1. finance
2. investing
3. stocks

International Equity Review
First Quarter 2015
Table 1: International Equity Benchmark Performance
(Total Return Data as of 3/31/15)
As of March 31, 2015
Index
MSCI AC World ex USA
(USD)
MSCI AC World ex USA
(Local Currency)
MSCI World ex USA
(USD)
MSCI World ex USA
(Local Currency)
MSCI Emerging Markets
(USD)
MSCI Emerging Markets
(Local Currency)
MSCI Frontier Markets
(USD)
Total Return Performance
MTD
QTD
YTD
1 Year
-1.5%
3.6%
3.6%
-0.6%
0.9%
9.1%
9.1%
16.0%
-1.6%
4.0%
4.0%
-0.9%
1.1%
10.2%
10.2%
17.3%
-1.4%
2.3%
2.3%
0.8%
0.2%
4.9%
4.9%
11.3%
-1.7%
-2.9%
-2.9%
-3.2%
Source: Bloomberg
Developed Markets
Market Overview
The benchmark’s positive first
quarter performance, which
was concentrated in the month
of February, was primarily
driven by the announcement of
the ECB’s new asset purchasing
program on January 22nd.
International developed equity markets experienced an assortment of
new economic policies, geopolitical events, and currency fluctuations
during the first quarter of 2015. As such, international developed equity
markets sloshed around with the flux of current events, but ultimately
ended the first quarter positive. For the first three months of 2015, the
MSCI World ex USA Index gained 4.0%. The benchmark’s positive first
quarter performance, which was concentrated in the month of February,
was primarily driven by the announcement of the ECB’s new asset
purchasing program on January 22nd. The new program was larger in
both size and duration than most analysts expected, showing the
enormous support the ECB is willing to make to ensure the Eurozone’s
economic recovery. The announcement produced an immediately
favorable response in developed equity markets, which should continue
to benefit from the policy as it helps to push investors into risk assets.
On the other hand, currency swings generated the largest drag on
overall equity performance as the U.S. Dollar continued its rally against
major foreign currencies. As seen in Table 2 below, the USD gained
against major foreign currencies during the quarter and in particular,
the Euro, which depreciated 11.3% relative to the USD. As a result, local
First Quarter 2015
currency returns outpaced USD-denominated returns. The disparity in
performance can be seen in Table 1 on the first page. However, even
with the currency drag on USD-denominated returns, international
developed markets were still able to outpace the broad U.S. equity
market during first quarter, as the S&P 500 only gained 1.0%.
Table 2: Snapshot of Currency Exchange Rate Metrics
Exchange Rate
Change Since (%)
Currency
International Equity Review
USD/Euro
USD/GB Pound
USD/Swiss Franc
Japanese Yen/USD
Chinese Renminbi/USD
Indian Rupee/USD
Brazilian Real/USD
Mexican Peso/USD
Russian Ruble/USD
Source: Bloomberg
Current
(3/31/15)
1.07
1.48
1.03
120.13
6.20
64.50
3.20
15.26
58.19
4Q14
(12/31/14)
1.21
1.56
1.01
119.78
6.21
63.04
2.66
14.75
60.74
1 Year Ago
(3/31/14)
1.38
1.67
1.13
103.23
6.22
59.89
2.27
13.06
35.17
4Q14
(12/31/14)
-11.3%
-4.9%
2.3%
0.3%
-0.1%
-0.9%
20.3%
3.5%
-4.2%
1 Year Ago
(3/31/14)
-22.1%
-11.1%
-9.0%
16.4%
-0.3%
4.4%
40.7%
16.9%
65.4%
Outlook & Recommendation
Developed markets have shown
increasingly positive signs of
recovery and the economic
boost from the ECB’s new asset
purchasing program should
help to propel developed
market equities higher,
especially within Europe.
