The second quarter has proven difficult for the international (non-US) economies and equity markets. Economic growth has been stuck in the slow lane.
The OECD reduced its global growth rates for both 2016 and 2017 by 0.3% to 3.0 and 3.3%, respectively. The IMF and private forecasters have also been trimming their forecasts.
Consumer demand is held in check by very limited wage gains, and businesses are reluctant to invest in the face of insufficient demand at home and sluggish growth abroad. Equity markets have seesawed, failing to find a trend. As of June 20th the all-country ex-US benchmark iShares MSCI ACWI ex-US ETF, (NASDAQ:ACWX), was up 0.96% over the past three months.
In June, markets have been roiled by great uncertainty about the June 23rd vote on whether the UK will remain a member of the European Union or leave (Brexit). The outcome of that vote will probably determine whether the final reading for the quarter is positive or negative. A vote to remain very likely would be followed by a relief rally.
Advanced markets outside the US slightly underperformed the global ex-US average over the past three months. The iShares MSCI EAFE ETF, (NYSE:EFA), which covers developed markets excluding the US and Canada, was up by 0.63%.
As has been the case for many markets, small-caps performed better. The iShares MSCI EAFE Small-Cap ETF, (NYSE:SCZ), ended the three months up 2.40%.
European Markets slumped after nice gains in March and April. The iShares MSCI European Monetary Union ETF, (NYSE:EZU), eased by 1.18%. While eurozone economies expanded strongly in May, momentum may have eased. We are particularly concerned about the weakness of the banking sector.
Japan did better over the past three months, with the iShares MSCI Japan ETF, (NYSE:EWJ), up 2.10% over the three months, reflecting a 7.4% gain in the yen, which boosted returns to the US-dollar investor.
Emerging market economies have also slowed, as Chinese economic growth has moderated. On the positive side, commodities have been doing better. Performance among emerging economies is diverse, reflecting differences in policies, in structural reforms, financial vulnerabilities, and the impact of commodity market developments.
India and Indonesia are experiencing strong investment, supported by reforms and healthy demand growth. Emerging equity markets have been on a roller coaster, trending upward this year until April, and then dropping through mid-May, followed by another rise and fall. Over the past three months the iShares MSCI Emerging Markets ETF (NYSE:EEM), ended down 0.50%.
Chinese markets have underperformed. The iShares MSCI China ETF, (NYSE:MCHI), was down 1.68%.
Some emerging markets did notably better. India has been outperforming, with the WisdomTree India Earnings ETF, (NYSE:EPI), advancing 5.0%. In Latin America, Peru is outperforming, with the iShares MSCI All Peru Capped ETF, (NYSE:EPU), advancing 16.15%.
Navigating these markets with their high volatility and diverse performance in a period when there are a number of uncertainties – Brexit is just one example – requires close monitoring and in-depth analysis of a wide range of economic, financial , technical, and geopolitical developments. At Cumberland Advisors we have maintained a cash reserve during the quarter, a small part of which we have used to take advantage of several trading opportunities.
For the time being, at least, we expect to maintain this somewhat defensive posture. Longer term, the very low interest rates globally should be positive for equities, and there is potential for more-positive market performance in the second half as the economic pace quickens in both the US and globally.