Q3 2016
As of June 30, 2016
Global Market Outlook
Pressures in Europe’s single market foreshadow
broad consequences
Megan E. Greene
Chief Economist
John Hancock
Asset Management
Robert M. Boyda
Co-Head of Global
Asset Allocation
John Hancock
Asset Management
Key takeaways
ƒƒ Most of the second quarter had quite a different tone from the start of the first; markets
remained relatively calm until the final week of June.
ƒƒ In its referendum on EU membership, just over half of the U.K. citizenry rebuffed decades
of economic orthodoxy that championed free trade, open markets, and global integration
by choosing to leave the EU.
ƒƒ Rebounding energy markets need to find a Goldilocks spot—not too hot, so the consumer
continues to catch a break, and not too cold, so oil exploration budgets can slowly ramp
up, lessening longer-term supply risk.
ƒƒ While we recognize that European equities trade at comparatively attractive valuations,
we also acknowledge the daunting economic growth challenges that the region faces.
Asset class views As of June 30, 2016
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Absolute return
Pressures in Europe’s single market foreshadow
broad consequences
The second quarter of 2016 had a different tone from that of the first. After witnessing the beginning
of the year’s sudden increase in market volatility, which remained elevated for weeks, investors and
policymakers may have been lulled into complacency by a subsequent rebound in asset prices, which
then remained relatively stable throughout the second quarter—at least until the last five trading
days of June.
Megan E. Greene
Chief Economist
“A world in which
Europe and the
United States eschew
cooperation and
revert to isolationist
tendencies is one in
which the economic
and foreign policy
influence of the
West will weaken.”
The calm before the storm
We can attribute the comparative calm for most of the period to at least a couple of developments:
The market’s concerns about China’s economic growth rate receded as earlier fiscal stimulus measures
began to work their way into the real economy and the U.S. Federal Reserve (Fed) projected a much
more dovish sentiment relative to that of the beginning of the year. The market’s reaction was almost
tangible: The U.S. dollar weakened, easing financial conditions across the globe and sending crude oil
prices higher. Both factors, in turn, provided an overdue boost to emerging markets, sparking a
broader intraquarter rally in global asset prices.
In our view, investors should not get too comfortable. An appreciating U.S. dollar, among other
things, is likely to influence the general path of global markets in the coming months. The relative
strength of the U.S. dollar will be influenced by the interest-rate path the Fed pursues in its bid to
return to a normalized monetary policy and by the activities of other central banks and economies
around the world.
Among developed economies worldwide, we expect U.S. growth rates to lead the way
GDP forecast (annual % change)
Forecasted data
2016
2017
2018
2019
2020
5-year average
2016–2020
World
2.2
2.7
2.9
3.0
3.0
2.8
The Brexit referendum
United States
2.0
2.3
2.2
2.1
2.0
2.1
results have
Canada
1.7
2.2
2.2
2.2
2.1
2.1
Eurozone
1.4
1.4
1.5
1.4
1.4
1.4
Germany
1.5
1.1
1.2
1.1
1.2
1.2
France
1.5
1.4
1.6
1.2
1.4
1.4
United Kingdom
0.6
–0.5
1.4
1.5
2.0
1.0
Japan
0.3
0.3
0.9
1.0
1.0
0.7
China
6.4
6.1
6.0
5.9
5.8
6.0
India
7.2
7.2
7.5
7.4
7.0
7.3
Source: John Hancock Asset Management, 7/14/16.
2
­reduced our U.K.
GDP expectations.
Enter Brexit, a chapter in a broader global story
Tracing its roots to the aftermath of the Second World War,
today’s European Union (EU) connects 28 countries through
a single market based on four freedoms: labor, capital, goods,
and services. In its June 23, 2016, nonbinding referendum on
EU membership, a slim majority of U.K. citizens took the world by
surprise by voting “Leave,” a rebuff to more than a half century
of economic orthodoxy that championed free trade, open markets,
and global integration. This prompted a spike in market volatility,
with risk assets falling sharply before partially recouping the
losses almost as quickly.
