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Q3 2014 Investment Viewpoints

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We expect stocks to outperform bonds, and income generating assets to beat treasuries. The spread between market winners and losers may continue to widen. We believe interest rates will stay low for a …

We expect stocks to outperform bonds, and income generating assets to beat treasuries. The spread between market winners and losers may continue to widen. We believe interest rates will stay low for a long time.


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  • 1. Q3 2014 MARKET CHARTS: INVESTMENT VIEWPOINTS THE BULL MARKET ISN’T OVER/ LOW RATES FOR LONG AS OF 6/30/14 The first half of the year brought a reversal in course from the torrid equity returns and rising interest rates of 2013. Broad equity indices in the U.S., Europe, and the emerging markets trended higher even as a greater divergence amongst stock returns within the indices emerged. Interest rates retested fall- 2013 levels as U.S. growth disappointed and foreign demand for U.S. dollar assets grew. As we enter the second half of the year, we maintain that the case for equities to outper- form bonds and for credit and equity-like income strategies to outperform treasuries is sound. In this quarter’s Investment Viewpoints we explore the implications of our two primary invest- ment themes: (1) The bull market isn’t over but a greater divergence between market winners and losers will continue to emerge, and (2) Interest rates will remain low for the long term. © 2014 OppenheimerFunds Distributor, Inc. Not FDIC Insured May Lose Value Not Bank Guaranteed Q3 2014 MARKET CHARTSAS OF 6/30/14 OppenheimerFunds’ Market Charts are designed to provide a comprehensive update of important economic and finan- cial market developments to help investors make more informed investment decisions. Using our Q3 2014 Market Charts, we have identified two Investment Viewpoints as well as the Oppenheimer funds we believe investors should consider as they work to position their portfolios for the future: u Viewpoint 1 Global Equities: The Bull Market Isn’t Over u Viewpoint 2 Fixed Income: Low Rates for a Long Time Not FDIC Insured May Lose Value Not Bank Guaranteed
  • 2. 2 2008 to 2012, but inflows have only totaled $233 billion since then.1 PAST MAY NOT BE PROLOGUE While the secular global bull market shows no sign of coming to an end, its characteristics may be changing. For many companies, the post-crisis recovery was a time of rapid earn- ings per share growth, driven in part by share buybacks and slashing costs. These tactics clearly cannot go on forever. Going forward, as Chief Economist Jerry Webman argues in a recent paper,2 such companies will need to find other ways to grow if they want to remain competitive. For many, the only way to increase sales will be to hire more workers and/or invest in capital equipment. While such moves would help build the foundation for future business inverse of price-to-earnings ratios) and respective countries’ 10-year bonds. But bull markets, as we’ve frequently reminded investors in recent months, tend not to end with valuations at or below long-term average valuations. Instead, they end with valuations in or near bubble territory or when econo- mies are overheating. Today neither description fits. Inflation remains muted across developed markets (per- ilously so in the Eurozone), as well as in many emerging markets. Growth in most of the world’s largest economies, while positive, remains modest. While investors have responded positively to this (more or less) “goldilocks”-style environment—not too hot and not too cool—it would be difficult to argue that they’ve gone overboard in their buying. After all, investors pulled almost $536 billion out of global equity mutual funds from The strong run in global equity perfor- mance that began in the fall of 2011 remains underway. Although many equity markets have seen valuations rise from deeply discounted levels, even the strongest performing markets of the last few years are only trading at roughly their historical average mul- tiples, while many others, especially in Europe and emerging markets, still appear relatively cheap. Emerging markets equities enter the second half of the year sporting lower valua- tions than European stocks, but the European Central Bank’s recent sortie of accomodative policy actions is likely to provide a