Economy in Transition: Infrastructure Spending & Inflationary Fears

What are the implications on the economy as infrastructure spending is anticipated to dramatically increase, while inflationary pressures remain high? Learn more from our panel of experts as we discuss these key market issues and what asset classes may stand to benefit.

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What are the implications on the economy as infrastructure spending is anticipated to dramatically increase, while inflationary pressures remain high? Learn more from our panel of experts as we discuss these key market issues and what asset classes may stand to benefit.

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Three Questions to Ask as an International Core Equity Investor

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How does Ivy approach a core international investment mandate?

Delaware Ivy International Core Equity Fund provides investors core exposure to developed non-U.S. companies. The strategy has a relative value approach that seeks to takes advantage of both traditional “value” and “growth” companies, owning them at attractive valuations with a catalyst for valuation rerating. Historically, our relative value approach to international core equity investing has fared well. As shown below, we’ve outperformed our benchmark index and peer group average over the 15-plus year period our longest tenured portfolio manager has been at the helm.

DELAWARE IVY INTERNATIONAL CORE EQUITY FUND HAS OUTPERFORMED THE INDEX AND CATEGORY AVERAGE SINCE INCEPTION

Chart Showing International Core Equity Fund outperforming the index

Source: Morningstar Direct. Past performance is not a guarantee of future results

How has the market evolved?

Our investment approach typically focuses on the middle segment of the valuation spectrum — avoiding both the “deep value” on one side and “momentum growth” stocks on the other side of the spectrum due to perceived risks we prefer to avoid. Over the last five years, investors favored a narrow set of growth companies within the “momentum growth” category where, in our view, valuations were too rich. However, this scenario has recently reversed and we believe this rotation away from momentum growth is sustainable.

As the table below shows, there have been three distinct market environments over the past 10.5 years. The “first five years” were comprised of a balance of returns across the valuation spectrum. The “next five years” experienced a dramatic shift — companies with the lowest valuations remained inexpensive while the companies with the highest valuations became significantly more expensive. Consistent with our investment approach, we’ve primarily owned more attractively priced stocks, an area of the market largely ignored for five years. The “most recent six months” depicts a market environment more similar to the “first five years” where companies at lower valuations are able to generate meaningful returns for investors.

MSCI EAFE Performance by P/E Decile

Chart Showing MSCI EAFE Performance

Source: FactSet. Table shows average 1Y forward P/E ratio and average cumulative return for companies within the MSCI EAFE Index. Highest and lowest P/E companies are grouped into the top three deciles and bottom seven deciles by average 1Y forward P/E ratio.

A deeper look at the individual components of P/E (share price divided and earnings per share) provides helpful context when evaluating this divergence of performance between growth and value. As investors, we know that over longer periods of time, earnings typically drive prices. However, over the last five years, earnings for growth underperformed earnings for value companies. Despite this, the price for growth exploded relative to value. We think this further reinforces the idea of mean reversion between value versus growth.

MSCI EAFE GROWTH RELATIVE TO MSCI EAFE VALUE
Price and Earnings Per Share

Chart Showing MSCI EAFE GROWTH RELATIVE TO MSCI EAFE VALUE

Source: FactSet. Past performance is not a guarantee of future results

Will the market continue to favor the investment style?

This most recent market rotation away from high duration growth and toward companies with lower valuations, cyclical exposure, and positive operating leverage has been supported by strong economic activity following the pandemic-fueled recession. We think there are several reasons why we will continue to see strong economic growth and our style stay in favor for the foreseeable future:

  • Current market positioning and valuations
  • Record fiscal stimulus
  • Pent up savings
  • Higher inflation

While our investment style has been challenged over the last five years, we believe the points above and recent market rotation is evidence that diversification across investment styles is important. There is no way to predict the future, but it is always changing. If the world continues down this path, which we think it will, the Delaware Ivy International Core Equity strategy is well positioned for the market environment ahead.


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* Effective July 1, 2021, the Fund name changed from Ivy International Core Equity Fund. Please see the prospectus and supplement dated April 30, 2021 for more information.

