Global Stock Market Viewpoints: Second Quarter 2017Submitted by Castlebar Asset Management on July 7th, 2017
International markets have had their best first half performance since 2009. The rally was driven by a synchronized global economic recovery, better than expected corporate earnings and reduced political risks. The US Dollar weakened in the quarter which helped lift portfolio returns.
Investors fell in love with European stocks this quarter. The tide of difficult economic, political and corporate headlines abated and investors returned in droves. Economic conditions were surprising stronger than expected. The Eurozone grew in the first quarter at 2.3% pace which was better than the US’s 1.4% growth. Sentiment among business and consumers reached their highest level since the financial crisis. On the political front, things are calming down with more establishment focused parties winning in local and national elections. Thoughts of a EU break up are a slim possibility at best.
The outlook for Europe looks bright. The market valuation looks attractive and earnings growth is expected to be in the mid-teens over the next 12 months. The two events of investors focus will be surrounding the BREXIT negotiations and the Germany elections. The BREXIT negotiations are off to slow start, but the two-year clock is ticking. How these negotiations play out will have a significant impact on the UK markets. Theresa May called snap elections this quarter and her party did not perform as well as expected. This has weakened her hand in negotiating with the EU to some degree and BREXIT terms may not be as favorable for the UK. German elections are in September and the support of antiestablishment parties are weakening. The German elections are the last of the major European elections in 2017. We will also be watching the European Central Bank (ECB) in the second half. They have been ultra accommodative and there are signs they may start to relax some of the monetary measures as the year ends.
Japan had a great first half of the year. The economy is performing better posting its fifth consecutive quarter of growth which is its longest expansion since 2006. They saw GDP growth in the past quarter of 2.2%. The Bank of Japan has indicated they plan to remain accommodative in the near term as other central banks are talking about raising rates or unwinding stimulus. As long as inflation remains low, we expect them to keep easy money policy. Valuations in Japan are trading at 17.1 x forward earnings. This is inline with their five year historical average.
Canada, Australia & Asia
Stocks in Canada squeezed out small gains in the quarter. The strong housing market in Canada showed some sign of strain this year. Home Capital Group, a sub prime home lender in Canada, was accused of misleading investors about mortgage application fraud. Canadian financial institutions are more tightly regulated than banks in the US so this caught some off guard. Berkshire Hathaway recused Home Capital with an equity infusion which averted a crisis but this could be the first sign of trouble in a rich housing market in Canada. Shares in Australia were the only developed market to post a negative return in the quarter. There were some concerns over housing prices in Australia as well. Asian markets did well as run up in technology companies across to the region lifted markets.
The weakness in the US Dollar was the theme this quarter. The US Dollar reached its lowest level since October 2016 and had its worst first half performance in six years. The driver behind the decline in the US Dollar was change in tone from central banks outside of the US. The US has started raising rates while most other countries or regions are still keeping dovish monetary policy in place. The Bank of Canada, Bank of England and ECB all started to talking about changing their ultra accommodative policies. Investors tend to move money to places that offer more attractive yields and responded this quarter by selling the dollar off.
You can read our 2017 First Quarter Global Market Viewpoints here.
Andrew Comstock, CFA
Please contact me at 913-660-0708 or by email to discuss your financial planning and investment management needs. You can sign up for our monthly newsletter here. Follow me on Twitter @CastlebarAM.
Disclaimer: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.