I’m recording this in the middle of June and so far this year both developed and emerging markets are slightly ahead of the S&P
which is somewhat surprising given that the dollar has been a headwind as have earnings revisions. The main reason for the slight international outperformance has to do with the significant Value style tilt in those indexes relative to the S&P 500. For example the MSCI EAFE index has just an 8% Technology weight versus 27% for the S&P 500. Just as we’ve seen here in the US, Value has been dramatically outperforming Growth internationally.
At the outbreak of the war in Ukraine we moved developed equities ex US to an underweight and they have underperformed since then, despite the value bias. Given Europe’s geographic proximity to the war and much greater dependence on trade with Russia and the Ukraine, we believe Europe’s economy is more at risk of a downturn. In a sense the US Fed has kind of evened the tables by getting more aggressive, putting our economy more at risk as well. Though the ECB looks to begin raising rates in July, also longer rates in Europe have been rising in line with or even more than US rates – and this is true around the globe with a few exceptions. Japan, is one of those exceptions as they face a much lower recession risk. Japan has seen a dramatic decline in their currency as their central bank is unlikely to raise rates and is still conducting policy to hold rates down.
Emerging market performance has been very mixed with strength in resource rich countries and weakness seen in more technology and goods exporters like Taiwan and Korea. China has been struggling with the property sector downturn and COVID related lockdowns. We are concerned that this highly contagious virus will continue to frustrate their zero COVID strategy and we are also concerned over signs that Chinese consumer spending is slowing and unemployment is rising.
We continue to remain underweight International equities, though not dramatically as valuations are very attractive relative to those here in the US.
For more of our thoughts on international equities please visit our website at Touchstone Funds.com
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