putnam: capital markets outlook q2 2012

8/2/2019 Putnam: Capital Markets Outlook Q2 2012

1/12

Q2 2012 Putnam Perspectives

Capital Markets OutlookJerey L. Knight, CFAHeadoGlobalAssetAllocation

Key takeaways

A record drop in volatility does not signal imminent market reversal.

Europes lag in the rally points to a possible source o weakness.

Muted rise in bond yields may refect economic concerns.

Putnams outlook
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2/12

Q2 2012 | Capital Markets Outlook

Investment themes

A record drop in volatility does not signal

imminent market reversal.

Marketconditionsthusarinhaverewardedthose

whohaveembracedinvestmentriskInact,othethirteen

weeksintherstquartero,onlytwosawnegative

returnsromtheS&PChartingmarketpricesorthis

quarterisremarkablenotsomuchbecauseothemarkets

level,orevenitstrajectory,asoritsuncannysteadiness

Intruth,areturnorstocks,aspostedbytheS&P

intherstquarter,isnotterriblyuncommonOntheother

hand,therecentcollapseinvolatilityismuchmorerare

Whatdoesthismeanorthemarketsprospectsinthe

secondquarter?

Weexaminedthedatasinceorsix-monthchangesin

impliedvolatilityasmeasuredbytheVIX(CBOEVolatility

Index)Otencalledtheearindex,theVIXreectsinvestor

expectationsasmeasuredbyoptionscontractsOur

researchshowsthatthereductioninimpliedvolatilitythat

wehaveseenoverthepastsixmonthsisunprecedented

FigurepresentsdataortheninelargestVIXdeclines

since,showingjusthowunusualthepastsixmonths

havebeen

Figure 1. Stocks typically rallied ater volatility dropped.

After the largest drops in volatility over two quarters, stocks have appreciated in the following quarter

6 out of 8 times (9/30/903/31/12)

10

20

30

40

6/30/03

12/31/02

3/31/03

9/30/02

3/31/91

6/30/91 6/30/99 6/30/02 6/30/03 9/30/03 9/30/09 12/31/09 3/31/11

9/30/90

6/30/09

12/31/08

3/31/02

9/30/01

12/31/10

6/30/10

3/31/99

9/30/98

9/30/09

3/31/09

3/31/12

9/30/11

5.9%7.0% 6.0%

15.6%15.4%

2.6%

-13.4%

-0.2%

Perormance o S&P 500 in subsequent quarter

Volatility

(VIX)

Source:PutnamTheVIX(CBOEVolatilityIndex)isakeymeasureomarketexpectationsonear-termvolatilityconveyedbyS&Pstockindex

optionpricesPastperormanceisnotaguaranteeoutureresults

The reduction in implied volatility that

we have seen over the past six months

is unprecedented.


3/12

PUTNAM INVESTMENTS | putnam.com

Fromthesedata,itisclearweshouldnotautomatically

assumeaturnortheworseisnearInact,historyindi-

catesitismorecommonaterasignicantdeclinein

volatilityorthestockmarkettomovehigheroverthe

subsequentquarterthantomovelowerIndeed,inthe

absenceoanycatalysttodisruptthiscalmadvance,wearecontenttogivethedurabilityostockmarketstrength

thebenetothedoubtasthesecondquarterbegins

Still,theplungeinvolatilitypromptstwoobservations

First,wemustconcedethatwehaverarelyobserved

signicantdeclinesinvolatilitystartingromthelevelswe

seetodaySinceatleastsomeothemarketsadvance

overthepastsixmonthsmustbeattributedtodeclining

investorriskaversion,itstandstoreasonthatmuchothis

orceisbehindus,andurtherstockmarketadvancesmust

comerommoreundamentalcatalysts,suchasearnings

anddividendsAssuch,thetrajectoryomarketgains

romrecentlevelsislikelytobelowerthanthatotherst

quarterSecond,itisworthnotingthatdownsidehedging

strategieswithoptionshavebecomesignicantlymoreaordablenowthantheyweresixmonthsago,andmay

beattractiveshouldcertainriskscenariosmaterializeinthe

comingmonths

Europes lag in the rally points to a possible

source o weakness.