We continue to favor international equity markets and in particular
developed market equities. Developed markets have shown increasingly
positive signs of recovery and the economic boost from the ECB’s new
asset purchasing program should help to propel developed market
equities higher, especially within Europe. Top analysts and economists
have become more optimistic towards developed Europe as Morgan
Stanley recently upgraded its earnings forecast for the MSCI Europe
universe for the first time in three years, while JP Morgan highlighted
that for the first time in over two years the MSCI Eurozone Index
outpaced the MSCI US Index in positive earnings revisions. These
increasingly positive earnings developments underscore the economic
developments in the region. Meanwhile, in Japan, the country’s easy
monetary policy should keep pressure on the Japanese Yen and continue
to make the currency attractively priced. Also, the recent fall in oil
prices is beneficial to the economy as Japan imports the vast majority of
its oil needs. Japanese equities also continue to trade at attractive
valuations relative to other developed market equities, and have
exhibited continued positive earnings revisions. Moreover, geopolitical
headwinds that persisted throughout 2014 in developed markets have
begun to ease in the early months of 2015. The Greek debt crisis has
taken a more promising turn for a compromise between Greece and its
lenders. While a compromise has not yet been finalized, the positive
developments and steps taken between the two parties shows a
willingness to formulate a solution to help Greece with its debts while
keeping the country in the Eurozone. As a result, we recommend an
overweight to international developed market equities with investment
2|Page
First Quarter 2015
through active management. We believe active management (vs. a
passive index) is more flexible to navigate the volatility that is likely to
persist in the region over the short term.
Emerging Markets
International Equity Review
We have concerns over the
near-term in regards to
currency movements as well as
the effect that rising U.S.
interest rates can have on
emerging market economies.
Emerging market equities ended the first quarter up 2.3% after finishing
2014 down 1.8%. The MSCI Emerging Markets Index is now positive for
the latest one year, up 0.8%. Just as in developed markets, emerging
market USD-denominated returns have been muted by the
strengthening U.S. Dollar relative to emerging market currencies.
Likewise, the ease in geopolitical headwinds also helped to push
emerging market equities higher. The Ukraine-Russia conflict, while
still a fragile situation, established a cease-fire in February that has
helped to quell the majority of fighting in the region with hopes that it
will facilitate a non-violent solution to the ongoing conflict. We
continue to remain neutral in our outlook for emerging market equities.
We have concerns over the near-term in regards to currency movements
as well as the effect that rising U.S. interest rates can have on emerging
market economies. Emerging market countries with current account
deficits are most severely affected by currency movements as well as
rising U.S. interest rates, as these conditions effectively increase the
cost of external financing needed to balance current accounts. However,
we are optimistic that growth and development in the region will
remain strong over the long term. Emerging market countries have
continued to increase their share of global nominal consumption, rising
from roughly 25% in 2005 to over 35% in 2015. 1
Frontier Markets
Frontier markets have dropped
over the last one year as they
have struggled with falling oil
prices. Many of the top
countries in the frontier market
benchmark are large energy
exporters.
Frontier markets exhibited sluggish performance relative to the rest of
international equity markets, declining 2.9% during the first quarter of
2015. Frontier markets have dropped 3.2% over the last one year as they
have struggled with falling oil prices. Many countries in the frontier
market benchmark are energy exporters, particularly the top countries
in the benchmark like Kuwait and Nigeria, which together comprise 37%
of the benchmark. We continue to recommend an allocation to frontier
market equities as the asset class continues to be attractively valued
relative to the rest of the international equity markets. As of quarterend, the MSCI Frontier Markets Index traded at a price-to-earnings ratio
(P/E) of 11.1x compared to the MSCI ACWI ex USA Index, which
exhibited a P/E of 17.2x. Moreover, frontier market equities provide
strong diversification within an international equity portfolio as frontier
markets display a 0.63 correlation with the MSCI ACWI ex USA Index.
1
Source: JP Morgan. “Guide to the Markets”. 2Q2015.
3|Page