Significant Event On December 2, 2020, Waddell & Reed Financial, Inc., the parent company of Ivy Investment Management Company, the investment adviser of the Ivy Funds, and Macquarie Management Holdings, Inc., the US holding company for Macquarie Group Limited’s US asset management business (Macquarie), announced that they had entered into an agreement whereby Macquarie would acquire the investment management business of Waddell & Reed Financial, Inc. (the “Transaction”). The Transaction closed on April 30, 2021. The Ivy Funds, as part of Delaware Funds by Macquarie, are now managed by Delaware Management Company and distributed by Delaware Distributors, L.P.

The opinions expressed in this piece are those of the investment team and are not meant to predict or project the future performance of any investment product. The opinions are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. International investments entail risks including fluctuation in currency values, differences in accounting principles, or economic or political instability. Investing in emerging markets can be riskier than investing in established foreign markets due to increased volatility, lower trading volume, and higher risk of market closures. In many emerging markets, there is substantially less publicly available information and the available information may be incomplete or misleading. Legal claims are generally more difficult to pursue. To the extent the Fund invests a significant portion of its assets in a particular geographical region or country, economic, political, social and environmental conditions in that region or country will have a greater effect on Fund performance than they would in a more geographically diversified equity fund and the Fund’s performance may be more volatile than the performance of a more geographically diversified fund. 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.

The disruptions caused by natural disasters, pandemics, or similar events could prevent the strategy from executing advantageous investment decisions in a timely manner and could negatively impact the strategy’s ability to achieve its investment objective and the value of the strategy’s investments.

Investing involves risk, including the possible loss of principal.

All information is based on Class I shares. Class I and Class R6 (where applicable) are available only to certain types of investors.

Index performance returns do not reflect any management fees, transaction fees, or expenses. Indices are unmanaged and one cannot invest directly in an index.

The MSCI EAFE (Europe, Australasia, Far East) Index represents large- and mid-cap stocks across 21 developed markets, excluding the United States and Canada. The index covers approximately 85% of the free floatadjusted market capitalization in each country.

The Morningstar Foreign Large Blend Category compares funds that invest in a variety of big international stocks. Most of these funds divide their assets among a dozen or more developed markets, including Japan, Britain, France, and Germany. These funds primarily invest in stocks that have market caps in the top 70% of each economically integrated market (such as Europe or Asia ex Japan). The blend style is assigned to portfolios where neither growth nor value characteristics predominate. These funds typically will have less than 20% of assets invested in US stocks.

©2021 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

The price-to-earnings ratio (P/E ratio) is a valuation ratio of a company’s current share price compared to its earnings per share. Generally, a high P/E ratio means that investors are anticipating higher growth in the future. P/E ratio / forward 1 year is a valuation ratio of a company’s current share price compared to its earnings per share. In this case, P/E is calculated using consensus forecasted earnings per share for the next 12 months.

Earnings per share (EPS) is calculated as a company’s profit divided by the outstanding shares of its common stock. The resulting number serves as an indicator of a company’s profitability. The higher a company’s EPS, the more profitable it is considered to be.

All third-party marks cited and property of respective owners.

Charts shown throughout are for illustrative purposes only and not meant to predict actual results.

The Fund’s investment manager, Delaware Management Company (Manager), may permit its affiliates, Macquarie Investment Management Global Limited (MIMGL) and Macquarie Funds Management Hong Kong Limited, to execute Fund security trades on behalf of the Manager. The Manager may also seek quantitative support from MIMGL.

Macquarie Asset Management (MAM) is the asset management division of Macquarie Group. MAM, through its affiliates, operates as a full-service asset manager offering a diverse range of products. Macquarie Investment Management (MIM) is the marketing name for certain companies comprising the asset management division of Macquarie Group. Investment products and advisory services are distributed and offered by and referred through affiliates which include Delaware Distributors, L.P., a registered broker/dealer and member of the Financial Industry Regulatory Authority (FINRA) and Macquarie Investment Management Business Trust (MIMBT), a Securities and Exchange Commission (SEC)-registered investment advisor. Investment advisory services are provided by a series of MIMBT. Macquarie Group refers to Macquarie Group Limited and its subsidiaries and affiliates worldwide. Delaware Funds by Macquarie refers to certain investment solutions that MIM distributes, offers, refers, or advises.