Asvolatilityhasdroppedsincelate,riskassetsoall

kindshaveralliedContinuingthistrend,stocks,commodi-

ties,creditinstruments,andemerging-marketcurrencies

showedsharpgainsintherstquarterForthemostpart,theseassetshavebehavedastheorywouldpredict:The

morevolatileones,likesmall-capstocks,emerging-market

stocks,andevennancialstocks,postedthehighest

returnsHowever,oneassetclassEuropeanstocks

deservesnotice

Thegeneralcalmthathasprevailedovermarketsmight

beattributedinparttotheEuropeanCentralBanksLong-

TermRenancingOperation(LTRO),initiatedinDecember

andexpandedinFebruary,oreventothelackoturmoil

aroundGreecesdebtdeaultButinvestorsshouldbe

careulnottoinerhastilythatalliswellinEuropeWhile

theLTROmighthaveboughtEuropesometimetodeal

withitssovereigndebtproblems,ithasdonenothingto

solvetheseproblems

Thesecondquarterwilldeliverseveralnewchallengesthat

coulddisruptthenascentcalmacrossEuropeannancial

marketsFirst,importantpoliticalelectionswilloccurin

comingmonths,includingapresidentialelectioninFrance,

nationalelectionsinGreece,andascalreerendumin

IrelandSecond,severalcountriescaughtupinthecrisis

acereundingneeds,withkeybondauctionsscheduled

inthesecondquarterorItaly,Spain,andPortugalFinally,

theimpactoausteritypoliciesshouldbegintoshow

throughineconomicstatisticsduringthesecondquarter

Further stock market advances

must come from more fundamental

catalysts, such as earnings and

dividends.

While the LTRO might have bought

Europe some time to deal with its

sovereign debt problems, it has done

nothing to solve these problems.


4/12


Alongtheselines,itistroublesometonotetherecent

underperormanceoSpain,inparticular(Figure)In

,theSpanishstockmarkethasdeliverednegative

returnsevenasmarketsworldwidehavedeliveredbroad

gainsDisconnectedmarketperormancelikethisrarely

occurswithoutaundamentalcauseInvestorsmaybe

detectinggrowingstrainsinSpain

Whilewearecomortablewithmaintainingapro-risk

stanceoverallasthesecondquarterbegins,signsostress

romthestockmarketsorromcreditdeaultswaps(CDS)

oSpain,Italy,Portugal,orAustriawouldpromptusto

reducerisklevelsInthemeantime,wecontinuetoavoid

riskinperipheralEuropeanmarkets

Muted rise in bond yields may refect

economic concerns.

Withallthepositivenewscomingromthestockmarket,

investorsmighthavepaidlessattentiontoasubtlestory-

linedevelopinginbondmarketsBondyieldsroseduring

therstquarter,andbyrecentstandards,anyincreasein

bondyieldsisnoteworthyAtthesametime,wethinkthat

therst-quarterriseinyieldsraisesanimportant,gener-

allyoverlooked,question,namely,whyhaventbondyields

risenbyamuchgreateramount?

Overthepastveyears,-yearTreasuryyieldshave

generallymovedinnearlockstepwithstockprices

(Figure)Everytimestockssoldo,bondyieldsdropped

alongsidethemHowever,overthepastsixmonths,the

reversehasnotbeentrueDespiteasignicantriseinstock

prices,bondyieldshaverisenonlymodestly

Figure 2. Spain has lagged in Europes LTRO-ueled recovery.

Performance of select European stock markets since start of ECBs LTRO program, 12/21/113/31/12

95

100

105

110

115

120

Spain (IBEX 35)

Italy (FTSE MIB)

France (CAC 40)Germany (DAX)

12/21/11 3/31/12

Source:BloombergValuesrebasedtoonDecember,,thebeginningotheEuropeanCentralBanksrstLong-TermRenancingOperation

Signs of stress from the stock markets

or from credit default swaps (CDS) of

Spain, Italy, Portugal, or Austria would

prompt us to reduce risk levels.Why havent bond yields risen by a

much greater amount?


