Peak Financial Management, Inc. ∞ 281 Winter Street, Suite 160, Waltham, MA 02451 ∞ 781-487-9500 ∞ www.peak-financial.com

Highlights

Emerging market weakness has created an undeserved drag on US stocks, and current headlines are not new.

Higher corporate earnings will push US stock prices higher. This earnings growth will come from economic recovery in the US, and toil in emerging markets

isn’t likely to have a significant impact.

Pran Tiku, President; Kerry Luria, Vice President; Neel Tiku, Director of Research; James Sichenzia, Research Analyst; Dennis Lagace, Research Analyst

MONTHLY MARKET UPDATE DESPITE EM CONCERNS, US CORPORATIONS ARE POISED TO

MAINTAIN EARNINGS GROWTH

FEBRUARY, 2014

Any economic impact to the US would be muted.

Despite clear reasons to be careful with emerging mar-

ket investments, US stocks are still attractive. We still

believe the US economy is positioned best in the world.

Economic growth is positive and rising, unemployment

is falling, and monetary stimulus is being pulled back.

Corporate earnings will likely drive returns in 2014, and

these earnings are not significantly impacted by emerg-

ing markets.

The US does about half its trade with emerging and

developing countries. This is a pretty significant

amount, about $2 trillion in 2012, and imports are high-

er than exports. This means that US corporations are

buying goods from overseas and are not dependent on

foreign sales. In addition, foreign exposure tends to be

concentrated in specific sectors, like luxury retail, that

are less exposed to national debt risk. Higher earnings

will come from increasing domestic growth rather than

foreign sales, a trend we think will continue throughout

the coming year.

Beyond systemic weakness in emerging market curren-

cies, the selloff began last May when Ben Bernanke

announced slowing Quantitative Easing. QE has kept the

dollar weak, but there is less need for such a loose mon-

etary policy now that the US economy is recovering.

“Taper Talk” was the catalyst last spring, so it’s no sur-

prise to see the market react now that reduced policy is

in effect.

Some risks do exist.

While falling currency values may dampen returns to

international investors, greater risks exist. High short-

term debt creates dependence on borrowing from for-

eign investors. An emerging market may find it difficult

to regularly refinance outstanding debt, particularly if

the country has a weak currency. This increases the risk

of default. In addition, if one country were to default, it’s

likely that several others would as well because lending

among emerging markets is common. This is referred to

as the risk of contagion, and widespread emerging mar-

ket defaults could significantly alter the structure of

global capital markets.

Fortunately, these risks are remote. Many emerging

markets are investment grade and can readily borrow

from other countries, including the World Bank. Pru-

dent leadership is replacing corruption as these coun-

tries develop further, and the European debt crisis

showed global leaders the potential fallout of national

default. We believe the most likely outcome is less

valuable currencies, a trend that has persisted over the

past year.

Renewed optimism in the market drove valuation multi-

ples higher in 2013, paving the way for real corporate

growth to shine in 2014. However, a pullback over the

month of January shows that confidence may be waning.

China’s indicators point to weaker growth and the Fed-

eral Reserve tapered another $10 billion, triggering a

shockwave through emerging markets and causing

investors to flee for more stability. We believe the cor-

rection in emerging markets has been an undeserved

drag to US stocks this year . The drawdown actually

started last year and, while some risks do exist, the effect

on US stocks will be limited.

This has been happening for awhile.

Emerging markets have received well-deserved atten-

tion. The countries are growing quickly, creating new

markets and opportunities to invest. Many are invest-

ment-grade and the securities industry has found inno-

vative ways to make these opportunities available to the

average investor.

There are definite challenges that have come along with

that growth. Short-term debt has risen, so these coun-

tries must refinance their national loans more frequent-

ly. Strong international trade led to surplus for many

years, but falling commodity prices and a sluggish global

economy have caused them to buy more than they sell.

These trends are not new and have been headwinds to

currency values for a number of years.

US earnings don’t depend heavily on emerging markets.

EM weakness has been accumulating for years.

Your feedback is important! We want to address

the issues most relevant to you. If you have any

comments, questions, or concerns, please contact

Neel Tiku, Director of Research, at (781) 487-9500

or neel@peak-financial.com

Currencies have been falling since “Taper Talk” last May.

12%

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Short Term Debt as a % of GDP*0.86

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1.00

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Average Change in Currency Value since January, 2013*

The start of "Taper Talk"

No taper in September...