IVY INVESTMENTS refers to the investment management and investment advisory services offered by Delaware Management Company, a series of MIMBT.

Other than Macquarie Bank Limited (MBL), none of the entities noted are authorized deposit-taking institutions for the purposes of the Banking Act 1959 (Commonwealth of Australia). The obligations of these entities do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of these entities, unless noted otherwise.

Before investing, investors should consider carefully the investment objectives, risks, charges and expenses of a mutual fund. This and other important information is contained in the prospectus and summary prospectus, which may be obtained at ivyinvestments.com or by calling the Ivy Distributors, Inc. sales desk at 877-693-3546. Please encourage your clients to read it carefully before investing.

Document must be used in its entirety.

©2021 Macquarie Management Holdings, Inc.

NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE

FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR USE WITH THE GENERAL PUBLIC.

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Going Viral: Emerging markets as the End of the Pandemic Hopefully Nears

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A closer look at three questions many international core equity investors ask themselves.

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Delaware Ivy International Core Equity Fund provides investors core exposure to developed non-U.S. companies.
Our investment approach typically focuses on the middle segment of the valuation spectrum — avoiding both the deep value on one side and momentum growth stocks on the other side of the spectrum due to perceived risks we prefer to avoid.
This most recent market rotation away from high duration growth and toward companies with lower valuations, cyclical exposure, and positive operating leverage has been supported by strong economic activity following the pandemic-fueled recession.

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Chart of the week – A view on rates and risk, part 2

Chart of the Week – A view on rates and risk, part 2

We recently highlighted our thoughts on tapering in early 2022 and the possible direction for interest rates. Here are additional thoughts on the topic.

Our Fed forecast

We believe the Federal Reserve (Fed) will begin tapering its asset purchase program, currently at $120 billion per month, in January 2022 and complete tapering by the end of year. We expect the first interest rate hike of the cycle to occur in the second quarter of 2023. We think the risk to this forecast is for the Fed to act sooner, and think the market is currently underestimating how much the Fed will have to hike interest rates, once the rate hike cycle starts.

Impact on interest rates and risk assets continued

As we highlighted in a previous “Chart of the week” discussion, if the Fed is successful in generating inflation, we think this could bring about higher nominal gross domestic product (GDP) growth than the US economy experienced in the last cycle. This has potential implications for market interest rates and risk assets.

In the previous post, we discussed the slope of the yield curve and implications for investors. The absolute level of yields also warrants attention. 10-year US Treasury yields typically rise further once interest rates hikes commence, as they historically have moved in the same direction as nominal GDP over time. While we would not necessarily expect 10-year yields to move as high as our forecast for nominal GDP growth of between 4 and 4.5% in this cycle, we believe that over the medium term, yields should move higher from here.

US policy rate and the 10-year Treasury yield

Chart source: Macrobond. The blue line represents the target interest rate set by the Federal Open Market Committee (FOMC) at which commercial banks borrow and lend their excess reserves to each other overnight. The green line represents the 10-year US Treasury Constant Maturity Yield. Dates shown are January 1, 1990 to July 1, 2021.


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Investing involves risk, including the possible loss of principal.
Past performance does not guarantee future results.

Nothing presented should be construed as a recommendation to purchase or sell any security or follow any investment technique or strategy.

The views expressed represent the investment team’s assessment of the market environment as of August 30, 2021, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject change without notice.

Charts shown throughout are for illustrative purposes only and not meant to predict actual results.

Chart is for illustrative purposes and is not representative of the performance of any specific investment.

