Market Monthly Jun 2014

Monthly Update

An analysis of the economy and
the markets

BB&T Monthly Update Podcast

June 2014

Asset Allocation Update

  • We continue to recommend a modest tactical underweight to equity versus our long-term targets. 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.
  • Within the equity allocation, we are maintaining a tactical underweight to emerging markets equity and a tactical overweight to developed equity. Within the developed equity allocation, we recommend a tactical overweight to non-U.S. developed equity. We are maintaining an equal weight to growth and value stocks within our U.S. and non-U.S. equity allocations.
  • We recommend a modest tactical underweight to fixed income. 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.
  • We continue to recommend an overweight to alternative strategies, and strategic weightings to commodities and REITs.


Economic Highlights

  • The U.S. economy contracted in the first quarter for the first time in three years, as GDP was revised to -1%. The weak report has been widely attributed to unusually adverse weather conditions. The third and final estimate of first quarter GDP is scheduled to be released on June 25th.
  • A number of U.S. economic reports for May came in stronger than expected (nonfarm payrolls, ISM manufacturing and non-manufacturing,). Retail sales came in slightly weaker than expected in May, but the April figure was revised sharply higher.
  • Eurozone GDP growth was revised to 0.2% in the first quarter (quarter/quarter) which was well below economists' expectations. At its June meeting, the ECB cut its main lending rate and installed a negative rate on bank deposits for the first time in its history.
  • GDP growth in Japan was revised to 6.7% (annualized) from an initial estimate of 5.9% largely due an unexpected surge in capital spending. Japanese consumer confidence rose for the first time in six months in May despite the April 1st tax hike.


Equity Highlights

  • U.S. small cap stocks underperformed large and mid-cap stocks in May, and have actually posted negative returns year-to-date (Russell 2000 Index). Within developed markets, growth stocks outperformed value stocks in May, but growth has underperformed over the year-to-date period.
  • Emerging markets outperformed developed markets in May, as Russian equities posted double-digit performance for the month.
  • Interest rates remain low, but we believe rising rates would provide a tailwind for high-quality relative performance.
  • The current environment continues to pose difficulties for active management within equities.


Fixed Income Highlights

  • We expect U.S. high yield to perform well relative to the aggregate U.S. bond market based on the low interest rate environment, low default rate, and investors’ continued appetite for yield.
  • Emerging markets debt spreads narrowed by 25 basis points in May 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 remain relatively attractive over a one year horizon.


Diversifying Assets Highlights

  • Alternative strategies underperformed equities and fixed income in May. The asset class has also underperformed year-to-date as of May 31, but still managed a positive return. We expect alternative strategies to provide downside protection in the event of an equity market correction.
  • 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 continue to be the best-performing asset class in our opportunity set over the year-to-date period (as of May 31).
  • The broad commodity index posted a negative return in May. Commodities have outperformed global equities and fixed income year-to-date as of May 31.


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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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