tailwind for asset prices on the Continent. Stocks also appear inexpensive com- pared to bonds in most developed and some emerging economies, based on comparisons of earnings yields (the Viewpoint 1 Global Equities: The Bull Market Isn’t Over 21 GLOBAL EQUITIES INTERNATIONAL EQUITIES 0 10 20 30 40 50x SwitzerlandU.S.South Africa MexicoGermanyUKJapanChinaKoreaEurope Ex. UK BrazilSpainItaly 10.2 11.7 13.3 9.8 13.9 12.8 17.2 18.2 21.4 20.6 22.4 20.4 17.0 38.7 23.9 18.9 19.4 19.1 19.3 Large Discount In-line 15.6 21.8 23.0 22.4 17.917.7 Modest Discount 16.5 19.9 Problem chart! Ugh! Use the layer with data to plot both columns of data. They will appear as double bars. Position the triangles in the labels layer to go on the top of the second set of bars. Duplicate the data layer. Rename the layer“with triangle data deleted.”Delete the second column of data and move the triangles horizontally over the remaining bars. 16.5 INTERNATIONAL STOCKS APPEAR TO BE ATTRACTIVELY VALUED AS OF 5/31/14 The cyclically adjusted price-to-earnings ratio (CAPE) divides a market’s price by 10-year average inflation-adjusted earnings to provide a smoothed measure of current valuations. Despite 2013’s gains, CAPEs suggest that some very good international companies are still trading at considerable discounts to historical valuations. Source: Ned Davis Research, 5/31/14. The cyclically adjusted price-to-earnings ratio is equal to the respective MSCI country index divided by the inflation-adjusted 10-year average earnings per share. Calculations based on respective MSCI country indices. Index definitions can be found on page 7. Past performance does not guarantee future results. Cyclically Adjusted Price-to-Earnings (CAPE) Ratio n Current P/E n Historical Median P/E
  • 3. 3 financial crisis, indicating that indi- vidual stocks are increasingly trading on their own fundamentals. Rather than frequently falling victim to sudden wholesale, risk-on/risk-off sentiment shifts, the market is increasingly dif- ferentiating between individual winners and losers. This shift is another indica- tion that selectivity is likely to keep growing in importance—an argument favoring an active approach to equity investing. RISKS TO CONSIDER Stocks are not guaranteed, involve risk and could lose value. Foreign invest- ments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes and geopolitical risks. Emerging expansion, increased outlays may put pressure on profit margins—and could draw the opprobrium of short- term investors. A rising tide may no longer lift all boats. Investors will need to become more selective, focusing on companies that can sidestep—or even capitalize on—the increasing need to spend on workers and equip- ment. These are likely to include firms that don’t need to expand costs much to grow sales; companies that sell efficiency or productivity to other firms; and companies whose inventions take costs out of a process, or that have built a “better mousetrap.” FALLING PAIRWISE CORRELATIONS FAVOR AN ACTIVE APPROACH In the U.S., pairwise correlations—the degree to which stocks are correlated to one another—have fallen since the 13 GLOBAL EQUITIES U.S. EQUITIES PAIRWISE CORRELATIONS AS OF 5/31/14 In the U.S. pairwise correlations—the degree to which stocks are correlated to one another— have fallen since the financial crisis, indicating that individual stocks are increasingly trading on their own fundamentals. Active management is likely an advantage in such an environment. Source: Ned Davis Research, 5/31/14. Index definitions can be found on pages 3–4. Past performance does not guarantee future results. 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 2014201220102008200620042002200019981996199419921990 AVERAGE: 0.50 Median 3-Month (63-Day) Correlation of S&P 500 Stocks to the S&P 500 Index We believe market fundamentals point to a long-term bull market in global equities, and that market, economic and geopolitical turmoil has resulted in attractive valuations— especially for companies that may benefit from medium- to long-term growth trends. u Oppenheimer International Growth Fund invests with a long-term investment horizon in potentially sustainable growth com- panies in non-U.S. markets. u Oppenheimer Global Value Fund seeks to invest in undervalued stocks around the world. and developing market investments may be especially volatile. Value investing involves the risk that undervalued securi- ties may not appreciate as anticipated.