Macquarie Investment Management (MIM) is the marketing name for certain companies comprising the asset management division of Macquarie Group. Investment products and advisory services are distributed and offered by and referred through affiliates which include Delaware Distributors, L.P., a registered broker/ dealer and member of the Financial Industry Regulatory Authority (FINRA) and Macquarie Investment Management Business Trust (MIMBT), a Securities and Exchange Commission (SEC)-registered investment advisor. Investment advisory services are provided by a series of MIMBT. Macquarie Group refers to Macquarie Group Limited and its subsidiaries and affiliates worldwide. Delaware Funds by Macquarie refers to certain investment solutions that MIM distributes, offers, refers, or advises.

Other than Macquarie Bank Limited (MBL), none of the entities noted are authorized deposit-taking institutions for the purposes of the Banking Act 1959 (Commonwealth of Australia). The obligations of these entities do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of these entities, unless noted otherwise.

© 2021 Macquarie Management Holdings, Inc.

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Chart of the week – A view on rates and risk, part 1

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If the Fed is successful in generating inflation, this could bring about higher nominal GDP growth than the US economy experienced in the last cycle. What are the implications?

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Chart of the week – A view on rates and risk, part 1

Chart of the Week – A view on rates and risk, part 1

Recently, we highlighted our thoughts on the US consumer’s impact on the domestic economic recovery as well as our view on inflation in relation to Consumer Price Index.

Our Fed forecast

We believe the Federal Reserve (Fed) will begin tapering its asset purchase program, currently at $120 billion per month, in January 2022 and complete tapering by the end of year. We expect the first interest rate hike of the cycle to occur in the second quarter of 2023. We think the risk to this forecast is for the Fed to act sooner, and think the market is currently underestimating how much the Fed will have to hike interest rates, once the rate hike cycle starts.

Impact on interest rates and risk assets

If the Fed is successful in generating inflation, we think this could bring about higher nominal gross domestic product (GDP) growth than the US economy experienced in the last cycle. This has potential implications for market interest rates and risk assets.

The steepness of the yield curve for US Treasury bonds (as measured by the difference between the yield on the 10-year bond and 2-year bond) usually peaks before the first Fed interest rate hike of a cycle as the market anticipates the Fed’s actions by pushing up yields at the short-end of the curve. While some may view this as a bearish signal, this typically happens early in the economic cycle. We would not become concerned about the slope of the yield curve unless it turns negative.

US policy rate and the yield curve

Chart source: Macrobond. Dates shown are January 1, 1990 to July 1, 2021.


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Investing involves risk, including the possible loss of principal.
Past performance does not guarantee future results.

Nothing presented should be construed as a recommendation to purchase or sell any security or follow any investment technique or strategy.

The views expressed represent the investment team’s assessment of the market environment as of August 13, 2021, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject change without notice.

Charts shown throughout are for illustrative purposes only and not meant to predict actual results.

Chart is for illustrative purposes and is not representative of the performance of any specific investment.

Macquarie Investment Management (MIM) is the marketing name for certain companies comprising the asset management division of Macquarie Group. Investment products and advisory services are distributed and offered by and referred through affiliates which include Delaware Distributors, L.P., a registered broker/ dealer and member of the Financial Industry Regulatory Authority (FINRA) and Macquarie Investment Management Business Trust (MIMBT), a Securities and Exchange Commission (SEC)-registered investment advisor. Investment advisory services are provided by a series of MIMBT. Macquarie Group refers to Macquarie Group Limited and its subsidiaries and affiliates worldwide. Delaware Funds by Macquarie refers to certain investment solutions that MIM distributes, offers, refers, or advises.

Other than Macquarie Bank Limited (MBL), none of the entities noted are authorized deposit-taking institutions for the purposes of the Banking Act 1959 (Commonwealth of Australia). The obligations of these entities do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of these entities, unless noted otherwise.

© 2021 Macquarie Management Holdings, Inc.

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We think tapering will begin in early 2022. Where do interest rates go from here?

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Chart of the week – A new set of outcomes

Chart of the Week – A new set of outcomes

Recently, we highlighted the Federal Reserve’s (Fed) revised set of goals to replace its long-held targets of achieving full employment and 2% inflation, as well as our view on inflation.

The changes at the Fed are important when thinking about the progression of growth and inflation. We believe economic growth has significant support for the remainder of this year and in 2022. We also continue to believe real gross domestic product (GDP) growth will exceed consensus forecasts.

