Putnam Investments: Is the ''Greenspan Conundrum'' over?

It was a good first half of the year with strong markets globally, but that benign environment may be over and investors may need to think about a strategy around a lower return environment.

The “Greenspan Conundrum” with low yields and interest rate hikes led to a booming world economy. The effect of a friendly interest rate background supported overall market gains. However, over the past 3 to 4 weeks, Government bond yields have been rising around the world while yield curves are no longer inverted but are reverting back to normal. In addition, bonds, not a wildly volatile asset class have had negative returns year to date. This may be a major development signifying that the “conundrum” may be over.

What does it mean to transition from an inverted yield curve back to a normal yield curve? Does it mean we move from a bond bull market to bond bear market? As we analyze this, we lean towards this transition marking an important turning point – This may be the end of the era when all asset classes are up all the time.

That being said, we think that stocks will hold steady for remainder of year – with returns that are flat or up slightly. 2007 has already been a good year for global stock markets with the Dow Jones Industrial Average (DJIA-Index) up 10.57% and German (DAX-EURO) market up 21.78% year-to-date through June 19, 2007 and we don’t expect a lot of downside for the remainder of the year.

The impact of post conundrum world has more to do with changes in leadership. We expect to see more pronounced differences within categories such as:

• Large caps outperforming small caps
• Developed markets outperforming emerging markets

We still prefer non-US markets but we have a smaller U.S. underweight than we did before and we continue to favor a growth stock profile with a durable profit model.

The Danger

The danger for the diversified investor is that the end of the conundrum could mean that all asset classes move down together. If we get into that type of environment, the best approach to take is a multi–faceted strategy. In this environment, investors would be wise to identify strategies that would provide stability in such a scenario. These strategies include exposure to:

• Cash, which provides downside protection and yields a competitive return.
• Currencies other than the U.S. dollar
• Active investment strategies that rely on manager skill rather than market appreciation should add value in both up and down markets.
• Diversification, the flexibility to invest across asset categories such as option strategies that typically go up when volatility increases.

The opinions expressed here are those of Jeffrey Knight, CIO, Putnam Investments as of June 20, 2007. They should not be construed as investment advice and are subject to change with market conditions. All economic and performance information is historical and does not guarantee future results.

Investors should carefully consider the investment objectives, risks, charges, and expenses of a fund before investing. For a prospectus containing this and other information for any Putnam fund or product, call your financial representative or call Putnam at 1-800-225-1581. Please read the prospectus carefully before investing.

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