Ivy Global Equity Income Fund

Ivy Global Equity Income Fund
09.30.17

Market Sector Update

  • Across the globe, markets continued to perform well despite the lack of U.S. legislation progress. European political uncertainty faded as a pro-business reformer Emmanuel Macron pushed through labor reforms, and in Germany, Chancellor Merkel was re-elected with the largest majority and will form a government that is still pro-European but with a local focus on tax cuts, tighter borders and stricter environmental standards. 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 3% versus a basket of other currencies.
  • During the quarter, the market debated whether the U.S. Federal Reserve (Fed) would stay the course and raise rates in December 2017, first pricing in no hike and then pricing in a hike. The Fed announced its plan to slowly unwind its multi-trillion-dollar 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, Spanish and Greek banks.
  • Global purchasing managers’ indices marginally improved during the quarter. Emerging-market growth has improved, and we believe will aid sales and earnings for multinational and emerging-market companies. We believe this will continue to improve in 2018, and will be more inflationary for the overall global economy.

Portfolio Strategy

  • The Fund outperformed the benchmark (before the effects of sales charges) driven primarily from strong stock selection in information technology, consumer discretionary, energy and consumer staples. Sector allocation aided performance, led by the Fund’s relative underweight position to the poor-performing consumer staples sector. On the other hand, currency hedges to the U.S. dollar detracted as the British pound and Japanese yen strengthened. The Fund maintains hedges to a portion of the British pound and yen exposure.
  • As the quarter progressed, we increased exposure to consumer discretionary and financials, while decreasing exposure to consumer staples.
  • We anticipate moderate earnings growth, relatively high valuations and a market environment with political and macroeconomic uncertainty in the U.S., Europe and Asia. Nevertheless, bonds are becoming less attractive relative to equities and we believe this trend will continue if inflation reaccelerates and the Fed enacts additional rate increases and continues to shrink its balance sheet.
  • The Fund’s largest sector overweights include information technology where we are targeting higher growth; financials where we continue to find companies we believe provide good dividend yield, recovery potential (higher rates) and/or growth prospects; and energy where we believe dividend yields remain attractive. In our view, our underweight allocations to consumer staples and telecommunications tend to have either poor fundamentals or high relative valuations.
  • Over the quarter, the Fund increased exposure to Europe and Asia (mainly financials) at the expense of U.S. consumer staples. We have maintained the Fund’s overweight allocation to Europe, as we believe European political fears will continue to subside over the next few years, which should bode well for the region and possibly increase investor interest. In addition, we are finding attractive global names in Europe and Asia.

Outlook

  • We think global economic growth will remain moderate but will pick up as we move into 2018. We expect the U.S., Europe, China and other parts of emerging markets to be the main engines of growth. We feel the U.K. faces additional headwinds stemming from Brexit, as unknowns and the likely volatility will hurt its economy. The U.K. consumer savings rate is at a 20-year low and inflation has picked up.
  • Further U.S. political problems regarding tax reform passage 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.
  • 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 the spring for Italy and the economy.
  • Currently, China is in a steady growth pattern with private sector spending offsetting some slowing of public spending. Besides gross domestic product, the government is concerned about housing price rises (affordable housing) and controlling pollution. We believe any economic slowdown will be countered by other fiscal or monetary easing.

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 September 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.

Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. 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. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the Fund may fall as interest rates rise. Investing in high-income securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. Dividend-paying investments may not experience the same price appreciation as non-dividend paying instruments. Dividend-paying companies may choose to not pay a dividend or the dividend may be less than expected.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.