In the next-to-last week of the second quarter, the factors that have led to high volatility in the global equity markets during the quarter are still present. Foremost among these are the destabilizing effects of rising trade and technology tensions, which are hurting the manufacturing sectors in many countries, disrupting global value chains and weighing heavily on investment decisions. Global trade has slowed dramatically, from a 5.5% annual pace in 2017 to a projected rate of just 2.1% for this year. The second cause of market volatility, related to the first, has been the slowdown in global economic growth and increasing concerns about the possibility of recession in major economies including the U.S. Along with the trade concerns, the easing of growth rates in China, India and many other emerging markets; the contracting of the manufacturing sector and consequent weakness in Europe; and the stagnating Japanese economy have added to growth worries.
What To Expect
With the U.S. economy also appearing to slow during the quarter, it is not surprising to see projections for global growth being marked down. The OECD is now projecting global economic growth for the current year at 3.2%, compared with 3.5% in 2018. The risks to the “fragile” world economy (as OECD’s Chief Economist Laurence Boone recently characterized it) will remain heavily on the down side unless there is a de-escalation of trade tensions. Further contributing to market uncertainties are the serious tensions between the U.S. and Iran, the political turbulence in the United Kingdom because of the unresolved Brexit issue and the reopening of questions about the future of Hong Kong’s relationship with Mainland China.
International equity markets have taken investors on a rollercoaster ride during the quarter to date, as of June 18. The iShares MSCI ACWI ex U.S. ETF, (NASDAQ:ACWX), which tracks all equity markets except the U.S., is unchanged from the beginning of the quarter, after rising 3%, tumbling 6% and then recovering. The advanced markets followed a similar pattern, whereas the more volatile emerging markets are down about 2%.
Looking at the year-to-date total returns for international markets, although ACWX is unchanged for the quarter, it is up 9.25% for the year. The advanced-market iShares MSCI EAFE ETF, (NYSE:EFA), has done slightly better, up 9.8%, whereas the iShares MSCI Emerging Market ETF, (NYSE:EEM), has gained just 7.1%, losing some of the substantial gains it made in the first quarter. Going forward, our base-case projection is that the global economy has stabilized at a moderate pace and will avoid a recession, with prospects for advanced-economy equity markets, particularly that of the U.S., being somewhat better than for the emerging markets. We expect the U.S. and China will agree at the G20 to resume trade negotiations and the U.S. will hold off applying another round of tariffs. We are maintaining a cash reserve in our International and Global ETF portfolios. Our strategy could change any time.