Commentaries
PMC Market Commentary: June 13, 2014
A Macro View – Simmering Geopolitical Risk
This week we had another pungent reminder of geopolitical risk. The self-proclaimed Islamic State of Iraq and Syria took advantage of the divisive policies of current Iraqi leader Nouri al-Maliki and seized control of the northern city of Mosul, which is not only a large urban center of nearly 2 million people but is also near some of the country largest oil refineries.
With equities markets up consistently over the past four weeks, it is hardly surprising that the news coincided with a modest dip in markets and a surge in energy prices. But while the instability in Iraq is surely troubling and a sign that the Syrian civil war and years of strife in the region – including two American wars – will be a chronic source of uncertainty and a potential trigger for geopolitical and financial turmoil.
That said, unless matters spiral into some sort of regional conflagration, the crisis in Iraq is rather on par with the crisis in the Ukraine. Both are simmering and unresolved and offer the possibilities for real global contagion, especially insofar as both involve vital oil or natural gas resources that many other countries depend on. But neither are as yet market events of the first order. Yes, if you have a portfolio with a considerable allocation to energy, either directly in the form of commodities or less directly through options, funds or bonds, how Iraq plays out will likely shape prices, though not necessarily beyond the short-term. And yes, these events matter greatly in terms of the ongoing rearrangement of the political balances in the regions. That, however, is distinct from the strictly financial and investing implications of these events.
Overall, equity markets have been enjoying a rather steady multi-week rally, though the major indices are still up modest single digits through nearly half of the year. Bonds yields, meanwhile, remain extremely low worldwide, perhaps in the face of new rounds of quantitative easing and liquidity measures announced by both China’s central bank and the European Central Bank in early June. There is little to suggest any sharp break, though of course such sharp moves tend to come unexpectedly. The fact that markets have been relatively placid is not, in our view, a cause for concern, but nor should it be a recipe for complacency.
The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this weekly review is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. Past performance is not indicative of future results.
Information obtained from third party sources are believed to be reliable but not guaranteed. Envestnet|PMC™ makes no representation regarding the accuracy or completeness of information provided herein. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.
Investments in smaller companies carry greater risk than is customarily associated with larger companies for various reasons such as volatility of earnings and prospects, higher failure rates, and limited markets, product lines or financial resources. Investing overseas involves special risks, including the volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. Income (bond) securities are subject to interest rate risk, which is the risk that debt securities in a portfolio will decline in value because of increases in market interest rates. Exchange Traded Funds (ETFs) are subject to risks similar to those of stocks, such as market risk. Investing in ETFs may bear indirect fees and expenses charged by ETFs in addition to its direct fees and expenses, as well as indirectly bearing the principal risks of those ETFs. ETFs may trade at a discount to their net asset value and are subject to the market fluctuations of their underlying investments. Investing in commodities can be volatile and can suffer from periods of prolonged decline in value and may not be suitable for all investors. Index Performance is presented for illustrative purposes only and does not represent the performance of any specific investment product or portfolio. An investment cannot be made directly into an index.
Alternative Investments may have complex terms and features that are not easily understood and are not suitable for all investors. You should conduct your own due diligence to ensure you understand the features of the product before investing. Alternative investment strategies may employ a variety of hedging techniques and non-traditional instruments such as inverse and leveraged products. Certain hedging techniques include matched combinations that neutralize or offset individual risks such as merger arbitrage, long/short equity, convertible bond arbitrage and fixed-income arbitrage. Leveraged products are those that employ financial derivatives and debt to try to achieve a multiple (for example two or three times) of the return or inverse return of a stated index or benchmark over the course of a single day. Inverse products utilize short selling, derivatives trading, and other leveraged investment techniques, such as futures trading to achieve their objectives, mainly to track the inverse of their benchmarks. As with all investments, there is no assurance that any investment strategies will achieve their objectives or protect against losses.
Neither Envestnet, Envestnet|PMC™ nor its representatives render tax, accounting or legal advice. Any tax statements contained herein are not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Taxpayers should always seek advice based on their own particular circumstances from an independent tax advisor.
© 2014 Envestnet. All rights reserved.