Fed Rate Decision: Liftoff at Last, but No Cause for Panic

  • The Federal Reserve has increased interest rates, as it appears confident about the U.S. labor market recovery, domestic inflation expectations and gradual economic recovery outside the U.S.
  • While the Fed has not laid out its precise path for normalization, it has stressed a careful approach to increasing rates, which may imply that this tightening cycle will be slower than past ones.
  • Although some areas of the bond market may lag in a rising rate environment, the income investors earn from bonds should benefit from higher yields going forward.
  • The impact on equities is more mixed, with some sectors benefitting as the economy continues to strengthen and others facing a headwind from higher financing costs.

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Slower Path to Higher Interest Rates

Lower for Longer U.S. interest rates have remained low for extended periods at several junctures in U.S. history

Source: Thomson Reuters Datastream. As of September 30, 2015.

  • The key question facing U.S. monetary policy is not whether the Federal Reserve will raise interest rates this year or next, but how far it can go given mixed economic conditions in the U.S. and intensifying financial pressures around the world.
  • Many are questioning whether the U.S. economy is strong enough to absorb a meaningful rise in rates — even 100 basis points — over the next couple of years, especially against the backdrop of weakness in Europe and emerging markets.
  • In the U.S., low inflation, slowing job growth and a strong dollar are the crucial factors that should prompt the central bank to move slower than market expectations.
  • Overall, we expect U.S. interest rates to remain suppressed for the foreseeable future, especially against the backdrop of cautious and measured Fed policy.

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MARKET COMMENTARY  |  September 2015

Fed Rate Decision: Near-Zero For Now, But Higher Soon?

  • The Federal Reserve has decided to keep interest rates close to zero, as concern about global economic conditions cast a shadow over an otherwise fairly bright outlook for the U.S. economy.
  • Looking forward, the Fed is expected to raise rates gradually, and an increase of 0.25%, for example, would be unlikely to have a significant impact on the economy.
  • Over time, higher interest rates can be beneficial for bond investors, enabling reinvestment in issues offering higher yields.
  • Rising rates have a varied impact on stocks. Selective investors who emphasize company-specific research should continue to find attractive longer term income and return opportunities.

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INVESTMENT INSIGHTS  |  September 2015  |  FEATURING Andrew H. Dougherty & Stephen Green

The China Syndrome: Meltdown or Recovery Ahead?

The Rise and Fall of China’s Stock Market

A powerful rally in Chinese stocks — and a subsequent sharp decline — were driven primarily by government statements and policy measures, including a series of interest rate cuts. China’s central bank cut rates again in late August and eased reserve requirements on banks.

Source: Wind Financial

A sharp selloff in China’s stock market, a surprise currency devaluation and a persistent slowdown in economic activity have raised doubts about the ability of the world’s second-largest economy to maintain the hypergrowth levels of the past two decades.

Against this backdrop, economist Stephen Green and China affairs specialist Andrew Dougherty discuss:

  • The outlook for China’s economy, which remains generally positive over the long term
  • The origins and potential implications of China’s stock market correction
  • Segments of the economy that are poised for growth despite an overall slowdown in activity
  • China’s uneasy shift toward a market-based foreign exchange regime

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INVESTMENT INSIGHTS  |  August 2015  |  FEATURING Hilda L. Applbaum

Who Wins in a Rising Rate Environment?

In a Low-Yield Environment, Income Stocks Remain in Demand

Heading into the sixth year of an equity bull market, U.S. stocks appear expensive in most sectors. Valuations for traditional dividend-paying sectors, including basic materials, consumer staples and utilities, are high both on a relative and an absolute basis. A notable exception is the telecommunications sector, which hasn’t benefited quite as much from the global search for yield.
Source: FactSet. As of 5/29/15.

Portfolio manager Hilda Applbaum discusses income investing

With central banks around the world aggressively suppressing interest rates, the challenge of finding reliable income-producing investments has never been greater. Few investors are more familiar with this dilemma than portfolio manager Hilda Applbaum, the principal investment officer of The Income Fund of America®. In this conversation, Hilda shares her perspective on:

  • Income-oriented investing in a market where the prospect of higher rates looms large
  • The emerging role of information technology companies as high-quality dividend payers
  • The sustainability of corporate profits and expectations for P/E expansion
  • Finding income opportunities in an aging bull market

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July 2015
 |  FEATURING Gerald Du Manoir & Matt Miller

Evolving Japan Now Offers Intriguing Opportunities

A portfolio manager discusses the recent evolution among some Japanese companies toward a more shareholder-friendly management strategy.

Watch Video (3:53)


Focus on Evolving Opportunities in Emerging Markets

Moving Up the S-Curve

China is one of the most important engines of global growth. Despite the recent slowdown, the transition of a huge middle class to a higher standard of living will have an enormous impact on companies in China and across the world.

Sources: CEIC, National Bureau of Statistics of the People‘s Republic of China, Deutsche Bank.