...but the Fed did taper twice.

-1.5%

-1.0%

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0.5%

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2.0%

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Current Account Balance as a % of GDP*

* For a basket of 20 emerging markets

Graph Source: Bloomberg

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Net Exports to Emerging and Developing Countries (billions)

0%

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S&P 500 Earnings Growth - Historical and Projected

Historical Projected

Peak Financial Management, Inc. ∞ 281 Winter Street, Suite 160, Waltham, MA 02451 ∞ 781-487-9500 ∞ www.peak-financial.com

Past performance does not guarantee future results. Diversification does not guarantee investment returns and does not eliminate the risk of loss.

Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the

information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and

strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal, or tax

advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied

upon or interpreted as a recommendation.

The price of equity securities may rise or fall because of changes in the broad market or changes in a company’s financial condition, sometimes rapidly or unpredictably. International investing involves a greater

degree of risk and increased volatility. There is no guarantee that companies that can issue dividends will declare, continue to play, or increase dividends.

much work that needs to be done within the

monetary union. Emerging markets have their

own host of issues, and we think returns for the

asset class will lag.

There are still some attractive opportunities

outside the US. Similar to the commentary last

month, Japanese and German companies are

positioned to benefit from political action and

will likely outperform their respective regions.

For more in-depth analysis, see the January

2014 “Monthly Market Update.”

Fixed Income and Alternatives

2013 was a difficult year for bonds because

coupons are low and interest rates were rising.

These trends are very likely to continue through

2014. To prevent loss, we recommend using

non-traditional or unconstrained bond funds.

The funds we recommend, for example, have

effective durations that range from –2.6 to 0.90

years and yields between 1.3 and 3.2%. This is

an effective method to lessen interest rate risk

found in core bond exposure.

Alternative strategies are also an effective tool.

Long/short equity strategies can provide equity

upside, without full correlation to broader stock

markets. Multi-asset strategies can be used to

generate current income with less interest rate

risk. We favor these types of investments over

traditional bonds to diversify equity risk.

Peak Financial’s Portfolio Strategy

Portfolio strategy has remained fairly consistent

over the previous months. Stocks are preferable

to bonds. Economic recovery and earnings

growth warrant higher stock prices, and rising

interest rates will continue to put pressure on

bond prices. We believe alternative investment

strategies, rather than traditional fixed income,

are a better way to diversify portfolio risk. As a

result, we recommend a strong overweight to

stocks. Keep fixed income allocations below

policy weights and, instead, allocate a greater

amount to alternatives.

Equity

Within the equity allocation, we favor the US

market. The domestic economy is stronger than

it’s developed peers. The Eurozone is still strug-

gling to emerge from recession, and there is still

Chart of the Month: Both earnings and P/E ratios climbed in 2013. EPS is poised to

grow, pushing stocks higher even if valuation multiples stay the same.

OUR APPROACH

We follow a holistic wealth management and financial

planning process by working with our clients as they

identify their goals. Working closely with each client,

we develop and review projections and suggest strate-

gies to help them achieve their objectives.

Our investment philosophy focuses on maximizing long-

term, risk-adjusted returns by employing a global ap-

proach to portfolio management. This approach seeks

to reduce risk, increase diversification, and enhance risk

-adjusted performance.

We offer the following services to help prepare our cli-

ents for the unexpected road ahead:

Cash flow analysis Retirement planning Tax and estate planning Investment management Feel free to reach out to us about your personal situa-

tion. We can be reached at (781) 487-9500, and look

forward to working with you to help secure your finan-

cial future.

OUR FIRM

Peak Financial Management, Inc. is a Registered Invest-

ment Advisor based in Waltham, MA. The firm has

specialized in financial planning and investment man-

agement for over two decades, offering our clients tai-

lored advice and the highest level of customer service.

Monthly Market Update: Despite EM Concerns, US Corporations are Poised to Maintain Earnings Growth February, 2014

Index returns as of 1/31/2014

Asset Class Underweight Neutral Overweight

Equity

Fixed Income

Cash

Alternatives

Equity Regions Underweight Neutral Overweight

United States

International

Emerging Markets

Stock Sectors Underweight Neutral Overweight

Consumer Discretionary

Consumer Staples

Energy

Financials

Health Care

Industrials

Information Technology

Materials

Telecommunication Services

Utilities

Source: Bloomberg

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EPS (RHS) P/E Ratio (LHS)