5/12


AswithEuropeanstocks,thedisconnectedperormance

obondsisnoteworthy,inouropinionOcourse,parto

theexplanationorlowTreasuryyieldsisthattheFedhas

beenpurchasingTreasurieswiththegoalokeepingrates

lowBeyondthis,however,wesurmisethatbondinves-

torsmaybedetectingagradualslowingineconomicdata,

basedoncertainkeydevelopmentsintherstquarter

Forexample,therateoeconomicsurpriseisdeteriorating

sharplyintheUnitedStatesandaroundtheworld,rising

oilpricesareeatingintodisposableincome,andmanuac-turingsurveyshaverespondedonlymildlytotheeconomic

recoveryInlightothesedevelopments,andrecognizing

thatbondsarelessovervaluedtodaythanatthebeginning

otheyear,webelieveitremainsprudenttomaintainsome

exposuretointerest-raterisk,whichmayalsobehelpul

giventhepotentialthreatswehaveoutlined

Overall,wearecontenttogiveriskassetsthebeneto

thedoubtasthesecondquarterbeginsHowever,we

regardthetwomarketnonconormiststhebehavior

oEuropeanstocksandTreasurybondyieldstobe

remindersthatrisksremain,andthatwehavenotescaped

thesecularpressuresbroughtonbythestill-deating

globaldebtbubble

Figure 3. Bucking recent history, Treasury yields have not ollowed stock prices higher.

Comparison of S&P 500 Index and yields of 10-year Treasuries, 3/31/073/31/12

1%

4%

7%

600

1100

1600

S&P

level Y

ield

3/07 3/08 3/09 3/10 3/11 3/12

Source:Bloomberg

S&P 500 Index

10-year U.S. Treasury yield

We surmise that bond investors may

be detecting a gradual slowing in

economic data, based on certain key

developments in the first quarter.

We have not escaped the secular

pressures brought on by the still-

deflating global debt bubble.


6/12


Asset class views

U.S. equity

Stocksralliedsharply,postingtheirstrongestrst-quarter

gainsinoveradecadeandreversingsomeotheear-

basedvaluationanomalieswesawinFinancials,

anextremelyundervaluedsectorattheendo,was

thebest-perormingS&Psectorinthemostrecent

quarterUtilities,asaehavenorinvestorsinwhenit

advanced,wastheonlysectorwithnegativeresults

intherstquarter(Source:Putnam)Small-capandlarge-

capstocksappreciatedatroughlythesamepace

Thequartersstunninggainscanpartlybecharacterized

asarelierallyUSeconomicgrowthcontinuedtosurprise

ontheupside,andinvestorsappeartohaveconcludedthe

recoveryhasbecomesustainableTheGDPgrowthreportedortheourthquarterwasnotparticularlyrobust,

butitwassufcienttoalleviateinvestorconcernsEurope

alsoprovedtobemorestableandalittlestrongerthan

earedGreeceunderwentanorderlydeaultwithout

muchincidenceagainstthebackdropotheECBinjecting

liquidityintothenancialsystem

Corporateearningsweretheotherenginedrivingstock

pricesAtover$pershare,theS&Psprojected

earningsareatall-timehighs,continuingonatrajectory

thatstartedinEarningsgrowthisnowbeginning

toshowsignsoatigueTheourthquarterssingle-digit

protgrowthmarkedadeclineromgrowthinthethird

quarter,andourexpectationisorsingle-digitearnings

growthinWhilethisdoesnotyettranslateintoan

expensivemarket,inourview,thedaysoeverycompany

beatingexpectationsareprobablyover

ThenearrallysinceOctobernecessarilyguresinto

ourviewotheopportunitysetWebelievevaluations

remaincompellinginmanyareasothemarket,butno

longerreecttheextremeswesawintheallo

Opportunitiesexistinstocksthathaveglobaleconomic

sensitivity,areinthenancialssector,orhavesomemacroconcern,inourviewAcrosstheeconomy,cash

onbalancesheetscontinuestogrow,soweexpectto

seeacontinuationothetrendoestablishingorraising

dividendsAtattheendoMarch,theS&Ps

dividendyieldisnowroughlyequivalenttotheyield

ona-yearTreasury(Sources:PutnamandUSFederal

Reserve)

Insum,ouroutlookisconstructiveandpro-cyclicalWe

believecorporateundamentalssupportthecontinuation

othecurrentrallybutthattherewillbeincreasingbenet

tocareulstockselectiongoingorwardAshasbeenthe

caseorthepasttwoyears,macroriskswhetherthe

concernisahardlandinginChina,aspikeinoilprices,or

economicdeteriorationinEuropemayreassertthem-selvesatanytime

Non-U.S. equity

Inthesecondhalo,internationalstocksgenerally

sueredintheaceocompoundingsovereignrisksin

EuropeButasmacroeconomicearsgraduallylosttheir

griponmarketsinDecemberandJanuary,

investorsexpressedincreasingenthusiasmaboutabroad

varietyointernationalstocksWiththisrenewedinterest,

correlationsellacrosstheglobalequitymarkets,and

internationalstocksreboundedsharplyForthesecond

quarterandbeyond,webelievethatnon-USstockunda-

mentalswillcontinuetomatter,makingstockselectionall

themoreimportantinseekingpositivereturns

Opportunities exist in stocks that have

global economic sensitivity, are in thefinancials sector, or have some macro

concern, in our view.

