As the first half of 2023 ends, international equity markets have paused. Investors are faced with high uncertainty about the future of a global economy that lost momentum in June following sizable gains in May. While inflation pressures are cooling in most countries, the UK being an exception, central bankers do not appear to be finished with raising policy interest rates. Yet, thus far, liquidity remains ample in the advanced economies, and balance sheets remain strong. China’s post-reopening growth bounce has been very modest thus far and slowed in the second quarter. Government and central bank actions to stimulate the Chinese economy are not likely to have a significant impact before the fourth quarter. A potential, but by no means certain, recession in the US economy beginning towards year-end presents a downside risk to the global economy. This recession, should it occur, would likely impact the resilient consumer spending that has sustained economic growth in many economies so far this year. The stresses that developed earlier this year in the banking sector are a continued concern, but thus far the risk of contagion has been contained. Last week’s brief but dramatic insurrection in Russia raises the dangerous threat of instability in that country and has added to uncertainties about the future course of the war in Ukraine.
International equity markets – that is, equity markets outside of the US – have achieved a modest gain of 6.2% year-to-date June 23 as measured by the iShares MSCI ACWI ex US ETF, ACWX. This figure was less than half the 13.3% gain of the S&P 500 in the US. The advanced-country equity markets as a group gained 8.1% as measured by the iShares MSCI EAFE ETF, EFA, which was well above the 3.4% return of the aggregate iShares MSCI Emerging Markets ETF, EEM. These aggregate measures mask a great diversity in the returns of individual national equity markets. Some markets boomed while others remained flat.
Considering first the advanced-economy markets, the Eurozone economy, following a mild winter recession, picked up momentum early in the second quarter but then stalled in June, according to the June HCOB Flash Eurozone PMI, as service sector growth slowed sharply. Manufacturing factory output fell for the third straight month. Business expectations in the largest Eurozone economy, Germany, fell in June for the second consecutive month, with waning external demand a key concern. A weak third quarter is looking likely. The iShares MSCI Eurozone ETF, EZU, gained a respectable 12.3% year-to-date but declined 2.4% over the last 30 days. The UK market underperformed dramatically, with the FTSE 100 Index gaining just 0.1% year-to-date for a number of reasons, including stubbornly high inflation and continuing negative effects of the UK’s leaving the European Union.
We need to look to Asia to find the strongest-performing advanced-economy equity market, that of Japan, which is the world’s second largest after the US market. The Nikkei Index has gained 25.6% year-to-date, reaching a 33-year high before slipping 2% over the last five days. The Japanese economy is growing faster than other large, advanced economies. Also, long-needed corporate governance reforms are benefiting shareholder returns; monetary policy remains very accommodative; and Japan is considered to have a low-risk investment environment, in contrast to the worsening climate for foreign investors in China.
Also in Asia are the two strongest outperforming emerging-market equity markets year-to-date, those of Taiwan (21.7%) and South Korea (14.9%). Both markets are sharing in the boom in technology stocks that has fueled the US market. The hoped-for boost from China’s reopening has yet to be felt in these economies. The China Mainland markets have underperformed, with the Shanghai Index up only 3.5% year-to date June 23. Some other Asian markets have fared worse, including Thailand, Indonesia, Malaysia, Singapore, and the advanced economies of Australia and New Zealand.
The second-largest economy in Asia, that of India, is projected to grow by 6% this year, faster than China’s economy, where a projected 5.4% advance may prove difficult to achieve. While India’s equity market’s year-to-date performance (3.0%) is similar to China’s, India’s has registered a strong 10% gain over the past three months, in contrast to the Shanghai market’s 2% decline.
The modest pace of China’s reopening has meant a weaker-than-expected global demand for commodities, and that lackluster demand has affected commodity-exporting economies such as Australia, Canada, and South Africa. In Latin America three markets did relatively well nevertheless – Mexico (10.1%), Brazil (8.4%), and Chile (7.9%).
At Cumberland Advisors we will continue to follow a well-diversified approach to investing in international equity ETFs in this period of high uncertainty, characterized by both significant downside and upside risks. Close monitoring of developments is essential.
The ETF ACWX is the only security mentioned above that is in Cumberland Advisers’ current investment holdings.
William H. Witherell, Ph.D.
Vice Chairman & Chief Global Economist
Email | Bio
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Sources: Financial Times, Wall Street Journal, Oxford Economics, CNBC.com, S&P Global, OECD.org, Goldman Sachs Economic Research.
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