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Peak Financial Management, Inc. ∞ 281 Winter Street, Suite 160, Waltham, MA 02451 ∞ 781-487-9500 ∞ www.peak-financial.com
Highlights
Emerging market weakness has created an undeserved drag on US stocks, and current headlines are not new.
Higher corporate earnings will push US stock prices higher. This earnings growth will come from economic recovery in the US, and toil in emerging markets
isn’t likely to have a significant impact.
Pran Tiku, President; Kerry Luria, Vice President; Neel Tiku, Director of Research; James Sichenzia, Research Analyst; Dennis Lagace, Research Analyst
MONTHLY MARKET UPDATE DESPITE EM CONCERNS, US CORPORATIONS ARE POISED TO
MAINTAIN EARNINGS GROWTH
FEBRUARY, 2014
Any economic impact to the US would be muted.
Despite clear reasons to be careful with emerging mar-
ket investments, US stocks are still attractive. We still
believe the US economy is positioned best in the world.
Economic growth is positive and rising, unemployment
is falling, and monetary stimulus is being pulled back.
Corporate earnings will likely drive returns in 2014, and
these earnings are not significantly impacted by emerg-
ing markets.
The US does about half its trade with emerging and
developing countries. This is a pretty significant
amount, about $2 trillion in 2012, and imports are high-
er than exports. This means that US corporations are
buying goods from overseas and are not dependent on
foreign sales. In addition, foreign exposure tends to be
concentrated in specific sectors, like luxury retail, that
are less exposed to national debt risk. Higher earnings
will come from increasing domestic growth rather than
foreign sales, a trend we think will continue throughout
the coming year.
Beyond systemic weakness in emerging market curren-
cies, the selloff began last May when Ben Bernanke
announced slowing Quantitative Easing. QE has kept the
dollar weak, but there is less need for such a loose mon-
etary policy now that the US economy is recovering.
“Taper Talk” was the catalyst last spring, so it’s no sur-
prise to see the market react now that reduced policy is
in effect.
Some risks do exist.
While falling currency values may dampen returns to
international investors, greater risks exist. High short-
term debt creates dependence on borrowing from for-
eign investors. An emerging market may find it difficult
to regularly refinance outstanding debt, particularly if
the country has a weak currency. This increases the risk
of default. In addition, if one country were to default, it’s
likely that several others would as well because lending
among emerging markets is common. This is referred to
as the risk of contagion, and widespread emerging mar-
ket defaults could significantly alter the structure of
global capital markets.
Fortunately, these risks are remote. Many emerging
markets are investment grade and can readily borrow
from other countries, including the World Bank. Pru-
dent leadership is replacing corruption as these coun-
tries develop further, and the European debt crisis
showed global leaders the potential fallout of national
default. We believe the most likely outcome is less
valuable currencies, a trend that has persisted over the
past year.
Renewed optimism in the market drove valuation multi-
ples higher in 2013, paving the way for real corporate
growth to shine in 2014. However, a pullback over the
month of January shows that confidence may be waning.
China’s indicators point to weaker growth and the Fed-
eral Reserve tapered another $10 billion, triggering a
shockwave through emerging markets and causing
investors to flee for more stability. We believe the cor-
rection in emerging markets has been an undeserved
drag to US stocks this year . The drawdown actually
started last year and, while some risks do exist, the effect
on US stocks will be limited.
This has been happening for awhile.
Emerging markets have received well-deserved atten-
tion. The countries are growing quickly, creating new
markets and opportunities to invest. Many are invest-
ment-grade and the securities industry has found inno-
vative ways to make these opportunities available to the
average investor.
There are definite challenges that have come along with
that growth. Short-term debt has risen, so these coun-
tries must refinance their national loans more frequent-
ly. Strong international trade led to surplus for many
years, but falling commodity prices and a sluggish global
economy have caused them to buy more than they sell.
These trends are not new and have been headwinds to
currency values for a number of years.
US earnings don’t depend heavily on emerging markets.
EM weakness has been accumulating for years.
Your feedback is important! We want to address
the issues most relevant to you. If you have any
comments, questions, or concerns, please contact
Neel Tiku, Director of Research, at (781) 487-9500
or neel@peak-financial.com
Currencies have been falling since “Taper Talk” last May.
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Short Term Debt as a % of GDP*0.86
0.88
0.90
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1.00
1.02
Average Change in Currency Value since January, 2013*
The start of "Taper Talk"
No taper in September...