A British exit from the EU, known as Brexit, would require a
number of steps, the most immediate of which are uncertain.
Regardless, we view the near-term economic implications
unfavorably, and we believe they are likely to be overshadowed by
weightier, wider-ranging consequences down the road, particularly
for the rest of Europe given the political and financial contagion.
Brexit is but one expression of a much larger economic and
political phenomenon, a reflection of antielite, anti-immigrant,
and antiglobalization sentiment among voters across the Western
world. Populist movements can have a number of different
characteristics, hailing from both sides of the political spectrum
and often invoking their own definitions of us and them. Populists
are frequently frustrated by the rising income dispersions that
we’ve witnessed across the globe in recent decades, and they’re
generally more active when an economy is doing poorly.
The Western world has been stuck in a prolonged period of
economic doldrums because of an oversupply of global resources
that has tamed the traditional business cycle. There’s a glut of
cheap labor worldwide that dates back to the unraveling of
another union—the Soviet Union—and the urbanization and
industrialization of China. In the wake of 2008’s global financial
crisis, there has also been a glut of savings as central banks have
continued to pump liquidity into the system while businesses and
consumers have chosen to hoard—rather than spend—the cash.
In a traditional business cycle, once companies overproduce,
there’s a repricing of labor and capital that is the beginning
of retrenchment. Such a repricing would be immensely painful,
and monetary authorities have continued to intervene with
extraordinary measures to avoid widespread suffering. As a result,
our current business cycle has been stretched significantly. This
has given populist movements a long runway to promote their
isolationist agendas and consolidate support.
Inflationary risks remain muted throughout much of the world
Inflation forecast (annual % change)
Forecasted data
2016
2017
2018
2019
2020
5-year average
2016–2020
United States
1.1
1.8
1.9
2.0
2.0
1.8
We will be watching
Canada
1.5
1.8
1.9
2.0
2.0
1.8
eurozone and U.K.
Eurozone
0.3
1.4
1.5
1.8
1.9
1.4
Germany
0.6
1.5
1.5
1.5
1.5
1.3
France
0.5
1.3
1.6
1.8
1.8
1.4
0.8
2.2
2.3
2.4
2.1
2.0
Japan
–0.1
0.2
0.6
1.2
1.2
0.6
China
1.7
2.1
1.8
2.1
2.5
2.0
India
5.4
5.1
5.3
5.2
5.0
5.2
United Kingdom
­inflation figures
closely as the political
crisis unfolds.
Source: John Hancock Asset Management, 7/14/16.
3
Historically low interest rates may begin to creep higher in the coming years
Long interest-rate forecast, end of period (%)
Forecasted data
2016
2017
2018
2019
2020
5-year average
2016–2020
United States
1.5
1.9
2.1
2.7
2.8
2.2
Canada
1.0
1.6
2.1
2.5
2.8
2.0
–0.2
–0.2
0.8
1.2
1.6
0.7
France
0.2
0.2
0.8
1.4
1.8
0.9
United Kingdom
0.9
1.4
1.5
1.8
1.9
1.5
Japan
–0.2
–0.2
0.2
0.4
0.7
0.2
China
2.8
2.9
3.0
3.1
3.2
3.0
Germany
U.S. rates look
relatively robust next
to those in other
developed economies.
Source: John Hancock Asset Management, 7/14/16.
Is there a way to avoid Brexit?
Are we witnessing the decline of the West?
Speculation on whether Brexit can be avoided is rampant,
particularly in London, which overwhelmingly voted to remain in
the EU. There are a few scenarios in which Brexit could still be
avoided, but each involves a lot of ifs; in our view, averting Brexit
is ultimately unlikely. Still, one possible scenario involves a snap
election, which could be prompted by the Conservative Party by
repealing the Fixed-term Parliaments Act 2011 with a simple
majority in Parliament. The Conservatives could be motivated to
trigger an election for two reasons. First, the Labour Party is in
utter disarray with a leadership challenge against Jeremy Corbyn
by Angela Eagle. The Conservative Party could stand to gain seats
in Parliament if an election were held before the Labour Party has
time to recuperate. Second, without any real contest for party
leadership, new Prime Minister Theresa May arguably has not
been given a mandate to make tough decisions and negotiate on
the U.K.’s behalf to determine its relationship with the EU.
