Quarterly Fund Commentary
Ivy European Opportunities Fund
March 31, 2016
Market Sector Update
- Across the globe, markets were turbulent. Largely, markets receded until mid- February, but then proceeded to climb steadily through quarter end. The U.S. market was a top performer and, within Europe, France and the Netherlands led the way. On the other hand, Italy performed poorly. From a sector standpoint relative to the benchmark, energy materials and industrials performed the best, while financials, health care and consumer discretionary fell.
- Over the quarter, the U.S. dollar weakened approximately 4% versus a basket of other currencies.
- The U.S. Federal Reserve (Fed) lowered expectations of a March or June rate hike. The Fed seems worried about additional slowing growth in China, Britain leaving the European Union (Brexit), emergingmarket growth and deflationary forces.
- News out of Europe was discouraging as additional terrorist bombings occurred during the quarter. If further bombings ensue, confidence and foreign tourism will be negatively impacted. The European Union deal with Turkey to limit the number of refugees entering Europe will lower the risk of increased political turmoil resulting from additional nonqualified refugees.
- Amid growing fears of worsening economic conditions, the ECB surprised financial markets and cut interest rates to an all-time low, expanded its moneyprinting program and reduced a key bank deposit rate further into negative territory.
- As the quarter developed, fears of a global recession slightly faded as stronger economic numbers stabilized global GDP at approximately 3%.
- The Fund underperformed the benchmark for the quarter. Poor stock selection was the main driver of underperformance, though strong sector allocation was a benefit to relative results. The Fund’s overweight allocation to industrials, a relatively strong-performing sector, and underweight allocation to the poorperforming financial sector were the top relative contributors. Stock selection in health care, financials and information technology posted relative declines.
- Partial U.S. dollar currency hedges to the euro and the British pound hurt performance as those currencies strengthened relative to the U.S. dollar.
- As the quarter progressed, we maintained an overweight to more defensive sectors in our positioning versus the benchmark due to hard landing concerns in China and volatility in credit markets. The Fund increased its allocation to consumer staples and telecommunications services, but decreased exposure to consumer discretionary and health care. The Fund also lowered its exposure to Switzerland and Italy, while increasing exposure to France and the Netherlands.
- The Fund’s largest sector overweights include industrials and information technology, where we continue to find companies we believe provide good growth prospects. In our view, our underweight allocations to financials, energy, and materials tend to have poor fundamentals as the emerging-market growth engine sputters. We continue to target European names with higher exposure to the U.S. economy, and lower emerging-market exposure.
- We think global economic growth will remain slow and face additional headwinds by slower-than-anticipated emergingmarket growth. We believe monetary policy is likely to remain aggressive for the foreseeable future, but to a lesser extent in the U.S. We think the Fed will continue to raise interest rates in 2016, which will keep the markets on edge.
- Economic and political issues continue to simmer in Europe, which could result in market fluctuations. The upcoming “Brexit” vote scheduled for June 23; the Italian government negotiations on a guaranteed scheme for banks’ nonperforming loans; and the continued refugee crisis all weigh on the markets. However, we believe the European economy is on firmer footing and will likely survive these events. The weaker euro and lower energy prices continue to aid the economic recovery.
- We continue to follow policies stemming from Europe, including reforms and regulation measures from foreign governments and the ECB. We believe the U.K. referendum on remaining in the EU will be close and will put pressure on the currency as the U.K. is running current account and government deficits.
- We believe China is in a hard landing and its multi-year rebalancing to a more consumer-based economy as well as its anti-corruption efforts need to be monitored. In our view, these changes will have lasting impacts throughout the global marketplace in shaping GDP growth, commodity prices and multinational profits based in Europe and the U.S.
The opinions expressed in this commentary are those of the Fund’s manager and are current through March 31, 2016. 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 not a guarantee of future results.
Risk factors. Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. International investing involves additional risks including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. These and other risks are more fully described in the Fund’s prospectus. Not all funds or fund classes may be offered at all broker/dealers.
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