Developed Markets Maintain Strong 2019
In the month of September, international developed stock markets gained 2.81%. The UK and Japanese equity markets recorded strong returns of 4.17% and 4.04%, respectively. The Pacific ex Japan region and the US lagged the broader markets. Even though trade frictions, recessionary concerns, and geopolitical risk were often at the forefront of investors’ minds in 2019, the US market and broader international developed markets are up 20.10% and 13.57% year to date, respectively. People who hold excessive amounts of cash may realize a large opportunity cost.
Russian Equities Having Strong Year
Broader emerging markets rose 1.23% for the month. Korea and Russia posted gains of 7.16% and 3.20%, respectively. China lagged other markets in September, dropping 0.03%. Emerging markets have posted a modest gain of 7.48% year to date, but still trade at attractive valuations relative to the U.S. market.
Financials and Energy Rally in September
Financials and energy recorded gains of 5.17% and 4.73%, respectively. Healthcare and telecommunications lagged other sectors, posting gains of 0.11% and 0.49%, 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 outperforms Growth
In September, value significantly outperformed growth in the large-cap and small-cap space. The return differential in the large-cap and small-cap space was 3.56% and 5.95%, respectively. Momentum recorded a loss of 3.38%. Over the past year, value has also outperformed growth.
Growth Companies Take a Step Back
In the international developed markets, value outperformed growth in the large-cap and small-cap space. Momentum recorded a modest gain of 0.54% while small-cap emerging market stocks returned 1.53%. 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.
U.S. Investors 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. With the yield curve being so flat, investors can buy shorter-term income investments to lower interest rate risk while still earning a competitive rate. The CPI increased by 1.76% year over year through August.
Bonds Flat in September
The returns of deflationary hedges were mostly flat or negative for the month. Catastrophe bonds led the way, returning 1.72%. The Barclays U.S. Agg Bond Index was down 0.53%. Emerging market bonds are off to a strong 2019, returning 12.08% 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 Outperforming in 2019
Inflation-sensitive investment returns were mixed for the month. U.S. real estate and infrastructure recorded gains of 2.71% and 2.17%, respectively. Oil and gold bullion declined in September. 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 Strengthens
Over the past three months, the U.S. dollar appreciated against most other major currencies. Relative to the U.S. dollar, the Israeli Shekel and Japanese Yen appreciated by 2.71% and 0.32%, 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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