Thus far 2014 has been a difficult year for international equity markets. An apparent slowing in the recovery of the global economy, including the advanced as well as emerging-market economies, a continuation of last year’s decline in commodity markets through the first part of the quarter, and the unsettling events in Ukraine all created headwinds for equity investors. With just two trading days remaining in the quarter, the MSCI All Country Ex-US equity market index was down 1.44% for the quarter to date. The EAFE (all developed markets ex-North America) index was breakeven at +0.04%, and the EMM (emerging markets) index was down 2.73%.
Indications of a slowdown in global growth in the final months of 2013 and into 2014 were widespread. Weakening growth in China has been the leading reason for a softening in business and investor confidence. It is looking less likely that China will meet its annual growth target of 7.5%, but the shortfall will not be great – perhaps 7.2% growth for the year. Emerging-market economies as a group slowed from a 6.4% growth rate in 2011 to 4.6% last year and are headed for a 4.4% advance in 2014. The moderation following the third-quarter growth spurt of the US economy (4.1% annualized) was another factor. US growth may hit a respectable 3% this year, but first-quarter growth appears to have been slower than that. Growth in Europe has turned positive but will be less than 2%. Japan’s growth is projected at only 1%.
The equity markets of the largest advanced countries shared the quarter’s weak performance, with Germany down -1.93% for the quarter to date, the United Kingdom down 2.3%, and Japan down 7.5%. Commodity exporters such as Canada and Australia struggled early in the quarter but picked up recently as commodities recovered somewhat. Australia’s market advanced 2.6% in March. The equity markets of some smaller advanced economies really outperformed: New Zealand, +14.4%; Israel +13.77%; Denmark, +12.05%; Ireland, +11% – and not-so-small Italy advanced by 8.33%, reflecting investor confidence in the new government there.
Equity market performance in the emerging-market economies also varied greatly among individual nations’ markets. The markets of three of the four largest emerging-market economies, the so-called BRICs, did poorly, with China off by 8.01%; Russia, hit by both a struggling economy and the aftermath of the Ukraine crisis, down by 18.08%; and Brazil eking out just a 0.21% gain, reflecting the slower growth in its most important market, China. Only India in this group has been able to outperform, up 5.41%. The weakness in commodity markets affected the Latin American region as a group, which is down 1.9%. The Eastern Europe region, hit hard by the increase in tensions, is down by 13.25%. In Asia the large equity market of South Korea also struggled, down by 4.14%, and Taiwan was not able to do better than a 0.22% decline. Several Asian emerging markets were able to swim against this tide, most notably Indonesia with an impressive gain of 18.72%. The Philippines equity market recovered from the effects of last year’s severe typhoon and gained 6.44%. Thailand also appears to be emerging from the negative investor sentiment due to political unrest and is up 4.04% so far this quarter.
Wise country selection was the only way to achieve positive international equity market gains in the quarter, and the same situation is likely to prevail in the coming quarter.
BY Bill Witherell