Topic Tags: International Equity - Developed

EM Growth Leads to Outperformance

After a tough 2015, emerging market (EM) equities have rebounded nicely, returning 16% through the first three quarters of the year. The asset class has benefitted from a change in the macro environment, including the stabilization and strength in commodities and currencies. Not surprisingly, GDP growth – particularly against developed countries – has started to accelerate and is expected to continue on its upward arc (shown by the blue line in the graph above).

After a tough 2015, emerging market (EM) equities have rebounded nicely, returning 16% through the first three quarters of the year. The asset class has benefitted from a change in the macro environment, including the stabilization and strength in commodities and currencies. Not surprisingly, GDP growth — particularly against developed countries — has started to accelerate and is expected to continue on its upward arc (shown by the blue line in the graph above).

The investment case for EM has always centered on growth and diversification. Investors look to capitalize on favorable demographics, urbanization trends, and expansion of the middle class across EM countries. EM equity’s performance versus developed markets (DM) follows closely with the difference in GDP growth between EM and DM. From 2000 to 2009 the differential grew from 1.7% to 6.3%, and outperformance followed. Since 2009 this gap has narrowed significantly, falling to 1.9% in 2015. DM largely outperformed during this time period. Looking forward, however, the IMF estimates the growth differential to widen beginning this year. This has furthered strengthened investor sentiment on the asset class and could be the start of a strong run for emerging market equities.

Equity Returns Post Brexit

The United Kingdom’s (UK) vote to leave the European Union on June 23 was an unprecedented event that impacted markets across around the world. While this exit won’t actually take place for another two years, equities sold off in a knee-jerk fashion as investors feared the ramifications on the global economy. Due to the heavy exposure to Europe, non-U.S. developed markets suffered the most, losing nearly 10% before rebounding.

The United Kingdom’s vote to leave the European Union on June 23rd was an unprecedented event that impacted markets around the world. While this exit won’t actually take place for another two years, equities sold off in a knee-jerk fashion as investors feared the ramifications on the global economy. Due to the heavy exposure to Europe, non-U.S. developed markets suffered the most, losing nearly 10% before rebounding.

With the U.S. viewed as a safe haven, domestic equities have fared relatively well in the Brexit aftermath. The U.S. dollar appreciated following the decision while the British pound slumped to a 30 year low against the greenback. Emerging market (EM) currencies have also depreciated against the dollar however EM equities have been one of the stronger performers. This asset class has benefitted from the U.S. Federal Reserve indicating it will not make any significant interest rate movements due to the risk the Brexit poses to the economy. Only a few days after the UK vote, EM equities rallied for its biggest weekly gain since March. While the Brexit will undoubtedly have long-term ramifications, many of which are currently unclear, equity markets have rebounded from the initial sell-off.

BREXIT: The Results and What’s Next

June 2016

On June 23rd, the United Kingdom (UK) shocked markets with its vote to leave the European Union (EU). The Remain vote lost to the Leave vote, 48.1% to 51.9%, with a strong turnout throughout the UK. Younger voters sided with the Remain camp by a wide margin, while older voters supported the Leave camp (Exhibit 2). In the weeks leading up to the referendum, global equity/credit markets and the British pound experienced positive price movement in anticipation of a Remain verdict. Using polling information and odds makers as indicators, investors were caught off guard at the Brexit result, leading to dramatic losses for risk assets on June 24th.

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What Should We Expect From an Oil Rebound?

Over the past 18 months oil has been a significant drag on global financial markets. While oil producing countries have obviously been hit the hardest, the rest of the world has also struggled. But recently there’s been a mild resurgence in oil, with the WTI index now near $50 per barrel.

Over the past 18 months, oil has been a significant drag on global financial markets. While oil producing countries have obviously been hit the hardest, the rest of the world has also struggled. But recently there’s been a mild resurgence in oil, with the WTI index now near $50 per barrel. This is still nowhere near its previous levels of over $100, but it is a significant increase from the low of about $26 seen earlier this year. This Chart of the Week examines what this means for different parts of the world by looking at the daily correlations between oil and MSCI countries’ indices over the past 18 months.

Not surprisingly, emerging markets, along with Canada, have the highest correlations due to their heavy dependence on oil exports. They’ve also had the worst performance over the past few years but stand to gain the most from rising oil prices. Developed markets though also have high correlations and even in the U.S. and Japan, which have the least significant correlations, oil is still a major factor. These correlations won’t necessarily hold up going forward, but the trend suggests that if oil continues its slow recovery financial markets will benefit across the board. While other issues may affect this recovery, such as a “Brexit” or Japan’s deflationary pressures, overall rising oil prices should be a boost to the global economy.