...but the Fed did taper twice.
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
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Current Account Balance as a % of GDP*
* For a basket of 20 emerging markets
Graph Source: Bloomberg
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Net Exports to Emerging and Developing Countries (billions)
0%
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S&P 500 Earnings Growth - Historical and Projected
Historical Projected
Peak Financial Management, Inc. ∞ 281 Winter Street, Suite 160, Waltham, MA 02451 ∞ 781-487-9500 ∞ www.peak-financial.com
Past performance does not guarantee future results. Diversification does not guarantee investment returns and does not eliminate the risk of loss.
Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the
information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and
strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal, or tax
advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied
upon or interpreted as a recommendation.
The price of equity securities may rise or fall because of changes in the broad market or changes in a company’s financial condition, sometimes rapidly or unpredictably. International investing involves a greater
degree of risk and increased volatility. There is no guarantee that companies that can issue dividends will declare, continue to play, or increase dividends.
much work that needs to be done within the
monetary union. Emerging markets have their
own host of issues, and we think returns for the
asset class will lag.
There are still some attractive opportunities
outside the US. Similar to the commentary last
month, Japanese and German companies are
positioned to benefit from political action and
will likely outperform their respective regions.
For more in-depth analysis, see the January
2014 “Monthly Market Update.”
Fixed Income and Alternatives
2013 was a difficult year for bonds because
coupons are low and interest rates were rising.
These trends are very likely to continue through
2014. To prevent loss, we recommend using
non-traditional or unconstrained bond funds.
The funds we recommend, for example, have
effective durations that range from –2.6 to 0.90
years and yields between 1.3 and 3.2%. This is
an effective method to lessen interest rate risk
found in core bond exposure.
Alternative strategies are also an effective tool.
Long/short equity strategies can provide equity
upside, without full correlation to broader stock
markets. Multi-asset strategies can be used to
generate current income with less interest rate
risk. We favor these types of investments over
traditional bonds to diversify equity risk.
Peak Financial’s Portfolio Strategy
Portfolio strategy has remained fairly consistent
over the previous months. Stocks are preferable
to bonds. Economic recovery and earnings
growth warrant higher stock prices, and rising
interest rates will continue to put pressure on
bond prices. We believe alternative investment
strategies, rather than traditional fixed income,
are a better way to diversify portfolio risk. As a
result, we recommend a strong overweight to
stocks. Keep fixed income allocations below
policy weights and, instead, allocate a greater
amount to alternatives.
Equity
Within the equity allocation, we favor the US
market. The domestic economy is stronger than
it’s developed peers. The Eurozone is still strug-
gling to emerge from recession, and there is still
Chart of the Month: Both earnings and P/E ratios climbed in 2013. EPS is poised to
grow, pushing stocks higher even if valuation multiples stay the same.
OUR APPROACH
We follow a holistic wealth management and financial
planning process by working with our clients as they
identify their goals. Working closely with each client,
we develop and review projections and suggest strate-
gies to help them achieve their objectives.
Our investment philosophy focuses on maximizing long-
term, risk-adjusted returns by employing a global ap-
proach to portfolio management. This approach seeks
to reduce risk, increase diversification, and enhance risk
-adjusted performance.
We offer the following services to help prepare our cli-
ents for the unexpected road ahead:
Cash flow analysis Retirement planning Tax and estate planning Investment management Feel free to reach out to us about your personal situa-
tion. We can be reached at (781) 487-9500, and look
forward to working with you to help secure your finan-
cial future.
OUR FIRM
Peak Financial Management, Inc. is a Registered Invest-
ment Advisor based in Waltham, MA. The firm has
specialized in financial planning and investment man-
agement for over two decades, offering our clients tai-
lored advice and the highest level of customer service.
Monthly Market Update: Despite EM Concerns, US Corporations are Poised to Maintain Earnings Growth February, 2014
Index returns as of 1/31/2014
Asset Class Underweight Neutral Overweight
Equity
Fixed Income
Cash
Alternatives
Equity Regions Underweight Neutral Overweight
United States
International
Emerging Markets
Stock Sectors Underweight Neutral Overweight
Consumer Discretionary
Consumer Staples
Energy
Financials
Health Care
Industrials
Information Technology
Materials
Telecommunication Services
Utilities
Source: Bloomberg
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EPS (RHS) P/E Ratio (LHS)