We think the US consumer should continue to drive the economic recovery. We expect job growth to accelerate going forward on the back of strong demand and the expiration of emergency unemployment benefits, which may spur some individuals to return to work. While several states have begun to remove these benefits early, the entire program is set to expire in early September, and President Biden has indicated he will not support an extension. The supply of jobs is extremely high for this stage in the recovery. Data through May shows roughly 9 million job openings, which compares to roughly 3 million early in the prior recovery.

An important factor to consider is the household balance sheet. One way to illustrate this is by looking at the amount of savings accrued above normal rates of saving. From February 2020 through June 2021, consumers have accumulated “excess” savings of nearly $2.5 trillion. Furthermore, household net worth has exploded to the upside, growing by nearly $19 trillion since the end of 2019. On the liability side of the balance sheet, household debt relative to income is the lowest it has been in more than 20 years.

There is some concern in the markets about the economic impact of fading fiscal stimulus, especially as it appears in year-over-year comparisons of economic data. While we are sympathetic to this view, we believe accelerating job growth and the aggregate underlying financial health of consumers should help to offset the fiscal headwinds.

Inflation has clearly surprised to the upside in recent months, driven by a strong recovery and supply chain issues. However, the breadth of inflation has been somewhat muted, as indicated by the Cleveland Fed’s median consumer price index (CPI). While near-term inflation momentum may be close to peaking, we believe a strong US economy and, ultimately a tighter labor market, will lead to sustainably higher inflation.

US Median CPI, year-over-year percentage change

Chart Source: Macrobond. The line represents the current US median CPI, percentage (%) of change year-over-year (y/y). Dates shown are January 1, 2007 to June 1, 2021. Median US CPI is based on data released in the Bureau of Labor Statistics’ monthly CPI report, as calculated by the Federal Reserve Bank of Cleveland. Median CPI is the one-month inflation rate of the component whose expenditure weight is in the 50th percentile of price changes.


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Investing involves risk, including the possible loss of principal.
Past performance does not guarantee future results.

Nothing presented should be construed as a recommendation to purchase or sell any security or follow any investment technique or strategy.

The views expressed represent the investment team’s assessment of the market environment as of August 13, 2021, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject change without notice.

Charts shown throughout are for illustrative purposes only and not meant to predict actual results.

Chart is for illustrative purposes and is not representative of the performance of any specific investment.

Macquarie Investment Management (MIM) is the marketing name for certain companies comprising the asset management division of Macquarie Group. Investment products and advisory services are distributed and offered by and referred through affiliates which include Delaware Distributors, L.P., a registered broker/ dealer and member of the Financial Industry Regulatory Authority (FINRA) and Macquarie Investment Management Business Trust (MIMBT), a Securities and Exchange Commission (SEC)-registered investment advisor. Investment advisory services are provided by a series of MIMBT. Macquarie Group refers to Macquarie Group Limited and its subsidiaries and affiliates worldwide. Delaware Funds by Macquarie refers to certain investment solutions that MIM distributes, offers, refers, or advises.

Other than Macquarie Bank Limited (MBL), none of the entities noted are authorized deposit-taking institutions for the purposes of the Banking Act 1959 (Commonwealth of Australia). The obligations of these entities do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of these entities, unless noted otherwise.

© 2021 Macquarie Management Holdings, Inc.

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Chart of the week - A New Set of Goals

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While near-term inflation momentum may be close to peaking, we believe a strong US economy and, ultimately a tighter labor market, will lead to sustainably higher inflation.

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Inflation…Emerging Markets…Is this bad?

bar chart and reflection of city

“Inflation? What’s that?” said the developed world. Much of the global economy has not experienced significant inflation in decades, and even moderate inflation has been absent in recent years. However, in the context of emerging markets, the thought of inflation can bring back haunting memories. As the word echoes across the financial media world and is now evident in the real world, let’s look at what inflation may mean for emerging-market investors.

Inflation effects

The word inflation is being thrown around everywhere. My mom even called and she is very concerned – not necessarily with emerging markets, but let’s not let details get in the way of a good story.

