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Time to read: 2 min

The payment sector has been the darling of Wall Street the last few years and has continued to be an active space with several mega-mergers. Only four months into 2019, the payment sector already reached $85 billion of merger and acquisition announcements — almost doubling the full-year record of $49 billion in 2018.1 I expect the trend to continue.

The Invesco Canada Small Cap Equity team, which manages funds in the US and Canada, has been participating in this trend through our investment in Global Payments, a Top Five holding in Invesco Select Companies Fund (5.34% of fund assets as of March 31, 2019).

Global Payments enables merchants to accept card and digital payments, and the company earns a small fee for processing the transaction. We started investing in the company in August 2013 at around $24 a share.2 At the time, the investment community was concerned about a data breach at Global Payments, as well as the risk that companies such as Square could lessen the need for payment intermediaries (Square was not a fund holding as of March 31, 2019). On top of that, the US economy was slowing, and there was a federal government shutdown and a sharp drop in job growth (sound familiar?).

A case for patience

Despite these concerns, we believe that the consumer switch from cash payments to card payments is an enduring shift, and Global Payments has scale as one of the leading providers in the US, UK, Canada and several Asian countries. We bought the stock at a very attractive valuation of 12x forward earnings. As of March 31, 2019, Global Payments had last traded at $136.52.3

Yet, having the tenacity and patience to hold onto any stock is challenging, even when the underlying story is solid. Every day for the past six years of owning Global Payments, there has been a long list of perfectly rational and well-supported reasons to sell:

  • Long-term industry worries such as intense competition and innovative disrupters like Square and Apple Pay
  • Macro fears such as interest rate increases and poor consumer spending
  • Short-term headwinds such as foreign exchange and tough comparisons
  • To add to the mix, the biggest equalizer of all — valuation
A long-term view

So how do we get the required fortitude to stay the course? We dig deep and we think long-term.

We study the business from multiple angles, including through direct access to management and competitors. Back in 2013, our team spent half a day at the Global Payments head office with the then-CEO, CFO and the president of the US division (who is the current CEO). We debated barriers to entry, dissected previous acquisitions, and examined their new strategy for a software-driven integrated payment solution. We talked to service resellers and end customers. As recently as last fall, we spent time with their chief product officer, who has rich experience from Google Pay and Qualcomm (not fund holdings as of March 31, 2019) but rarely meets with investors.

Coming out of these meetings, we believed in the broader credit card/digital payment penetration and that management may be able to partake in the strong industry growth (On the other hand, part of our thesis on international expansion in China and India did not materialize). It takes years, not quarters, to realize these long-term trends. Consequently, our shorter-term performance can look very different than the benchmark. While short-term performance can be uneven, we aim to bring value to our unitholders through long-term returns, as seen by our 10-year performance against the benchmark.

Our focus on long-term returns, and our concentrated portfolio of 25 to 35 holdings, helps us filter out the noise. In our opinion, perseverance is key to investment success.

1 Source: Financial Times, “Worldpay $43bn deal piles pressure on rivals for more tie-ups,” March 18, 2019

2 Price adjusted for a 2-for-1 stock split on Oct. 21, 2016

3 Source: New York Stock Exchange closing price on March 29, 2019 provided by Yahoo Finance

Forward earnings per share is a variant of earnings per share and is calculated using a company’s projected earnings over the next 12 months divided by the number of outstanding shares.

Important information

The opinions referenced above are those of the author as of May 16, 2019. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

Important information

Blog header image: Chua/Unsplash.com

Holdings are subject to change and are not buy/sell recommendations.

Because the Fund may hold a limited number of securities, a change in the value of these securities could significantly affect the investment value of the Fund.

The risks of investing in securities of foreign issuers can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.

Stocks of small and mid-sized companies tend to be more vulnerable to adverse developments, may be more volatile, and may be illiquid or restricted as to resale.

A value style of investing is subject to the risk that the valuations never improve or that the returns will trail other styles of investing or the overall stock markets.

The Fund is subject to certain other risks. Please see the current prospectus for more information regarding the risks associated with an investment in the Fund.

Invesco Distributors, Inc., and Invesco Canada Ltd. are indirect, wholly owned subsidiaries of Invesco Ltd.

Virginia Au

Vice President and Portfolio Manager

Virginia Au is Vice President and Portfolio Manager for the Invesco Canada Equity team.

Ms. Au began her career in the financial services industry in 2003 at Pembroke Management Ltd., where she worked as a research associate focusing on North American equities. She joined Invesco in 2006 as an investment analyst and became a portfolio manager in 2009.

Ms. Au earned a Bachelor of Commerce with honors from the University of British Columbia, specializing in finance. She holds the Chartered Financial Analyst® (CFA) designation. Ms. Au is a member of the Invesco Women’s Network management committee.

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Time to read: 4 min

Last week took investors on a roller coaster ride. The climax came at the stroke of midnight on Friday, May 10, when US President Donald Trump’s newest tariffs went into effect — a 25% toll on $200 billion of Chinese goods. Then later on Friday, the negotiations ended with no material progress, and there are no formal plans to resume talks.  What’s more, China retaliated the morning of May 13 by announcing tariffs on US goods being imported to China.

As regular readers of this blog may recall, I have always been quite pessimistic on the possibility of the US achieving a meaningful trade agreement with China. I have worried about the negative impact of tariffs and the potential that China can retaliate against the US in a meaningful way. In addition, I have always believed there is a misguided concern by the US over trade deficits. Free trade has historically produced lower prices by enabling companies and consumers to purchase from the lowest-cost provider — cheaper imports from China have lowered US consumer price levels by 1% to 1.5% in aggregate.1 That is meaningful for lower and middle income Americans. For a typical US household earning about $56,500 in 2015, trade with China saved families up to $850 that year.1 Conversely, the imposition of tariffs and other forms of protectionism will only serve to drive up prices, in my view. Tariffs can create inflation — not by stimulating demand, but by simply increasing the cost of goods.

When a new tariff is imposed, one of three things could happen:

  • In some industries, companies will be unable to pass the cost onto its customers. This means the company’s profits would be reduced. For public companies, this would negatively impact earnings and could therefore impact stock prices.
  • A company passes the cost of tariffs to their customers (as, for example, Apple has suggested it would do) and consumers pay more for the same item. This means that, all else being equal, they have less money left to spend on other goods or services.
  • A company tries to pass the cost of tariffs to their customers, but there is demand destruction as consumers cut back their purchases. Traditionally economists have largely discussed demand destruction in the context of energy. For example, if the Organization of the Petroleum Exporting Countries (OPEC) lowers production, thereby increasing oil prices, consumers may reduce their driving and thereby their consumption of oil, creating demand destruction. In the case of the current trade wars, we have already begun seeing demand destruction in an industry that was one of the first to experience the imposition of tariffs at the start of 2018: washing machines. The same fate could befall other items, including other “big ticket” purchases such as autos, if tariffs are applied to them.
The problem with tariffs as a revenue source

I am becoming increasingly convinced that a trade deal may be a long way off — for several reasons.

First of all, China has made it clear it has serious reservations with the US’ demands regarding intellectual property and technology transfers, which are critical terms for the US. And, as I have said before, China believes it can “wait out” the Trump administration. As was reported in the May 13 Wall Street Journal, one senior Chinese official explained that “Time is on our side.”

In addition, I am beginning to worry that the US may begin to rely on tariffs in order to help counter the growing US budget deficit. We recently learned that the US budget deficit increased dramatically in the first seven months of the fiscal year (October 2018 through April 2019) to $531 billion, up from the $385 billion deficit it ran during the same period a year earlier.2 Federal outlays rose 8% to nearly $2.6 trillion, although some of this was due to the timing of benefit payments, while revenues increased 2% to $2.04 trillion.2 It is worth noting that tariff collections nearly doubled from October through April, to $39.9 billion from $21.8 billion, which certainly helped with the revenue increase.2

The idea that the US may need to rely on tariffs to help increase revenues in a difficult budgetary environment seems to be supported by some recent presidential tweets:

  • “Tariffs will bring in FAR MORE wealth to our country than even a phenomenal deal of the traditional kind. Also, much easier & quicker to do. Our Farmers will do better, faster, and starving nations can now be helped. Waivers on some products will be granted, or go to new source!”3
  • “Talks with China continue in a very congenial manner – there is absolutely no need to rush – as Tariffs are NOW being paid to the United States by China of 25% on 250 Billion Dollars worth of goods & products. These massive payments go directly to the Treasury of the U.S….”3

However, the problem with tariffs is that 1) they don’t get paid by China — they get paid by Americans; and 2) they are not progressive like income tax. That means they disproportionately affect those Americans in lower- and middle-income brackets because those taxes represent a larger portion of their incomes. (Income taxes are based on a percentage of a person’s income; tariffs cost the same no matter how much a person earns). And so, while thus far the US consumer has shown significant strength — which is not surprising given how strong the US labor market is — we will want to follow consumer confidence and spending closely as the tariff wars heat up.

