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Aon Retirement and Investment Blog

Weekly Update - 19 December 2016


  • Rethink Pensions Webinar Series.  In October 2016, Aon Hewitt Retirement & Investment Solutions hosted a conference in Amsterdam focused on European retirement issues called “Rethink Pensions and Retirement Savings.” To further serve our clients’ interest as they evaluate options and strategies for managing their global retirement plans there will be a three-part webinar series on Thursdays in January (January 12, January 19, and January 26). Click here to register for this webinar series. If you cannot attend live, registering will ensure you receive access to the webinar replays that can be viewed at your convenience.
  • Radar. Provides a summary of recent regulatory and industry events in Canada affecting talent, retirement, and health.
  • U.S. Discount Rate Update.  Average discount rates increased by 34 basis points in November as U.S. Treasury rates rose across the curve. Inflation expectations remain high as investors continue to expect rate increases form the Fed and possible changes to the U.S. tax policy following the election. In early December, rates have increased by 9 basis points through Friday. The average plan sponsor’s discount rate has now decreased by 8 basis points in 2016.
  • What’s at Stake for Health Care Organizations with Church Pension Plans. This white paper from the U.S. investment consulting practice examines the litigation and financial risks facing health care pension plans that are exempt from ERISA, and suggests steps that plan sponsors can take to prepare for and mitigate those risks. It is timely given the U.S. Supreme Court’s December 2nd announcement that it has agreed to hear cases regarding the church plan status of pension plans maintained by church-affiliated health care organizations.
  • Putting “Watch Lists” on Watch?  This white paper from the U.S. investment consulting practice examines the use of “watch lists” for monitoring investment managers. The criteria in watch lists are often misaligned with the views of the fiduciaries. One of our greatest concerns is that many watch lists over-emphasize short- and medium-term performance. Investors should monitor and review all aspects of their investment programs periodically, and watch lists are no exception. They need to be examined carefully and improved when problems exist, or be eliminated.

MARKET MOVES (week ending December 16, 2016)

  • Global equities were mixed this week with notable differences in regional returns. The US Federal Reserve (Fed) raised short term interest rates and indicated faster pace of tightening in 2017.The MSCI World Index fell marginally by 0.3%, underperforming S&P 500 which provided flat returns over the week. On a year to date basis, S&P 500 has outperformed MSCI World (12.8% vs. 8.3%).
  • US Small Cap stocks underperformed Large Cap stocks as the Russell 2000 fell 1.7% over the week whereas the S&P 500 was flat. On a year to date basis, Small Cap stocks have outperformed Large Cap stocks (21.8% vs. 12.8%). Value stocks outperformed Growth stocks last week (0.1% vs. -0.2%) as measured by MSCI USA indices. On a year to date basis, Value stocks have outperformed Growth stocks, returning (17.5% vs. 7.6%).
  • 10 year US Treasury yields rose by 12bps to 2.59% and the 30 year US Treasury yield rose by 2bps to 3.17% over the week, as the Fed signaled three rate hikes in 2017.
  • 20 year TIPS yields rose by 18bps to 0.92% over the week. 20 year Breakeven fell by 11bps to 1.77%.
  • Credit spreads fell over the week. Barclays Capital Long Credit Index spread over treasury yields fell by 4bps to 171bps and the Merrill Lynch US Corporate Index fell by 3bps to 130bps over the week. The US high yield bond spread over US treasury yields ended the week 7bps lower at 421bps. The spread of USD denominated EM debt over US treasury yields finished the week 4bps lower at 340bps.
  • The S&P GSCI commodity index rose by 0.4% in USD terms over the week. The energy sector rose by 0.9% as the price of WTI crude oil rose 0.8% to USD 52/BBL. Industrial metals fell 2.3% as copper prices decreased by 3.3% to $5,630/MT. Agricultural prices fell 1.1% and the gold price fell by 2.7% to $1,132/ounce.
  • The US dollar appreciated against all the major currencies. The US dollar appreciated by 1.1% against sterling, ending the week at $1.24/£. US dollar strengthened 1.2% against the euro, finishing the week at $1.04/€. The Japanese yen depreciated by 2.7% against the US dollar, ending the week at ¥118.37/$.
  • US initial jobless claims (the number of Americans filing for unemployment benefits) beat forecasts this week, falling from 258k to 254k on 10 December, 1k less than expected. Claims continue to hover at multi-decade lows. Consumer Price Inflation (CPI) in November was 1.7%, up from 1.6% in the previous month and in line with forecasts. CPI (excluding food and energy) in November remained at 2.1%, the same as the previous month, 0.1% behind expectations. This week the Fed increased its benchmark interest rate from 0.5% to 0.75% which will affect consumers with variable rate products at banks. The latest meeting minutes showed that the majority of Fed members expect more rate hikes to come next year, with expectations up from 2 rises to 3.
  • In the Eurozone, preliminary PMI data was released. The manufacturing sector index beat expectations by rising to 54.9 in December when analysts were expecting it to remain unchanged from the previous month. The services index was expected to be unchanged but actually fell to 53.1. The composite was unchanged from 53.9 and remains above the 50 point level, thus signaling growth. The ZEW survey of economic sentiment jumped from 15.8 to 18.1 for the Eurozone signaling confidence in the economy as it braces itself for 2017 and elections across Germany, France and Holland.
  • Japanese economic data was generally strong. The closely watched Bank of Japan’s (BOJ) Tankan survey revealed an optimistic outlook for the economy supported by renewed yen weakness. The large manufacturer’s index rose for the first time in 18 months to 10 from the previous reading of 6. Both the index and outlook components of the manufacturing and non-manufacturing sectors were encouraging. The Nikkei manufacturing PMI continued in the expansion territory with the index rising to 51.9 in December from 51.3 in November. Machine tool orders fell 5.60% over the twelve months to November but it was better than the 8.9% fall penciled in by analysts.
  • In China, year on year industrial production growth increased to 6.2%, beating expectations by 0.1%. Similarly, retail sales also beat the consensus, growing 10.8% year-on-year vs the 10.2% forecast. The data showed strong consumption potential in rural areas, with retail sales expanding 11 percent, outpacing the 10.8-percent rate in urban areas. Lending was significantly above analyst expectations in November as Chinese banks lent out 795bn yuan (c. $115bn) in new loans, beating estimates of 720bn and up from 651bn in October.
Sources: Global Asset Allocation, Bank of America Merrill Lynch, Barclays Capital, Datastream. Click here for index descriptions.

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