While the level of extremes and duration of inflation is largely unpredictable, we believe it is important to analyze the possible side effects to understand how it may impact our investment case in the region. So, before we let my mom get worked-up, let’s review what is driving inflation and likely outcomes for emerging markets.

With commodity prices surging to multi-year highs (Chart 1), what does this mean for emerging markets? The question boils down to whether or not commodity price inflation trickles down to the consumer and if it impacts corporate margins.

First, let’s look at how commodity inflation has historically affected consumer prices (CPI) in emerging markets (Chart 2).

Chart 1 — Global Commodity Prices Have Been On the Rise
Chart Showing GLOBAL COMMODITY PRICES HAVE BEEN ON THE RISE

Source: Bloomberg, Macrobond. Past performance is not a guarantee of future results.

Chart 2 — Are Consumer Prices Impacted by High Commodity Prices?

Chart Showing consumer prices

Source: Bloomberg, Macrobond. Past performance is not a guarantee of future results.

While there is moderate correlation between commodities and CPI in China and South Korea, consumer prices remain relatively tame over the course of commodity price extremes. In recent years, inflation has consistently been below 5% and often around 2%. In both India and Brazil, where inflation has run higher, there is no correlation between the two measures. Inflation in those more fragile economies seems to be driven by other factors.

Similarly, corporate profit margins are overall more influenced by other economic forces. In fact, margins generally tend to improve when commodity prices rise. This is likely because commodity prices rise in strong economic periods when companies experience higher revenue growth and, therefore, gain other margin benefits. Also, emerging markets is home to many commodity exporters who are helped by these higher prices. A natural diversification benefit of emerging-market investing.

Chart 3 — Emerging Market Profit Margin vs. Commodity Prices

Chart Showing Emerging Market Profit Margin
vs. Commodity Prices

Source: Bloomberg. Past performance is not a guarantee of future results.

My rich Uncle Sam

Fiscal and monetary stimulus has dumped unprecedented amounts of money supply into the financial markets.

Chart 4 — COVID-19 Fiscal Stimulus 2020 – 2021 (Select G-20 Economies)
Chart Showing COVID-19 Fiscal Stimulus 2020 – 2021
(Select G-20 Economies)

Source: IMF and UBS. As a percentage of GDP. Past performance is not a guarantee of future results.

What does this mean for emerging markets? The question boils down to if this will constrain future spending in the developed world and if interest rates will rise. And, of course, how will this flow to emerging markets?

As developed nation governments have spent large amounts of money to stimulate its economies, this has been a windfall for emerging-market economies, primarily China. Look at China’s export activity below. China has benefitted from both global stimulus and its ability to keep factories running through the pandemic. China was “open for business” and the world went there to shop. Export activity had stagnated for more than five years, but has now hit new highs. While this is quite obviously not sustainable, does that matter?

Chart 5 — China Exports ($)
Chart Showing China exports ($

Source: Bloomberg. Past performance is not a guarantee of future results.

The primary risk many would associate with this scenario is what China’s sources of growth will be when exports normalize. For many years now, China has been evolving into a services-based economy. While the country operated as the world’s factory during the pandemic, it does not rely on industrial manufacturing like it once did.

Chart 6 — China: Components of 2019 GDP
Chart Showing China: Components of 2019 GDP

Source: Statista. Past performance is not a guarantee of future results.

So, while the unique circumstances of the pandemic contributed to more stable growth in China, the reversion to normal should not be a headwind.

Please don't throw another (Taper) Tantrum

Let’s talk about monetary tightening and interest rates. An industry favorite topic since 2009 and made famous in emerging-market circles during the “taper tantrum.” Afterall, if inflation persists, central banks will be forced to tighten. While they have upheld their message that they believe inflation is transitory and monetary policy can remain accommodative, what happens if that changes? And what happens when they do ultimately taper? What are the risks to emerging markets?