The impact of economic policy uncertainty on business investment

I believe a greater concern is business investment. Building on years of findings, economists Huseyin Gulen and Mihai Ion concluded that economic policy uncertainty has a strong negative correlation to business investment.4 It has also been demonstrated that positive shocks to the Economic Policy Uncertainty Index have been accompanied by significant decreases for at least two to three years in several data points — in particular, industrial production, employment, GDP (gross domestic product) and real investment.5

Trade policy uncertainty is a particularly potent form of economic policy uncertainty. In the past year, anecdotal information from the Federal Reserve (Fed) Beige Book and purchasing manager surveys have indicated that some companies are curtailing or suspending business investment plans, citing trade policy uncertainty. Given this recent deterioration in US-China trade relations, we will need to follow business investment plans closely as well.

More volatility ahead?

Looking ahead, we should expect continued volatility in both equities and fixed income. My base case is a resumption in negotiations, episodic flare ups in tensions, markets moved by both positive and negative news flow, and no meaningful deal reached any time soon. In the near term, I wouldn’t be surprised to see a continued flight to safety favoring US Treasuries and yen, and stocks selling off — although at a certain point I expect bargain hunting to begin. Investors may or may not be comforted to know that, in my view, this sell-off could be a lot worse if the Fed hadn’t changed its policy stance this year.

Subscribe to the Invesco US Blog and get Kristina Hooper’s Weekly Market Compass posts in your inbox. Simply choose “Market & Economic” when you sign up.

1 Source: Oxford Economics for the US-China Business Council, “Understanding the US-China Trade Relationship,” January 2017. Most recent data available.

2 Source: US Treasury Department as of May 2019

3 Source: Twitter, Donald J. Trump, (@realDonaldTrump), May 10, 2019

4 Gulen, Huseyin and Ion, Mihai, Policy Uncertainty and Corporate Investment (June 24, 2015). Review of Financial Studies, Vol. 29 (3), 2016, 523-564

5 Baker, Scott, Bloom, Nicholas and Davis, Steven, “Measuring Economic Policy Uncertainty,” 2016

Important information

Blog header image: Phill T/Shutterstock.com

The Economic Policy Uncertainty Index is calculated by the Federal Reserve Bank of St. Louis to measure sentiment about policies that impact the economy.

The Summary of Commentary on Current Economic Conditions by Federal Reserve District (commonly known as the Beige Book) is published eight times per year. Each Federal Reserve Bank gathers anecdotal information on current economic conditions in its district, and the Beige Book summarizes this information by district and sector.

Gross domestic product is a broad indicator of a region’s economic activity, measuring the monetary value of all the finished goods and services produced in that region over a specified period of time.

The opinions referenced above are those of Kristina Hooper as of May 13, 2019. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

Kristina Hooper

Chief Global Market Strategist

Kristina Hooper is the Chief Global Market Strategist at Invesco. She has 21 years of investment industry experience.

Prior to joining Invesco, Ms. Hooper was the US investment strategist at Allianz Global Investors. Prior to Allianz, she held positions at PIMCO Funds, UBS (formerly PaineWebber) and MetLife. She has regularly been quoted in The Wall Street Journal, The New York Times, Reuters and other financial news publications. She was featured on the cover of the January 2015 issue of Kiplinger’s magazine, and has appeared regularly on CNBC and Reuters TV.

Ms. Hooper earned a BA degree, cum laude, from Wellesley College; a J.D. from Pace University School of Law, where she was a Trustees’ Merit Scholar; an MBA in finance from New York University, Leonard N. Stern School of Business, where she was a teaching fellow in macroeconomics and organizational behavior; and a master’s degree from the Cornell University School of Industrial and Labor Relations, where she focused on labor economics.

Ms. Hooper holds the Certified Financial Planner, Chartered Alternative Investment Analyst, Certified Investment Management Analyst and Chartered Financial Consultant designations. She serves on the board of trustees of the Foundation for Financial Planning, which is the pro bono arm of the financial planning industry, and Hour Children.

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Time to read: 4 min

Taken together, the recent combination of testimony, press releases, and other communications suggest that the US Federal Reserve (Fed) may be considering a shift to average inflation targeting. If true, this could mean the Fed would move away from trying to engineer a sustained, specific inflation level and would be free to allow above-target inflation for a period before using rate hikes to slow the economy. Such a shift could certainly change how the Fed reacts to new economic and market data. Although there are still many questions around this possible new framework, Invesco Fixed Income believes it would have positive implications for US and global macro performance and could benefit risk assets.

Average inflation targeting could reduce Fed dependence on forward-looking data

Average inflation targeting means the Fed would prefer that inflation average 2% over a given business cycle (with the ability to fluctuate above and below 2%) rather than imposing an informal cap near its 2% target.1

How might this change the way that the Fed operates?

Historically, the Fed has generally relied on a forward-looking view of inflation, meaning it has based policy decisions on economic models and forecasts. For example, the unemployment rate has traditionally been a leading indicator of inflation. If models suggested inflation would accelerate beyond its target in the future, the Fed would hike interest rates in anticipation. This methodology drove the tightening cycles in 2004 through 2007 and 2016 through 2017. In both cases, core personal consumption expenditures (PCE) inflation either just overshot or never consistently met the Fed’s 2% target, but since inflation was expected to accelerate based on forward-looking data, rates were hiked anyway.

Moving toward average inflation targeting implies that the Fed would not tighten monetary policy as much based purely on forward-looking data, unless inflation was already above-target.

Why might the Fed change its approach?

The previous policy framework has resulted in an extended period of inflation below the Fed’s 2% target. On a year-over-year basis, core PCE inflation has been above-target in only six months since the start of the global financial crisis.2 And since the Fed achieved inflation near its 2% target for the first time in the 1990s, core consumer price inflation has spent only 24% of the time above-target.3 Over this period, consumer inflation expectations have drifted to low levels (Figure 1), and if these expectations continue to drift downward, it may become increasingly difficult to achieve the 2% inflation target in the future.

Figure 1: Consumer inflation expectations have declined

Consumer inflation expectations have declined

Source: University of Michigan, data from April 1990 to April 2019. The University of Michigan Inflation Expectations survey of consumers presents the median expected price changes for the next five to 10 years. Past performance is no guarantee of future results.

In the current business cycle, the US has yet to obtain 2% inflation on a sustainable basis. Core PCE inflation reached 2%4 in July 2018 but has since retreated to 1.8%5 and will likely continue to decrease, in our view. If the economy slows before inflation picks up, we may not see sustainable 2% inflation before the next recession.

The Fed may change the way it reacts to incoming information

A focus on average inflation could cause the Fed to react differently to incoming market and economic information. For example, the Fed noted elevated lending to the corporate sector and possibly high asset valuations in its November review of financial conditions. Previously, this scenario might have led the Fed to change monetary policy in response to overly loose financial conditions. However, with an increased focus on achieving average inflation around its target, the Fed may focus less on such data.

This policy shift may also facilitate swifter reactions to global shocks. There have been two major global financial shocks in the past decade — the European debt crisis in 2012 and a Chinese growth slowdown in 2015. In both cases, US core PCE inflation dropped even though economic measures of slack were stable. As such, the Fed delayed taking any monetary policy action since the threat to US growth was unclear. However, if the Fed believes that global slowdowns will drag down US inflation (as in the recent past), they may consider adjusting policy more quickly.

A policy shift could support risk assets

This shift by the Fed would likely lead Invesco Fixed Income to adopt a more positive view on our macro factors: growth, inflation and financial conditions. Achieving average inflation would likely prevent the Fed from preemptively raising rates and could result in a longer business cycle. Inflation could also trend higher than it does under traditional policy. We believe these positive changes would benefit credit assets and eventually lead to a higher, steeper yield curve. This environment would also suggest a weaker US dollar, but in our view, we see the direction of the dollar as largely dependent on the economic performance of other countries.

