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Putnam Perspectives: Capital Markets Outlook Q3 2014

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Signs of inflation will raise the stakes for the Fed’s policy communications. Favorable conditions for leveraged strategies could reverse quickly. Reasonable valuations and the Fed’s policy goals continue to support risk assets.

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Putnam Perspectives: Capital Markets Outlook Q3 2014

  1. 1. Q3 2014 » Putnam Perspectives Capital Markets Outlook Putnam’s outlook Arrows in the table indicate the change from the previous quarter. Underweight Smallunderweight Neutral Smalloverweight Overweight Asset class EQUITY U.S. large cap l U.S. small cap l U.S. value l U.S. growth l Europe l Japan l Emerging markets l FIXEDINCOME U.S. government l U.S. tax exempt l U.S. investment-grade corporates l U.S. mortgage-backed l U.S. floating-rate bank loans l U.S. high yield l Non-U.S. developed country l Emerging markets l COMMODITIES l CASH l CURRENCY SNAPSHOT Dollar vs. euro: Favor dollar (unchanged from last quarter) Dollar vs. pound: Favor pound (from favor dollar last quarter) Dollar vs. yen: Favor dollar (unchanged from last quarter) Key takeaways • Signs of inflation will raise the stakes for the Fed’s policy communications. • Favorable conditions for leveraged strategies could reverse quickly. • Reasonable valuations and the Fed’s policy goals continue to support risk assets. Jason R. Vaillancourt, CFA Co-Head of Global Asset Allocation Signs of inflation will raise the stakes for the Fed’s policy communications. As July began, the attention of global markets was a bit distracted by the quadrennial ques- tion of which nation would win the World Cup. However, now that the tournament has concluded, by far the most pressing issue for global markets for the remainder of the third quarter will be the mounting challenge for the U.S. Federal Reserve to keep reinforcing its “optimal control” framework in the face of higher inflation data.  The Fed has a dual mandate under the law: to pursue policies that promote full employment and price stability. But many years into the recovery, we are, in the Fed’s view, still far from full employ- ment. The idea behind optimal control is that the Fed will be more tolerant of adverse moves in one objective if it is still far from achieving the second objective. In the current case, this means the Fed is willing to tolerate a little bit of inflation because it believes there is still quite a bit of slack in the labor market. In particular, the Fed has noted that real earnings, or wages adjusted for inflation, have started to stagnate recently. The constant reinforcement of the “easier for longer” message by the Fed has contributed to keeping both short rates and overall market vola- tility very low. As we move through the balance of the year, continuing to reinforce that message runs the risks that at some point, markets may come to view the Fed as being behind the curve and needing to tighten policy faster than what is currently discounted in market prices. This scenario would cause short rates and volatility across asset markets to rise quickly. Fundamental inflation measures look set to rise steadily over the next several months, in our view. Indeed, inflation “surprises” have already risen dramatically, in that inflation data have come in above economists’ expectations (Figure 1).
  2. 2. 2 Q3 2014 | Capital Markets Outlook Rising inflation data would put upward pressure on short-term rates. As we have said in the past, rising short rates in and of themselves do not necessarily present a problem for the real economy. Indeed, there is a link between real rates of interest and real economic growth. With growth clearly improving since last winter, rates should move higher. Favorable conditions for leveraged strategies could reverse quickly. For risk assets, such as stocks and high-yield bonds, the potential for volatility comes as the Fed struggles to handle the communication challenges about its policy steps. It is unwinding the extraordinary policies that have been in place for several years (Figure 2). This long period of cheap money and low volatility has created favorable conditions for many market participants to reach for yield in a leveraged fashion. Figure 1. Inflation surprises have risen in 2014 — what the Fed calls “noise” may be an emerging trend. — U.S. Inflation Surprise Index -40 -35 -30 -25 -20 -15 -10 -5 0 1/12 6/12 1/13 6/13 1/14 6/14 Source: Putnam. The U.S. Inflation Surprise Index is a quantitative measure of aggregate inflation data surprises relative to market expectations. A large positive or negative reading of the index points to accumulation of greater or less inflation than expected. “I think recent readings on, for example, the CPI index have been a bit on the high side, but I think…the data that we’re seeing is noisy. …Broadly speaking, inflation is evolving in line with the Committee’s expectations [for] a gradual return in inflation toward its 2 percent objective.” — Janet Yellen Chair, U.S. Federal Reserve, speaking at the June 18, 2014 FOMC press conference Figure 2. Volatility of stocks, Treasuries, and currencies has fallen to multi-year lows. — MOVE Index (LH scale)  — VIX Index (RH scale) — CVIX Index (RH scale) 0 14 28 42 56 70 0 50 100 150 200 250 MOVE Index 8/01 1/03 1/05 1/07 1/09 1/11 1/13 6/14 Source: MOVE (Merrill Lynch Option Volatility Estimate) is a yield curve weighted index of the normalized implied volatility on 1-month Treasury options. VIX (The Chicago Board Options Exchange SP 500 Volatility Index) reflects a market estimate of future volatility, based on the weighted average of the implied volatilities for a wide range of strikes. CVIX (Deutsche Bank Currency Volatility Index) measures the implied volatility of currency markets calculated based on the 3-month implied volatilities of nine major currency pairs. Depending on how quickly the Fed makes further policy moves, this low-cost funding and low volatility could vanish quickly.