Our expectation is for single-digit

earnings growth in 2012.


7/12


Someothemostattractivenon-USequitiesromavalu-

ationstandpointarethosethatsoldomostsharplylast

yearBargainhuntinginEurope,orexample,isbackon

theagendaWeexpecteconomicallysensitivesectors,

ingeneral,tobenetromthedecliningperceptiono

Europeanmacroeconomicrisks,andthatconsumerdiscretionarystocks,inparticular,willbewell-positioned

inthisenvironmentFurthermore,althoughcompanydata

suggesttheeconomyismakingorwardstrides,investor

attitudesrequentlyrangeromambivalenttonegativeon

theEuropeanconsumersabilitytosupportabroadrange

obusinessesThissustainsthevaluationopportunityin

Europe,inourview,inanindustrysuchasbanking,where

weeelanumberohigher-qualitybankswillultimately

distinguishthemselvesromlower-qualitybanksthatare

ingreaternancialdistress

Intheemergingmarkets,investorcapitalhasreturnedand

appetiteorriskhasgrown,despiteearsoaslowdown

andthepotentialorpolicyerrorinChinaContrarytotheconsensus,wetakeaconstructiveviewonChinaWhere

othersseesluggishdata,weseeamoresustainable

growthpattern,bolsteredbythegrowingsignicanceo

theChineseconsumerandtheimpressivepolicyarsenal

oChinascentralbankOthercountrieswithpositive

undamentalsandexcellentseculargrowthstories,such

asBrazilandIndonesia,alsooerarangeoattractive

opportunitiesthataremadeevenmorecompellingby

easingeconomicpolicyAsemergingeconomiesloosen

policywhiletakingcarenottogotooaritcreatesapositiveenvironmentorequities,particularlybanks,

consumerdiscretionarystocks,anddomestic-ocused

industrials,inourview

TheUSeconomy,meanwhile,isshowingcontinuedsigns

ostrength,andwhileEuropemaytipintorecession,

weexpecttheproblemswillbecontainedTherisko

sustainedhighoilpricesisoneotheprimaryactorsthat

couldcrimpglobalgrowthButidiplomaticsolutions

areoundthatcanhelpdeusesomeotheunderlying

geopoliticalrisks,itcouldarrestrisingoilpricesand

lendurthersupporttonon-USequitymarketsandthe

continuingrecovery

Fixed income

Thexed-incomemarketsingeneralbenetedromachangeininvestorsriskoutlookinCentralbanks

continuedtoprovideliquidityornancialmarkets,bothin

EuropethroughtheLTROandintheUnitedStates,where

thereisspeculationthattheFederalReserve(theFed)is

consideringathirdroundoquantitativeeasing(QE)This

accommodativepolicyhelpedoersomelevelosupport

orthebondmarketsaterachallengingourthquarterin

whichinvestorsdemonstratedlittleappetiteorrisk

U.S. fxed income IntheUnitedStates,interestrates

climbedhigher,evenontheshortendotheyieldcurve,

inpartreectingincreasingoptimismaboutthestrength

otheeconomicrecoveryRecenteconomicdata,while

notindicativeoastrongrecovery,hasgenerallycome

instrongerthananticipatedTherecontinuestobesome

speculationastowhethertheFedintendstolaunchQE

RecentstatementsbyChairmanBenBernankesuggest

thattheFediscareullymonitoringthehealthothe

economyandthatmorepolicyinterventionisapossibility

ItwasanunusuallymildwinterinmuchotheUnited

States,andsomemarket-watchershavebeenraisingquestionsastowhetherthestronger-than-expected

economicdatawasdrivenbythewarmerweatherWe

wontknowtheanswerorsureuntildataorMarchand

Aprilbecomeavailableaspointsocomparison,butitsan

issuewerekeepingacloseeyeonnonetheless

In the emerging markets, investor

capital has returned and appetite

for risk has grown, despite fears of a

slowdown and the potential for policy

error in China.