We expect greater clarity in 2020

By leaving interest rates on hold in the first quarter of this year and lowering guidance for 2019 overall, the Fed has already taken policy actions consistent with achieving average inflation. However, this type of policy may or may not be adopted on a permanent basis. The Fed may still revert to its old ways of reacting if financial conditions ease too quickly or the unemployment rate starts to decline again. The Fed is currently conducting a review of how best to achieve its dual mandate of price stability and full employment. Policymakers plan to make their findings public in the first half of 2020. If the Fed decides to permanently emphasize average inflation, the change may be announced at that time.

1 Source: US Federal Reserve, target set in Jan. 2012.

2 Source: Bureau of Economic Analysis, data from Oct. 31, 2008 to Jan. 31, 2019.

3 Source: Bureau of Economic Analysis, data from Dec. 31, 1994 to Jan. 31, 2019.

4 Source: US Bureau of Labor Statistics, data from Aug. 10, 2018.

5 Source: US Bureau of Labor Statistics, data from April 10, 2019.

Important information

Blog header image: Good Vibrations Images/Stocksy.com

The core personal consumption expenditures (PCE) price index measures the price changes of consumer goods and services, excluding food and energy prices. It is reported by the US Department of Commerce’s Bureau of Economic Analysis.

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Time to read: 2 min

Sunday, May 12 is Mother’s Day, providing an opportunity for those everywhere to celebrate the special mothers in their lives. And when I say mothers, I do not mean just yours — I mean any wonderful woman in your world who is a mother. Someone who nurtures, provides and loves without hesitation or qualification. This could be your sister, daughter, best friend or even a cousin twice removed.

As you celebrate Mother’s Day, consider honoring these special moms in a way that will leave a lasting legacy. By contributing to a 529 plan for their children, you celebrate motherhood while helping build a future for the recipients. You can even put your contribution in mom’s name to celebrate all she’s done for her kids.

Costs continue to rise

According to the most recent figures, the cost of higher education is heading in only one direction — higher. The most recent data from The College Board reports the cost of room and board, fees and tuition as exceeding $21,000 for the 2018-2019 academic year for in-state, public institutions and $48,000 for private universities.1 When you consider the burden that student loans place on young graduates, a 529 contribution could be the perfect Mother’s Day gift because every dollar saved is one less to be borrowed.

  • 529 savings plans are tax-advantaged, meaning that contributions are after-tax, earnings grow tax-deferred and qualified distributions are tax-free.
  • 529 plans can be used to pay for qualified educational expenses such as tuition, room and board, books, equipment and school supplies at any eligible institution.
  • In some states, 529 plans can be used to cover up to $10,000 per year of public, private or religious elementary or secondary school tuition. 
  • A 529 plan can be opened for anyone with a valid Social Security number. There are no account minimums to get started and no income limits to contribute.
Honor the moms in your life

So this Mother’s Day, consider giving the gift of college savings. It honors the special mothers in your life while providing their children with a gift that lasts a lifetime.

Interested in learning more about 529 plans? Visit CollegeBound529.com to explore helpful resources and tools to plan your own education savings strategy.

Before you invest, consider whether your (or the beneficiary’s) home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in that state’s qualified tuition program.

For more information about CollegeBound 529, contact your financial advisor, call 877-615-4116, or visit http://www.collegebound529.com/ to obtain a Program Description, which includes investment objectives, risks, charges, expenses, and other important information; read and consider it carefully before investing. Invesco Distributors, Inc. is the distributor of CollegeBound 529.

1 Source: The College Board, Trends in College Pricing 2018

Earnings on non-qualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes. Tax and other benefits are contingent on meeting other requirements and certain withdrawals are subject to federal, state, and local taxes.

For beneficiary changes to occur without federal or state income tax consequences, the new beneficiary must be a family member of the current beneficiary.

Important information

Blog header image: monkeybusinessimages/iStockphoto.com

Thomas Rowley
Director, Retirement and Education Strategies

Thomas Rowley is director of retirement and education strategies and one of Invesco’s most frequently requested speakers. He provides analysis of the evolving retirement landscape and develops actionable strategies to help investors and financial advisors maximize their retirement-planning opportunities. Mr. Rowley regularly shares his insights online at invesco.com/us in addition to his speaking engagements.

Mr. Rowley’s insights reflect more than 20 years of experience in the investment industry. He translates his comprehensive knowledge of retirement planning into lively, clear explanations of the complexities of legislative, investing, tax and social issues.

Mr. Rowley shares his analyses of retirement-related issues through regular personal appearances, continuing education webinars and Web-based commentaries.

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Time to read: 4 min

Infrastructure is a topic that has been in the news consistently over the past year. Importantly, everyone seems to agree that whatever infrastructure is, the country needs more of it. Given this rare moment of national consensus, I want to welcome you to the second installment of my blog series focusing on the different types of alternative investments. My last blog focused on real estate. Today, we will drill down into the infrastructure sector and a popular subsector, master limited partnerships (MLPs).

Overview of infrastructure

Merriam-Webster defines infrastructure as “the basic equipment and structures (such as roads and bridges) that are needed for a country, region, or organization to function properly.” This definition is a good starting point as it links infrastructure to meeting the needs of society. Roads, bridges, airports, tunnels, power lines, water distribution systems, shipping ports and railroads are examples of infrastructure assets.

On a global basis, there is a need for increased investment in infrastructure, both among emerging and developed economies. Emerging economies need infrastructure to support growth and increased urbanization. Developed countries need to make ongoing investments to maintain and upgrade existing infrastructure. For example, New York recently replaced the dilapidated Tappan Zee Bridge with the new Mario M. Cuomo Bridge, and is also in the middle of a multi-year redevelopment of LaGuardia Airport. If you’ve ever had the misfortune of driving over the old Tappan Zee or flying through LaGuardia (as I have), you know those projects were desperately needed!

As shown below, there is a global need (currently estimated at $49 trillion1) for sizeable investments in infrastructure. The challenge is how to pay for investments of such magnitude when global gross domestic product (GDP) is approximately $86 trillion.2

Global infrastructure investment need estimated at $49 trillion

Map Source: Invesco Real Estate, IHS Global Insight, ITF, GWI, National Statistics, McKinsey Global Institute analysis. This is not financial advice or a recommendation to buy / hold / sell these securities. There is no guarantee that Invesco will hold these securities within its funds in the future. Chart Source: OECD; IHS Global Insight; GWI; IEA; McKinsey Global Institute analysis as of June 2018. $=US. OECD telecom estimate covers only OECD members plus Brazil, China and India. Energy estimate through 2023. There is no guarantee that these estimated needs will be funded.

While many governments acknowledge their strong need to make infrastructure investments, resources are often limited due in part to ongoing budget deficits. For this reason, government investment in infrastructure has been falling as a percentage of GDP, as illustrated below:

Despite need, global infrastructure investment has been declining as a percentage of GDP

Source: Invesco Real Estate using data from World Bank and McKinsey Global Institute Analysis as of 2015. Latest available data. Europe is represented by the European Union. Infrastructure investment is defined by gross fixed capital investment as a percent of GDP. Past performance is no guarantee of future results.

Public-private partnerships

Given the limited ability of governments to meet the need for infrastructure investment, private investors have rushed in to fill the void. For example, the LaGuardia Airport project is being built through a public-private partnership.

While the use of private funds for infrastructure is viewed as novel within the US, it is actually quite common elsewhere. Most airports outside the US are publicly listed and generate significant earnings from their retail business tenants (in addition to airline passenger fees). During my recent trip to Spain, I was struck by how much the airports resembled shopping malls.

Infrastructure investment options

Investors looking to gain exposure to infrastructure have several options:

  1. Listed infrastructure securities (such as the equity of firms that own and operate infrastructure)
  2. Mutual funds that invest in listed infrastructure securities
  3. Unlisted infrastructure investments (either through direct asset purchases or shares of privately placed funds)

Typically, only large investors such as institutions and high-net-worth individuals can access unlisted investments, whereas listed infrastructure securities can be purchased by anyone, either directly or through mutual funds.

