International Equities Gaining Momentum

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Includes: ADRD, DBEF, DDBI, DPK, DZK, EFA, EFO, EFU, EFZ, FDT, FWDI, GAB, HEFA, HFXI, IDHQ, IEFA, KLDW, LLDM, MFLA, RFDI, URTH, VEA
by: Kevin Mahn

Summary

The current outperformance of international developed market equities is a shift we have been expecting.

2016 may ultimately be the year when international developed stock market returns surpass those of the U.S. stock market.

Certain international emerging markets, have gotten off to a great start so far in 2016, may also be worthy of consideration for those looking to diversify globally.

As a backdrop, here is my current outlook for global economic growth in 2016.

· The U.S. economy, while not knocking the cover off the ball by any means is stabilizing and we anticipate that it will grow this year by an annualized rate of somewhere between 2.4% - 2.8%. This forecast is consistent with our longer term forecast of sub-3% annual GDP growth in the U.S. for the next 5 years.

· China remains as a vital worldwide trading partner and major contributor to worldwide Gross Domestic Product (GDP) growth at present. As a result, if the yuan remains weak and Chinese citizens do not purchase as many imported goods as they did previously, this could translate into a cut in earnings of multinational companies who derive a large percentage of their revenues from China. On the other hand, if the Chinese government is successful with their currency strategy and a pick-up in exports helps to renew growth in their economy, this could translate into greater job opportunities and associated income available for Chinese citizens to spend down the road.

· The European economy, which is still at the beginning stages of their economic recovery and also is not knocking the cover off the ball by any means, has shown signs of life which we believe will be further intensified by additional stimulus measures on the part of Mario Draghi and the European Central Bank (ECB) in 2016 involving some form of interest rate cuts or quantitative easing increases. In fact, due to increased efforts to stimulate their respective economies, and a U.S. dollar which should only get stronger in 2016, we anticipate Europe, and international developed markets as a whole, outpacing the U.S. stock market in USD terms in 2016.

A review of current global equities market performance appears to be relatively consistent with our overall outlook for 2016 above. For example, after outpacing domestic and emerging markets the prior week, international developed market equities, as represented by the MSCI EAFE index, posted their second consecutive weekly gain and are now up 0.44% for the year as of April 22, 2016. The 1.3% gain in the MSCI EAFE index, which is used to help measure the performance of international developed markets, was stronger than the 0.5% gain in U.S. stocks, as measured by the S&P 500 index, and the -0.14% loss in international emerging market equities, as measured by the MSCI EM index, for the week ending April 22, 2016. This marked the second consecutive week of international developed market equities outperformance.

Mutual fund flow data released by the Investment Company Institute (ICI) for the first two months of 2016 seems to suggest a change in investor sentiment towards international equities and we would expect the trend shown in the table below to have only intensified in March and April. Interestingly, another rotational shift that has taken place thus far in 2016, in addition to outflows from domestic equity funds and inflows to world equity funds, involves outflows from taxable bond funds and inflows to municipal bond funds.

Net New Cash Flow of Mutual Funds (Millions of dollars)

Mutual Fund Classification

February 2016

January 2016

January - February
2016

January - February
2015

Domestic Equity

-3,330

-15,480

-18,809

8,376

World Equity

10,820

10,507

21,326

13,599

Hybrid

-1,457

-10,639

-12,096

6,057

Taxable Bond

-3,980

-9,425

-13,405

19,914

Municipal Bond

4,690

4,269

8,959

7,230

Taxable Money Market

44,925

-10,874

34,051

-45,488

Tax-exempt Money Market

-7,642

-9,372

-17,013

-2,039

Total

44,026

-41,013

3,013

7,649

Click to enlarge

Source: Investment Company Institute, February 2016 - Trends in Mutual Fund Investing, March 30, 2016.

The current out-performance of international developed market equities is a shift we have been expecting and is consistent with our previously stated contention that 2016 may ultimately be the year when international developed stock market returns surpass those of the U.S. stock market (in U.S. dollar terms). In addition, certain international emerging markets, with China as their most infamous member, have gotten off to a great start so far in 2016, and while they may face more headwinds in the months ahead and experience more volatility than the vast majority of developed market investments, may also be worthy of consideration for those looking to diversify globally.

Disclosure: All index performance information is provided by JP Morgan on a total return basis as of 4/22/16. You cannot invest directly in an index. Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion and Walsh cannot guarantee the accuracy of said information and cannot be held liable for any errors or omissions.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.