  • 4. 4 Gross Domestic Product and the 10-year U.S. Treasury rate, they tend to track each other closely. Short of a meaningful breakout in real economic activity or a bout with unexpected inflation, rates are likely to remain low for long. For investors, the best opportunities to generate meaningful real income (and to protect themselves should rates retest the still-low but higher levels reached at the end of 2013) will continue to be beyond traditional government-related securities. While certain income categories may offer less enticing nominal yields than they have in the past, many assets continue to appear attractive relative to cash and government bonds. u Real estate investment trusts (REITs) REITs have outperformed in 2014 as interest rates declined and occupancy and rental rates improved. New supply of commercial real estate is coming off of 25-year A confluence of factors, including weaker-than-expected U.S. growth, a decline in U.S. Treasury issuance, and greater foreign demand for U.S. dollar assets, sent rates plummeting in the first half of the year. Many investors were caught on the wrong side of that trade. Our view has been, and remains, that interest rates will remain low for much longer than anticipated. Why? For one, the major global central bankers are in no rush to tighten policy. The European Central Bank is unleashing a wave of policy measures to combat deflationary pressures, while modest U.S. infla- tion provides the Federal Reserve with the cover it needs to attempt to ease the plight of the long-term unemployed. Additionally, the macro fundamentals do not support higher rates. As the chart shows, over the long term, interest rates have been a function of economic growth and inflation. Historically, if you look at the relationship between U.S. nominal Viewpoint 2 Fixed Income: Low Rates for a Long Time 27TAXABLE FIXED INCOME HOW HIGH WILL INTEREST RATES RISE? AS OF 3/31/14 U.S. interest rates have historically tracked the nominal growth rate of the U.S. economy. Rates will likely remain low for long unless there is an unexpected increase in real GDP or inflation. Source: Bloomberg, 3/31/14. GDP (gross domestic product) is the total value of all final goods and services produced in a country in a given year. Index definitions can be found on page 7. Past performance does not guarantee future results. 10-Year U.S. Treasury Yield vs. Nominal U.S. GDP Year-over-Year % Change (10-Year Moving Average) 0 2 4 6 8 10 12 14 16 18 20% 10-Year U.S.Treasury U.S. Nominal GDP (Smoothed) 20142010200620021998199419901986198219781974197019661962 Basis Points AVERAGE: 195.2 n U.S. Nominal GDP (Smoothed) n 10-Year U.S. Treasury Yield 4 lows and the current supply/demand relationship will likely continue to support valuations. u Senior loans Spreads over short- term rates remain attractive, and most new issuance in the market is predominantly for refinancing exist- ing loans, not re-leveraging balance sheets. The refinancing wave has led to increased interest coverage ratios for businesses and pushed the matu- rity wall further into the future. u Municipal bonds Municipal bonds staged a strong rally in the first half of the year but remain cheap to most other fixed income categories. Headline risks remain, even as fun- damentals improve. u Master Limited Partnerships (MLPs) Valuations are stretched relative to historical averages, but substantial infrastructure investment remains necessary, likely supporting cash flows well into the future.
  • 5. 5 26TAXABLE FIXED INCOME ALTERNATIVE SOURCES OF YIELD U.S. rates remain low by historical standards, with yields on traditional fixed income categories not far above the rate of inflation. Other income vehicles that currently offer more competitive real yields may help investors better protect their purchasing power. Source: Barclays, FactSet, Credit Suisse and JPMorgan, 5/31/14. CPI as of 4/30/14. Index definitions can be found on page 7. Past performance does not guarantee future results. *Note: 3-Month LIBOR yield is added to the discount margin to maturity to determine Credit Suisse Leveraged Loan Index Yield. 0 1 2 3 4 5 6 7 8% JPMorgan GBI-EM Global Diversified Composite Index Alerian MLP Index JPMorgan Domestic High Yield Index Credit Suisse Leveraged Loan Index* Merrill Lynch BBB Municipal Index FTSE NAREIT Equity REITs Index Barclays U.S. Credit/ Corporate/ Investment Grade Bond Index Barclays U.S. Aggregate Bond Index Barclays U.S. Aggregate Commercial Mortgage- Backed Securities Index Barclays U.S. Aggregate Agencies Index Barclays U.S. Aggregate Treasury Index 1.29 1.52 2.172.00 3.65 2.85 4.66 5.28 5.38 5.00 6.63 CPI = 2.0% Yields n Components of the Barclays U.S. Aggregate Bond Index n Sources of Yield Beyond the Barclays Agg Many high grade, fixed income secu- rities have high duration and, in our view, investors may be better served by certain sectors of the fixed income markets. u Oppenheimer Senior Floating Rate Fund seeks to provide higher income potential and lower interest-rate risk versus other U.S. debt sectors. u We