The risk of sustained high oil prices is

one of the primary factors that could

crimp global growth.


8/12


Inthenon-governmentsectors,mortgagecredit

specically,non-agencyresidentialmortgage-backed

securities(RMBS)andcorporatecreditpostedstrong

returnsorthequarterRMBSwasoneothehardest

hitsectorsattheendo,asinvestorsearedthat

Europeanbanks,whichholdasignicantvolumeothese

securities,wouldbeorcedtoliquidatepositionsquickly

toraisecapitalWhiletherehasbeensomeselling,itwas

nowherenearthemagnitudeinvestorseared,andthe

sectorralliedintherstquarteroOnthecorporate

side,undamentalsremainedattractive,withpositive

earningsandlowdeaults,andhighyieldperormed

particularlywellEmerging-marketdebtalsobeneted

romtheinvestorsincreasedriskappetitesduring

theperiod,withcommodity-exportingcountrieslike

VenezuelaandRussiaenjoyinghigheroilpricesand

strongdemand

Non-U.S. fxed income TheGreekdeault,which

occurredinFebruary,wasanorderlyone,andappears

unlikelytostartawaveorestructuringsinotherperipheral

EuropeancountriesororceEuropeanbankstorapidly

de-leverandraisecapitalThatsaid,whiletheshort-term

liquidityissuesatstakeinEuropeappeartobeunder

control,thelarger,long-termstructuralproblemshave

beenlargelyunaddressedthusarEuropeishometoa

varietyoeconomies,eachwithitsownsetochallenges,

whetherahousingmarketbubble,anover-leveraged

bankingsector,oraworkorcestrugglingtoremain

competitiveTheseeconomiesnolongerhaveasbroad

asetopolicytoolstoaddresstheirchallenges,either

throughdevaluingtheircurrencyoradaptingmonetary

policytailoredtotheirparticularcircumstancesAsit

stands,theEuropeanCentralBankcanonlysetasingle

policyorthisdiversegroupoeconomiesdespite

theirdierentdynamicsanddierentneedsUntilthatundamentalproblemisaddressed,webelieveinvestors

willcontinuetoseewavesovolatilityromtheEuropean

bondmarkets

U.S. tax exempt Overallcreditqualityacrossthe

municipalbondmarketremainsgenerallysoundandis

showingsignsoimprovementWebelievethatthescal

conditionsostatesandmunicipalitiesareindicativeo

stability,butthatstateswillcontinuetoacenancial

challengesastheeconomicrecoveryworkstogainsome

tractionTaxreceiptsarebeginningtoincrease,albeit

slowly,andwebelieveactualdeaultswillremainrelatively

lowin,butwewouldnotbesurprisedbyanuptick

inlocalGOsOurprimaryconcernsremainocusedon

thebroadeconomyandCongresssplanstoreducethe

decitBroad-basedtaxreorm,achangeinthetaxstatusomunicipalbonds,andsignicantcutsinstateundingall

wouldhaveconsequencesorthemunicipalbondmarket

Wearemonitoringallotheseactorsclosely,andbelieve

ourundsarewellpositionedorthisless-than-certain

environmentgoingorward

Commodities

WecontinuetoavoranunderweighttocommoditiesAs

wearticulatedlastquarter,wendcommodities,overall,to

bejustanotherwaytotakeinvestmentrisk,andagenerally

inerioroneatthatCommoditiesunderperormedequities

duringtherstquarter,whichwasastrongquarterorrisk

assetsDuetotheirnegativerollyield,economicsensitivity,

andhighvolatility,wewouldexpectcommoditiestolag

otherriskassetsinasell-oaswell

On the corporate side, fundamentals

remained attractive, with positive

earnings and low defaults, and high

yield performed particularly well.

Europe is home to a variety of

economies, each with its own set of

challenges, whether a housing market

bubble, an over-leveraged banking

sector, or a workforce struggling to

remain competitive.

We believe actual defaults will remain

relatively low in 2012, but we would not

be surprised by an uptick in local GOs.