Overview of master limited partnerships (MLPs)

MLPs represent a subset of infrastructure securities – these are publicly traded limited partnerships that are generally focused on energy infrastructure within the US. Pipelines, storage facilities and processing plants are all examples of assets that MLPs build, own and operate.

MLPs are typically classified into three categories:

  1. Upstream MLPs are involved in the exploration, recovery, development and production of crude oil and natural gas.
  2. Midstream MLPs are involved in the gathering, processing, storage and transportation of oil and gas.
  3. Downstream MLPs are involved in the distribution of fuels to end customers such as residential, industrial and agricultural entities.

MLPs are limited partnerships and, as such, do not pay federal income tax. Rather, MLPs pass income through to the limited partners who are then subject to income tax. Also, unlike many private limited partnerships with limited liquidity, MLPs are publicly traded and provide investors with the same liquidity as a publicly traded stock.

Production gains create corresponding need for more infrastructure

From 1980 through 2006, US production of crude oil and natural gas fell by approximately 20%.3 We believe this decline was primarily caused by the decreasing productivity of existing oil wells. Since 2006, the US has enjoyed strong growth in energy production and is projected to become a net exporter of energy in 2020.4

The growth in US energy production has been driven by new technologies such as hydraulic fracturing. This has allowed upstream producers to extract oil and gas from previously uneconomical locations.

As production has increased and new technologies have come online, the geography of US energy production has changed. For example, the Bakken formation in North Dakota and Montana and the Marcellus formation that spans New York, New Jersey, Pennsylvania, Ohio, West Virginia, Kentucky and Tennessee has turned those states into energy producers. One of the biggest challenges in those regions is how to transport and ship all the oil and gas. For natural gas, this challenge can be seen in the illustration below.

The challenge of getting natural gas to ports

Sources: Invesco Real Estate Research and Bloomberg as of December 2018. For illustrative purposes only.

The increasingly diverse geography of US energy production, combined with gains in overall production, has created a strong need for more energy infrastructure. The American Petroleum Institute estimates as much as $1.3 trillion in total direct investment of oil and gas transportation and storage infrastructure will be needed through 2035 to support US energy production levels.5 MLPs are expected to play an important role in providing the capital to build this infrastructure.

The evolution of MLPs

As the energy industry has evolved, so have MLPs. Today, most MLPs focus on midstream energy infrastructure with natural gas (rather than oil) as the primary focus.

MLPs often favor midstream infrastructure because demand has been growing for the plumbing that transports and stores oil and gas. Furthermore, revenue from midstream infrastructure is based on the volume of oil and gas processed and tends to be insulated from price fluctuations.

Gas MLPs have emerged as a popular investment for a number of reasons. The US is now the world’s top producer of natural gas with several competitive advantages over second-place Russia, including superior geology and more efficient infrastructure. Within the US, natural gas is quickly replacing coal in the generation of electricity. Globally, demand for natural gas (particularly in China and Japan) has been increasing. As a result, the US is on track to become a net exporter of natural gas in the near future.

Why investors should consider infrastructure and MLPs

We believe there are four primary reasons to consider making an infrastructure-related investment:

  • Attractive return potential. As illustrated below, infrastructure and MLPs have historically provided competitive returns relative to broad markets.
Historical returns of infrastructure and MLPs

Source: Bloomberg L.P., Infrastructure represented by Dow Jones Brookfield Global Infrastructure Total Return Index. MLPs represented by Alerian MLP Index. US Stocks represented by S&P 500 Index. Past performance is no guarantee of future results.

  • Potential to generate attractive yield. Both infrastructure and MLPs have the potential to offer attractive yield to investors. This is especially important given the current low yields offered in the equity and fixed income markets. As can be seen in the chart below, infrastructure and MLPs have been providing investors with a yield well above that of equities.
Current dividend yield on infrastructure and MLPs as of Feb. 28, 2019

Source: Bloomberg L.P., Infrastructure represented by Dow Jones Brookfield Global Infrastructure Total Return Index. MLPs represented by Alerian MLP Index. US Stocks represented by S&P 500 Index. Past performance is no guarantee of future results.

  • Inflation protection. An investment in infrastructure and MLPs may help investors hedge against inflation. During inflationary periods, infrastructure and MLPs may see an increase in both value and in current income generated (typically by raising prices and fees).
  • Diversification. Infrastructure and MLP investments can provide portfolio diversification as both have demonstrated a modest correlation to stocks and bonds. The correlation of infrastructure and MLPs to stocks and bonds can be seen in the table below.
Historical correlation of infrastructure and MLPs to stocks and bonds
 

 US Stocks

 US Bonds

 Infrastructure

 MLPs

 US Stocks

1.00

 US Bonds

-0.13

1.00

 Infrastructure

0.72

0.27

1.00

 MLPs

0.66

0.03

0.69

1.00

Source: Bloomberg L.P., Infrastructure represented by Dow Jones Brookfield Global Infrastructure Total Return Index. MLPs represented by Alerian MLP Index. US Stocks represented by S&P 500 Index. US Bonds represented by Bloomberg Barclays US Aggregate Bond Index. For the 10-year period ending Feb. 28, 2019.

Summary 

It’s not every day that a consensus is reached on government spending priorities, but with regard to infrastructure, all US political parties seem to agree that the country needs more. As such, I cannot help but have a positive outlook for this sector. We hope this overview of MLPs and infrastructure, the second in our series featuring alternative investments, was timely and helpful. My next blog will focus on commodities.

For a review of alternative investment types and related strategies, please see the Invesco framework below. To learn more about Invesco and its alternative capabilities please visit our website at www.invesco.com/alternatives.

A special thanks to David Wertheim for his assistance on this blog.

The Invesco alternative investments framework

1 Source: OECD; IHS Global Insight; GWI; IEA; McKinsey Global Institute analysis as of March 2017, latest data available.

2 Source: OECD; IHS Global Insight; GWI; IEA; McKinsey Global Institute analysis as of March 2017, latest data available.

3 Source: US Energy Information Administration report issued December 4, 2014

4 Source: CNBC, “US to become a net energy exporter in 2020 for time in 70 years, Energy Dept says”, Jan. 24, 2019.

5 Source: “API: Big investments needed in U.S. energy infrastructure”, UPI, June 22, 2018

Important information

Blog header image: JP Danko/Stocksy.com

Gross domestic product is a broad indicator of a region’s economic activity, measuring the monetary value of all the finished goods and services produced in that region over a specified period of time.

The Dow Jones Brookfield Global Infrastructure Total Return Index measures the stock performance of companies that exhibit strong infrastructure characteristics.

The Alerian MLP Index is a composite of the 50 most prominent energy master limited partnerships calculated by Standard & Poor’s using a float-adjusted market capitalization methodology.

The S&P 500® Index is an unmanaged index considered representative of the US stock market.

The Bloomberg Barclays US Aggregate Bond Index is an unmanaged index considered representative of the US investment-grade, fixed-rate bond market.

Fixed income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.

Diversification does not guarantee a profit or eliminate the risk of loss.

A master limited partnership (MLP) is a publicly traded limited partnership in which the limited partner provides capital and receives periodic income distributions from the MLP’s cash flow and the general partner manages the MLP’s affairs and receives compensation linked to its performance.

Energy infrastructure MLPs are subject to a variety of industry specific risk factors that may adversely affect their business or operations, including those due to commodity production, volumes, commodity prices, weather conditions, terrorist attacks, etc. They are also subject to significant federal, state and local government regulation.

Alternative investments can be less liquid and more volatile than traditional investments such as stocks and bonds, and often lack longer-term track records.

Alternative products typically hold more non-traditional investments and employ more complex trading strategies, including hedging and leveraging through derivatives, short selling and opportunistic strategies that change with market conditions. Investors considering alternatives should be aware of their unique characteristics and additional risks from the strategies they use. Like all investments, performance will fluctuate. You can lose money.

Short selling is a speculative investment and may require investors to meet margin requirements and repurchase the security at a higher price, causing a loss. As there is no limit on how much the price of the security can increase, loss potential is unlimited.

Investment in infrastructure-related companies may be subject to high interest costs in connection with capital construction programs, costs associated with environmental and other regulations, the effects of economic slowdown and surplus capacity, the effects of energy conservation policies, governmental regulation and other factors.