Can recent history, the “taper tantrum,” teach us a lesson? It’s tricky. To very quickly review, in 2013 the Federal Reserve announced they were tapping the breaks on monetary policy, investors became concerned about emerging markets, money flooded out of those economies, and both their currencies and asset prices declined. Will this happen again? The short answer is, the circumstances were different before. How? 1) Global growth was generally weak and 2) fragile emerging markets economies had major macro imbalances.

After a sharp global recovery coming out of the financial crisis, global output decelerated. Global growth is important for emerging markets as it drives economic growth. It drives export led economies and is an important underlying factor for investment in emerging markets countries. And by most accounts, global growth looks promising for the foreseeable future. As the vaccination laggards catch-up, which are primarily emerging-markets countries, this will be another leg going forward.

Chart 7 — World GDP Growth (%)
Chart Showing World GDP Growth (%)

Source: IMF & Statista. Past performance is not a guarantee of future results.

In addition to muted global growth, key emerging-market countries had significant macro imbalances at the time. For example, India and Brazil, two sensitive countries, were becoming more stressed for years leading up. This scenario, coupled with high amounts of U.S. dollar denominated debt, created an additional overhang. More stability, as well as internal borrowing (borrowing in their own currency), puts emerging markets on more solid ground today.

Chart 8 — Current Account Balance (% GDP)
Chart Showing Current Account Balance (% GDP)

Source: Bloomberg. Past performance is not a guarantee of future results.

There is also a strong case to be made within the emerging markets interest-rate environment and their underlying currencies. Because of the stronger macro circumstances touched on above, central banks have been able to use interest rates as a tool. Both to stimulate and now allowing rates to creep back up without the “deflationary police” sounding the alarm bells. Investors get concerned that higher rates in emerging markets will dangerously slow their economies down. This is not the case right now and, in fact, these higher rates are very supportive of currencies.

And finally…

As investors, we cannot go this entire time without addressing what is most important — the companies we invest in. While the topic of margins was briefly discussed above, and the idea that consumer purchasing power should not be destroyed, we would be hard pressed not to also mention that emerging-market businesses continue to impress. The region is at the forefront of innovation. Valuations, however not cheap in absolute historical terms, look relatively attractive compared to the rest of the world. And overall growth should outpace the rest of the world. We continue to believe emerging markets presents one of the best

Let's wrap this up

The word inflation is everywhere and, perhaps, we are staring down the proverbial barrel. We are already seeing inflation tick up in many areas of the global economy. While the side effects and treatments (developed world response) have historically been significantly negative for emerging markets, it doesn’t appear to be a major threat. There are plenty of risks out there in the world of investing. For now, we can focus more on the others.


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Significant Event On December 2, 2020, Waddell & Reed Financial, Inc., the parent company of Ivy Investment Management Company, the investment adviser of the Ivy Funds, and Macquarie Management Holdings, Inc., the US holding company for Macquarie Group Limited’s US asset management business (“Macquarie”), announced that they had entered into an agreement whereby Macquarie would acquire the investment management business of Waddell & Reed Financial, Inc. (the “Transaction”). The Transaction closed on April 30, 2021. The Ivy Funds, as part of Delaware Funds by Macquarie, are now managed by Delaware Management Company and distributed by Delaware Distributors, L.P.

Past performance is no guarantee of future results.

Investing involves risk, including the possible loss of principal.

The opinions expressed in this article are those of the investment team and are not meant to predict or project the future performance of any investment product. The opinions are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.

International investments entail risks including fluctuation in currency values, differences in accounting principles, or economic or political instability. Investing in emerging markets can be riskier than investing in established foreign markets due to increased volatility, lower trading volume, and higher risk of market closures. In many emerging markets, there is substantially less publicly available information and the available information may be incomplete or misleading. Legal claims are generally more difficult to pursue..

IBOR risk is the risk that changes related to the use of the London interbank offered rate (LIBOR) or similar rates (such as EONIA) could have adverse impacts on financial instruments that reference these rates. The abandonment of these rates and transition to alternative rates could affect the value and liquidity of instruments that reference them and could affect investment strategy performance. The IMF World Commodity Price Index.

