Economic data for February provided clear indications that the global economy is experiencing a broad recovery, with the major advanced economies growing close to or even above their estimated potential growth rates. This positive macroeconomic environment is providing a tailwind for equity markets despite the many political uncertainties adding risk that is reflected in investor attitudes. In this note we will look at international economies and equity markets outside the US.
The JPMorgan Markit Composite Global Purchasing Managers’ Index (PMI) for February, covering both manufacturing and services, while down a bit from its January reading, is at a level consistent with solid, above-potential global GDP growth. It has signaled expansion consistently for the past 53 months. Global manufacturing reached a 69-month high in February, driven by stronger growth in new orders and rising levels of international trade. Business confidence in the global manufacturing sector also improved. Global service sector growth was weaker than in January.
The February Markit Composite PMI for the Eurozone presents an even stronger picture than the global average. Output growth in the four largest economies accelerated, leading the PMI for the entire Eurozone to rise to a 70-month high. Output growth in Germany was at a 34-month high, while France, despite domestic political uncertainties, hit a 69-month high. Output in Spain was at an 18 month high while Italian output reached a 14 month high. Manufacturing growth led the output advance in the Eurozone with increased new orders and exports, presumably helped by the weaker euro. Services sector momentum also increased. Jobs creation was strong, and inflation increased slightly. The overall picture is one of a robust recovery that could lead the European Central Bank to begin to begin tapering its monetary stimulus earlier than many have expected. However, the political uncertainties in Europe – elections in Netherlands, France, Germany, and possibly Italy, along with BREXIT – cloud the outlook considerably for investors.
Other major advanced economies registered very slight slowdowns in the pace of manufacturing-sector output growth but remain at levels reflecting solid growth momentum. In the UK the continued expansion was underpinned by growth in new orders, including new export orders. In Japan, for which we have the composite PMI, the slight registered slowdown (from 52.3 in January to 52.2 in February) still keeps overall output growth (manufacturing plus services) well above the pace experienced throughout much of last year. Manufacturing output in Japan increased by the most it had done in three years.
Manufacturing output in emerging markets improved on average at a somewhat slower pace than it did in the advanced economies but was marginally better than in January. Growth accelerated in China, India, Vietnam, and the Philippines. On the negative side, Brazil’s manufacturing downturn was notable, registering the 25th month in a row of declining output, although the rate of decline softened. Also noteworthy was the decline in manufacturing in Indonesia and Turkey.
Global equity markets outside the US have had a favorable start to the year, similar to that in the US market and likely reflecting positive investment sentiment in the US. The benchmark iShares MSCI ACWI ex US ETF, ACWX, is up 6.03% year-to-date March 2, in keeping with the 6.66% gain on a total-return basis of the SPDR S&P 500 ETF Trust, SPY. Advanced countries outside of North America did almost as well, with the iShares MSCI EAFE ETF, EFA, gaining 5.54%. Canada, not included in EFA, dropped sharply in February after a strong run, with the result that the iShares MSCI Canada ETF, EWC, gained only 2.64% year-to-date.
Among the advanced economies included in EFA, outperformer country ETFs year-to-date include iShares MSCI Hong Kong, EWH, 11.34 %; iShares MSCI Australia, EWA, 8.65%; iShares MSCI Sweden Capped, EWD, 6.93%; and iShares MSCI Switzerland, EWL, 6.82%. The Eurozone as a whole underperformed EFA, with the iShares MSCI Eurozone ETF, EZU, registering a 4.74% gain. The iShares Currency Hedged MSCI Eurozone ETF did marginally worse at 4.29%. Germany was relatively strong, with the iShares MSCI Germany ETF, EWG, gaining 5.70%. The iShares MSCI Spain Capped ETF, EWP, also put in a strong performance with a 6.07% gain. The iShares MSCI Netherlands ETF, EWN, outperformed, advancing 7.74%, suggesting investors are not particularly concerned about the upcoming election. France lagged the Eurozone average despite its strong economic data, with the iShares France ETF, EWQ, gaining 3.85%. The iShares MSCI Italy Capped ETF, EWI continues to struggle, advancing only 1.32% year-to-date. Favorable economic data there have not been able to offset the political turmoil and continued weakness in the banking sector. Also in Europe the iShares MSCI United Kingdom ETF, EWU, continued to do reasonably well despite the BREXIT uncertainties, advancing 4.37%.