Without a snap election, Ms. May is likely to face significant
resistance both from within her party and from the opposition.
Our now-overstretched business cycle is partly how the Vote
Leave campaign in the United Kingdom found such a receptive
audience. It is also how populist movements have gained
positions in government in Greece, Portugal, Hungary, Poland,
and Slovakia; populists have also gained support in Italy,
France, Austria, and Germany, and it goes some way in explaining
various political movements in the United States as well.
Another scenario for avoiding Brexit would involve the EU
making sufficient progress on integration over the next couple of
years, such that the U.K. government could then argue that the
EU on which the British people voted in 2016 was fundamentally
different and a new referendum must be held. We are doubtful
that the EU will use Brexit to make progress toward further
integration given how much solidarity has been eroded through
the euro crisis and the refugee crisis. In our view, Brexit of some
sort is likely to happen.
4
Whatever the politics of populism are, the economic cost of
doing nothing is potentially severe. The U.K.’s referendum on
EU membership is unlikely to be the last: The Netherlands, Italy,
France, Sweden, and Hungary are all potential candidates for
referenda on EU membership, but for now, it’s unclear whether
these prospective referenda would result in a decision to leave
the trade bloc.
A splintering of the EU could tip the global economy back into
recession. Even if these countries all choose to stay in the single
market, U.S. exasperation is likely to grow with a Europe
perpetually in crisis. Overseas initiatives such as the Transatlantic
Trade and Investment Partnership—already facing big
challenges—could be undermined further. A world in which
Europe and the United States eschew cooperation and revert
to isolationist tendencies is one in which the economic and
foreign policy influence of the West will weaken.
For these reasons, investors should not be complacent. The
second half of the year could look more like the volatile opening
weeks of 2016 than the oasis-like calmness of this past spring.
Asset class roundup, beginning with a case study
in Canada
Outside of Canada, the typical investor response to news about the country’s economy or capital
markets can be summed up, politely, in two words: Who cares? However, we believe market
participants around the world would be wise to pay more attention to the U.S.’s northern neighbor
right now, not so much for its 3% share of global equity market capitalization as for its stellar
economic acceleration in the first quarter of 2016.
Robert M. Boyda
Co-Head of Global
Asset Allocation
“If Canada is a
window into emerging
economies, which
are more opaque than
their more mature
counterparts, then the
developing world is
in better shape than
the consensus would
have us believe …”
Gleaning insight into other regions
If Canada is a window into emerging economies, which are more opaque than their more mature
counterparts, then the developing world is in better shape than the consensus would have us believe:
At two-decade lows on the valuation front, emerging-market equities look better all the time. Our
forecast returns for the asset class, at over 8% annually for the next half decade, easily top the
middling 5% to 6% forecast returns for developed-market equities over the same time period.
Turning back to North America, we have to acknowledge that the U.S. consumer has done something
most uncharacteristic. Unlike during prior oil price declines, Americans have collectively decided to
save—rather than spend—money. U.S. savings rates have climbed throughout the last couple of
years. There are two thoughts on the saving and spending statistics that deserve consideration.
Consumer savings serve as an insulator for the economy, which pushes out much of the material risk
of recession beyond our five-year forecast horizon—good news for investors of risk assets. Moreover,
spending is tricky to measure when prices are falling, in that we might be consuming 20% more
gasoline, for example, but as we pay 50% less in price, the GDP accounts say the value of economic
Emerging-market equities haven’t found much favor in recent years
Major stock market indexes—5/31/11 to 4/29/16
2,200
From a very low base,
we believe that
corporate earnings
1,800
across certain emerging
Points
markets are primed
for a positive surprise.
1,400
n S&P 500 Index
n MSCI World Index
1,000
600
n MSCI EM (Emerging Markets) Index
2011
2012
2013
2014
2015
2016
Source: FactSet, 5/16/16. Past performance does not guarantee future results.
