By: Mark Simenstad, Chief Investment Strategist, Thrivent Asset Management May 02, 2019
International stocks have enjoyed an unexpected change of fortune this year – particularly in the emerging markets – mirroring the rebound in U.S. stocks. But is that rally sustainable?
Last year, both the U.S. and the international markets experienced one of their worst years since the Great Recession. The S&P 500 slipped 6.25%, while the international market fared even worse, as the MSCI EAFE Index, which tracks the performance of developed-economy stocks in Europe, Asia and Australia, plunged 16.14% for the year.
But this year, the S&P 500 is up 17.51% through the end of April while the MSCI EAFE is up 11.72%. (The S&P 500 Index is a market-cap-weighted index that represents the average performance of a group of 500 large-capitalization stocks.)
The rebound in the international market has come despite a weak European economy that continues to be dragged down by Brexit and weak financial sectors in Germany and Italy. However, that recent weakness has led to some attractive valuations in Europe, which could present some investment opportunities as the economy stabilizes.
Emerging markets have also begun to perform better thanks, in large part, to an unexpected improvement of the Chinese economy. Gross domestic product (GDP) growth in China has steadily declined since hitting double-digits right after the Great Recession. GDP growth in 2018, estimated at about 6.5%, was the lowest rate since 1990.
The economic slow-down in China was attributed to declining retail sales, issues surrounding questionable lending practices, and tariff and trade issues involving the U.S. While those trade issues still remain unresolved, China has been attempting to stimulate its economy in recent months through other economic measures.
Those policies seem to be working, as the economy appears to be picking up in China, and the stock market has posted solid gains. The recovery in China has been driving the rebound in equities in the emerging markets. Chinese stocks make up more than one-third of the market capitalization of the MSCI Emerging Markets Index, which represents the weighted average performance of stocks in 24 emerging markets around the world. (India and Brazil are the other largest members.)
The resurgence has been led by technology stocks, including China’s “BAT” stocks (Baidu, Alibaba and Tencent), as well as Samsung, the South Korea tech giant.
A weaker U.S. dollar has also contributed to the recovery since companies in many emerging market countries finance their debt in U.S. dollars. A higher dollar valuation translates into higher real debt for emerging market enterprises, while the recent decline in the value of the dollar has made it cheaper to service their debt.
The encouraging results in the emerging markets have compelled us to adjust our weighting in our asset allocation funds from slightly underweight to modestly overweight.
Although we expect emerging market equities to continue to have some positive results, they still face some challenges ahead. If the dollar suddenly strengthens, that could be a drag on the economies of many emerging market economies.
But the biggest factor is still the Chinese economy. If the recent stimulus policies of the Chinese government continue to be effective, the prospects for the emerging markets should continue to improve. But if the Chinese economy begins to slip, that could affect equities throughout the emerging markets.
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Media contact: Samantha Mehrotra, 612-844-4197, email@example.com
All information and representations herein are as of May 2, 2019, unless otherwise noted.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management associates. Actual investment decisions made by Thrivent Asset Management will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
An index is unmanaged, and an investment cannot be made directly in an index.
Past performance is not necessarily indicative of future results.