For the last few weeks, we have been warning investors of alarming deflationary trends such as the decline in commodity prices, growth slowdowns in emerging markets, tepid growth in developing economies. And up until now we believed our Global Income edge portfolios were well insulated.

But new market developments and upcoming changes in U.S. monetary policy demand action on some portfolio holdings, please see the subscriber section for ratings changes. 

The wave of selloffs in the last two weeks in stock and commodities markets of the U.S., China, Europe, and around the world, suggests that global growth may have decelerated more significantly than previously believed, which has significant investment implications for a whole host of industries in our portfolios.  

And there is a growing concern that the Federal Reserve’s anticipated rate increase in mid-September could derail the U.S. and global recovery. This from some economists who believe the U.S. economy is still too weak for such an action, given lower-than-projected inflation rates and still weak capital investment. The strengthening of the U.S. dollar also has not helped, being a drag on growth as it makes our exports more expensive and so less competitive.  

The Federal Reserve on Aug. 19 released its minutes of the July 28-29 Federal Open Market Committee session, which offered no clear sign whether it would raise rates in its September 16-17 meeting.  The Fed officials said conditions for raising interest rates were approaching, though they saw more room for labor market healing and need more confidence that inflation is moving toward their goal, according to a Bloomberg news report.

Long-term bond markets are signaling that the Fed rate hike could be a mistake if it happens.  Even as short-term U.S. bonds continue to signal that the that the Fed is poised for a rate hike soon, U.S. 30-year yields are down more than 30 basis points since hitting 3.25 percent in early July, falling to a low in late August of 2.84%.

The assumption of a global recovery has been a major pillar of Global Income Edge’s investment thesis, but we have long acknowledged that this recovery could come in fits and starts. However, these recent events introduce the greater possibility of a global recession that requires pairing down holdings that were more positioned for growth, as these investments will likely be casualties of a selloff as a result of a greater investor flight to safety.   

Further, the ideal time to reposition income portfolios is now, whether the Fed raises rates or not, as there is evidence that investors will become more fearful a major market correction over the next six months.   

We see income opportunities in the coming months as some great long-term growth and income investments will be oversold in the shakeup.  For example, we continue to believe the REIT space and utilities will be a beneficiary of bond investors looking for a safe place to preserve gains as high yield bond markets are expected to continue to sell off on global weakness.  

As such, in the next few weeks, Global Income Edge plans to unveil new holdings that are better positioned for this higher risk market environment.