksWiththisrenewedinterest,
correlationsellacrosstheglobalequitymarkets,and
internationalstocksreboundedsharplyForthesecond
quarterandbeyond,webelievethatnon-USstockunda-
mentalswillcontinuetomatter,makingstockselectionall
themoreimportantinseekingpositivereturns
Opportunities exist in stocks that have
global economic sensitivity, are in thefinancials sector, or have some macro
concern, in our view.
Our expectation is for single-digit
earnings growth in 2012.
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Someothemostattractivenon-USequitiesromavalu-
ationstandpointarethosethatsoldomostsharplylast
yearBargainhuntinginEurope,orexample,isbackon
theagendaWeexpecteconomicallysensitivesectors,
ingeneral,tobenetromthedecliningperceptiono
Europeanmacroeconomicrisks,andthatconsumerdiscretionarystocks,inparticular,willbewell-positioned
inthisenvironmentFurthermore,althoughcompanydata
suggesttheeconomyismakingorwardstrides,investor
attitudesrequentlyrangeromambivalenttonegativeon
theEuropeanconsumersabilitytosupportabroadrange
obusinessesThissustainsthevaluationopportunityin
Europe,inourview,inanindustrysuchasbanking,where
weeelanumberohigher-qualitybankswillultimately
distinguishthemselvesromlower-qualitybanksthatare
ingreaternancialdistress
Intheemergingmarkets,investorcapitalhasreturnedand
appetiteorriskhasgrown,despiteearsoaslowdown
andthepotentialorpolicyerrorinChinaContrarytotheconsensus,wetakeaconstructiveviewonChinaWhere
othersseesluggishdata,weseeamoresustainable
growthpattern,bolsteredbythegrowingsignicanceo
theChineseconsumerandtheimpressivepolicyarsenal
oChinascentralbankOthercountrieswithpositive
undamentalsandexcellentseculargrowthstories,such
asBrazilandIndonesia,alsooerarangeoattractive
opportunitiesthataremadeevenmorecompellingby
easingeconomicpolicyAsemergingeconomiesloosen
policywhiletakingcarenottogotooaritcreatesapositiveenvironmentorequities,particularlybanks,
consumerdiscretionarystocks,anddomestic-ocused
industrials,inourview
TheUSeconomy,meanwhile,isshowingcontinuedsigns
ostrength,andwhileEuropemaytipintorecession,
weexpecttheproblemswillbecontainedTherisko
sustainedhighoilpricesisoneotheprimaryactorsthat
couldcrimpglobalgrowthButidiplomaticsolutions
areoundthatcanhelpdeusesomeotheunderlying
geopoliticalrisks,itcouldarrestrisingoilpricesand
lendurthersupporttonon-USequitymarketsandthe
continuingrecovery
Fixed income
Thexed-incomemarketsingeneralbenetedromachangeininvestorsriskoutlookinCentralbanks
continuedtoprovideliquidityornancialmarkets,bothin
EuropethroughtheLTROandintheUnitedStates,where
thereisspeculationthattheFederalReserve(theFed)is
consideringathirdroundoquantitativeeasing(QE)This
accommodativepolicyhelpedoersomelevelosupport
orthebondmarketsaterachallengingourthquarterin
whichinvestorsdemonstratedlittleappetiteorrisk
U.S. fxed income IntheUnitedStates,interestrates
climbedhigher,evenontheshortendotheyieldcurve,
inpartreectingincreasingoptimismaboutthestrength
otheeconomicrecoveryRecenteconomicdata,while
notindicativeoastrongrecovery,hasgenerallycome
instrongerthananticipatedTherecontinuestobesome
speculationastowhethertheFedintendstolaunchQE
RecentstatementsbyChairmanBenBernankesuggest
thattheFediscareullymonitoringthehealthothe
economyandthatmorepolicyinterventionisapossibility
ItwasanunusuallymildwinterinmuchotheUnited
States,andsomemarket-watchershavebeenraisingquestionsastowhetherthestronger-than-expected
economicdatawasdrivenbythewarmerweatherWe
wontknowtheanswerorsureuntildataorMarchand
Aprilbecomeavailableaspointsocomparison,butitsan
issuewerekeepingacloseeyeonnonetheless
In the emerging markets, investor
capital has returned and appetite
for risk has grown, despite fears of a
slowdown and the potential for policy
error in China.
The risk of sustained high oil prices is
one of the primary factors that could
crimp global growth.