  3. 3. PUTNAM INVESTMENTS | putnam.com 3 Depending on how quickly the Fed makes further policy moves, this low-cost funding and low volatility could vanish quickly. In turn, this would make it more difficult to exit leveraged carry trades, since everyone might head for the exit at the same time. Statements by members of the Fed have the potential to trigger a race to the exits. While many market participants know that equity volatility (both realized and implied) has been very low, another major force driving these so-called carry trades comes from officials at both the International Monetary Fund (IMF) and the Bank for International Settlements (the BIS is essentially the central bank for the world’s central banks), who have recently dropped not-so-subtle hints to central banks to be more vigilant in their oversight of so-called macroprudential supervision. In other words, low-interest-rate policies meant to foster recovery might also be creating conditions for taking undue risks with carry trades. As an example, a carry trade can involve currencies. An investor can borrow money in a country that sports low interest rates and invest the borrowings in short-term deposits in another currency that offers higher interest rates, and earn the interest-rate differential. Amid low volatility, this can be a stable source of returns. Figure 3 shows an example of a hypothetical carry trade using currencies of G-10 countries since 2009, when the Fed lowered the federal funds rate to 0–0.25%. Rather than using more extensive types of leverage, the figure simply shows the returns available from long positions in high- interest currencies and short positions in low-interest currencies. The risk is that sooner-than-expected changes in interest-rate levels could trigger volatility. What’s more, the Fed’s communication challenge has also been slightly complicated by the mid-June comments by Bank of England (BoE) Governor Mark Carney that rate hikes in the United Kingdom “could happen sooner than markets currently expect.” This statement from the head of the BoE serves as a reminder that the world’s major central banks are no longer working closely together in pursuing the same policies, as they had been for much of the period since the 2008 crisis. It is also a reminder that the extraordinarily low vola- tility in the markets during recent quarters is likely not a permanent feature. In addition, with geopolitical tensions multiplying — in Iraq, Syria, Ukraine, Nigeria, and the East and South China Seas — it is certainly easy to envision the VIX rising from the 7-year low to which it recently sank. Reasonable valuations and the Fed’s policy goals continue to support risk assets Still, despite the uncomfortable and eerie calm, and despite how well the old “sell in May and go away” adage has worked in each of the past four years, there are still encouraging signs suggesting that it’s too early to give up on risk assets. For one, the Fed has been transparent in telling markets its exact intentions over the past several years. Thus, if Janet Yellen says that the FOMC will keep easy policies in place until real wages rise comfortably, then there is no reason to doubt it. Figure 3. Cumulative total return of hypothetical G-10 currency carry trade, 1/1/09–6/30/14 For illustrative purposes only. -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 1/09 1/10 1/11 1/12 1/13 1/14 6/14 Source: Putnam. G-10 currencies are the Australian dollar, British pound, Canadian dollar, euro, Japanese yen, New Zealand dollar, Norwegian krone, Swedish krone, Swiss franc, and U.S. dollar. The hypothetical performance is based on daily rebalancing of the currency positions. This long period of cheap money and exceptionally low volatility has created favorable conditions for many market participants to reach for yield.
