Developed markets bounced back; emerging market bonds shine

Prepared by Brandon Yee, CFA, CAIA, and Thomas Connelly, CFA

Developed Markets losing steam

Developed Markets Bounce Back

In the month of January, international developed stock markets in the aggregate rose by 7.14%. Canada and the U.S. recorded gains of 13.03% and 8.18%, respectively. Europe ex UK and Japan also posted solid gains of 6.40% and 6.10%, respectively. After a volatile December 2018 and this subsequent bounce back, investors are reminded that trying to time the market is a costly game.

developed markets
Volatility increasing in emerging market equities

Emerging Markets Outperform in January

Broader emerging markets posted a gain of 8.25% in January. Brazil and Russia recorded sizable gains of 17.76% and 13.89%, respectively. India took a step back in January, dropping 1.93%. Trade tensions and changes in developed market monetary policy has increased market volatility, but investors should focus on the attractive relative valuations of emerging markets over developed markets.

emerging markets
Global Sector

Energy and Industrials Have Strong Month

Energy and industrials recorded gains of 10.34% and 9.28%, respectively. After outperforming other global sectors in 2018, healthcare and utilities post a modest gain. The sectors that generally perform well in the later stages of a business cycle include those with inflation-sensitive properties such as materials and energy.

global sector periodic performance
Domestic Equity Factors

Value Underperforms Growth

In January, value underperformed growth in the large-cap and small-cap space. Momentum recorded a gain of 7.43%. 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.

global growth domestic equity
Foreign Equity Factors

International Small-Cap Stocks Outperform

In the international developed markets, value outperformed growth in the large-cap space in January, but underperformed in the small-cap space. Momentum recorded a gain of 6.44% while small-cap emerging market stocks posted a gain of 6.40%.

global growth foreign equity
Liquidity Providers

Cash is a Viable Investment Option

The Fed raised rates again last December, which should translate into higher money market fund yields and competitive returns relative to longer duration bonds. However, the central bank recently decided to hold off on another rate hike. With the U.S. equity market near a historically high valuation and a flat yield curve, investors can still turn to cash and get paid to wait. The CPI increased by 1.95% year over year through last December.

liquidity providers
Deflationary Hedges

Emerging Market Bonds Shine in January

The returns of deflationary hedges were primarily positive for the month. Emerging market bonds recorded a gain of 4.42%. The Barclays U.S. Agg Bond Index rose by 1.06%. Government bonds have recorded modest gains over the past few years, but they still provide valuable diversification in a portfolio. Extra care must be taken in the high yield and leveraged loan space as covenants have become weaker over time.

deflationary hedges performance
Inflation Sensitive Investments

Energy Starts Year Off Strong

Inflation-sensitive investment returns were mostly positive for the month. Crude oil and the Alerian MLP recorded gains of 17.90% and 12.64%, respectively. Gold and inflation-indexed bond returns posted modest gains. Gold currently has favorable supply/demand dynamics for gold investors and provides a valuable hedge against currency debasement and inflation.

inflation-sensitive investments
World Currencies

U.S. Dollar Weakens

Over the past three months, the U.S. dollar depreciated against most other major currencies except the Canadian dollar. The Yen appreciated by 3.56% relative to the U.S. dollar, and the Mexican peso appreciated by 4.5%. After a period of U.S. dollar strength, investors in international securities may get a modest tailwind if the U.S. dollar depreciates any further.

world currencies

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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