9/12


MARKET TRENDS

Index name (returns in USD) 1Q 1212 months

ended 3/31/12

EQUITY INDEXES

Dow Jones Industrial Average 8.84% 10.18%

S&P 500 12.59 8.54

Nasdaq Composite 18.67 11.16

MSCI World (ND) 11.56 0.56

MSCI EAFE (ND) 10.86 -5.77

MSCI Europe (ND) 10.66 -7.54

MSCI Emerging Markets (ND) 14.07 -8.81

Tokyo Topix 18.47 0.75

Russell 1000 12.90 7.86

Russell 2000 12.44 -0.18

Russell 3000 Growth 14.58 10.14

Russell 3000 Value 11.16 4.30

FIXED-INCOME INDEXES

Barclays Capital U.S. Aggregate Bond 0.30% 7.71%

Barclays Capital 10-Year Bellwether -2.25 14.97

Barclays Capital Government Bond -1.12 7.89

Barclays Capital U.S. Mortgage-Backed Securities (MBS) 0.57 6.21

Barclays Capital Municipal Bond 1.75 12.07

CG World Government Bond ex-U.S. -0.22 3.93

JPMorgan Developed High Yield 5.46 7.81

JPMorgan Global High Yield 5.87 7.41

JPMorgan Emerging Markets Global Diversied 4.25 10.94

S&P LSTA Loan 3.76 2.85

COMMODITIES S&P GSCI 5.88% -6.21%

CASH

BoA ML U.S. 3-Month Treasury Bill 0.01% 0.06%

ItisnotpossibletoinvestdirectlyinanindexPastperormanceisnotindicativeoutureresults

Withincommodities,wecontinuetoavortheenergy

subsectorDemandoroilremainsstrongeveninlight

orisingprices,andtheongoingthreatogeopolitical

tension,principallyinIran,couldsupportoilpricesinthe

monthsaheadOntheotherendothespectrum,we

regardindustrialmetalsasthemostunattractivesub-

sector,andparticularlyvulnerabletoanysoteningo

economicgrowth

Currency

Therstquartersawasizeableincreaseinliquidityand

expectationsormorewiththesecondECBLTROatthe

endoFebruaryThisenvironmentwasquiteconducive

orriskassetsandorthecarrystrategywithinoreign

currencyWithbetterUSeconomicdata,adecreasing

probabilityoadditionalquantitativeeasingmeasures

(QE)intheUnitedStatesandamoredovishBanko

Japan(BoJ),themarkethasbeguntoreplacetheUS

dollarwiththeyenastheprimaryundingcurrency


10/12


The Barclays Capital Government Bond Index is an

unmanaged index o U.S. Treasury and government

agency bonds.

The Barclays Capital Municipal Bond Index is an

unmanaged index o long-term xed-rate investment-

grade tax-exempt bonds. You cannot invest directly inan index.

The Barclays Capital 10-Year U.S. Treasury Bellwether

Index is an unmanaged index o U.S. Treasury bonds with

10 years maturity.

The Barclays Capital U.S. Aggregate Bond Index is

an unmanaged index used as a general measure o U.S.

xed-income securities.

The Barclays Capital U.S. Mortgage-Backed Securities

(MBS) Index covers agency mortgage-backed pass-

through securities (both xed-rate and hybrid ARM)

issued by Ginni e Mae (GNMA), Fannie Mae (FNMA), and

Freddie Mac (FHLMC).

The BoA Merrill Lynch U.S. 3-Month Treasury Bill Index

consists o U.S. Treasury Bills maturing in 90 days.

The Citigroup Non-U.S. World Government Bond

Index is an unmanaged index generally considered to be

representative o the world bond market excluding the

United States.

The Dow Jones Industrial Average Index (DJIA) is an

unmanaged index composed o 30 blue-chip stocks

whose one binding similarity is their hugene ss each

has sales per year that exceed $7 bil lion. The DJIA has

been price-weighted since its inception on May 26, 1896,

refects large-cap companies representative o U.S.

industr y, and historically has moved in tandem with other

major market indexes such as the S&P 500.

The Goldman Sachs Commodity Index is a composite

index o commodity sector returns that represents a

broadly diversied, unleveraged, long-only position in

commodity utures.

The JPMorgan Developed High Yield Index is an

unmanaged index o high-yield xed-income securitiesissued in developed countries. You cannot invest directly

in an index.