  4. 4. 4 Q3 2014 | Capital Markets Outlook In addition, corporate balance sheets remain in excel- lent condition by historical standards, with the economy just now entering a phase of self-reinforcing growth driven by capital expenditures. Finally, many risk assets like equities and high yield are still priced quite rationally given their fundamentals and the current phase of the business cycle. They no longer have the tailwind of being cheap, but we also do not believe them to be terribly expensive either. In short, it makes sense to maintain positions in risk assets, though it does open the possibility of seeing some excitement during the summer months, well after the entertainment of the World Cup has ended. Asset class views Equity U.S. equity In a relatively calm quarter, U.S. equities continued their notable advance. As June came to a close, the SP 500 Index posted its fifth consecutive month — and sixth consecutive quarter — of gains. While equities performed well, the most defining characteristic of the market was its lack of volatility. There were few nega- tive macroeconomic events to unnerve investors and no significant pullbacks for equities. It was a constructive quarter for the U.S. economy, as clear signs of improvement emerged after the previous quarter’s contraction. SP 500 earnings growth has been stronger than we expected, particularly for cyclical businesses that had been pressured by harsh weather conditions early in the year. In addition, earnings expec- tations for the remainder of 2014 have not changed, a positive development considering the soft first quarter. While we would not describe earnings potential as explo- sive, we believe there is room for improvement as long as economic growth remains supportive. A heightened level of merger-and-acquisition activity has also been favorable for U.S. equities. We view it as a sign that investors believe the deals will be accretive and can stimulate growth for the companies and the economy. Looking to the second half of 2014, we are mindful of the length and magnitude of the current bull market, and are taking a slightly more cautious approach to portfolio construction. Non-U.S. equity We feel that international stocks offer numerous opportunities to investors at the present time. Valuations, earnings recoveries, and restructuring oppor- tunities all continue to make the case for international stock investing fairly compelling. We believe gradual healing for Europe is under way. With positive external factors, including improving U.S. growth, stable growth in China, and incrementally recov- ering global corporate confidence, our outlook for Europe and other developed-market equities is quite positive. Notable risks for global markets include the potential for softer economic data from China as well as various political transitions in emerging-market countries such as India, Indonesia, and Brazil. Political change is rarely a seamless process, so there is room for economic and market disappointments. In addition, a number of emerging-market countries, including India, Indonesia, Brazil, Russia, and Turkey, have had to raise interest rates to stem capital outflows from their countries. Ultimately, this can have a negative impact on growth, so we remain watchful with respect to these risks and continue to be on the lookout for opportunities. Other geopolitical risks remain. The situation in Ukraine, for example, has effectively become a civil war. Iraq, too, is in crisis, as is Sudan, where ethnic tensions have similarly destabilized economic progress and political coherence. Having said that, although geopolitical crisis appears to have become the norm, the opportunities in international stocks outweigh many of the risks, in our view. Fixed income Global fixed income As 2014’s second quarter came to a close, it appeared that the U.S. economic environ- ment was transitioning to a more normal growth pattern. In our view, U.S. gross domestic product (GDP) growth could increase to 3% to 3.5% during the second half of the year, which we believe would put upward pressure on interest rates. Globally, we expect the United States and the United Kingdom will be the economic growth leaders, while the European Central Bank (ECB) continues to provide liquidity to eurozone economies as it seeks to stimulate growth in that region. Though we expect U.S. rates to move higher through the year, the ECB’s recent policy moves may affect that trajectory. Many investors globally are looking at the U.S. rate spread relative to Germany as a constraint on U.S. yields moving higher. Over the past decade or so, U.S. rates have generally not traded more than 125 basis points over German rates, which is approximately where the spread is today. The European Central Bank is unlikely to stop providing liquidity very soon, which may keep a lid on European rates and, market participants feel, conse- quently slow the ability of U.S. rates to move higher.