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Time to read: 4 min

US-China trade talks have taken a turn for the worse in the last several days and may temporarily go off the rails.

It all started when President Trump threatened to increase the level of tariffs on $200 billion of Chinese goods to 25% by May 10, asserting that China is taking too long in the negotiations and is attempting to “renegotiate.” He also threatened to place 25% tariffs on additional goods. Now China, in response, is threatening to cancel trade negotiations planned for this week between the US and China.

What can we make of these developments? First of all, it shows that the US is in a hurry to seal a deal. That suggests that the current trade situation is having a negative impact on the US economy at a time when the current administration needs to begin planning for the presidential election of 2020. Now that may seem hard to believe given the strong US economic data we have seen recently, including the much-better-than-expected first quarter gross domestic product (GDP) print and the very strong April jobs report. However, I do believe the tariff wars are having a negative impact on the US economy that could grow over time. We have seen a few recent warning signs, especially the most recent ISM Manufacturing Index. The April reading for the index was 52.8, a decrease of 2.5 points from the March reading of 55.3.1 What is particularly worrying is the New Orders Index, which clocked in at 51.7, a decrease of 5.7 points from the March reading of 57.4.2 Some of the comments from purchasing managers in the ISM survey support my belief that the tariffs are creating problems:

“Tariffs are resulting in increased prices on computer components, as well as manufacturers moving out of China to countries not impacted by the tariffs.” (Computer & Electronic Products)

“Monitoring the tariffs and Mexico border issues, which are a potential threat. The China trade agreement getting completed will help with stability with suppliers and costs management.” (Machinery)

While business investment has increased in recent months — likely due to the incentivization of capital spending in the tax reform package — business investment is still relatively low, which suggests that there is significant economic policy uncertainty brought on by the US-China trade war, which is depressing business investment. This was borne out in some of the ISM Manufacturing survey comments:

“Commodity-price uncertainty — partially driven by concerns of an economic slowdown and trade/tariff policies — has led my company to reduce its capital spend in 2019. Our 2019 capital-spend levels will be similar to 2016 levels.” (Petroleum & Coal Products)

“[We are] closely watching the Mexico border situation as well as the tariff situation.” (Transportation Equipment)

This is also borne out in other feedback from companies. For example, the March Federal Reserve Beige Book reported, “numerous manufacturing contacts conveyed concerns about weakening global demand, higher costs due to tariffs, and ongoing trade policy uncertainty.”   And a study by the Federal Reserve Bank of New York, Princeton University, and Columbia University concluded that steel and aluminum tariffs have cost companies and consumers $3 billion a month in additional costs in 2018.  According to a study by the Peterson Institute for International Economics, the steel and aluminum tariffs inflated the price of steel products by nearly 9% last year, increasing costs for steel users by $5.6 billion.

While China has had some better economic data recently – including a good GDP print — its most recent PMI data has been disappointing. China would clearly like to reach a deal as well, as the trade wars are negatively impacting its economy. However, China certainly does not want to be forced into an agreement with undesirable terms. And so, not surprisingly, the People’s Bank of China (PBOC) announced early on Monday morning a targeted reserve ratio requirement (RRR) cut that would inject RMB 280 billion in the market, suggesting that China is not backing down but instead is attempting to boost Chinese economic growth in order to counter headwinds created by any possible additional tariffs.

It seems China’s policy makers will stand ready to soften major volatility swings in the financial markets with monetary stimulus if needed. This is in keeping with the significant monetary and fiscal stimulus China has been injecting into its economy for nearly a year. And China will likely continue to stimulate its economy, so that it can ensure that the US will not be able to force its hand to accept a trade deal that it deems unfavorable.

Unfortunately, a successful US-China trade agreement had been priced into US and China equities and so we have seen a significant sell-off. This turn of events injects substantial uncertainty into the outcome, forcing investors to now factor in the possibility that a near-term trade deal may not be reached and that tariffs may be increased. Given these developments, we expect significant volatility.

We could see more actions — such as China embarking on further stimulus — and more threats, as the US could alter its export control requirements to hurt China.

The key takeaway, though, is that US and Chinese equities and Chinese bonds are unlikely to experience the same level of negative price impacts seen in the fall of 2018 for several reasons. First, the US and especially China are likely to be more proactive in countering the negative market and economic impacts of the tariff wars. Second, the Fed has taken a far more dovish monetary policy stance, which should help cushion capital markets globally.

I believe investors should be prepared for continued volatility, especially to the downside, as the situation evolves. Whether or not the US and China reach a quick trade deal, I do believe that tariff-related sell-offs could represent an attractive buying opportunity for both US and Chinese equities and Chinese bonds for those with a long enough time horizon. Of course investors need to be discerning but opportunities will present themselves with such a fear-driven sell-off.

Subscribe to the Invesco US Blog and get Kristina Hooper’s Weekly Market Compass posts in your inbox. Simply choose “Market & Economic” when you sign up.

1 Source: April 2019 Manufacturing ISM® Report On Business®

2 Source: April 2019 Manufacturing ISM® Report On Business®

Important information

Blog header image: Phill T/Shutterstock.com

The ISM Manufacturing Index, which is based on Institute of Supply Management surveys of more than 300 manufacturing firms, monitors employment, production inventories, new orders and supplier deliveries.

The New Orders Index is a component of the PMI Index. It tracks the monthly changes in new orders by purchasing managers and is calculated by the Institute of Supply Management.

Gross domestic product is a broad indicator of a region’s economic activity, measuring the monetary value of all the finished goods and services produced in that region over a specified period of time.

The Summary of Commentary on Current Economic Conditions by Federal Reserve District (the Beige Book) is published eight times per year. Each Federal Reserve Bank gathers anecdotal information on current economic conditions in its district, and the Beige Book summarizes this information by district and sector.

The reserve ratio is the portion of reservable liabilities that commercial banks must hold, rather than lend or invest. This requirement is determined by each country’s central bank.

The opinions referenced above are those of Kristina Hooper as of May 6, 2019. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

Kristina Hooper

Chief Global Market Strategist

Kristina Hooper is the Chief Global Market Strategist at Invesco. She has 21 years of investment industry experience.

Prior to joining Invesco, Ms. Hooper was the US investment strategist at Allianz Global Investors. Prior to Allianz, she held positions at PIMCO Funds, UBS (formerly PaineWebber) and MetLife. She has regularly been quoted in The Wall Street Journal, The New York Times, Reuters and other financial news publications. She was featured on the cover of the January 2015 issue of Kiplinger’s magazine, and has appeared regularly on CNBC and Reuters TV.

Ms. Hooper earned a BA degree, cum laude, from Wellesley College; a J.D. from Pace University School of Law, where she was a Trustees’ Merit Scholar; an MBA in finance from New York University, Leonard N. Stern School of Business, where she was a teaching fellow in macroeconomics and organizational behavior; and a master’s degree from the Cornell University School of Industrial and Labor Relations, where she focused on labor economics.

Ms. Hooper holds the Certified Financial Planner, Chartered Alternative Investment Analyst, Certified Investment Management Analyst and Chartered Financial Consultant designations. She serves on the board of trustees of the Foundation for Financial Planning, which is the pro bono arm of the financial planning industry, and Hour Children.

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Time to read: 5 min

It is spring and elections are in the air — along with expectations for increased polarization and uncertainty across Europe.

Pro-EU party wins in Spain — but not convincingly

General elections in Spain were April 28, and the European Union’s (EU) big fear — that Spain would follow in the footsteps of Italy and elect politicians who are antagonistic to the EU — does not seem to have come to fruition, at least not fully. 

The current governing party, the Socialists, won the most votes. Therefore, their prime minister will continue to lead the country, and he is very pro-European Union. However, the Socialists (PSOE) and Podemos did not garner enough votes together to win a majority. As with other European countries’ recent elections, we have seen a fall in popularity for mainstream parties and an increase in popularity for a variety of fringe parties, thereby fragmenting votes. Therefore, in my view, PSOE and Podemos will need to form a coalition government with other political parties, and that carries with it some uncertainty.

There are a few possible combinations that could work and enable the Socialists to continue to govern Spain in a coalition government. Some worry that the PSOE may be forced to partner with a separatist Catalan party. This could be problematic, as it would likely mean agreeing to a Catalan independence referendum. If there is difficulty in forming a coalition government, that could result in a widening of spreads for Spanish bonds.