  • The long–term structural growth story in emerging markets remains intact. These areas of the world will likely continue to face cyclical headwinds, but things appear more favorable on a secular basis.
  • Headline risk is becoming less significant in emerging markets. Globalization and the broadening of investment opportunities has minimized the impact that regional and country-specific events have on the share prices of individual companies.

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Oil Price Declines Could Have Far-Reaching Effects

It Isn’t Just Shale: Oil Production Growth Is a Global Phenomenon

While U.S. shale has certainly contributed to a steady rise in global supply, non-OPEC supply growth has also been robust in the face of increasing production from Saudi Arabia.

Annual World Oil Production, 1980–2014

Source: U.S. Energy Information Administration. Data for OPEC, Saudia Arabia and World production as of September 30, 2014. Data for U.S. production as of December 16, 2013. U.S. figures for 2013 and 2014 are forecasts.

Analysts and Portfolio Managers Weigh Valuations Amid Ongoing Volatility

In 2014, oil prices posted their largest annual decline since the global financial crisis, losing more than 45% as weaker demand and strong global crude output created a supply glut. The collapse saw prices at a five–year low, battering energy shares — which finished 2014 nearly 13% lower — and weighing heavily on financial markets in oil–exporting countries. In our view:

  • Oil prices could continue to remain low — and may even continue to decline — before supply–demand imbalances are corrected.
  • Some oil companies have begun to show signs of better capital discipline, but many have room to improve.
  • Despite lower prices in the near term, demand fundamentals over the longer term should remain supportive of higher oil prices.
  • Market declines may provide some attractive entry points for investors.

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INVESTMENT INSIGHTS  |  January 2015  |  FEATURING Frank C. Hu

An Analyst’s Perspective: Do Low Oil Prices Put Dividends in Jeopardy?

Oil Companies Have Been a Healthy Source of Dividends Globally

In 2014, the oil industry was the second-largest payer of dividends after financials, contributing 13% of the dividends paid by companies in the MSCI All Country World Index. Royal Dutch Shell and Exxon Mobil were among the largest dividend payers of all index constituents.

Source: FactSet, as of December 31, 2014.

* Figures may not total 100% due to rounding. 

Over the last few years, large oil and gas companies have been among the biggest payers of dividends. Clearly the decline in oil prices is concerning because in most cases, it means that dividends cannot be fully funded from free cash flow. But I believe that, for the large integrated oil companies, the oil price would have to fall a lot further to call into question their ability to pay and increase their dividends.

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INVESTMENT INSIGHTS  |  January 2015  |  FEATURING Ritchie Tuazon & David A. Hoag

Fixed Income Q&A

Portfolio managers David Hoag and Ritchie Tuazon discuss the newest American Funds fixed income fund, how American Funds Inflation Linked Bond Fund℠ can help a wide variety of investors and their forecast for inflation.

Why introduce an inflation–linked bond fund as an individual investment now?

David: Investors will always have specific needs that have to be satisfied, and having an investment that seeks to mitigate inflation risk is just something that has to be in the tool chest. Whether inflation is going up, down or sideways, this is a timeless issue that we’re happy we can now explicitly address within individual client portfolios.

Ritchie: Internally, we see our fixed income offerings as tools for advisors and clients. Think about a set of golf clubs, for example. Maybe you never use a nine iron, until that day you decide that a shot requires one. The availability of American Funds Linked Bond Fund helps complete an investment set for investment professionals and shareholders. Whether or not inflation is a core investment theme for a given investor right now, it can make sense in some measure for almost all investors.

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MARKET COMMENTARY  |  November 2014  |  FEATURING Jonathan Knowles & Jay Markowitz

Innovation and Disruption in Biotech and Pharma

The Drug Pipeline Appears Healthier

Source: U.S. Food and Drug Administration. New Molecular Entities data.

Breakthrough drugs transform medicine and the health care investment landscape.

  • Pharmaceutical and biotechnology stocks have generated among the highest year-to-date returns of any segment of the market — prompting some commentators to suggest that valuations are unjustifiably high.
  • Arguably, broad valuations have at times moved out of line with fundamentals. And yet, as active investors who have experienced multiple market cycles, we believe that the current outlook for certain firms is especially bright.

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INVESTMENT INSIGHTS  |  September 2014  |  FEATURING Jim B. Lovelace & Gregory D. Johnson

Positioning Income-Oriented Portfolios for Rising Rates

Equities Are Working Harder Due to Low Bond Yields

Income breakdown by asset class for Capital Income Builder, 2006–2013

Capital Income Builder® (CIB) and American Balanced Fund® (AMBAL) are two funds for which the principal investment officer plays a role in the overall asset allocation of the fund. Jim Lovelace plays this role for CIB and Greg Johnson for AMBAL. In this Q&A, they talk about the challenge of investing in an environment in which very little income is being generated by bonds, many dividend-paying stocks have high valuations, and non-U.S. equities appear to be more attractive than the U.S. market overall. 