  5. 5. PUTNAM INVESTMENTS | putnam.com 5 We believe the economic backdrop in the quarters ahead will be supportive of riskier fixed-income assets. That said, there are global risk factors we are watching, including recent developments in Iraq and their possible effect on oil prices. Additionally, we continue to monitor the situation in Ukraine as well as the transition in China to a slower-growth phase of its economic cycle. Volatility has been relatively low among most financial assets, and spread markets have generally returned to pre-2008 levels, which, in our view, suggests the markets may be more vulnerable to shocks and surprises. In terms of portfolio positioning, we plan to continue emphasizing sectors that have benefited from increased liquidity, such as commercial mortgage-backed securities and non-agency residential mortgage-backed securities. However, the yield advantage over Treasuries offered by these sectors is not as great as it was, and with certain central banks potentially raising rates in the medium term, the liquidity in these areas of the market could diminish. We are cognizant of this risk and, as a result, have slightly increased cash positions in select portfolios while modestly reducing overweights in these sectors. U.S. tax exempt Despite the strong start for municipal bonds in 2014 and our belief that the credit outlook for municipal bonds appears solid given improvement in U.S. growth, we still remain cautious and believe that there could be some volatility surrounding supply/demand factors and interest rates in the coming months. With regard to tax policy, we think comprehensive tax reform is unlikely at least until after the 2014 mid-term elections. Over the longer term, we believe federal deficits and pres- sures around social programs will likely contribute to the ongoing debate for broader tax reform, which could affect the value of municipal bonds. As we witnessed in 2013, municipal bond prices can be influenced by a host of factors — most notably, the direction of U.S. Treasury rates; headline risk, as we saw in Detroit and Puerto Rico; and municipal bond flows. Against this backdrop, we plan to maintain a defensive duration posture because we believe that the municipal bond market’s attractive returns thus far in 2014 can be attributed primarily to a combination of lower rates and strong market technicals. Nevertheless, we believe the ebb and flow of the markets present inefficiencies that create attractive investment opportunities. We see our fundamental research as the key to unlocking these opportunities and providing return potential. Commodities The second quarter was very different from the first quarter for commodities markets. The agriculture and livestock sub-sectors posted strong returns in the first quarter, but sharp reversals for key contracts occurred in the second quarter. The GSCI Wheat Excess Return Index fell 20%, and the GSCI Corn Excess Return Index declined 17%. These markets had rallied toward the end of the first quarter because of military tensions in Ukraine, but that situation has unsettled markets much less during the course of the second quarter. Instead, another source of geopolitical risk emerged, as the destabilization in Iraq caused strong returns for crude oil and related energy contracts, with the GSCI Light Crude Excess Return Index up 6% for the quarter. While the supply of oil has not yet been meaningfully disrupted by the insurgency in Iraq, there is a consensus that the risk of future disruptions has risen considerably. Market trends 12 months ended 6/30/14Index name (returns in US$) Q2 14 EQUITY INDEXES Dow Jones Industrial Average 2.83% 15.56% MSCI EAFE (ND) 4.09 23.57 MSCI Emerging Markets (ND) 6.60 14.31 MSCI Europe (ND) 3.30 29.28 MSCI World (ND) 4.86 24.05 Nasdaq 7.42 34.15 Russell 1000 5.12 25.35 Russell 2000 2.05 23.64 Russell 3000 Growth 4.86 26.75 Russell 3000 Value 4.89 23.71 SP 500 5.23 24.61 Tokyo Topix 5.35 12.26 FIXED INCOME INDEXES Barclays Government Bond 1.34% 2.08% Barclays MBS 2.41 4.66 Barclays Municipal Bond 2.59 6.14 Barclays U.S. Aggregate Bond 2.04 4.37 BofA ML 91-day T-bill 0.01 0.05 CG World Government Bond ex-U.S. 2.64 8.88 JPMorgan Developed High Yield 2.46 12.60 JPMorgan Emerging Markets Global Diversified 4.76 11.63 JPMorgan Global High Yield 2.74 12.30 SP LSTA Loan 1.38 5.59 COMMODITIES SP GSCI 2.69% 10.40%
