Market Sector Update

• Much of 2018 was a tug-of-war between fear (in the form of slowing global growth, regional policy uncertainty and global trade) and hope (broadly the hope that growth would remain as robust as the hard data indicated, and hope that trade and policy issues would be amenably resolved). In the fourth quarter, fear clearly gained ground on the field of battle as December was markedly down.
• Growth in China showed continued signs of stress and deceleration as the lagged effects of increased regulatory tightness in several areas of the economy remained a drag on growth. Additionally, some sequential slowing as a result of increased tariffs also appears to be impacting growth in China. The government has taken numerous actions over the past several months as part of an effort to achieve stable growth around current levels. However, the current set of initiatives has been more tactical and targeted, not the sort of “shock and awe” stimulus that has occurred during prior periods of slowing growth. Thus, the delay from announcement and enactment to impact on hard data is more protracted than prior cycles.
• In Europe, indicators of economic activity have hooked down recently due to a combination of slowing global growth and sluggish domestic demand in a variety of markets. These concerns with respect to slowing growth were compounded by the return of broad political uncertainty in the region. The budget in Italy, “yellow vest” in France and a cancelled Brexit vote in Parliament served as a reminder that tail-risks in Europe are fatter than consensus. European markets were underperformers relative to our benchmark as hope for further reform gave way to fears of continued malaise.
• In the U.S., economic data remained favorable though signs of slower economic and earnings growth became more prevalent towards quarter-end. As a result, the forward-looking debate of a 2019 U.S. recession grew, though economic and earnings growth was likely to decline from the elevated levels stemming from the tax cuts. However, the intersection of slowing global growth, lack of any demonstrable progress on U.S.-China trade and growing political leadership concerns drove U.S. equities sharply down. Despite the decline, U.S. equities outperformed their international peers albeit with tremendous volatility.

Portfolio Strategy

• The Fund underperformed its benchmark during the period with sector allocation and stock selection drags on relative performance. Overweight positions in energy and industrials detracted as these two areas were the worst performing sectors in the benchmark. Underweight allocations in communication services and utilities were a headwind to relative performance as these less economically sensitive sectors outperformed during the recent sell-off. On the other hand, country allocation benefitted performance as did the Fund’s overweight allocation to health care.
• The Fund’s underweight in emerging markets adversely impacted performance as many of these countries exhibited strong performance during the period. In particular, Brazil was a drag as both equities and the currency appreciated during the quarter following favorable election results. The Fund’s overweight in France hurt performance as this market underperformed as a result of increasing domestic instability and challenges in implementing President Emmanuel Macron’s reformist agenda. Underweight positions in Japan and Germany helped results, while being overweight the U.S. also helped.
• Stock selection in utilities, health care, energy, communication services and information technology were positive, while stock selection in industrials and financials had a negative effect on relative performance. At an individual stock level, performance was helped most by positions in Enel S.p.A., Johnson & Johnson, Pfizer, Inc., Orange S.A., and Intel Corp. Positions in Lockheed Martin Corp., BNP Paribas S.A., Suncor Energy, Inc., BAE Systems plc and United Technologies Corp. adversely impacted performance by the greatest amount.
• Our investment approach remains steadfastly focused on investing in 1) high-quality businesses with 2) favorable near and intermediate fundamentals with 3) generally rising dividends 4) when they are available at perceived attractive valuations. This approach is consistent across sectors and regions.
• We are still fairly early on in the process of rationalizing consensus earnings expectations for a slower growth environment. Additionally, as we have previously mentioned, hard economic data is only beginning to show evidence of slowing. However, at this point an enormous amount of pain has been inflicted upon many of the stocks that are considered most sensitive to a slowdown in global industrial activity. These companies have seen their share prices decline far in excess of the market as a whole. In many cases, these stocks are beginning to embed a contraction in earnings that looks far more severe than our baseline view. That is to say, for the first time in a few years large groups of stocks are beginning to look substantially undervalued. At this point, the positioning of the Fund remains fairly balanced given we are still quite early on in the discovery process of this slowdown. However, within that neutral positioning we are taking advantage of some of the displacements that are occurring to acquire shares in companies that we believe are poised to outperform as the nature and scope of the global slowdown unfolds.

Outlook

• We expect global economic growth to slow appreciably and expect corporate earnings growth to decelerate substantially from the robust 2018 levels. However, at this point we do not see conditions that would be consistent with either an economic recession or a corporate earnings recession in the foreseeable future. We believe growth in China should stabilize as the negative impulse from prior tightening actions and global trade drag is offset by numerous progrowth reforms that are being implemented. Growth in U.S. gross domestic product and corporate earnings will slow from levels that were boosted by the impact of tax reforms, but we are of the view that this is a growth slowdown and not a recession (economic or earnings) in the U.S. The eurozone is the one area that could come closest to a technical economic recession and corporate earnings recession in the coming year in our view, though this is not our base case. The punchline bears repeating – we think we are in the midst of an industrial slowdown, not a recession.
• Valuation levels in numerous markets have collapsed on concerns on growth. Forward earnings multiples in U.S. markets have de-rated by roughly 4 points over the past year as these concerns have mushroomed, and investors begin discounting slower growth. That de-rating is even more notable for several world stock indices. Our point is that fair-to-excessively optimistic valuation levels have now given way to fair-to-overly pessimistic valuation levels. Realistically markets could de-rate further as hard economic and earnings data confirms a slowdown. However, based on our growth outlook, we are not of the view that a potential de-rating would be excessive from here.
• As you can likely discern, we are not overly bullish at this juncture. However, we are not especially bearish either given lowered expectations. We continue to expect substantial volatility as data is more likely to get worse before it gets better. We expect to use this volatility to add to or establish perceived attractive long-term positions that fit our investment process.

The opinions expressed are those of the Fund’s manager regarding Class I shares and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through Dec. 31, 2018, 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.

The Ivy Dividend Opportunities Fund merged into Ivy Global Equity Income Fund on Feb. 26, 2018.

Effective February 26, 2018, Christopher Parker, CFA, was named a portfolio manager to the Ivy Global Equity Income Fund.

Top 10 equity holdings as a percent of net assets as of 12/31/2018: Pfizer, Inc., 4.0%, Royal Dutch Shell plc, Class A 3.9%, Nestle S.A., Registered Shares 3.3%, Chevron Corp. 3.2%, Intel Corp. 3.1%, Roche Holdings AG, Genusscheine 3.1%, Total S.A. 3.1%, Lockheed Martin Corp. 2.7%, Procter & Gamble Co. 2.6% and AstraZeneca plc 2.6%.

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.