This outcome, while viewed as a win for the EU, is not ideal as the election indicates a growing polarization among the electorate — including a nationalist movement that has been gaining momentum in Spain (the Vox party, which garnered about 10% of the vote1 — although that was below expectations). However, I believe Spain will continue to be pro-EU and that nationalist forces will not gain that much ground. After all, Spain is no Italy. For example, gross domestic product (GDP) growth for Spain is expected to be 2.1% this year, while GDP growth for Italy is expected to be 0.1% this year.2 In addition, government debt-to-GDP in Spain has recently been at 97.1% — which is not ideal but is far more manageable than that of Italy, which was recently at 132.2%.3. While youth unemployment is high in Spain, the general economic landscape is far better than that of Italy. And it is economic dissatisfaction that tends to sow the seeds of strong nationalist and populist movements.

Could the European parliament become Euroskeptic?

European parliamentary elections will occur on May 23. There is widespread fear that the European parliament will experience major changes and greater polarization — in other words, more seats may go to fringe political movements, including those who espouse Euroskeptic nationalist views. Of course, this raises questions as to the efficacy of the European parliament.

In my view, it does seem likely that the two mainstream blocs in the European parliament will lose seats as well as their governing majority. However, it appears likely that they would build an alliance with liberal fringe parties within the European parliament in order to continue to dominate the decision-making on key issues and withstand growing Euroskeptic forces.

This situation is certainly being complicated by questions about whether the UK will participate in the elections. Given how close-at-hand the elections are, it seems likely the UK will participate. However, whether or not it participates is not expected to significantly alter the composition of the next parliament.

And so we should not expect the European Union to become a shrinking violet because of internal schisms. Yes, the European parliament is likely to experience some disruption as a result of growing nationalist and populist forces. However, the EU appears focused on continuing to be an important force in the global scene, and is likely going to move forward with greater regulation — and with a heavier hand with regard to the UK as it nears its Oct 31 Brexit deadline.

In my view, this should not have any material impact on the European economy or markets — except as it relates to the appointment of the successor for European Central Bank President Mario Draghi. As I have said before, that could have a significant impact on markets given how Draghi was able to instill confidence and tamp down systemic stress during his tenure.

Will the UK see another Brexit referendum?

We also have the potential for some kind of election in the UK. There has continued to be a powerful movement afoot attempting to hold a second referendum on Brexit. In addition, while Prime Minister Theresa May was able to survive a “no confidence” vote in December, and therefore is protected from another such vote for the ensuing 12 months, there are reports of machinations going on behind the scenes in an attempt to oust her sooner given the growing dissatisfaction with her leadership.

Amidst all this economic policy uncertainty, one thing seems almost certain, in my view: The longer it lasts, the greater negative impact it may have on business investment, which has already been falling.

India’s elections continue

Important elections are happening outside of Europe as well. For example, we will want to follow the ongoing elections in India closely. Voting takes place over a five-week period, with the outcome to be announced in late May.

Narendra Modi is likely to remain as Prime Minister with his Bharatiya Janata Party (BJP) likely to remain the largest party in Parliament — though it may well lose the outright majority it won in the 2014 general elections (which had been the first in many years). The likely loss of the BJP’s majority would reflect popular disappointment with Modi’s track record in economic policy and performance. Though India is the fastest growing large economy in the world, the growth rate and the labor market have not improved as much as the hype in the 2014 election suggested might happen. In addition, some policies and reforms, no matter how well-intentioned, have had negative effects for ordinary Indians as well as small and mid-sized businesses because of their design and execution:

  1. Demonetization was a radical and risky measure in November 2016, under which most of the currency in circulation was rendered useless in order to be exchanged and legitimized in a short period. India has the highest proportion of cash transactions and currency in circulation of any large economy because hundreds of millions live on subsistence cash incomes and do not have access or spare resources for bank accounts. The policy had a hard impact on the small scale sector, farmers and sole trading businessmen. Most of the effects have probably dissipated by now, but there is still a political repercussion.
  2. The Goods and Services Tax (GST) has helped reduce the trade barriers between the states of the Indian Union and should have a significant effect on boosting potential growth, just like trade liberalization between the early US states after the Second Constitutional Convention. However, the GST reform was executed with many levels of tax rates and many exclusions and loopholes, creating complexity and onerous record-keeping requirements that will very likely reduce the potential GDP boost well below the quite optimistic 2% per annum that India’s Finance Minister had projected.

And so, as with the Spanish parliament and the European parliament, I expect a more fragmented Indian parliament with more power for the opposition alliance. That likely means that critical reforms — including labor market liberalization of hire and fire rules, and land acquisition reform to boost investment and efficiency in the industrial and agricultural sectors — could face an even more difficult time. Against that, Modi is likely to continue his reform agenda with the streamlining of India’s bureaucracy, especially if his larger reform agenda is stymied in parliament by stronger opposition parties (given that the bureaucracy is an area where Modi can maneuver without parliamentary backing for legislative reform). In addition, he is also less likely to engage in radical experimental reforms or overrule expert advice as he evidently did with demonetization itself. The net effect of these changes is that the markets may probably remain relatively well-supported and the growth rate may remain in the high single digits where it is now.

What to watch for in the coming week: 

US-China trade talks. US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin will travel to Beijing for trade talks beginning on April 30, with Chinese Vice Premier Liu He once again leading the Beijing delegation. (Liu will then travel to Washington for more discussions starting on May 8.) There is a good chance a deal could be struck in the next few months; however, we need to worry about the potential for it to include a reciprocal enforcement agreement which, as I explained in a previous commentary, could prove very problematic.

Eurozone GDP. We have gotten some disappointing eurozone data recently, so the GDP print will be very important. We will see the first-quarter eurozone GDP figures on April 30.

US employment data. The Employment Cost Index for March will be released April 30. This report is important as labor costs have been on the rise and could be a potential reason for the Federal Reserve (Fed) to be forced to tighten. The Employment Situation Report for April will be released May 3. There was a big surge in jobless claims last week to 230,000, albeit from a 50-year low and albeit during a holiday week.4 However, we will want to carefully analyze this report for any signs of weakness.

Federal Open Market Committee. The FOMC meets April 30-May 1. The results will be helpful to better understand what the Fed is thinking and worrying about — and their certainty on how long they can keep rates on hold.

Chinese manufacturing data. The China Caixin Manufacturing Purchasing Managers’ Index for April will be released this week. I hope that the index will confirm a continuation of improving Chinese data.

Bank of England (BOE). The BOE’s Monetary Policy Meeting is this week, but I believe they are unlikely to make any policy changes at this meeting.

Subscribe to the Invesco US Blog and get Kristina Hooper’s Weekly Market Compass posts in your inbox. Simply choose “Market & Economic” when you sign up.

1 Source: Time, “Socialists Won the Spanish Election, But the Right-Wing Vox Party Gained in Popularity,” April 29, 2019

2 Source: International Monetary Fund World Economic Outlook, April 2019

3 Source: Eurostat, as of Q4 2018

4 Source: US Labor Department, as of April 25, 2019

Important information

Blog header image: Phill T/Shutterstock.com

Brexit refers to the scheduled exit of the UK from the European Union.

The Federal Open Market Committee (FOMC) is a committee of the Federal Reserve Board that meets regularly to set monetary policy, including the interest rates that are charged to banks.

Gross domestic product is a broad indicator of a region’s economic activity, measuring the monetary value of all the finished goods and services produced in that region over a specified period of time.

The Caixin/Markit Purchasing Managers’ Index (PMI) for China is considered an indicator of economic health for the Chinese manufacturing sector. It is based on survey responses from senior purchasing executives.

Spread represents the difference between two values, such as yields on two different bonds.

The Employment Cost Index is released by the US Bureau of Labor Statistics and measures compensation costs for civilians, private industry, and state and local government workers.

The Employment Situation Report is released by the US Bureau of Labor Statistics to monitor labor market data on a monthly basis.

The opinions referenced above are those of Kristina Hooper as of April 29, 2019. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

Kristina Hooper

Chief Global Market Strategist

Kristina Hooper is the Chief Global Market Strategist at Invesco. She has 21 years of investment industry experience.

