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.
The Altrinsic International Equity Portfolio gained 2.2% during the second quarter, outperforming returns of 0.6% and 0.5% by the MSCI EAFE and MSCI All Country World ex- U.S. indices as measured in U.S. dollars.1 Strong mergers and acquisitions activity, efforts to unlock value via prudent capital management (e.g., dividends, buybacks, divestitures), and growing evidence of positive change in Japanese corporate behavior contributed to outperformance during the quarter.
The Altrinsic International Equity Portfolio gained 5.7% during the first quarter, outperforming the 4.9% gain by the MSCI EAFE Index and the 3.5% return by the MSCI All Country World Ex-US Index as measured in U.S. dollars.1 Strong absolute and relative performance was led by our Japanese holdings. A combination of company-specific initiatives along with Prime Minister Abe’s aggressive macroeconomic policies boosted profits and share prices.
2014 and the fourth quarter have been defined by a continued climb in international equity markets, a collapse in commodity prices, and a further reduction in government bond yields, many of which have actually fallen below zero. We believe these conditions are unsustainable. Having enjoyed an almost uninterrupted ascent from the 2009 bottoms, markets may be entering a more turbulent environment, asconsequences associated with volatility in commodities, the economic slowdown in China, and the geopolitical developments in Europe, Russia, and the Middle East garner greater attention.