The JPMorgan Emerging Markets Global Diversifed

Index is composed o U.S. dollar-denominated Brady

bonds, eurobonds, traded loans, and local market debt

instruments issued by sovereign and quasi-sovereign

entities.

The JPMorgan Global High Yield Index is an unmanaged

index that is designed to mirror the investable universe o

the U.S. dollar global high-yield corporate debt market,

including domestic (U.S.) and international (non-U.S.)

issues. International issues are composed o both

developed and emerging markets.

The MSCI EAFE Index is an unmanaged list o equity

securities rom Europe and Australasia, with all valuesexpressed in U.S. dollars.

The MSCI Emerging Markets Index is a ree-foat-

adjusted market-capitalization-weighted index that is

designed to measure equity market perormance in the

global emerging markets.

The MSCI Europe Index is an unmanaged list o equity

securities originati ng in any o 15 European countries, with

all values expressed in U.S. dollars.

The MSCI World Index is an unmanaged list o securities

rom developed and emerging markets, with all values

expressed in U.S. dollars.

The Nasdaq Composite Index is a widely recognized,

market-capitalization-weighted index that is designed

to represent the perormance o Nasdaq securities and

includes over 3,000 stocks.

The Russell 1000 Index is an unmanaged index o the

1,000 largest U.S. companies.The Russell 2000 Index is an unmanaged list o common

stocks that is requently used as a general perormance

measure o U.S. stocks o small and/or midsize

companies.

The Russell 3000 Growth Index is an unmanaged index

o those companies in the broad-market Russell 3000

Index chosen or their growth orientation.

The Russell 3000 Value Index is an unmanaged index o

those companies in the broad-market Russell 3000 Index

chosen or their value orientation.

The S&P/LSTA Leveraged Loan Index (LLI) is an

unmanaged index o U.S. leveraged loans.

The S&P 500 Index is an unmanaged list o common

stocks that is requently used as a general measure o U.S.

stock market perormance.

The Tokyo Stock Exchange Index (TOPIX) is a market-

capitalization-weighted index o over 1,100 stocks traded

on the Japanese market.

Wehaveavoredthedollarmodestlyasriskaversionhas

remainedsubduedThisstanceissupportiveocurrencies

thatbenetromrisingcommoditypricesandapro-

cyclicalorientation,especiallythosewithgreatertradeties

totheUnitedStatesIngeneral,exposuretocurrencies

ocommodity-exportingcountrieshasbeentempered

duetouncertaintyregardingChinaanditsdemandor

commoditiesInterest-ratemomentumhasmovedinavor

otheUSdollarandagainsttheJapaneseyen,butthedollarshouldalsoremainsupportedagainstthemajor

currenciesduetopositiveequityows,increasedyield

support,andthecurrentphaseotheglobalgrowthcycle

InEurope,theECBhasconducteditssecondthree-year

LTROtoensurebanksareabletoachievenancingAsa

result,theriskpremiumortheeurohasbeenreducedas

nancialdisasterhasbeenavertedHowever,economic

dataremainmodestatbest,andthereisstillpressureon

EuropeansovereignbondsThiswillkeepinterest-ratecutsapossibilityandthesizeotheECBbalancesheetlarger

thanthatotheFed,withthepotentialtogetevenbigger

Theseactorsshouldkeeppressureontheeuro

WeavorthedollaroverthepoundastheBankoEngland

(BoE)hasincreaseditstargetholdingsoUKgovernment

GILTbondsThismoveexpandstheBoEsquantitative

easingandshouldkeeppressureonthecurrencyRelative

totheeuro,thepoundshouldbesupportedasreserve

managerscontinuetodiversiyawayromthesingle

currency

The dollar should remain supported

against the major currencies due to

positive equity flows, increased yield

support, and the current phase of the

global growth cycle.


11/12

Jefrey L. Knight, CFA

Head o Global Asset Allocation

James A. Fetch

Portolio Manager

Robert J. Kea, CFA

Portolio Manager

Joshua B. Kutin, CFA

Portolio Manager

Robert J. Schoen

Portolio Manager

Jason R. Vaillancourt, C

Portolio Manager

The Asset Class Views reect the thinking o Putnamssector research experts across global equity and fxed-

income markets, distilled through senior investment

leaders and portolio managers across Putnam.

