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What’s on Equity, Bond Horizon for 2nd Half of 2015

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There are many global investment uncertainties: Greece and its negotiations with the Troika; an interest rate hike that has been in investors’ minds for months; oil prices and geopolitical instability in the Middle East. Will these ongoing issues impact markets in the second half of 2015?

Here’s what the investors are saying.

Mike Avery, portfolio manager, Ivy Asset Strategy

“The key issue that market participants and we as a team are wrestling with is how the markets will respond to a potential increase in the Fed Funds rate. This issue has been out there for some time, of course, and it’s probably the most widely anticipated issue, so it’s not so much a question of whether the Fed raises rates but the uncertainty associated with how the market reacts after seven years of zero interest rate policy,” he said.

“During that time, the bond and equity markets have become less liquid and the issue of liquidity combines with the associated concern of just how fragile the global economy is. No one can really be sure of what happens to a market that has been artificially supported. Could we see a situation where rates rise too soon, thereby resulting in a new recession? No one is quite sure and that’s a key question that will affect markets in the second half,” according to Avery.

“The other issue that we believe will weigh on the market for the next month or so and has implications for the second half is Greece’s negotiations with the International Monetary Fund and the European Central Bank.  There’s a key date coming up at the end of June when the Greek government runs out of money — unless they subscribe to the Troika’s prescriptions. The market has been conditioned to believe that this argument will go back and forth till the eleventh hour,” he said.

“Finally, the situation in the Middle East and its potential impact on oil prices is, in our perspective, a third cause for concern in the second half. The situation is more dangerous because you have competing groups trying to carve out territory in a power vacuum. The region is very complex and since the U.S. now depends less than in the past on the Middle East for its oil supply, the market doesn’t worry as much about the impact of the tensions on oil supply. But with improved economics in the U.S. and in Europe, with China and India growing and Japan doing well, there’s a ton of demand for oil. Asia in particular depends on oil supplies coming directly from the Middle East, so the supply-demand equation is so tight that even a minor disruption will affect oil supply to Asia, which could then result in other issues at a time when the market is concerned about the possibility of a Fed rate hike,” Avery said.

Nathan Rowader, director of investments, senior market strategist, Forward

“Generally speaking there isn’t a lot that investors need to be worried about. We’re in a positive trend for both domestic and international markets, but that being said, we’re also in the seventh inning of the bull market, which probably means we’re getting near the end of it. We’re seeing that not every market sector is moving in tandem, that in the U.S., there’s stress in energy, utilities and REITs and interest rate sensitive stocks are starting to show some stress. Oil prices are also a concern for certain parts of the global markets—emerging markets are particularly sensitive to   the direction of oil prices,” according to Rowader.

“However, I don’t think there’s any major cause for concern in the second half of the year. Even on the interest rate front, markets are expecting a September increase but people wouldn’t be surprised if it’s pushed out to the Fed’s December meeting, as there’s no major change in economic data that warrants an immediate rate change. And when rates are finally changed, the Fed should do that in a measured way,” he said.   “Overall, I expect stock investors to be rewarded for the year, with some choppiness here and there, something that isn’t unusual in the latter part of the bull market, but in my view, there’s nothing major that investors need to be worried about.” Jim Kochan, chief fixed income strategist, Wells Fargo

“The Federal Reserve is on everyone’s minds and in an environment where interest rates might rise, the question is what happens to bond yields in response to that. There’s little doubt that you have to take the Fed officials’ word and that before the end of the year, the Fed Funds rate will go up,” Kochan said.

“The key then, I believe, is for investors to get into those areas of the fixed income universe that provide better interest income,” he said.

“Domestically, the high yield bond market and the municipal bond market still look attractive yield wise compared to the Treasuries. And internationally, emerging market debt offers much the same value, and I believe that will continue for the rest of the year because yields are still so low on U.S. and developed markets debt,” according to Kichan.

“Of course, the soap opera that is Greece has the potential to undo things. If things went badly with respect to the Greek negotiations, you might see another rush to safety on the part of international investors, which would push Treasury yields and yields in Germany and France down. Or, if for whatever reason the global and U.S. economies slowed down, the Fed would then be prompted not to raise rates, and that would lead to a rally in the bond markets,” he said.