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Global Investment Strategy
Global Macro Strategy Report
April 7, 2015
Analysis and outlook for the global economy
Sameer Samana, CFA ®
Senior Global Strategist
» We believe the recent market volatility can be attributed to
divergence in central bank policy.
» The market movements have created opportunities for
investors to rebalance.
What it may mean for investors
» Investors should consider trimming asset classes with less
constructive outlooks, such as domestic fixed income, and
add to those that have better prospects, such as domestic
equities.
Taking Advantage of Volatility
The first quarter of 2015 has been marked by an increase in volatility compared to the same period in previous
years. The uptick has been driven by mounting uncertainty among investors about a variety of issues including:
when the Federal Reserve (Fed) will begin to raise rates, the economic effects of an appreciating U.S. dollar, the
significant drop in oil prices, and the recent softness in U.S economic data, especially compared to global peers.
Fortunately for disciplined, long-term investors, the choppiness is creating an opportunity to rebalance portfolios.
As seen in the chart below, market volatility remained fairly benign over the past two years as the Fed maintained
stimulative policy by setting short-term rates near zero and suppressing long-term rates through bond purchases,
known as quantitative easing (QE). The Fed’s latest QE program ended in October 2014, and the removal of the
word ‘patient’ at the most recent Federal Open Market Committee (FOMC) meeting in March indicated that a
short-term rate increase may be coming as soon as this summer.
At the same time, central banks outside the U.S. have begun new efforts to boost their economies. The best
example is the European Central Bank (ECB), which began QE in March. Other notable examples include Japan,
which has a QE program of its own, and China, which has been cutting reserve requirements for local banks in an
effort to prevent its economy from slowing too quickly. This divergence in monetary policy between less stimulus
in the U.S. and more stimulus overseas has been the primary driver behind the latest episode of market volatility.
Volatility –Rolling 60-day moving average of U.S. VIX Index
36
Index level
31
26
21
16
11
© 2015 Wells Fargo Investment Institute. All rights reserved.
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Global Investment Strategy—| Taking Advantage of Volatility | April 7, 2015
Source: Source: Bloomberg, Wells Fargo Investment Institute Data sample: Daily from Apr. 6, 2010 to Apr. 6, 2015, as of Apr. 6, 2015 *Chicago Board Options Exchange Volatility Index (VIX) is a
measure of market expectations of near-term volatility in the S&P 500 Index.
The divergence has also led to a sharp increase in the U.S. dollar, which many have blamed as contributing to the
precipitous decline in oil prices and the recent disappointments in U.S. economic data, such as the weaker-thanexpected payrolls number last week. We believe these cross currents are creating opportunities for investors to
take advantage of, as opposed to a period of major market turbulence, like we observed in 2010 and 2011. Our
global economic outlook remains positive, and we are encouraged by the measures from central banks outside the
U.S. Also, the value of the U.S. dollar and global oil prices both seem to be stabilizing and may lose their
effectiveness as causes of uncertainty. Moreover, the recent softness in U.S. economic data seems to be driven by
the same weather-related issues as last year and, in similar fashion, should improve as the year progresses.
While investors may be tempted to chase performance in asset classes that have done well, our recommended
strategy is to rebalance. This involves reducing holdings in areas that have performed well and have unattractive
prospects for the remainder of the year, such as domestic fixed income, and rotating towards laggards with
stronger prospects, such as large-capitalization domestic equities. We believe the recent decline in bond yields will
give way to higher U.S. rates as the economic data improves—a trend we anticipate for the rest of the year.
On the other hand, equities look to have further upside, especially in the U.S. Positive factors include the potential
for economic improvement in the second quarter, stabilization in both crude oil prices and the U.S. dollar, and the
strong possibility that the Fed will choose to raise rates gradually. It is also important to make sure that investors
are not abandoning diversification in asset classes with poor performance, such as commodities. Maintaining
allocations during uncertain times can help investors benefit from unforeseen circumstances. Above all, we believe
now is a good time for investors to focus on the constructive outlook for the remainder of the year and position
their portfolios accordingly.
Risk Factors
Asset Allocation does not guarantee a profit or protect against loss.
An index is unmanaged and not available for direct investment.
The Chicago Board Options Exchange Volatility Index (VIX) reflects a market estimate of future volatility,
based on the weighted average of the implied volatilities for a wide range of strikes.
There is no assurance that any of the target prices or other forward-looking statements mentioned will be attained.
Any market prices are only indications of market values and are subject to change.
Disclaimers
Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII) WFII is a
registered investment adviser and wholly-owned subsidiary of Wells Fargo & Company and provides investment
advice to Wells Fargo Bank, N.A., Wells Fargo Advisors and other Wells Fargo affiliates. Wells Fargo Bank, N.A. is
a bank affiliate of Wells Fargo & Company.
The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of
the date of this report and are for general information purposes only and are not intended to predict or guarantee
the future performance of any individual security, market sector or the markets generally. GIS does not undertake
to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company
affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this
report.
© 2015 Wells Fargo Investment Institute. All rights reserved.
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Global Investment Strategy—| Taking Advantage of Volatility | April 7, 2015
This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in
any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for
investment decisions. Do not select an asset class or investment product based on performance alone. Consider all
relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and
investment time horizon.
Brokerage products and services are offered through Wells Fargo Advisors. Wells Fargo Advisors is the trade
name used by two separate registered broker-dealers: Wells Fargo Advisors, LLC and Wells Fargo Advisors
Financial Network, LLC, Members SIPC, non-bank affiliates of Wells Fargo & Company. First Clearing, LLC.
Member SIPC, is a registered broker-dealer and Non-bank affiliate of Wells Fargo & Company. CAR # 0415-00944
© 2015 Wells Fargo Investment Institute. All rights reserved.
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