Ivy VIP Global Bond

Ivy VIP Global Bond
09.30.18

Market Sector Update

  • The Federal Open Market Committee (FOMC) has met its dual mandate with the unemployment rate at 3.9% and core inflation approaching the U.S. Federal Reserve’s (Fed) 2% inflation target.
  • The Trump Administration’s policies regarding international trade and investment have emerged as an important source of downside risk for the global economy. Having completed a revamp of the North American Free Trade Agreement (NAFTA), known as the United States-Mexico-Canada Agreement (USMCA), President Trump will look to trade negotiations with the European Union (EU) and Japan. Negotiations with China are not imminent.
  • Central banks will continue to normalize their policies driven by strengthening growth and easy financial conditions. We believe the Fed will continue raising its policy rate at a gradual pace, while the European Central Bank (ECB) recently announced its tapering program that will end additional purchases by December 2018.
  • As global liquidity waned, weaker emerging-markets countries such as Turkey, Argentina, Brazil and Mexico felt the effects with wider credit spreads, weaker currencies and lower stock prices.
  • Political concerns emerged from elections as Italy’s new government brought the European Union’s sustainability back into the spotlight. The new government’s targeted budget deficit was more aggressive than market expectations, resulting in the euro weakening and Italian government rates increasing.
  • We believe the shape of the yield curve should continue to remain flat with the FOMC’s intention of raising shortterm rates and measured inflationary pressures on the long end of the curve. The long end of the curve is also being affected by the push (increased Treasury supply from budget deficits, Fed balance sheet normalization and increased term premium) and the pull forces (global trade concerns, a strong U.S. dollar, political concerns and emerging-market volatility).

Portfolio Strategy

  • The Portfolio underperformed its benchmark and peer group average for the quarter primarily driven by an overweight allocation to emerging-market credit. Trade tensions stemming from the Trump Administration, as well as EU stability and political concerns arising from the Italian elections, led to a rush for U.S. dollar-denominated assets. U.S. dollar strength led to emerging market weakness. For context, the Japanese yen, British pound and euro depreciated 2.6%, 1.3% and 0.6%, respectively to the U.S. dollar. The Portfolio’s large U.S. dollar exposure (99%) benefited relative performance.
  • We continue to seek opportunities to reduce volatility in the Portfolio. Additionally, we are maintaining a low duration strategy for the Portfolio as we feel it allows us a higher degree of certainty involving those companies in which we can invest.
  • We continue to focus on maintaining proper diversification for the Portfolio. We continue to hold a higher level of liquidity (patient capital) because of structural changes in the capital markets. We will be opportunistic in allocating that capital when we believe dislocations in market arise.

Outlook

  • We believe the FOMC will continue with its gradual rate hikes over the course of 2018. The market is anticipating another hike in December and two to three hikes in 2019.
  • Labor markets continue to grow and beat expectations, which has kept consumer confidence near cycle highs and supported strong spending growth.
  • Trade will continue to be a risk factor going forward. There is the potential for more tariffs, followed by retaliatory action that might impact company’s capital investment plans. A negative feedback loop might impact markets, stocks and ultimately consumer confidence.
  • We believe U.S. growth should continue to benefit from lower individual and corporate tax burdens, vigorous privatesector hiring and consumer spending.
  • Pressure on U.S. rates should continue, as a growing Treasury supply from budget deficits and Fed balance sheet normalization put some term premium back into the yield curve.

The opinions expressed are those of the Portfolio’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 Sept. 30, 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.

Diversification and asset allocation are investment strategies that attempt to manage risk within your portfolio but they do not guarantee profits or protect against loss in declining markets.

Risk factors: The value of the Portfolio’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. 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 below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. Loans (including loan assignments, loan participations and other loan instruments) carry other risks, including the risk of insolvency of the lending bank or other intermediary. Loans may be unsecured or not fully collateralized may be subject to restrictions on resale and sometimes trade infrequently on the secondary market. These and other risks are more fully described in the Portfolio’s prospectus.

Annuities are long-term financial products designed for retirement purposes. Annuity and life insurance guarantees are based on the financial strength and claims-paying ability of the issuing insurance company. The guarantees have no bearing on the performance of a variable investment option. Variable investment options are subject to market risk, including loss of principal. There are charges and expenses associated with annuities and variable life insurance products, including mortality and expense risk charges, management fees, administrative fees, expenses for optional riders and deferred sales charges for early withdrawals. Withdrawals before age 59 1/2 may be subject to a 10% IRS tax penalty and surrender charges may apply.