The disruptions caused by natural disasters, pandemics, or similar events could prevent the Fund from executing advantageous investment decisions in a timely manner and could negatively impact the Fund’s ability to achieve its investment objective and the value of the Fund’s investments.

All third-party marks cited are the property of their respective owners.

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Brian Landy, CFA

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In the context of emerging markets, the thought of inflation can bring back haunting memories. As the word echoes across the financial media world and is now evident in the real world, let’s look at what inflation may mean for emerging-market investors.

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While the level of extremes and duration of inflation is largely unpredictable, we believe it is important to analyze the possible side effects to understand how it may impact our investment case in emerging markets.
As developed nation governments have spent large amounts of money to stimulate its economies, this has been a windfall for emerging-market economies, primarily China.
We are already seeing inflation tick up in many areas of the global economy. While the side effects and treatments (developed world response) have historically been significantly negative for emerging markets, it doesn’t appear to be a major threat.

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Chart of the week - A New Set of Goals

Line graph

Chart of the Week – A New Set of Goals

After a nearly two-year review of its monetary policy strategy, tools, and communications, in August 2020 the Federal Reserve (Fed) released a revised set of goals to replace its long-held targets of achieving full employment and 2% inflation. The Fed will now seek to achieve inflation that averages 2% over the business cycle, allowing inflation to temporarily run above the 2% target to make up for past shortfalls.

On the employment front, instead of focusing on the headline unemployment rate, the Fed is seeking to drive down the unemployment rate across various racial and demographic groups with the aim of fostering a more inclusive recovery in labor markets

Unemployment Gaps by Race/Ethnicity

Difference From White Rate (Percentage Points)

Chart Source: NBER (National Bureau of Economic Research). The gray shaded areas represent recessions. NBER defines recession as a period of time involving a significant decline in economic activity that is spread across the economy and lasts more than a few months. Dates shown are January 1, 2007 to June 1, 2021.

Past performance does not guarantee future results.
Investing involves risk, including the possible loss of principal.

Inflation Outlook

Inflation has clearly surprised to the upside in recent months, driven by a strong recovery and supply-chain issues. However, the breadth of inflation has been somewhat muted. While many of the supply-chain disruptions are likely to continue, we estimate that the momentum in month-to-month increases in inflation is close to peaking. Looking beyond the near-term price volatility, we think that a more sustainable move in inflation is set to come.

We believe the Fed’s new flexibility around the 2% inflation target combined with its focus on broader, more inclusive measures of the labor markets will result in the Fed letting the economy “run hot.” This coupled with continued strong gross domestic product (GDP) growth and tightening labor markets should result in a broader and more sustainable increase in prices later in 2022.


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Investing involves risk, including the possible loss of principal.
Past performance does not guarantee future results.

Nothing presented should be construed as a recommendation to purchase or sell any security or follow any investment technique or strategy.

The views expressed represent the investment team’s assessment of the market environment as of July 20, 2021, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject change without notice.

Charts shown throughout are for illustrative purposes only and not meant to predict actual results.

Chart is for illustrative purposes and is not representative of the performance of any specific investment.

Macquarie Investment Management (MIM) is the marketing name for certain companies comprising the asset management division of Macquarie Group. Investment products and advisory services are distributed and offered by and referred through affiliates which include Delaware Distributors, L.P., a registered broker/ dealer and member of the Financial Industry Regulatory Authority (FINRA) and Macquarie Investment Management Business Trust (MIMBT), a Securities and Exchange Commission (SEC)-registered investment advisor. Investment advisory services are provided by a series of MIMBT. Macquarie Group refers to Macquarie Group Limited and its subsidiaries and affiliates worldwide. Delaware Funds by Macquarie refers to certain investment solutions that MIM distributes, offers, refers, or advises.

Other than Macquarie Bank Limited (MBL), none of the entities noted are authorized deposit-taking institutions for the purposes of the Banking Act 1959 (Commonwealth of Australia). The obligations of these entities do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of these entities, unless noted otherwise.

© 2021 Macquarie Management Holdings, Inc.

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New Federal Reserve goals aim to provide support for strong US GDP growth and inflation.

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