One of Penn Mutual Asset Management's core competencies is its investment advisory capabilities and its role as manager of managers relating to variable products offered through The Penn Mutual Life Insurance Company. In its role as manager of managers, we select and oversee sub-advisers to assist in investment management activity.
I recently invited a portfolio manager from one of our sub-advisers, David Giroux of T. Rowe Price Associates, to share his perspective on the markets and the economy.
As you will see, David and I have similar concerns on many of the issues facing investors today, but we each have our own perspective. David Letterman may have had his Top Ten list on current events, but we have created a list of our own focused on current financial and economic events.
1. The Fed
David O'Malley: My number one concern is the first Fed interest rate increase since 2006, which may increase market volatility.
David Giroux: Agreed. Will we see a large inversion, and, if so, what will be the ramifications from an announcement? If the Fed raises rates, what will the long-end of the curve do?
O'Malley: Investment grade and high yield credit spreads have underperformed Treasury bonds so far in 2015 and I expect a turnaround in fourth quarter.
Giroux: China is my next biggest concern. Will the recent market weakness and emerging market/Chinese weakness cause a slowdown in M&A activity?
O'Malley: China's economic growth is indeed emerging as a significant concern, but the recent stimulus should improve economic conditions.
Giroux: What specific steps will the Chinese government take to improve their sagging economy? Moreover, how bad is the Chinese economy right now, in reality? Their reported GDP growth almost never changes. We will know a lot more about that question after the third and fourth quarter reporting seasons.
3. Oil, Energy, and Commodities
Giroux: Are we seeing the first signs of distress on bank balance sheets from the decline in oil and natural gas prices as hedges roll off and this causes loan losses to start increasing?
O'Malley: I'm watching for energy prices to stabilize after reaching new lows.
Giroux: Assuming the Iranian deal is not vetoed by Congress, my questions are: How fast will Iran ramp up oil production in 2016 and 2017, and what are the implications for oil prices?
O'Malley: U.S. economic strength continues to be a highlight this year. I expect stronger economic data through this quarter and the fourth quarter.
Giroux: One concern: What happens to the health of the consumer in the U.S. as we start to lap the big benefits from lower oil prices late in the year?
5. The Global Markets
O'Malley: Increased unrest in the Middle East could impact markets negatively. Dollar strength and emerging market currency weakness is a concern. Continued weakness in emerging market currencies could spillover to other markets.
Giroux: For me, I look to politics as the big question. What are the implications for 2016 if Trump continues to lead the Republican polls and Sanders continues to close in on Hillary Clinton? Will we see some form of tax reform come out of Congress?
My thanks to David Giroux for taking the time to share his top concerns in the market and the economy for the remainder of 2015. Continue to follow our blog as PMAM addresses these top concerns in future posts.
I plan on inviting many of our other sub-advisers to similar discussions in the future. Stay tuned.