The US equity markets finished the first half of 2015 with positive returns. However, the second quarter itself was lackluster, accompanied by a marked increase in volatility late in June.
Volatility was also present in fixed income markets globally. Market concerns about China’s diminished growth prospects and Greece’s imminent default supplanted debate about the effectiveness of the global Central Banks’ easy money policies. Meanwhile, there was particular volatility in commodity prices such as gold and natural gas, but the general direction of most commodities was down.
Large US companies, as represented by the Standard & Poor’s 500 Stock Index, rose 0.28% in the second quarter and 1.23% for the first half of 2015 (1H15). Smaller companies that derive a greater percentage of revenue from domestic operations fared better, returning 0.42% for the second quarter and 4.75% for 1H15 as represented by the Russell 2000 Index. As for international equities, the emerging markets equity index (MSCI EM) returned 0.69% for the second quarter and 2.95% for 1H15. The developed international markets, however, took top honors with the MSCI EAFE index returning 0.62% for the quarter and 5.52% for 1H15.
In global fixed income markets, low European yields and a rising dollar made even the current low US yields attractive to global investors during the first half of 2015. US Treasuries and high-quality corporate bonds experienced some volatility as the seesaw debate about inflation/deflation concerns was overwhelmed by a flight to safety due to issues surrounding China and Greece.
United Church Funds’ Total Equity and balanced funds have meaningful allocations to US equity markets. The managers we hire on your behalf have capitalized on the positive market performance as reflected in the year-to-date results of the Domestic Core Equity, Beyond Fossil Fuels and Small Cap Equity Funds. However, we remain committed to global diversification, as relatively strong growth in the US is offset by less attractive valuations, while potentially more rewarding opportunities appear in emerging and developed international markets. That said, we reduced our exposure to emerging markets with the elimination of Aberdeen Asset Management during the second quarter. Still, geographic diversification has been beneficial to results this year.
As the second half of 2015 unfolds, we expect that the Greek issues will be resolved one way or another. China, however, will continue to be a source of anxiety for global markets. In the US, market participants will continue to speculate as to when the Federal Reserve will begin to raise interest rates. Our sense is that interest rates will trend higher over the second half of 2015. We believe a nimble approach to asset allocation will best serve our clients, in the context of a strategic decision to favor equities and some alternative investments, where appropriate, over fixed income. We continue to position your portfolios accordingly.
We continue to work hard on your behalf and we thank you for your continued confidence and support.