  6. 6. 6 Q3 2014 | Capital Markets Outlook We continue to advocate for neutral positioning in commodity markets. Our signals continue to be weak, with momentum and roll yield metrics below their histor- ical averages. Risk as measured by commodity-related implied volatility indices remains low, and we would not be surprised to see risks increase in these markets. With geopolitical tensions still high, we do not feel that prices adequately reflect these risks. This is not the time to take an aggressive position in either direction, in our view. Currency Within active currency strategies, we now favor a small long position in the U.S. dollar. The outcome of the June FOMC meeting was largely as expected: The taper continued, the post-meeting statement was little- changed, the 2015 and 2016 interest-rate forecasts were revised somewhat higher and the longer-term forecast somewhat lower, and Yellen’s press conference continued to indicate no urgency to step back from highly accom- modative monetary policy. As a result, future monetary policy remains very much data dependent. If growth and inflation rebound soundly, as we expect, the FOMC view is likely to be challenged and rate hikes will begin to get priced in sooner, which should be supportive of the U.S. dollar over the course of the year. The euro position remains an underweight. Over the past month, the ECB agreed to cut its deposit rate below zero, provide new four-year Longer-Term Refinancing Operation loans in September and December, stop sterilizing its Securities Markets Program bond purchases, and work on options for buying private-sector asset- backed securities in future. All of these measures appear sufficient to cap the single currency in its current 1.35–1.40 range against the dollar, and the anticipated developments in the U.S. story should help to push this value down over the coming months. The British pound sterling positioning remains a modest positive. Bank of England Governor Carney signaled in a June speech that interest rates may need to rise earlier than markets were anticipating. He subse- quently highlighted that the economy continues to have more slack to absorb before interest rates need to rise. Also, while the pace of job creation has been strong, wage growth had been softer than expected. This somewhat puzzling outlook should be viewed as preparing the market for earlier tightening but at a more gradual pace, and eventually arriving at a lower terminal rate than past tightening cycles. A quite modest underweight position to the Japanese yen remains after an extended period of being neutral. We expect that the Bank of Japan will have to do more, which should provide further impetus for the U.S. dollar to move higher versus the yen. However, Bank of Japan Governor Haruhiko Kuroda remains optimistic around the recovery in the economy and the trajectory of recent inflation data. He remains clear that if growth is weaker than expected and inflation does not accelerate, then the BoJ will do more.
  7. 7. TheBarclaysGovernmentBondIndexisanunmanagedindexofU.S.Treasuryandgovernmentagencybonds. TheBarclaysMunicipalBondIndexisanunmanagedindexoflong-termfixed-rateinvestment-gradetax-exemptbonds. TheBarclays10-YearU.S.TreasuryBellwetherIndexisanunmanagedindexofU.S.Treasurybondswith10years’maturity. TheBarclaysU.S.AggregateBondIndexisanunmanagedindexusedasageneralmeasureofU.S.fixed-incomesecurities. TheBarclaysU.S.Mortgage-BackedSecurities(MBS)Indexcoversagencymortgage-backedpass-throughsecurities (bothfixed-rateandhybridARM)issuedbyGinnieMae(GNMA),FannieMae(FNMA),andFreddieMac(FHLMC). TheBofAMerrillLynchU.S.3-MonthTreasuryBillIndexconsistsofU.S.Treasurybillsmaturingin90days. TheCitigroupNon-U.S.WorldGovernmentBondIndexisanunmanagedindexgenerallyconsideredtoberepresentativeoftheworld bondmarketexcludingtheUnitedStates. TheDowJonesIndustrialAverageIndex(DJIA)isanunmanagedindexcomposedof30blue-chipstockswhoseonebindingsimilarity istheirhugeness—eachhassalesperyearthatexceed$7bil­­lion.TheDJIAhasbeenprice-weightedsinceitsinceptiononMay26,1896, reflectslarge-capcompaniesrepresentativeofU.S.industry,andhistoricallyhasmovedintandemwithothermajormarketindexessuch astheSP500. TheGSCIWheatExcessReturnIndex,GSCICornExcessReturnIndex, andGSCILightCrudeExcessReturnIndexrepresent unleveraged,long-onlyinvestmentsincommodityfuturesinthewheatsector,thecornsector,andthecrudeoilsector,respectively. TheJPMorganDevelopedHighYieldIndexisanunmanagedindexofhigh-yieldfixed-incomesecuritiesissuedindevelopedcountries. TheJPMorganEmergingMarketsGlobalDiversifiedIndexiscomposedofU.S.dollar-denominatedBradybonds,eurobonds,traded loans,andlocalmarketdebtinstrumentsissuedbysovereignandquasi-sovereignentities. TheJPMorganGlobalHighYieldIndexisanunmanagedindexofglobalhigh-yieldfixed-incomesecurities. TheMSCIEAFEIndexisanunmanagedlistofequitysecuritiesfromEuropeandAustralasia,withallvaluesexpressedinU.S.dollars. TheMSCIEmergingMarketsIndexisafree-float-adjustedmarket-capitalization-weightedindexthatisdesignedtomeasureequity