Economic Outlook for the second half of 2012

1. SEI Investment Management Unit
Commentary
Economic Outlook
Second Quarter 2012
By: James R. Solloway, CFA, Managing Director, Senior Portfolio Manager
Investors’ Lament: “No Cure for the Summertime Blues”
The Global Portfolio Strategies Group recently released its second-quarter 2012 economic outlook. A summary of its
conclusions is provided below:
Global equity markets peaked in early April and fell sharply in May, which was not a complete surprise to us. At
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the beginning of the quarter, we speculated that an exuberant S&P 500 Index could reverse by up to 10%. From
the peak in early April, it fell by almost exactly 10% by early June.
It could be the case that this presents a good buying opportunity, but economic and political uncertainties have
intensified in the intervening months. While we are not compelled to reduce equity exposures below their strategic
target weights, we do think it is better to err on the side of caution and maintain a neutral stance for now.
We continue to favor U.S. equities over international, especially Europe. The recent European Union agreement,
while a step forward, is not a game changer in our view. In contrast, the U.S. economy and financial system
remain in fairly decent shape, U.S. equity valuations have declined from their recent peak, and a modestly
expanding economy and moderate earnings growth bode well for a continuation of the cyclical bull market.
Unfortunately, politics are creating a level of uncertainty in the near term that is trumping bullish U.S.
fundamentals. In Europe, serious thought now needs to be given to once-unthinkable break-up scenarios. And if
policymakers do not act to avert automatic tax hikes and spending cuts in 2013, the U.S. could quickly fall into
recession. If there is a bull market anywhere, it is in fear. If there are asset bubbles to be found, it is in the
sovereign debt of the safe-haven countries.
The U.K. economy has felt the full force of the slumping eurozone, coming on top of domestic fiscal austerity. The
government recently committed itself to additional liquidity injections and a targeted fiscal stimulus. Fortunately,
inflation is finally ebbing from the stubbornly high rates of last year, providing the needed flexibility to respond
more forcefully to the slowdown.
Emerging markets have gone through a soft patch, partially owing to a triple dose of trouble, including falling trade
with Europe, falling trade among emerging countries, and tighter trade credit as stressed commercial banks cut
back their lending exposures. The sharp currency depreciation experienced by many emerging countries,
combined with aggressive monetary policy actions, should provide a boost to these economies in the months
ahead.
Emerging market investors have faced harsh challenges during the past quarter, grappling with slowing growth
and severe declines in local currencies. Emerging market equities are starting to look cheap on the basis of
1 Standard & Poor’s 500 Stock Index (S&P 500): An index comprised of 500 widely held common stocks considered to be representative of the U.S.
stock market in general. The S&P 500 is often used as a benchmark for equity fund performance.
© 2012 SEI 1

2. earnings, cash flow and dividend yields. When the “risk-on” trade comes back into vogue, we think emerging
market equity could be a major beneficiary.
As in recent summers, the investing environment has turned challenging. Market participants face a raft of
uncertainties. Will the favorable market response to the latest European agreement last any longer than prior
ones? How serious is the U.S. soft patch? Who will be elected in November? Will Congress jump off the fiscal
cliff at the beginning of 2013? Not only is it hard to guess the answers to these questions, but it is just as hard to
gauge the reaction of the markets. In this environment, we expect markets to remain choppy and news-driven
going into the November elections.
A full-length paper is available if you wish to learn more about this timely topic.
This material is provided by SEI Investments Management Corporation (SIMC) for educational purposes only and is
not meant to be investment advice. The reader should consult with his/her financial advisor for more information. This
material represents an assessment of the market environment at a specific point in time and is not intended to be a
forecast of future events, or a guarantee of future results. There are risks involved with investing, including possible
loss of principal. SIMC is a wholly owned subsidiary of SEI Investments Company.
International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from
differences in generally accepted accounting principles or from economic or political instability in other nations.
Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading
volume.
© 2012 SEI 2