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Inthenon-governmentsectors,mortgagecredit
specically,non-agencyresidentialmortgage-backed
securities(RMBS)andcorporatecreditpostedstrong
returnsorthequarterRMBSwasoneothehardest
hitsectorsattheendo,asinvestorsearedthat
Europeanbanks,whichholdasignicantvolumeothese
securities,wouldbeorcedtoliquidatepositionsquickly
toraisecapitalWhiletherehasbeensomeselling,itwas
nowherenearthemagnitudeinvestorseared,andthe
sectorralliedintherstquarteroOnthecorporate
side,undamentalsremainedattractive,withpositive
earningsandlowdeaults,andhighyieldperormed
particularlywellEmerging-marketdebtalsobeneted
romtheinvestorsincreasedriskappetitesduring
theperiod,withcommodity-exportingcountrieslike
VenezuelaandRussiaenjoyinghigheroilpricesand
strongdemand
Non-U.S. fxed income TheGreekdeault,which
occurredinFebruary,wasanorderlyone,andappears
unlikelytostartawaveorestructuringsinotherperipheral
EuropeancountriesororceEuropeanbankstorapidly
de-leverandraisecapitalThatsaid,whiletheshort-term
liquidityissuesatstakeinEuropeappeartobeunder
control,thelarger,long-termstructuralproblemshave
beenlargelyunaddressedthusarEuropeishometoa
varietyoeconomies,eachwithitsownsetochallenges,
whetherahousingmarketbubble,anover-leveraged
bankingsector,oraworkorcestrugglingtoremain
competitiveTheseeconomiesnolongerhaveasbroad
asetopolicytoolstoaddresstheirchallenges,either
throughdevaluingtheircurrencyoradaptingmonetary
policytailoredtotheirparticularcircumstancesAsit
stands,theEuropeanCentralBankcanonlysetasingle
policyorthisdiversegroupoeconomiesdespite
theirdierentdynamicsanddierentneedsUntilthatundamentalproblemisaddressed,webelieveinvestors
willcontinuetoseewavesovolatilityromtheEuropean
bondmarkets
U.S. tax exempt Overallcreditqualityacrossthe
municipalbondmarketremainsgenerallysoundandis
showingsignsoimprovementWebelievethatthescal
conditionsostatesandmunicipalitiesareindicativeo
stability,butthatstateswillcontinuetoacenancial
challengesastheeconomicrecoveryworkstogainsome
tractionTaxreceiptsarebeginningtoincrease,albeit
slowly,andwebelieveactualdeaultswillremainrelatively
lowin,butwewouldnotbesurprisedbyanuptick
inlocalGOsOurprimaryconcernsremainocusedon
thebroadeconomyandCongresssplanstoreducethe
decitBroad-basedtaxreorm,achangeinthetaxstatusomunicipalbonds,andsignicantcutsinstateundingall
wouldhaveconsequencesorthemunicipalbondmarket
Wearemonitoringallotheseactorsclosely,andbelieve
ourundsarewellpositionedorthisless-than-certain
environmentgoingorward
Commodities
WecontinuetoavoranunderweighttocommoditiesAs
wearticulatedlastquarter,wendcommodities,overall,to
bejustanotherwaytotakeinvestmentrisk,andagenerally
inerioroneatthatCommoditiesunderperormedequities
duringtherstquarter,whichwasastrongquarterorrisk
assetsDuetotheirnegativerollyield,economicsensitivity,
andhighvolatility,wewouldexpectcommoditiestolag
otherriskassetsinasell-oaswell
On the corporate side, fundamentals
remained attractive, with positive
earnings and low defaults, and high
yield performed particularly well.
Europe is home to a variety of
economies, each with its own set of
challenges, whether a housing market
bubble, an over-leveraged banking
sector, or a workforce struggling to
remain competitive.
We believe actual defaults will remain
relatively low in 2012, but we would not
be surprised by an uptick in local GOs.
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MARKET TRENDS
Index name (returns in USD) 1Q 1212 months
ended 3/31/12
EQUITY INDEXES
Dow Jones Industrial Average 8.84% 10.18%
S&P 500 12.59 8.54
Nasdaq Composite 18.67 11.16
MSCI World (ND) 11.56 0.56
MSCI EAFE (ND) 10.86 -5.77
MSCI Europe (ND) 10.66 -7.54
MSCI Emerging Markets (ND) 14.07 -8.81
Tokyo Topix 18.47 0.75
Russell 1000 12.90 7.86
Russell 2000 12.44 -0.18
Russell 3000 Growth 14.58 10.14
Russell 3000 Value 11.16 4.30
FIXED-INCOME INDEXES
Barclays Capital U.S. Aggregate Bond 0.30% 7.71%
Barclays Capital 10-Year Bellwether -2.25 14.97
Barclays Capital Government Bond -1.12 7.89
Barclays Capital U.S. Mortgage-Backed Securities (MBS) 0.57 6.21
Barclays Capital Municipal Bond 1.75 12.07
CG World Government Bond ex-U.S. -0.22 3.93
JPMorgan Developed High Yield 5.46 7.81
JPMorgan Global High Yield 5.87 7.41
JPMorgan Emerging Markets Global Diversied 4.25 10.94
S&P LSTA Loan 3.76 2.85
COMMODITIES S&P GSCI 5.88% -6.21%
CASH
BoA ML U.S. 3-Month Treasury Bill 0.01% 0.06%
ItisnotpossibletoinvestdirectlyinanindexPastperormanceisnotindicativeoutureresults
Withincommodities,wecontinuetoavortheenergy
subsectorDemandoroilremainsstrongeveninlight
orisingprices,andtheongoingthreatogeopolitical
tension,principallyinIran,couldsupportoilpricesinthe
monthsaheadOntheotherendothespectrum,we
regardindustrialmetalsasthemostunattractivesub-
sector,andparticularlyvulnerabletoanysoteningo
economicgrowth
Currency
Therstquartersawasizeableincreaseinliquidityand
expectationsormorewiththesecondECBLTROatthe
endoFebruaryThisenvironmentwasquiteconducive
orriskassetsandorthecarrystrategywithinoreign
currencyWithbetterUSeconomicdata,adecreasing
probabilityoadditionalquantitativeeasingmeasures
(QE)intheUnitedStatesandamoredovishBanko
Japan(BoJ),themarkethasbeguntoreplacetheUS
dollarwiththeyenastheprimaryundingcurrency
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Q2 2012 | Capital Markets Outlook
The Barclays Capital Government Bond Index is an
unmanaged index o U.S. Treasury and government
agency bonds.