marketperformanceintheglobalemergingmarkets. TheMSCIEuropeIndexisanunmanagedlistofequitysecuritiesoriginatinginanyof15Europeancountries,withallvaluesexpressedin U.S.dollars. TheMSCIWorldIndexisanunmanagedlistofsecuritiesfromdevelopedandemergingmarkets,withallvaluesexpressedinU.S.dollars. TheNasdaqCompositeIndexisawidelyrecognized,market-capitalization-weightedindexthatisdesignedtorepresentthe performanceofNasdaqsecuritiesandincludesover3,000stocks. TheRussell1000Indexisanunmanagedindexofthe1,000largestU.S.companies. TheRussell2000IndexisanunmanagedlistofcommonstocksthatisfrequentlyusedasageneralperformancemeasureofU.S.stocks ofsmalland/ormidsizecompanies. TheRussell3000GrowthIndexisanunmanagedindexofthosecompaniesinthebroad-marketRussell3000Indexchosenfortheir growthorientation. TheRussell3000ValueIndexisanunmanagedindexofthosecompaniesinthebroad-marketRussell3000Indexchosenfortheir valueorientation. TheSPGSCIisacompositeindexofcommoditysectorreturnsthatrepresentsabroadlydiversified,unleveraged,long-onlypositionin commodityfutures. TheSP/LSTALeveragedLoanIndex(LLI)isanunmanagedindexofU.S.leveragedloans. TheSP500IndexisanunmanagedlistofcommonstocksthatisfrequentlyusedasageneralmeasureofU.S.stockmarketperformance. TheTokyoStockExchangeIndex(TOPIX)isamarket-capitalization-weightedindexofover1,100stockstradedintheJapanesemarket. Youcannotinvestdirectlyinanindex.
  8. 8. NOTES This material is provided for limited purposes. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or any Putnam product or strategy. References to specific asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or investment advice. The opinions expressed in this article represent the current, good-faith views of the author(s) at the time of publi- cation. The views are provided for informational purposes only and are subject to change. This material does not take into account any investor’s particular investment objectives, strategies, tax status, or investment horizon. Investors should consult a financial advisor for advice suited to their individual financial needs. Putnam Investments cannot guarantee the accuracy or completeness of any statements or data contained in the article. Predictions, opinions, and other information contained in this article are subject to change. Any forward-looking statements speak only as of the date they are made, and Putnam assumes no duty to update them. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties. Actual results could differ materially from those anticipated. Past performance is not a guarantee of future results. As with any investment, there is a potential for profit as well as the possibility of loss. This material or any portion hereof may not be reprinted, sold, or redistributed in whole or in part without the express written consent of Putnam Investments. The information provided relates to Putnam Investments and its affiliates, which include The Putnam Advisory Company, LLC and Putnam Investments Limited®. Prepared for 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 affiliate, The Putnam Advisory Company, LLC. Diversification does not assure a profit or protect against loss. It is possible to lose money in a diversified portfolio. In the United States, mutual funds are distributed by Putnam Retail Management. putnam.com CM0100 289118 7/14 Consider these risks before investing: International investing involves certain risks, such as currency fluctuations, economic instability, and political developments. Investments in small and/or midsize companies increase the risk of greater price fluctuations. Bond investments are subject to interest-rate risk, which means the prices of the fund’s bond investments are likely to fall if interest rates rise. Bond investments also are subject to credit risk, which is the risk that the issuer of the bond may default on payment of interest or principal. Interest-rate risk is generally greater for longer-term bonds, and credit risk is generally greater for below-investment-grade bonds, which may be considered speculative. Unlike bonds, funds that invest in bonds have ongoing fees and expenses. Lower-rated bonds may offer higher yields in return for more risk. Funds that invest in government securities are not guaranteed. Mortgage-backed securities are subject to prepayment risk. Commodities involve the risks of changes in market, political, regulatory, and natural conditions. You can lose money by investing in a mutual fund. If you are a U.S. retail investor, please request a prospectus, or a summary prospectus if available, from your financial representative or by calling Putnam at 1-800-225-1581. The prospectus includes investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing. Market update putnam.com/markets Research putnam.com/perspectives putnam.com/white-papers Find us