The fear that persisted in the aftermath of the Global Financial Crisis (GFC) has been replaced by complacency and growing excesses in many markets. It was difficult to lose money in 2017, as 38 of the 39 major asset classes monitored by Deutsche Bank delivered positive returns. Global equity markets, as measured by the MSCI World Index, climbed in every single month of 2017 and have now delivered a 237% total return since their 2009 lows.2 Stock market valuations have become stretched by historical measures, while interest rates, credit spreads, and volatility hover near all-time lows.
Strong gains were delivered across most markets and asset classes during the third quarter, fueled by synchronized (yet tepid) global economic growth, a benign inflationary environment, and continuing unorthodox monetary policies. Improving corporate earnings further supported market strength with emerging markets and the most economically cyclical industries leading markets to all-time highs. Meanwhile, volatility levels, as measured by the VIX index, fell to all-time low levels. This inherent complacency is unsettling in light of historically low interest rates, high valuation levels,
The Altrinsic International Equity Portfolio gained 7.9% in the second quarter, outperforming the MSCI EAFE's 6.1% rise as measured in U.S. dollars. Outperformance was overwhelmingly driven by stock-specific factors, most notably delivered by our investments in Nintendo (Japan), Japan Exchange (Japan), and Heineken (Netherlands). At the broad market level, underlying corporate earnings have been strong, but the degree of complacency in many markets concerns us. Macro imbalances persist and stock market valuations remain elevated, following a robust nine-year climb.
The Altrinsic International Equity Portfolio gained 7.4% during the first quarter. International equity markets, as measured by the MSCI EAFE index returned 7.2% over the same period, as measured in U.S. dollars. An improving outlook for corporate profits in many parts of the world, easing of stresses emanating from China, and a continuation of reflationary central bank monetary policies outweighed the ongoing geopolitical uncertainties, lofty asset valuations, and macroeconomic imbalances in many of the world’s largest countries.
The Altrinsic International Equity Portfolio declined 1.2% and gained 8.9% during the fourth quarter and full year, respectively. By comparison, the MSCI EAFE declined 0.7% and gained 1.0% over the same periods, as measured in U.S. dollars. Strong absolute and relative gains were delivered during an eventful year in which key developments, most notably Brexit results and the election of Donald Trump, defied the odds makers.
The Altrinsic International Equity Portfolio gained 7.7% during the third quarter, outperforming gains of 6.4% and 6.9% for the MSCI EAFE and ACWI ex-US indices, respectively, as measured in U.S. dollars. Stock-specific factors were the primary drivers of outperformance, led by positions in the technology, energy, telecommunications, consumer staples, and industrial sectors.
The Altrinsic International Equity Portfolio gained 3.1% during the second quarter. By comparison, the MSCI EAFE declined 1.5% and the MSCI ACWI ex-U.S. Index was down 0.6% as measured in U.S. dollars. Stock-specific factors were the primary sources of outperformance amidst an eventful macro backdrop. During the quarter, British citizens voted to leave the European Union, concerns about the European banking system intensified, Middle East unrest spread to distant lands, and the yields on U.S. Treasuries fell near their lowest level ever.
A transition appears to be underway. International equity markets have delivered above-normal returns during the last seven years with low volatility and few lasting setbacks, but we may have entered a new environment characterized by more normal returns albeit with much greater volatility. The first quarter was reflective of this increase in volatility, as an 11.2% rally in the MSCI EAFE Index during the second half of the quarter tempered anxieties that emerged during the 12.8% dip in the first half, as measured in U.S. dollars.
International equity market returns were relatively flat for the year, measured in local currency, but this result masked the significant dispersion in performance among stock, bond, currency, and commodity markets. These muddling markets appear to be increasingly recognizing fragile underlying fundamentals including lingering global imbalances, eroding confidence in policymakers, a slowing Chinese economy, intensifying geopolitical risks, and the vulnerability of U.S. corporate profit margins.
The third quarter was particularly challenging given the broad-based nature of the selloff across asset classes. International equity markets declined 10.2% and 12.2% as measured by the MSCI EAFE and MSCI All Country World Ex-US indices, respectively as measured in U.S. dollars. This weakness was largely precipitated by a pair of factors, namely mounting concerns about China’s growth rate and the credibility of policymakers’ efforts to revitalize economies globally. The Altrinsic International Equity Portfolio declined 11.3% as measured in U.S.