Prior to joining Invesco, Ms. Hooper was the US investment strategist at Allianz Global Investors. Prior to Allianz, she held positions at PIMCO Funds, UBS (formerly PaineWebber) and MetLife. She has regularly been quoted in The Wall Street Journal, The New York Times, Reuters and other financial news publications. She was featured on the cover of the January 2015 issue of Kiplinger’s magazine, and has appeared regularly on CNBC and Reuters TV.

Ms. Hooper earned a BA degree, cum laude, from Wellesley College; a J.D. from Pace University School of Law, where she was a Trustees’ Merit Scholar; an MBA in finance from New York University, Leonard N. Stern School of Business, where she was a teaching fellow in macroeconomics and organizational behavior; and a master’s degree from the Cornell University School of Industrial and Labor Relations, where she focused on labor economics.

Ms. Hooper holds the Certified Financial Planner, Chartered Alternative Investment Analyst, Certified Investment Management Analyst and Chartered Financial Consultant designations. She serves on the board of trustees of the Foundation for Financial Planning, which is the pro bono arm of the financial planning industry, and Hour Children.

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Witnesses at a March 14 hearing held by the House Financial Services Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets called on the Securities and Exchange Commission (SEC) to strengthen its investment advice reform proposal.

Rep. Carolyn Maloney, D-NY, chairwoman of the subcommittee, said in her opening statement that the SEC’s Regulation Best Interest (BI), which is designed to raise broker conduct above the current suitability standard, falls short of needed investor protections. She asserted that the SEC proposal relies too much on disclosure of conflicts of interest rather than their elimination. She also argued that the regulation does not subject brokers to a full fiduciary duty, despite the staff recommendations to do so, and that it does not clearly define “best interest.” Instead of saying that brokers have to provide advice “without regard to” their own financial interests, she observed that the SEC’s rule would allow brokers to take their own interests into account.

Rep. Bill Huizenga, R-MI, the highest-ranking Republican on the panel, backed the SEC proposal, contending that under the proposed regulation, “consumers will be able to make more informed decisions about the types of financial professionals which would be able to meet their needs …” He also said that the proposal “allows investors greater choices and access to the products and services they require.”

Susan McMichael John, chair of the Certified Financial Planner (CFP) Board of Standards, expressed concern that as a practical matter, the proposal does not offer increased investor protection. She emphasized that a final rule must include explicit fiduciary protections for retail investors, regardless of the business model under which that advice is provided.

Barbara Roper, Director of Investor Protection at the Consumer Federation of America, said that without “substantial improvements” by the SEC, the proposal is “likely to do more harm than good by misleading investors into expecting protections that the rule simply does not provide.” She added that it was still possible for the SEC to adopt sufficient changes to the regulation for it to earn its “best interest” label. She explained that the SEC could do this without having to restart its rulemaking process by adopting a handful of changes to the regulatory text, including clarifying what it means by “best interest.”

Among the witnesses, the lone defender of the rule was former SEC chairman Harvey Pitt, the chief executive of Kalorama Partners, a Washington, D.C. consulting firm. He testified that the SEC’s proposal was well thought out and offers an important standard that is not too restrictive. He said that the proposal should be considered as an initial first step and that changes could still be made.

A separate component of the hearing was draft legislation from Rep. Sean Casten, D-IL, that would require the SEC to conduct usability tests regarding the agency’s disclosures to retail investors. The bill would help ensure that the disclosures developed by the SEC are designed to convey information that investors are more likely to read, thereby helping them make better, more informed investment decisions.

It’s important to view this hearing in the context of the larger political fight which has been playing out over the past several years, first over the Department of Labor’s fiduciary rule and now the SEC’s Reg BI. As the SEC prepares to finalize their rule, this hearing and the subsequent mark-up of Rep. Casten’s bill was seen as a late-in-the-game political attempt to slow down the final rule. With the strict partisan vote out of Committee, the attempt will likely fall flat.

As it stands now, industry officials anticipate a final version of the SEC rule by the end of this summer. We’ll keep you posted.

Sources:

Investment News, “House Democrats call on SEC to strengthen Regulation Best Interest,” Mark Schoeff Jr., March 14, 2019

ThinkAdvisor, “SEC Reg BI’s economic analysis too weak, will face legal challenges: SEC’s Jackson,” Melanie Waddell, March 14, 2019

NAPA Net, “SEC’s Reg BI still ‘far too weak,’ witnesses at House hearing say,” Ted Godbout, March 15, 2019

Important information  

Blog header image: Koki Jovanovic/Stocksy.com

Jon Vogler

Senior Analyst Retirement Research, Invesco Consulting

Jon Vogler draws on extensive pension expertise to offer retirement thought leadership for Invesco. In addition to writing Invesco’s Retirement blog, he tracks legislative and regulatory developments and contributes as a writer to a variety of retirement-related Invesco communications.

Prior to joining Invesco in 2008, Mr. Vogler spent more than 25 years in the research, writing, compliance and underwriting areas of the retirement services industry, including roles as a senior consultant at Mutual Benefit Life’s pension consulting firm and as a compliance manager in the Automatic Data Processing retirement services division.

Mr. Vogler earned the Fellow, Life Management Institute (FLMI) and Competent Toastmaster (CTM) designations. He earned a BA degree in history from Rutgers, The State University of New Jersey.

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Expert Investment Views: Invesco Blog by Kristina Hooper, Chief Global Marke.. - 3w ago

Time to read: 4 min

In the past several months, we have seen central banks make an abrupt turn toward a more dovish monetary policy stance. The initial assumption by markets was that this was a decisive turn. However, more recent communications suggest otherwise. As doubts about economic growth continue to grow, so does uncertainty about the path of policy.

Will the Fed raise rates — or cut them?

For example, the release of the March Federal Open Market Committee (FOMC) meeting minutes several weeks ago indicated that the next move by the Federal Reserve (Fed) was equally likely to be a hike or a cut. Recent comments from FOMC members have reinforced the notion that the Fed doesn’t know whether its next move will be up or down — but it’s comfortable sitting in a holding pattern for the time being.

In a speech two weeks ago, Fed Vice Chair Richard Clarida expressed his belief that the US economy is “in a good place” but that “the incoming data have revealed signs that US economic growth is slowing somewhat from 2018’s robust pace.”1 He added, “Prospects for foreign economic growth have been marked down, and important international risks, such as Brexit, remain.”1

Last week, Chicago Fed President Charles Evans explained that he still expects the Fed to raise rates given what seems like a solid economic outlook, but he also believes there is a good chance the Fed could cut rates. He explained that he believes the current rate of 2.25% to 2.50% is at “about neutral” in terms of its effect on the economy, which means it is “a good place to be” because it gives the central bank the flexibility to either raise or cut rates – which is needed in uncertain times.2 Evans could see rates staying at current levels until the fall of 2020, which would be a very long holding pattern. Interestingly, Evans suggested that if inflation is running well below the Fed’s target, that could provide a rationale for the Fed to cut rates. His argument is that, if inflation is running too low, it suggests current monetary policy is restrictive.

China and Europe question the path for growth

There is a similar sentiment coming from other government entities. Despite recent positive economic data, China remains concerned about growth for 2019. A recent politburo meeting chaired by President Xi Jinping warned that while first quarter gross domestic product (GDP) growth positively surprised, the economy still faces headwinds. The Chinese government is not sure current economic growth is sustainable, explaining in a statement: “The external economic environment is generally tightening and the domestic economy is under downward pressure.” As reported by official news agency Xinhua, the politburo explained their perspective: “While fully affirming the achievements, we should clearly see that there are still many difficulties and problems in economic operations.” China is clearly not confident that the economic turnaround is sustainable, which is being used as a justification to maintain and even increase policy stimulus. Xinhua reported that China will continue with proactive fiscal policy but that it “will become more forceful and effective,” and that monetary policy “will be neither too tight nor too loose.”

Meanwhile, the European Central Bank (ECB) is in a holding pattern, compelled to backtrack on its plans to finally raise rates given recent data showing greater weakness. President Mario Draghi this week was optimistic that economic growth would improve for the eurozone in the back half of the year, arguing that many of the global forces exerting downward pressure on eurozone growth appear to be on the decline. However, he acknowledged that other factors could negatively impact growth, including the risk of a hard Brexit and a global trade war. This suggests that there are real question marks around the next step for the ECB.

In short, governmental entities are hoping for the best, but have a lot of uncertainty about the outlook — and so are planning for the possibility of something worse.