The Barclays Capital Municipal Bond Index is an
unmanaged index o long-term xed-rate investment-
grade tax-exempt bonds. You cannot invest directly inan index.
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 U.S. Mortgage-Backed Securities
(MBS) Index covers agency mortgage-backed pass-
through securities (both xed-rate and hybrid ARM)
issued by Ginni e Mae (GNMA), Fannie Mae (FNMA), and
Freddie Mac (FHLMC).
The BoA Merrill Lynch U.S. 3-Month Treasury Bill Index
consists o U.S. Treasury Bills maturing in 90 days.
The Citigroup Non-U.S. World Government Bond
Index is an unmanaged index generally considered to be
representative o the world bond market excluding the
United States.
The Dow Jones Industrial Average Index (DJIA) is an
unmanaged index composed o 30 blue-chip stocks
whose one binding similarity is their hugene ss each
has sales per year that exceed $7 bil lion. 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 Developed High Yield Index is an
unmanaged index o high-yield xed-income securitiesissued in developed countries. You cannot invest directly
in an index.
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 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 MSCI EAFE Index is an unmanaged list o equity
securities rom Europe and Australasia, with all valuesexpressed 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 originati ng 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 1000 Index is an unmanaged index o the
1,000 largest U.S. companies.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 midsize
companies.
The Russell 3000 Growth Index is an unmanaged index
o those companies in the broad-market Russell 3000
Index chosen or their growth orientation.
The Russell 3000 Value Index is an unmanaged index o
those companies in the broad-market Russell 3000 Index
chosen or their value orientation.
The S&P/LSTA Leveraged Loan Index (LLI) is an
unmanaged index o U.S. leveraged loans.
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.
Wehaveavoredthedollarmodestlyasriskaversionhas
remainedsubduedThisstanceissupportiveocurrencies
thatbenetromrisingcommoditypricesandapro-
cyclicalorientation,especiallythosewithgreatertradeties
totheUnitedStatesIngeneral,exposuretocurrencies
ocommodity-exportingcountrieshasbeentempered
duetouncertaintyregardingChinaanditsdemandor
commoditiesInterest-ratemomentumhasmovedinavor
otheUSdollarandagainsttheJapaneseyen,butthedollarshouldalsoremainsupportedagainstthemajor
currenciesduetopositiveequityows,increasedyield
support,andthecurrentphaseotheglobalgrowthcycle
InEurope,theECBhasconducteditssecondthree-year
LTROtoensurebanksareabletoachievenancingAsa
result,theriskpremiumortheeurohasbeenreducedas
nancialdisasterhasbeenavertedHowever,economic
dataremainmodestatbest,andthereisstillpressureon
EuropeansovereignbondsThiswillkeepinterest-ratecutsapossibilityandthesizeotheECBbalancesheetlarger
thanthatotheFed,withthepotentialtogetevenbigger
Theseactorsshouldkeeppressureontheeuro
WeavorthedollaroverthepoundastheBankoEngland
(BoE)hasincreaseditstargetholdingsoUKgovernment
GILTbondsThismoveexpandstheBoEsquantitative
easingandshouldkeeppressureonthecurrencyRelative
totheeuro,thepoundshouldbesupportedasreserve
managerscontinuetodiversiyawayromthesingle
currency
The dollar should remain supported
against the major currencies due to
positive equity flows, increased yield
support, and the current phase of the
global growth cycle.
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8/2/2019 Putnam: Capital Markets Outlook Q2 2012
11/12
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
WeavorthedollarovertheJapaneseyenastheBank
oJapansurprisedthemarketswithitsdecisiontoraise
thetargetonitscurrentAssetPurchaseProgramby
trilliontotrillionTherelativeshitinmonetary
policyotheBoJandtheFed,whichnowappearsless
likelytointroduceaQEprogramollowingbetterrecenteconomicdata,hascausedtheyentoonce
againbecometheundingcurrencyortheoreign
currencymarketsThisviewissubjecttovolatilityasthe
BoJmeetstwiceinAprilandtheFederalOpenMarket
Committeehasatwo-daymeetinginlateAprilWhile
USdataremainsupportive,risingUSyieldsshould
continuetodrivethedollarhigherversustheyen
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.
-
8/2/2019 Putnam: Capital Markets Outlook Q2 2012
12/12
NOTES
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