5
activity is shrinking. Our view is that economic activity is stronger
than the topline GDP measures indicate because of the lower
price phenomena. The cautionary tale is that oil prices are at risk
of climbing once again, just as they did during the second quarter.
Prospects for U.S. equities depend on the time horizon
Compared with their international counterparts, we believe equity
markets in the United States may stand to benefit in the short
term, given the relative stability and strength of the U.S. economy.
The post-Brexit probability of a global recession has increased,
but U.S. economic resiliency may buffer the downside as long
as liquidity from central banks remains abundant. U.S. stock
valuations are high and are likely to remain so as long as
investors favor assets with some measure of insulation against
Europe’s uncertainties. Still, we expect long-run returns on U.S.
equities will be below their historical averages, a view Brexit
has not altered.
European equities present a conundrum
When viewed through the lens of our five-year forecast horizon,
we recognize the attractive valuations embedded in European
equities. However, we also acknowledge the long-standing
economic growth challenges facing the region—challenges that
the Brexit referendum intensified. The vulnerability of European
financials offers a case in point: The volume of commercial activity
that drives their profit growth is likely to decline further in the
near term. We expect to see more value across the Europeandomiciled banking industry only once the complexities of dealing
with higher barriers across Europe’s borders become clearer in
the coming years. In the meantime, we expect that opportunities
in European financials may be quite narrow, limited to the
strongest banks capable of paying outsized dividends while
withstanding various stress tests.
Emerging-market equities merit cautious optimism
and selectivity
Our view of emerging-market equities continues to improve.
Many of today’s developing economies, unlike those caught in the
economic crisis of the late 1990s, have rebalanced and reformed.
While a continued rebound in oil and other commodity prices
may temporarily benefit the asset class as a whole, capitalizing
on the longer-term potential will likely require greater discretion.
We are particularly enthusiastic about selective local growth
opportunities that reside in certain regions, and we are cautiously
optimistic about early signs of stabilization in China, which
bodes well for greater Asia. Many of its economies are relatively
self-sustaining, particularly in the consumer and information
technology sectors.
More Japanese government bond issues now yield less than zero
Japanese government bond yield curve (%)
0.8
Japan is not the only
0.6
country issuing bonds
with negative yields.
0.4
0.2
n As of 3/31/16
n As of 6/30/16
0.0
–0.2
–0.4
1
2
3
4
Source: Ministry of Finance of Japan, 7/8/16.
6
5
6
7
8
Years
9
10
15
20
25
30
40
Japanese equities deserve their due
Inflation-Protected Securities (TIPS). If a cyclical uptick in inflation
presents itself—as we expect—then that trend would likely
reverse, with TIPS outperforming nominal Treasuries.
Despite more than a dozen consecutive quarters of growing
earnings and exceeding estimates, Japanese equities continue
to command no respect. We are still out of consensus here, but
we believe that the opportunity in Japan could last a decade
or more. The country’s corporate culture is reforming, with a
greater emphasis on shareholder value and returns on equity.
A range of industries may benefit as preparations for the Tokyo
2020 Olympic Summer Games continue. In our view, the
Japanese stock market merits greater attention from investors
around the world.
We favor emerging-market debt over international
developed-market debt
U.S. credit markets remain healthy
We expect corporate credit to demonstrate continued resiliency.
While we may be in the later stages of the credit cycle, we still
prefer the risk/reward profile of U.S. high-yield corporate debt
to many equity markets. Meanwhile, nominal U.S. Treasury
issues offer positive yields and a measure of insulation against
uncertainty shocks. Inflation expectations have fallen below
core inflation rates, pressuring relative returns on U.S. Treasury
We remain positive on emerging-market debt and continue to
believe it will offer above-average returns over the next five
years, bolstered by steady to slightly strengthening currencies.
Valuations are attractive, as many of these assets have been
dismissed amid an extended commodity market downturn. In
our view, most emerging economies are in far better financial
condition than at any time in the last two decades; however,
the long-run prospects for international developed-market debt
issues are much dimmer. Given extremely low—and in some
cases negative—yields, we view most European and Japanese
government bonds with a good deal of caution. Although they
may still benefit from fleeting flights to safety, international
developed-market sovereigns may now be poised for some of
their weakest returns in a generation or more.
