International Equity Outlook

November 20, 2018

The challenges stacked against international equities can seem daunting at times. But global headlines may overshadow a fairly stable outlook for the underlying economies.

Sandra Ackermann-Schaufler, senior portfolio manager of SEI’s international and emerging-market equity strategies, discusses our expectations for the global economy and financial markets over the coming months.

International Equity Outlook

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Hello, I’m Sandra Ackermann-Schaufler, senior portfolio manager of SEI’s international and emerging-market equity strategies.

Today I will be sharing our expectations for the global economy and financial markets over the coming months.  

The challenges stacked against international equities in both developed and emerging markets can seem daunting at times.

Global headlines currently are dominated by stories about trade battles and contentious Brexit negotiations.

But this news, in our opinion, overshadows a fairly stable outlook for the underlying economies.

Let’s look at emerging markets first: Economic growth has actually been strong on the back of broadly supportive domestic-oriented policies.

GDP growth in emerging markets has consistently outpaced the U.S. and other advanced economies by a healthy margin, and is projected to continue doing so for the foreseeable future.

As the Federal Reserve has started and is generally expected to continue hiking interest rates, we’ve seen increased stress in currency markets.

Emerging economies in particular have shouldered an outsized share of currency volatility due to a combination of local and external factors.

A strong dollar makes it challenging for emerging-market countries to meet their foreign-currency debt obligations and finance their current account deficits.

This explains why Fed tightening cycles have a history of leading to trouble in emerging markets.

However, today over half of emerging-market countries run a current-account surplus, up from about 15% two decades ago, so they’ve become more insulated from a strengthening dollar.

In our opinion, this is not fully recognized by financial markets.

We think the lion’s share of currency volatility might be behind us and don’t expect emerging-market currencies necessarily to weaken much further from here.

China–U.S. trade has certainly taken center stage in the past few months.

So let’s look at some facts: Starting in January of 2018, the U.S. started imposing tariffs on China’s imported goods.

Over the course of the summer further tariffs where imposed.

China’s reaction to U.S. trade barriers has thus far been measured, so we believe it has left the door open for future negotiations.

U.S.–China trade is highly interdependent, meaning there’s a lot of incentive to negotiate on both sides.

The reality is that trade tariffs have negative implications not just for the U.S. and China, but for the overall global economy.

The concerns around trade have certainly driven volatility higher, but have given rise to pockets of idiosyncratic opportunities in emerging and developed markets.

So let’s move on to developed economies: European companies are still delivering solid earnings growth in a low-inflation environment, and economic fundamentals have continued to slowly trend in a positive direction.

There is some risk that political developments in peripheral Europe could have a negative impact, but for now we are more concerned about the implications of the UK’s departure from the European Union in early 2019.

It seems both sides would prefer an orderly divorce, so we hope a hard Brexit can be avoided, but little progress has been made thus far.

In Asia, Japan continues to benefit from a healthy level of business confidence, improving corporate profitability and muted core inflation.

Prime Minister Abe’s recent party-level re-election implies he’ll likely serve as a source of political predictability in Japan for a few more years.

It’s possible that we could begin to see a gradual effort by the Bank of Japan to adjust its loose orientation on monetary policy.

Currently, valuations offer a strong argument in favor of international equities.

U.S. stocks have been supported by robust economic growth and a healthy earnings backdrop in recent years, but looking out to 2019 and beyond, we expect U.S. leadership to slow.

And as such, in our opinion, international developed and emerging markets provide a more attractive combination of valuations and expected growth.

In closing, we see an opportunity to capitalize on major themes unfolding around the globe over the coming years.

Skilled active management enables us to identify and invest in companies from health-care and technology to consumer staples that we believe are positioned to capitalize on these opportunities.

Thank you.

Legal Note

Disclosure:
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice. This information is for educational purposes only.

There are risks involved with investing, including loss of principal. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. These risks may be magnified further with respect to “frontier market countries,” which are a subset of emerging market countries with even smaller national economies. Bonds and bond funds will decrease in value as interest rates rise. High yield bonds involve greater risks of default or downgrade and are more volatile than investment grade securities, due to the speculative nature of their investments.

Information provided by SEI Investments Management Corporation, a wholly owned subsidiary of SEI Investments Company. Neither SEI nor its subsidiaries is affiliated with your financial advisor.

Index Definitions:

MSCI EAFE Index: The MSCI EAFE Index is an unmanaged, market-capitalization-weighted equity index that represents the developed world outside North America.

MSCI Emerging Markets Index: The MSCI Emerging Markets Index is a free float-adjusted market capitalization weighted index designed to measure the performance of global emerging market equities.

MSCI European Economic and Monetary Union Index: The MSCI European Economic and Monetary Union Index captures large- and mid-cap representation across the developed-market countries in the European monetary union (EMU).

MSCI Europe ex-UK Index: The MSCI Europe ex-UK Index captures large- and mid-cap representation across developed markets countries in Europe excluding the U.K.

MSCI Japan Index: The MSCI Japan Total Return Index is designed to measure the performance of the large- and mid-cap stocks in Japan.

MSCI United Kingdom Index: The MSCI United Kingdom Index is designed to measure the performance of the large- and mid-cap segments of the UK market.

MSCI USA Index: The MSCI USA Index is designed to measure the performance of the large- and mid-cap segments of the U.S. market.

Nikkei 225 Index: The Nikkei 225 is a price-weighted equity index which consists of 225 stocks blue-chip stocks listed on the Tokyo Stock Exchange.

S&P 500 Index: The S&P 500 Index is a market-capitalization weighted index that consists of 500 publicly traded large U.S. companies that are considered representative of the broad U.S. stock market.

Stoxx 600 Index: The STOXX 600 Index represents large, mid and small capitalization companies across countries of the European region.