believe the U.S. energy renaissance will have multiple beneficiaries. Oppenheimer SteelPath funds invest in energy infrastructure MLPs and seeks to provide an attractive yield. u We believe municipal bonds have solid fundamentals and con- tinue to be attractively valued relative to treasuries. Our suite of Oppenheimer Rochester funds seeks to invest in broad and diverse portfolios of municipal bonds in an attempt to generate attractive levels of tax-free income. u Emerging market debt (EMD) Geopolitical uncertainty and weaker- than-expected economic results led to a sharp sell-off in EMD earlier in the year. Volatility is likely to persist, but the market may reward coun- tries offering attractive real yields or strong structural growth stories. RISKS TO CONSIDER Fixed income investing involves credit risk and interest rate risk (when interest rates rise, bond prices generally fall, and a fund’s share prices can fall). Lower rated and below-investment- grade (“junk”) bonds are more at risk of default and are subject to liquidity risk. Senior loans are typically lower rated (more at risk of default) and may be illiquid investments (which may not have a ready market). A portion of a municipal bond fund’s distributions may be taxable and may increase taxes for investors subject to the alternative minimum tax (AMT). Capital gains distributions are taxable as capital gains. Investing in MLPs involves additional risks compared to the risks of com- mon stock, including risks related to cash flow, dilution and voting rights. Energy infrastructure companies are subject to risks such as fluctuations in commodity prices, reduced volumes of natural gas or energy commodities, environmental hazards, changes in macroeconomic conditions, regula- tions or extreme weather. MLPs may trade less frequently which may result in erratic price movement. MLPs are highly regulated and may be adversely affected by changes in the regulatory environment, including the risk that an MLP could lose its tax status as a partnership. Distributions from MLP funds have been classified as “return of capital” which reduces the investor’s adjusted cost basis. For additional risks related to investing in MLPs, please refer to page 7.
  • 6. 6
  • 7. 7 1. Source: Investment Company Institute, 5/21/14. 2. For details, see “The Bull Market Isn’t Over. It’s Changing,” oppenheimerfunds.com. The Alerian MLP Index is a composite of the 50 most prominent energy Master Limited Partnerships (MLPs). The Barclays U.S. Aggregate Agencies Index and Commercial Mortgage-Backed Securities (CMBS) Index represent the U.S. Government Related-Agencies and CMBS components of the Barclays U.S. Aggregate Bond Index, respectively. The Barclays U.S. Aggregate Bond Index is an investment-grade domestic bond index. The Barclays U.S. Credit/Corporate/Investment Grade Bond Index represents primarily investment-grade corporate bonds within the Barclays U.S. Aggregate Bond Index. The Barclays U.S. Aggregate Treasury Index represents public obligations of the U.S. Treasury with a remaining maturity of one year or more. The Credit Suisse Leveraged Loan Index tracks the performance of senior loans. The FTSE National Association of Real Estate Investment Trusts (NAREIT) Equity REITs Index is an index consisting of certain companies that own and operate income-producing real estate that have 75% or more of their respective gross invested assets in the equity or mortgage debt of commercial properties. The JPMorgan Domestic High Yield Index is an index composed of non-investment-grade corporate bonds. The JPMorgan GBI-EM Global Diversified Composite Index is a global local emerging markets index, consisting of regularly traded, liquid fixed rate, domestic currency government bonds. The London InterBank Offered Rate (LIBOR ) is the interest rate that banks charge each other for loans (usually in Eurodollars). LIBOR is officially fixed once a day by a small group of large London banks, but the rate changes throughout the day. The MSCI All Country World Index is designed to measure the equity markets performance of developed and emerging markets. The MSCI Australia, MSCI Brazil, MSCI Canada, MSCI China, MSCI Europe ex-UK, MSCI Indonesia, MSCI Italy, MSCI Spain, MSCI UK and MSCI USA represent equity market performance in those countries or regions. The S&P 500 Index is a broad-based measure of domestic stock market performance. The U.S. 10-Year Treasury Yield is generally considered to be a barometer for long-term interest rates. Each index is unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any investment. Past performance does not guarantee future results. The views contained in the preceding document represent the opinions of OppenheimerFunds as of 6/30/14, are subject to change based on subsequent developments, are not intended as investment advice, and are not intended to predict or depict the performance of any Oppenheimer fund. Consult your financial advisor. Risks to Consider Investments in securities of growth companies may be especially volatile. Value investing involves the risk that undervalued securities may not appreciate as anticipated. Small and mid-sized company stock is typically more volatile than that of larger, more established businesses, as these stocks tend to be more sensitive to changes in earnings expectations and tend to have lower trading volumes than large-cap securities, creating potential for more erratic price movements. It may take a substantial period of time to realize a gain on an investment in a small or mid-sized company, if any gain is realized at all. There is no guarantee that the issuers of stocks held by mutual funds will declare dividends in the future, or that if dividends are declared, they will remain at their current levels or increase over time. Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes and geopolitical risks. Emerging and developing markets may be especially volatile. Due to the recent global economic crisis that caused financial difficulties for many European Union countries, Eurozone investments may be subject to volatility and liquidity issues. Fixed income investing entails credit risks and interest rate risks. When interest rates rise, bond prices generally fall, and a Fund’s share prices can fall. Below-investment-grade (“high yield” or “junk”) bonds are more at risk of default and are subject to liquidity risk. Asset- backed and mortgage-backed securities are subject to prepayment risk. Senior loans are typically lower rated (more at risk of default) and may be illiquid investments (which may not have a ready market). Commodity-linked investments are considered speculative and have substantial risks, Investing in a limited number of sectors, such as gold, oil and real estate, can increase volatility and exposure to issues affecting that sector. Investing in MLPs involves additional risks as compared to the risks of investing in common stock, including risks related to cash flow, dilution and voting rights. Each Fund’s investments are concentrated in the energy infrastructure industry with an emphasis on securities issued by MLPs, which may increase volatility. Energy infrastructure companies are subject to risks specific to the industry such as fluctuations in commodity prices, reduced volumes of natural gas or other energy commodities, environmental hazards, changes in the macroeconomic or the regulatory environment or extreme weather. MLPs may trade less frequently than larger companies due to their smaller capitalizations which may result in erratic price movement or difficulty in buying or selling. Additional management fees and other expenses are associated with investing in MLP funds. The Oppenheimer SteelPath MLP Funds are subject to certain MLP tax risks. An investment in an Oppenheimer SteelPath MLP Fund does not offer the same tax benefits of a direct investment in an MLP. The Funds are organized as Subchapter “C” Corporations and are subject to U.S. federal income tax on taxable income at the corporate tax rate (currently as high as 35%) as well as state and local income taxes. The potential tax benefit of investing in MLPs depend on them being treated as partnerships for federal income tax purposes. If the MLP is deemed to be a corporation, its income would be subject to federal taxation at the entity level, reducing the amount of cash available for distribution which could result in a reduction of the fund’s value. MLP funds accrue deferred income taxes for future tax liabilities associated with the portion of MLP distributions considered to be a tax-deferred return of capital and for any net operating gains as well as capital appreciation of its investments. This deferred tax liability is reflected in the daily NAV and as a result a MLP fund’s after-tax performance could differ significantly from the underlying assets even if the pretax performance is closely tracked. Diversification does not guarantee profit or protect against loss.
  • 8. Follow us: Visit blog.oppenheimerfunds.com Search Google Currents for OppFunds to access our timely thought leadership Visit oppenheimerfunds.com | Call 800.225.5677 Scan this code to learn more about us: Shares of Oppenheimer funds are not deposits or obligations of any bank, are not guaranteed by any bank, are not insured by the FDIC or any other agency, and involve investment risks, including the possible loss of the principal amount invested. Before investing in any of the Oppenheimer funds, investors should carefully consider a fund’s investment objectives, risks, charges and expenses. Fund prospectuses and summary prospectuses contain this and other information about the funds, and may be obtained by asking your financial advisor, visiting oppenheimerfunds.com or calling 1.800.CALL OPP (225.5677). Read prospectuses and summary prospectuses carefully before investing. Oppenheimer funds are distributed by OppenheimerFunds Distributor, Inc. 225 Liberty Street, New York, NY 10281-1008 © 2014 OppenheimerFunds Distributor, Inc. All rights reserved. DS0001.134.0614   June 30, 2014 CONTACTUS Visit oppenheimerfunds.com Call 800.225.5677