U.S. Equities

Robert D. Ewing, CFA

Co-Head o U.S. Equities

International Equities

Shep Perkins, CFA

Co-Head o International

Equities

Fixed Income

D. William Kohli

Co-Head o Fixed Income

Commodities

Jefrey L. Knight, CFA

Head o Global Asset Alloc

Currency

Robert L. Davis, CFA

Analyst

WeavorthedollarovertheJapaneseyenastheBank

oJapansurprisedthemarketswithitsdecisiontoraise

thetargetonitscurrentAssetPurchaseProgramby

trilliontotrillionTherelativeshitinmonetary

policyotheBoJandtheFed,whichnowappearsless

likelytointroduceaQEprogramollowingbetterrecenteconomicdata,hascausedtheyentoonce

againbecometheundingcurrencyortheoreign

currencymarketsThisviewissubjecttovolatilityasthe

BoJmeetstwiceinAprilandtheFederalOpenMarket

Committeehasatwo-daymeetinginlateAprilWhile

USdataremainsupportive,risingUSyieldsshould

continuetodrivethedollarhigherversustheyen

Putnams veteran senior market

strategists review opportunities

and risks across global asset classe

The Investment Themes o Capital Markets Outlook

are developed by Putnams Global Asset Allocation

Team, one o the industrys largest and longest-tenure

groups dedicated to multi-asset strategies. The team

monitors global markets on an ongoing basis and each

quarter produces a comprehensive review o invest-

ment potential and risks. This rigorous research proces

guides the teams management o Putnam Global Asse

Allocation Funds, Putnam RetirementReady Funds,

Putnam Retirement Income Liestyle Funds, and PutnaAbsolute Return 500 Fund and 700 Fund.


12/12

NOTES

The opinions expressed in this article represent the current, good-

aith views o the author(s) at the time o publication and are

provided or limited purposes, are not denitive investment advice,

and should not be relied on as such. The inormation presented in

this article has been developed internally and/or obtained rom

sources believed to be reliable; however, Putnam Investmentsdoes not guarantee the accuracy, adequacy, or completeness o

such inormation. Predictions, opinions, and other inormation

contained in this article are subject to change continually and

without notice o any kind and may no longer be true ater the

date indicated. Any orward-looking statements speak only as o

the date they are made, and Putnam assumes no duty to and does

not undertake to update orward-looking statements. Forward-

looking statements are subject to numerous assumptions, risks,

and uncertainties, which change over time. Actual results could

dier materially rom those anticipated in orward-looking state-

ments. Past perormance is not a guarantee o uture results. As

with any investment, there is a potential or prot as well as the

possibility o loss.

The inormation provided relates to Putnam Investments and its

afliates, which include The Putnam Advisory Company, LLC and

Putnam Investments Limited.

Prepared or use in Canada by Putnam Investments Inc.

[Investissements Putnam Inc.] (o/a Putnam Management in

Manitoba). Where permitted, advisory services are provided in

Canada by Putnam Investments Inc. [Investissements Putnam

Inc.] (o/a Putnam Management in Manitoba) and its afliate, The

Putnam Advisory Company, LLC.

Diversication does not assure a prot or protect against loss. It is

possible to lose money in a diversied portolio.

In the United States, mutual unds are distributed by Putnam Retail Management.

putnam.com CM /

Consider these risks beore investing: Internationalinvestinginvolvescertainrisks,suchascurrencyuctuations,

economicinstability,andpoliticaldevelopmentsInvestmentsinsmalland/ormidsizecompaniesincreasetherisko

greaterpriceuctuationsFundsthatinvestinbondsaresubjecttocertainrisksincludinginterest-raterisk,creditrisk,and

inationriskAsinterestratesrise,thepricesobondsallLong-termbondsaremoreexposedtointerest-rateriskthanshort-termbondsUnlikebonds,bondundshaveongoingeesandexpensesLower-ratedbondsmayoerhigheryieldsin

returnormoreriskFundsthatinvestingovernmentsecuritiesarenotguaranteedMortgage-backedsecuritiesaresubject

toprepaymentriskCommoditiesinvolvetherisksochangesinmarket,political,regulatory,andnaturalconditions

I you are a U.S. retail investor, please request a prospectus, or a summary prospectus i available, rom your fnancial

representative or by calling Putnam at 1-800-225-1581. The prospectus includes investment objectives, risks, ees,

expenses, and other inormation that you should read and consider careully beore investing.

putnam: capital markets outlook q2 2012

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