Market Sector Update
- The Federal Reserve (Fed) announced a reduction in its monthly bond purchases by $10 billion from $85 billion to $75 billion. We are looking forward for the Fed to engage in further reductions over the remainder of 2014 as long as the economic data supports it.
- The initial discussion of Fed tapering produced a substantial tightening in emerging market (EM) financial conditions as yields spiked and exchange rates and equity markets retraced. EM countries that have been running current account and fiscal deficits have been hit particularly hard during this volatility.
- The European Central Bank (ECB) reiterated forward guidance that rates will remain at the present level or lower for an extended period. Growth momentum is set to stay subdued while inflation teeters on the boarders of deflation.
- The Bank of Japan will continue its easing policy into 2014. We see a major slowdown in Japan’s gross domestic product (GDP) growth in 2014.
- In China, we think that the government will lower its 2014 GDP growth target to 7%, based upon the government’s continued desire to rebalance the economy from the export led to domestic consumption oriented.
- We continue to seek opportunities to reduce the volatility in the Fund.
- We are maintaining a low duration strategy for the Fund as it allows us a higher degree of certainty involving those companies in which we can invest.
- We continue to focus on maintaining proper diversification for the Fund.
- We look for opportunities to make longterm investments in foreign currencies in certain emerging markets should they weaken versus the dollar.
- Given our expectation of slow growth in the developed world into 2014, we expect short-term interest rates to remain low overall.
- We believe developed markets such as the U.S., Japan, and the U.K. are likely to grow a little more in 2014 than they did in 2013. The Eurozone’s growth looks to be stable.
- However, longer Treasury rates will be more volatile and subject to market emotions regarding fiscal and monetary policies.
- The U.S. continues to be a safe haven globally, and will continue to attract funds from outside the U.S. In this scenario, there will be opportunities to make long-term investments in foreign currencies in certain emerging markets should they weaken versus the dollar.
- In contrast, the Bank of Japan, Reserve Bank of Australia, and the European Central Bank are all likely to at least contemplate further easing over the course of the year. This all bodes well for the U.S. dollar.
The opinions expressed in this commentary are those of the Fund’s manager and are current through Dec. 31, 2013. The manager’s views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed. Past performance is no guarantee of future results.
Risk Factors. As with any mutual fund, the value of the Fund’s shares will change, and you could lose money on your investment. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. International investing involves additional risks including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. Fixed-income securities are subject to interest-rate risk and, as such, the net asset value of the Fund may fall as interest rates rise. Not all funds or fund classes may be offered at all broker/dealers. These and other risks are more fully described in the Fund’s prospectus.
Investors should consider the investment objectives, risks, charges and expenses of a fund carefully before investing. For a prospectus, or if available, a summary prospectus, containing this and other information for the mutual funds offered by Waddell & Reed, call your financial advisor or visit us online at www.waddell.com. Please read the prospectus or summary prospectus carefully before investing.