I happen to be optimistic that growth should continue to improve for China, and that China’s ratcheting up of fiscal stimulus should help to ensure that. This should in turn positively impact eurozone growth — with a lag. Recall that Draghi recently explained, “The outlook for the euro area fundamentally depends on global growth momentum,”3 and that in turn has a lot do with China. I do expect US growth to weaken modestly later this year, but to remain relatively solid.  However, I must admit there is much uncertainty in the air, and so we will need to follow the data closely as well as developments vis a vis trade.

What to watch this week

The coming week is an important one for investors around the world, and should provide some clues about the economic growth picture in the coming months. Here are some key dates/events to focus on:

  • April 24-25 will be the next Bank of Japan (BOJ) meeting. No major policy change is expected, but it is widely believed that the BOJ will lower its near-term growth and inflation forecasts — which would be helpful in shaping global growth expectations for the year. This in turn could trigger a discussion about further easing measures among BOJ Policy Board members. The BOJ could be a test case in terms of what other experimental tools could be used to provide monetary policy stimulus.
  • On April 26, the first estimate of first-quarter GDP growth for the US will be released. Over the last several months, we have seen significant fluctuations in the Atlanta Fed’s GDPNow barometer for first-quarter growth. This GDP print could be above 2% annualized for the first quarter, well above what had been expected just a month or two ago. However, we will want to take a deeper dive into the components. In particular, a drop in business investment may indicate that economic policy uncertainty continues to weigh on capital spending. This would reflect the continued damage created by ongoing trade conflicts, which has created economic policy uncertainty — and which shows no signs of ending any time soon.
  • Several central banks, including the Bank of Canada, have monetary policy meetings this coming week, possibly offering additional insights into growth expectations.
  • More than 140 companies in the S&P 500 Index are expected to report earnings this week. The outlooks shared by their management teams should also help provide some insight into economic growth expectations for the rest of 2019.

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1 Source: Reuters, “Fed’s Clarida: US slowing, but expansion will ‘almost certainly’ break record,” April 11, 2019

2 Source: The Wall Street Journal, “Fed’s Evans: Rate Rises Still Possible If Economy Meets Expectations,” April 15, 2019

3 Source: U.S. News & World Report, “Euro Zone Growth Relies on Global Pull: ECB’s Draghi,” April 12, 2019

Important information

Blog header image: Brian A Jackson/Shutterstock.com

Brexit refers to the scheduled exit of the UK from the European Union.

The Federal Open Market Committee (FOMC) is a committee of the Federal Reserve Board that meets regularly to set monetary policy, including the interest rates that are charged to banks.

Gross domestic product is a broad indicator of a region’s economic activity, measuring the monetary value of all the finished goods and services produced in that region over a specified period of time.

The Federal Reserve Bank of Atlanta’s GDPNow forecasting model provides a “nowcast” of the official GDP estimate prior to its release by estimating GDP growth using a methodology similar to the one used by the US Bureau of Economic Analysis.

A politburo is the principal policymaking committee of a communist party.

The S&P 500® Index is an unmanaged index considered representative of the US stock market.

The opinions referenced above are those of Kristina Hooper as of April 22, 2019. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.

Kristina Hooper

Chief Global Market Strategist

Kristina Hooper is the Chief Global Market Strategist at Invesco. She has 21 years of investment industry experience.

Prior to joining Invesco, Ms. Hooper was the US investment strategist at Allianz Global Investors. Prior to Allianz, she held positions at PIMCO Funds, UBS (formerly PaineWebber) and MetLife. She has regularly been quoted in The Wall Street Journal, The New York Times, Reuters and other financial news publications. She was featured on the cover of the January 2015 issue of Kiplinger’s magazine, and has appeared regularly on CNBC and Reuters TV.

Ms. Hooper earned a BA degree, cum laude, from Wellesley College; a J.D. from Pace University School of Law, where she was a Trustees’ Merit Scholar; an MBA in finance from New York University, Leonard N. Stern School of Business, where she was a teaching fellow in macroeconomics and organizational behavior; and a master’s degree from the Cornell University School of Industrial and Labor Relations, where she focused on labor economics.

Ms. Hooper holds the Certified Financial Planner, Chartered Alternative Investment Analyst, Certified Investment Management Analyst and Chartered Financial Consultant designations. She serves on the board of trustees of the Foundation for Financial Planning, which is the pro bono arm of the financial planning industry, and Hour Children.

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Several years ago, I read an article1 that detailed what you can do with $10 around the world. The author challenged her fellow reporters across the globe to see how far $10 could take them. From two sub sandwiches in Connecticut to two days of groceries in the Philippines, the answers varied widely depending on each reporter’s location.

That interesting perspective stuck with me over the years, so when I caught wind of another $10 challenge, I was all ears. Aptly named the 529 Ten Dollar Challenge, this initiative was created to raise awareness of one of my favorite topics — 529 plans — by showing that even small contributions to education savings accounts can add up over time. Education savers are currently participating by posting photos of themselves with $10 bills to social media and using the #529TenDollarChallenge hashtag.

As Invesco’s Director of Education Strategies and the proud father of three college graduates, I have plenty of personal and professional experience with 529 plans — so it’s no surprise that this challenge appealed to me on many levels. But for many new parents or first-time contributors, the journey to education savings starts with some questions. Here are five things to know before you take part in your own 529 Ten Dollar Challenge.

  1. What is a 529 plan?
    A 529 plan is an education savings plan intended to help families set aside funds for future education costs. 529 plans were created in 1996 and named after Section 529 of the Internal Revenue Code, and they are sponsored by educational institutions, states or state agencies.
  2. What are the potential benefits of a 529 plan?
    529 savings plans are tax-advantaged, meaning that contributions are after-tax, earnings grow tax-deferred and qualified distributions are tax-free. There is no account minimum to get started and no income limit to contribute.
  3. What kinds of costs do 529 plans cover?
    529 plans can be used to pay for qualified educational expenses at an eligible institution, such as tuition, room and board, books, equipment and school supplies.
  4. Are 529 plans just for college? Not necessarily. In some states, 529 plans can be used to cover up to $10,000 per year of public, private or religious elementary or secondary school tuition.
  5. Who can be a 529 plan beneficiary?
    A 529 plan can be opened for anyone with a valid Social Security number. While 529 plans are commonly opened for a child or grandchild, there are no age restrictions, and the beneficiary can be changed to a relative of the existing beneficiary without income tax consequences.3

Whether you’re saving for your own child or donating to a friend or relative’s account, why not join the national 529 awareness campaign by making a $10 contribution of your own? It’s a fun way to connect with fellow 529 Ten Dollar Challenge participants while showing your commitment to your favorite student’s future.

Interested in learning more about 529 plans? Visit CollegeBound529.com to explore helpful resources and tools to plan your own education savings strategy.

Before you invest, consider whether your or the beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in that state’s qualified tuition program.

For more information about CollegeBound 529, contact your financial advisor, call 877-615-4116, or visit www.collegebound529.com to obtain a Program Description, which includes investment objectives, risks, charges, expenses, and other important information; read and consider it carefully before investing. Invesco Distributors, Inc. is the distributor of CollegeBound 529.

1 This link takes you to a site outside of invesco.com. Invesco does not guarantee any claims or assume any responsibility for any of the content.

2 Earnings on non-qualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes. Tax and other benefits are contingent on meeting other requirements and certain withdrawals are subject to federal, state, and local taxes.

3 For beneficiary changes to occur without federal or state income tax consequences, the new beneficiary must be a family member of the current beneficiary.

Important information

Blog header image: Keith Luke/Unsplash

Thomas Rowley
Director, Retirement and Education Strategies

Thomas Rowley is director of retirement and education strategies and one of Invesco’s most frequently requested speakers. He provides analysis of the evolving retirement landscape and develops actionable strategies to help investors and financial advisors maximize their retirement-planning opportunities. Mr. Rowley regularly shares his insights online at invesco.com/us in addition to his speaking engagements.

Mr. Rowley’s insights reflect more than 20 years of experience in the investment industry. He translates his comprehensive knowledge of retirement planning into lively, clear explanations of the complexities of legislative, investing, tax and social issues.

Mr. Rowley shares his analyses of retirement-related issues through regular personal appearances, continuing education webinars and Web-based commentaries.

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