Japanese equities, like the Japanese economy, continued to advance at a moderate but steady pace, with the iShares MSCI Japan ETF, EWJ, gaining 5.14% year-to-date. In Japan, too, the currency hedged ETFs lagged, with the WisdomTree Japan Hedged Equity Fund gaining just 4.20%.
Emerging market equity markets as a group have outperformed so far this year, recovering from their swoon in the fourth quarter of 2016. The iShares MSCI Emerging Market ETF, EEM, has gained 9.08% year-to-date. This average conceals some widely differing country market performances and considerable volatility.
The Latin American markets were particularly strong but have seen some slippage in recent weeks. The iShares Latin America 40 ETF, ILF, has gained 15.26%. Brazil continued its recovery, with the iShares MSCI Brazil Capped ETF, EWZ, advancing 15.72%. Over the past 12 months it is up 65.79% despite, as noted earlier, the manufacturing sector continuing to decline. Argentina is another recovery story. The Global X MSCI Argentina ETF, ARGT, has similarly gained 15.74% so far this year and 41.78% over the past 12 months. The highly volatile iShares MSCI Chile Capped ETF, ECH, managed to gain a strong 8.90% year-to-date. The Mexican market recovered some of the sharp loss experienced after the Trump victory, with the strong growth of its major trading partner, the US, more than offsetting the uncertainties surrounding future US trade policy vis-à-vis Mexico. The iShares MSCI Mexico Capped ETF, EWW, is up 9.07% year-to-date.
Asian emerging market equity market performance has been generally sound but more subdued than in Latin America. The SPDR S&P Emerging Asia Pacific ETF, GMF, has gained 10.42%, about two-thirds of the ILF’s advance. China equities have recovered from their December low, with the iShares MSCI China ETF, MCHI, gaining 11.25% so far this year. The Indian market, like its economy, has recovered from the government’s demonetarization experiment, with the iShares MSCI India ETF, INDA, gaining 11.38%. South Korea slipped 2.27% in the past week due to political developments on the peninsula, but the iShares MSCI South Korea Capped ETF, EWY, still managed to register an 8.47% gain year-to-date, as the economy is doing well. The iShares MSCI Taiwan Capped ETF, EWT, registered a similarly strong performance of 8.99%. Weaker-performing national market ETFs in Asia include iShares MSCI Malaysia, EWM, at 6.02%; iShares MSCI Philippines, EPHE, at 4.40%; and iShares MSCI Indonesia, EIDO, at 2.20%.
Overall, the broad regional ETFs have tracked the relatively robust global economic performance in the opening months of 2017. The widely dispersed country performances demonstrate the importance of carefully identifying those country markets most likely to perform well and confirm the value of diversification when adding international exposure to portfolios. At Cumberland Advisors our International and Global ETF Portfolios are almost fully invested, with small cash positions available to use if attractive opportunities should arise.
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About The Author
Bill Witherell, Chief Global Economist and Portfolio Manager
William Witherell joined Cumberland Advisors as Chief Global Economist in November 2005 and became a Portfolio Manager in December 2005. He is also a Senior Consultant for Finance and Corporate Governance to the Organization for Economic Cooperation and Development (OECD). From 1989 through September 2005, he was OECD’s Director for Financial and Enterprise Affairs. He joined the Secretariat of the OECD in Paris, France, in 1977.Dr. Witherell is a graduate of Colby College and holds M.A. and Ph.D. degrees in economics from Princeton University. Dr. Witherell began his career as a business economist with Exxon and Esso Eastern, from 1967 to 1973, where he held positions in the economics, treasury, and corporate planning functions. He moved to the international economic and financial relations field in 1973, with positions first in the U.S. Department of State and then in the Department of the Treasury, from 1974 to 1977, as Director of the Office of Financial Resources and Energy Finance.
Dr. Witherell currently resides in North Grafton, Massachusetts. He is a past Chairman of the International Roundtable of the National Association for Business Economics, and a member of the Boston Economic Club and the Westborough, MA Rotary Club.