Ivy European Opportunities Fund

Ivy European Opportunities Fund
06.30.17

Market Sector Update

  • Across the globe, markets continued to perform surprisingly well despite the lack of U.S. legislation progress. European political uncertainty faded as a pro-business reformer Emmanuel Macron was elected President in France. In U.S. dollar terms, the U.S., Europe and Asia performed well.
  • The U.S. dollar continued to relinquish its past gains over the quarter, losing approximately 5% versus a basket of other currencies. The euro appreciated quite strongly as European political risk faded after the French elections.
  • As expected, the U.S. Federal Reserve (Fed) raised rates, and we believe has stayed on a path of one additional increase in 2017. The Fed has slowly begun to unwind its huge balance sheet. Both consumer and business confidence remained high during the quarter, with the U.S. economy expected to pick up in the second half.
  • The European Central Bank (ECB) does not plan to lower rates further, and has focused its attention on getting the banking system fit to handle any additional shocks. The ECB will begin to taper its bond purchases in early 2018. The ECB’s current focus is forcing more capital into weaker Italian, German and Spanish banks.
  • Global purchasing managers’ indices marginally improved during the quarter. Slower emerging-market growth has been a drag to global gross domestic product (GDP) growth as well as for multinational corporate sales and earnings growth. We believe this will continue to improve in 2017 and will aid in less deflationary forces for the overall economy.

Portfolio Strategy

  • The Fund underperformed its benchmark for the quarter. The Fund was positioned for an outlook of reflation and cyclical recovery, including higher oil prices, which did materialize. Weak stock selection and a drag from currency hedges stemming from the U.S. dollar weakening versus the euro and the British pound were main detractors. With oil prices falling more than 10% in the quarter, the overweight allocation to the energy sector was a detractor to performance.
  • The Fund benefitted from good stock selection in information technology and financials, but those gains were more than offset by poorer selection in industrials, consumer staples and healthcare.
  • At the country level, allocation effects slightly hurt performance as did poor stock selection – notably in the U.K., France and Switzerland. Stock selection in the Netherlands and Norway were strong positive contributors for the quarter.
  • As the quarter progressed, we tilted the Fund to a slightly more cyclical overweight allocation relative to the benchmark. We reduced exposure to staples (due to valuation concerns) and added to materials and information technology.
  • The Fund’s largest sector overweights include information technology, industrials and energy where we continue to find companies we believe provide good recovery potential or growth prospects. In our view, our underweight allocations to healthcare, consumer staples and telecommunication services tend to have poor relative fundamentals and valuation.

Outlook

  • We think global economic growth will remain slow but will pick up as we move through 2017. We expect the U.S., part of Europe, China and India to be the main engines of growth, and believe other emerging-market economies will continue to recover. We feel the U.K. faces additional headwinds stemming from Brexit, as unknowns and the likely volatility will hurt its economy.
  • Further U.S. political problems might hurt business, consumer and investor confidence. Further strength in the euro is a concern for European-based earning per share (EPS) growth. We believe monetary policy is likely to remain loose for the foreseeable future, but to a much lesser extent in the U.S. Uncertainty surrounding the new Trump administration and Congress will most likely cause market selloffs due to timing and high investor expectations.
  • We are still concerned about potential terrorist attacks in Europe, and the effects the large refugee influx will have on European politics via upcoming elections in Italy and Germany and the economy.
  • Currently, China is accelerating local and regional infrastructure spending and has allowed housing prices to increase in larger cities. We believe this can only be sustainable for a few years as debt will pile higher and housing prices will ultimately correct.

The opinions expressed are those of the Fund’s manager and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through June 30, 2017, 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. Past performance is not a guarantee of future results.

Class R6 shares were renamed Class N on March 3, 2017.

Risk factors: The value of the Fund's shares will change, and you could lose money on your investment. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. International investing involves additional risks including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Because the Fund is generally invested in a small number of stocks, the performance of any one security held by the Fund will have a greater impact that if the Fund were invested in a larger number of securities. 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.

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