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INVESTMENT INSIGHTS  |  April 2014  |  FEATURING Andrew Suzman

As Emerging Markets Evolve, a New Opportunity for Income Develops

Source: RIMES. United States, emerging markets, and Europe and Canada represent the MSCI USA, Emerging Markets, EAFE (Europe, Australasia and Far East) and Canada indexes, respectively. Data are as of December 31, 2013.

Expansion of dividend culture abroad offers additional dimension to international investing 

  • International equities aren’t always associated with dividends, but a growing number of companies from Asia to Europe have initiated or raised dividend payments in recent years. These companies now represent an increasingly important element of international investing, especially for investors seeking income during retirement.

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Dividend Payments Soared to Another Record in 2013

Sources: Standard & Poor’s and FactSet. Data for the S&P 500 dividends represent four-quarter sums. The list of top 10 includes companies with preliminary reporting status.

After reaching $300 billion for the first time, dividends may be headed higher in 2014

  • S&P 500 companies paid out a record $311.8 billion in dividends last year. The total marked a 10.8% increase from the previous year, and also the first time dividends surpassed $300 billion.

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INVESTMENT INSIGHTS  |  October 2013  |  FEATURING Mark Denning

Finding Investment Opportunities in Europe’s Recovery

Mark Denning, a portfolio manager in American Funds EuroPacific Growth Fund and other funds, shares his views on Europe’s recovering economy and how he prefers domestically oriented European companies. He also discusses:

  • Why he is warming up to the airline industry
  • Potential value in pharmaceutical companies developing new types of cancer therapies
  • Opportunities in the wake of the recent slide in emerging markets
  • European banks may be underestimated by the markets
  • Japan’s corporate sector and its need to show greater profitability
  • Why he pays attention to “terminal multiples” and avoids deep cyclicals. 

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INVESTMENT INSIGHTS  |  September 2013  |  FEATURING Alan N. Berro

A Constructive View of U.S. Stocks, Despite Rising Interest Rates

Portfolio manager Alan Berro shares his views on the U.S. stock market and why he remains optimistic despite a rising rate environment. As an income-oriented investor, he is finding investment opportunities in pharmaceuticals, technology and industrials and is not that enthusiastic about traditional dividend payers. He also discusses:

  • Prospects for banks to further increase their dividends
  • Whether companies will use their cash stockpiles for acquisitions
  • The allocation to equities and bonds in American Balanced Fund®
  • Options for investors in a rising rate environment

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INVESTMENT INSIGHTS  |  August 2013  |  FEATURING Joyce E. Gordon

The Expanding Search for Dividend Yield Across Global Markets

Portfolio manager Joyce Gordon tackles the challenge of finding yield in today’s market, where many traditional dividend-paying stocks have risen sharply, making valuations more expensive. She is finding newer sources of dividend growth, such as technology companies, as well as attractive opportunities outside the U.S. She is also bracing for higher U.S. interest rates and the implications for funds such as Capital Income Builder and American Mutual Fund.

U.S. economic growth has been steady, corporate earnings are strong and the equity market is at record highs. As an investor, what does all of this say to you about the U.S.?

U.S. companies are in terrific financial shape; they have a lot of cash on their balance sheets and many are increasing their dividends. It continues to be a good environment for U.S. equities, largely driven by the ongoing rebound in the housing and auto markets. Another area that looks attractive is industrials, where many firms are gaining strength and starting to increase their dividends.

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INVESTMENT INSIGHTS  |  July 2013  |  FEATURING Steve T. Watson

A Contrarian’s Guide to Global Dividend Investing and Opportunities in China

A flood of assets into higher yielding equities and a slowdown in economic growth in China are two of the major issues shaking the confidence of global investors. Portfolio manager Steve Watson explains how a contrarian approach to the market can help uncover opportunities even when investors are most doubtful.

As a manager in several dividend-focused funds, particularly International Growth and Income Fund, where are you currently finding value among dividend-paying companies?

Insurance companies have done very well over the past few months. The insurance companies were hurt by being part of the financials sector during the global financial crisis, even though their business models were much more robust than their share prices indicated.

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The top-yielding quintile of the Standard & Poor’s 500 Composite Index had the worst returns in 2009 and the best returns in 2011. We are often asked the question, “Where do these stocks go from here?” While there may be some value in trying to time an entry point into dividend-focused strategies, there is only so far one can go with that approach; we believe it is best to take a strategic, long-term approach to dividend investing.

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Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.  

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses or the funds’ characteristics statement, which can be obtained from a financial professional or your relationship manager, and should be read carefully before investing.  

The return of principal for bond funds and for funds with significant underlying bond holdings is not guaranteed. Fund shares are subject to the same interest rate, inflation and credit risks associated with the underlying bond holdings.  Lower rated bonds are subject to greater fluctuations in value and risk of loss of income and principal than higher rated bonds.  While not directly correlated to changes in interest rates, the values of inflation linked bonds generally fluctuate in response to changes in real interest rates and may experience greater losses than other debt securities with similar durations. 

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Investing outside the United States involves risks, such as currency fluctuations, periods of illiquidity and price volatility, as more fully described in the prospectus. These risks may be heightened in connection with investments in developing countries. 

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