2016 Market Preview

January 2016

Similar to previous years, we offer our annual market preview newsletter. Each year presents new challenges to our clients, and 2016 is off to a volatile start with equity markets down significantly, oil dropping below $30, the Fed poised to further increase interest rates, and fears of a China slowdown rippling through the markets. However, other headlines will emerge as the year goes on, and it is critical to understand how asset classes will react to each new development and what such reactions will mean to investors. The following articles contain insightful analysis and key themes to monitor over the coming year, themes which will underlie the actual performance of the asset classes covered.

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Some Perspective on the Size of Chinese Equity Market Losses

Over the last month, the Chinese equity market has been a cause of concern for investors and it is impossible to ignore its impact on recent market volatility.

Over the last month, the Chinese equity market has been a cause of concern for investors and it is impossible to ignore its impact on recent market volatility. In an effort to provide some perspective on the size of recent market losses in relation to Chinese consumers, this week’s chart of the week compares the size of the market cap loss to household assets represented by household deposits, 2014 GDP, household financial balance sheets, and household total balance sheets. As shown above, the Chinese equity market cap loss only represented 12% of household financial balance sheet assets which include stocks, bonds, and cash. Additionally, the market cap loss only represented 5% of total household assets which notably include personal real estate. Although the recent loss in the Chinese equity market was not insignificant, at this point in time the overall effect on the Chinese economy is bearable and should not be considered catastrophic.

International Equity Returns vs. Strong Dollar

A major concern for investors over the last year has been the impact of a stronger dollar on international equity returns. Generally speaking, a stronger dollar translates to lower returns for international equity investments, and in 2014 the currency effect on the EAFE index was -10.9%, a sizable reduction to returns for U.S.-based investors.

A major concern for investors over the last year has been the impact of a stronger dollar on international equity returns. Generally speaking, a stronger dollar translates to lower returns for international equity investments, and in 2014 the currency effect on the EAFE index was -10.9%, a sizable reduction to returns for U.S.-based investors. On the other hand, valuations for international equities – especially those in Europe – appear far more attractive relative to levels in the U.S., and suggest higher upside potential, with the ECB’s asset purchase program offering further upside for European equities.

To date, how has this dynamic played out? Have the compelling valuations abroad been more than offset by the currency drag from the dollar’s strength? Our chart this week examines these very questions, looking at year-to-date performance for major markets and regions. Perhaps not surprisingly, Eurozone equities show the largest downward adjustment as a result of exchange rates, while Japan and China show little to no difference between local and dollar-denominated returns. After the first quarter, international equities have outperformed their U.S. counterparts in 2015 and rewarded investors who were patient with their non-U.S. equity allocations. Though it has only been one quarter, this is a theme that may persist for the better part of the year, as the dollar is still stronger than its historical average versus the Euro, and equity valuations are suppressed relative to those in the U.S.

The End for Non-U.S. Equities?

Since 2009, the S&P 500 has been on a historic run with six straight calendar years of positive performance, producing an annualized return of 17.2%. Meanwhile, the MSCI EAFE index has failed to keep pace during the same time period, thus leaving many investors to question their non-U.S. equity allocations.

Since 2009, the S&P 500 has been on a historic run with six straight calendar years of positive performance, producing an annualized return of 17.2%. Meanwhile, the MSCI EAFE index has failed to keep pace during the same time period, thus leaving many investors to question their non-U.S. equity allocations. This week’s chart examines the historical performance of these two indices over the last thirty plus years.

Since October 1982 the S&P 500 and MSCI EAFE have taken turns as the leader, each going on significant bullish runs. Between 2000 and 2007, international equities (7.7%) outperformed domestic stocks (1.4%). Since then, the S&P 500 has returned the favor, beating by nearly 7% on an annualized basis. The data shows that long periods of outperformance have been a common occurrence for both indices. However, this does not assure the imminent resurgence of international equities since past performance does not guarantee future results. Similarly, investors should note that the recent run by U.S. stocks does not mark the end for non-U.S. equities.

2015 Market Preview

January 2015

Similar to previous years, we offer our annual market preview newsletter. Each year presents new challenges to our clients, and 2015 is no different: U.S. equities are at all-time highs, uncertainty reigns for international equities, and to everyone’s surprise, interest rates fell dramatically in 2014…but are poised to rise from historic lows over the next year. In the alternative space, real estate remains a solid contributor to portfolio returns, and private equity delivered on return expectations, though dry powder is on the rise. Hedge fund results were mixed, but have shown to add value in past rising interest rate environments. Further macroeconomic items that bear watching for their potential impact on capital markets include the precipitous fall in oil prices, the strengthening U.S. dollar, job growth, and international conflicts.

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