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Monthly Update

An analysis of the economy and
the markets

BB&T Monthly Update Podcast

April 2014

Asset Allocation Update

  • We currently recommend a tactical underweight to equity versus our long-term targets for all models (except the Fixed Income Model). The tactical underweight to equity is consistent with our global equity forecast model which incorporates changes in equity valuations and changes in the U.S. 10-year Treasury yield.
  • We are also recommending a tactical underweight to fixed income and a tactical overweight to diversifying assets for all models (except the Fixed Income and Aggressive Growth models).
  • Within the developed equity allocation, we recommend a tactical overweight to international developed equities. We are maintaining an equal weight to both growth and value stocks.
  • Within fixed income, we continue to recommend a tactical overweight to U.S. aggregate fixed income, and strategic weightings to international fixed income (hedged), U.S. high yield, and U.S. TIPS. We are awaiting a more favorable entry point for emerging markets debt.
  • Within diversifying assets, we continue to recommend a tactical underweight to commodities and a tactical overweight to alternative strategies.

 

Economic Highlights

  • U.S. fourth quarter GDP was revised up to 2.6% from 2.4% in the third (and final) estimate. The improved estimate reflects larger than previously estimated personal consumption expenditures.
  • Recent economic weakness in the U.S. has largely been attributed to adverse weather conditions. Early indicators for March (initial jobless claims, auto sales, ISM, etc.) suggest that the U.S. economy may have regained some positive momentum.
  • Although the recovery in real GDP is proceeding at a slower pace in the euro area than in the U.S., the ECB decided against taking any easing measures at its latest meeting. Economic activity in Japan is widely expected to decelerate in Q2 as a tax increase begins to take effect.
  • The prospect of an economic slowdown in China has negatively impacted sentiment related to global equity markets generally and emerging markets in particular. The China HSBC Manufacturing PMI, a monthly indicator of business conditions in the manufacturing sector, indicated contraction in March, and has deteriorated for three consecutive months.

 

Equity Highlights

  • Fed policy remains a significant risk factor for equities. The minutes from the latest policy meeting were interpreted by many market participants as an indication that the Fed may remain accommodative for longer than previously thought.
  • According to FactSet, the first quarter of 2014 has the second-highest number of companies issuing warnings since the company began tracking guidance data in 2006. The highest number was in the fourth quarter of 2013.
  • Interest rates remain low, but we believe rising rates would provide a tailwind for high-quality relative performance.
  • During the first quarter, emerging market equities underperformed developed market equities. The prospect of an economic slowdown in China and the conflict in Ukraine has negatively affected sentiment for the asset class.

 

Fixed Income Highlights

  • U.S. high yield continues to look attractive based on the low interest rate environment, low default rate, and investors’ continued appetite for yield.
  • Emerging markets debt spreads continued to narrow in March and remain well below the historical average.
  • Based on our TIPS forecast model, which incorporates breakeven rates and changes in the unemployment rate, U.S. TIPS are relatively attractive.

 

Diversifying Assets Highlights

  • Alternative strategies, which typically outperform in down markets, underperformed global equities by a slim margin in March.
  • REITs are still reasonably attractive based on their dividend-yield advantage versus Treasuries. However, REITs may be pressured should U.S. interest rates trend higher. REITs have outperformed global equities by a wide margin year-to-date as of March 31.
  • Commodities, led by agricultural commodities (softs), have rebounded in 2014. Commodities significantly outperformed global equities and fixed income during the first quarter.

 

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The opinions expressed herein are those of the Sterling Advisory Solutions Team, and not those of BB&T Corporation or its executives. The stated opinions are for general information only and are not meant to be predictions or an offer of individual or personalized investment advice. They also are not intended as an offer or solicitation with respect to the purchase or sale of any security. This information and these opinions are subject to change without notice. Any type of investing involves risk and there are no guarantees. Sterling Capital Management LLC does not assume liability for any loss which may result from the reliance by any person upon any such information or opinions.

Investment advisory services are available through Sterling Capital Management LLC, a separate subsidiary of BB&T Corporation. Sterling Capital Management LLC manages customized investment portfolios, provides asset allocation analysis and offers other investment-related services to affluent individuals and businesses. Securities and other investments held in investment management or investment advisory accounts at Sterling Capital Management LLC are not deposits or other obligations of BB&T Corporation, Branch Banking and Trust Company or any affiliate, are not guaranteed by Branch Banking and Trust Company or any other bank, are not insured by the FDIC or any other government agency, and are subject to investment risk, including possible loss of principal invested.

The securities/instruments discussed in this material may not be suitable for all investors. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.

Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.

The indexes are unmanaged and are shown for illustrative purposes only. Indexes do not represent the performance of any specific investment. An investor cannot invest directly in an index.

The indexes selected by Sterling Capital Management to measure performance are representative of broad asset classes. Sterling Capital Management retains the right to change representative indexes at any time.

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