Inflation expectations in Japan and the eurozone remain below target
Inflation expectations—1/2/15 to 5/6/16 (%)
2.0
Tepid inflation
1.5
­expectations will likely
prompt more central
bank easing measures
1.0
in Japan and Europe.
0.5
n Europe
n Japan
0.0
–0.5
1/15
3/15
5/15
7/15
9/15
11/15
1/16
3/16
5/16
Source: John Hancock Asset Management, Bloomberg, 5/6/16.
7
Asset class returns As of June 30, 2016
24.34
25
A partial rebound in energy
20
prices drove commodity and
U.S. high-yield credit markets
15
but declining European
equities weighed down
9.32
10
6.60
5
2.46
3.84
5.31
3.79
2.22
–1.19 –4.04
0
–5
higher for the second quarter,
12.78 13.25
0.80
6.75
5.88
international developed-market
stock indexes.
2.21
n Q2 2016
n YTD
U.S. largecap stocks
U.S. smallcap stocks
International Emergingstocks
market stocks
Core U.S.
bonds
U.S. highyield bonds
Commodities
Gold
Source: Morningstar Direct, 2016. U.S. large-cap stocks are represented by the S&P 500 Index, which tracks the performance of 500 of the largest publicly traded companies in the United
States. U.S. small-cap stocks are represented by the Russell 2000 Index, which tracks the performance of 2,000 publicly traded small-cap companies in the United States. International stocks
are represented by the MSCI Europe, Australasia, and Far East (EAFE) Index, which tracks the performance of publicly traded large- and mid-cap stocks of companies in those regions. Total
returns are calculated gross of foreign withholding tax on dividends. Emerging-market stocks are represented by the MSCI Emerging Markets Index, which tracks the performance of publicly
traded large- and mid-cap emerging-market stocks. Core U.S. bonds are represented by the Barclays U.S. Aggregate Bond Index, which tracks the performance of U.S. investment-grade bonds
in government, asset-backed, and corporate debt markets. U.S. high-yield bonds are represented by the Bank of America Merrill Lynch (BofA ML) U.S. High Yield Master II Index, which tracks
the performance of globally issued U.S. dollar-denominated, high-yield bonds. Commodities are represented by the Bloomberg Commodity Index, which provides broadly diversified representation
of commodity markets as an asset class. Gold is represented by the Bloomberg Gold Index, which provides a representation of gold as an asset class. It is not possible to invest directly in an
index. Past performance does not guarantee future results.
The MSCI World Index tracks the performance of publicly traded large- and mid-cap stocks of developed-market companies. Total returns are calculated gross of foreign withholding tax on dividends.
Views are those of Megan E. Greene, chief economist, and Robert M. Boyda, co-head of global asset allocation, and are subject to change. No forecasts are guaranteed. This commentary is
provided for informational purposes only and is not an endorsement of any security, mutual fund, sector, or index.
Past performance does not guarantee future results.
Diversification does not guarantee a profit or eliminate the risk of a loss.
All investments involve risk, including the possible loss of principal. The stock prices of midsize and small companies can change more frequently and
dramatically than those of large companies. Growth stocks may be more susceptible to earnings disappointments, and value stocks may decline in
price. Large company stocks could fall out of favor, and foreign investing, especially in emerging markets, has additional risks, such as currency and
market volatility and political and social instability. Fixed-income investments are subject to interest-rate and credit risk; their value will normally
decline as interest rates rise or if an issuer is unable or unwilling to make principal or interest payments. Investments in higher-yielding, lower-rated
securities include a higher risk of default.
A fund’s investment objectives, risks, charges, and expenses should be considered carefully before investing. The prospectus
contains this and other important information about the fund. To obtain a prospectus, contact your financial professional, call
John Hancock Investments at 800-225-5291, or visit us at jhinvestments.com. Please read the prospectus carefully before
investing or sending money.
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