Our Quarterly Commentary
Information on this site is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Our Investment Outlook in This Time of Great Uncertainty
Scenario analysis forces us to think about a variety of different macro outcomes over our five-year decision horizon. We then assess the return potential for each asset class in each macro scenario. The valuation work we review is a major driver of the return analysis, though the macro factors are also important. It would not be shocking to find bargain valuations in some asset classes when the outlook is poor—often times risk is more than fully priced into financial assets in negative environments. Unfortunately, that is not the case today—generally speaking, return potential over the next five years is not compelling. However, that does not mean that returns couldn’t be decent over the near term.

Global Stock Outlook: We think mid-single-digit returns or worse are more likely for stocks than higher returns over the next five years. Our outlook for developed market foreign equities is similar and for emerging-markets equities is slightly higher across all scenarios. We believe risks are relatively high, but we can’t predict timing. We can easily imagine good returns in 2010 if the economy continues to grow, low rates encourage risk taking, and there is no catalyst to cause risk aversion.

We never want to be complacent in our assumptions. We constantly test and challenge our own thinking, and look for new ways to analyze issues. One example is our work to approach the all-important question of what corporate earnings growth will be by analyzing historical sales and margin data. The results are slightly more favorable than our more conventional earnings growth analysis, which is based on a much longer history.

Emerging-Markets Local-Currency Bonds: Among other asset classes, emerging-markets local-currency bonds remain a compelling opportunity from a relative-return perspective versus the other major asset classes we track. We think it can generate mid- to high-single-digit returns in our most likely five-year scenarios—admittedly not spectacular returns but better than any other asset class. The returns are driven by the underlying bond yields plus an expectation of at least mild currency appreciation we expect given the stronger fiscal conditions in much of the developing world.

High-Yield Bonds: High-yield has continued to do well in 2010, though the returns have been much more moderate. As high-yield has rallied, we have reduced our exposure. We no longer view the asset class as clearly superior to equities (both have low expected returns in most scenarios). High-yield could continue to generate decent returns in the short to intermediate term if the economy continues to gradually improve and interest rates remain low. But the huge increase in prices of high-yield bonds (now at or approaching par for most of the high-yield universe) means that our expectations for returns over our five-year investment horizon have fallen.


Tarpley & Underwood Financial Advisors, LLC      First Quarter 2010