Trade Uncertainty Affecting Developed Markets
In the month of August, international developed stock markets dropped 2.46%. The Japanese and Canadian markets held up relatively well, only dropping 1.01% and 1.17%, respectively. The Pacific ex Japan region and the UK dropped 5.77% and 4.68%, respectively. Trade uncertainty continues to be top of mind for investors. US tariffs are at their highest levels in 40 years, contributing to slowing global trade volumes and manufacturing.
Brazil Hit Hard in August
Broader emerging markets declined by 4.46% for the month. Mexico and India dropped by 0.42% and 2.92%, respectively. Brazil lagged other markets in August, dropping 9.23%. Emerging markets have posted a modest gain of 6.17% year to date, but still trade at attractive valuations relative to the U.S. market.
Utilities and Infrastructure Have Strong Month
Defensive sectors held up well in a volatile month. Utilities and infrastructure recorded gains of 3.60% and 0.39%, respectively. Energy and financials lagged other sectors, posting losses of 7.21% and 4.98%, respectively. Much of this bull market’s return has been driven by technology and consumer discretionary companies. Investors should not extrapolate these returns, especially given the business cycle is in the late stages.
Value underperforms Growth
In August, value underperformed growth in the large-cap and small-cap space. Momentum recorded a loss of 1.50%. Growth investors continue to be rewarded; however, this outperformance is coming primarily from increasing valuation multiples and historically high profit margins as opposed to top line earnings growth.
Investors Bidding Up Growth Companies
In the international developed markets, value outperformed growth in the small-cap space, but underperformed in the large-cap space. Momentum recorded a loss of 0.94% while small-cap emerging market stocks dropped 5.36%. Historically, different equity factors have their own periods of outperformance, usually in shorter time periods but sometimes lasting a decade. However, tilting portfolios to capture more of the value and size premium has historically compensated investors in the long run.
Savers Facing Low Rates
Low rates are affecting savers; however, with the U.S. equity market trading at a high valuation and fixed income spreads low, investors can still earn a competitive risk-adjusted rate of return. At the moment, investors can earn a higher annual interest rate on cash versus the 30 year Treasury bond. The CPI increased by 1.81% year over year through July.
Bonds Provide Diversification in August
The returns of deflationary hedges were primarily positive for the month. Long-term government bonds led the way, returning 10.39%. The Barclays U.S. Agg Bond Index was up 2.59%. Emerging market bonds are off to a strong 2019, returning 12.49% year to date. Emerging market debt may warrant a higher portfolio allocation if developed market growth continues to slow and their high debt levels become burdensome.
Gold and Real Estate Outperforming in 2019
Inflation-sensitive investment returns were mixed for the month. Gold bullion and U.S. real estate recorded gains of 7.06% and 2.37%, respectively. Most energy-related investments declined in August. Over the past year, gold has outperformed other inflation-sensitive investments. Given its favorable supply/demand dynamics and role as a hedge against late cycle risks, gold merits an allocation in clients’ portfolios.
U.S. Dollar Weakens Against Japanese Yen and Swiss Franc
Over the past three months, the U.S. dollar appreciated against the British Pound and Chinese Yuan by 3.26% and 3.43%, respectively. Relative to the U.S. dollar, the Swiss Franc and Japanese Yen appreciated by 1.65% and 2.44%, respectively, over the past three months. For international equity investors, a weakening U.S. dollar will provide a tailwind to returns.
Brandon Yee, CFA, CAIA – Research Analyst
Brandon conducts investment due diligence for Versant Capital Management, and designs and implements tools and processes to support the firm’s research. His background in biology and finance help him to look at challenges from multiple angles, resulting in unique and well-rounded approaches and solutions.
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