Global Markets – 2Q18 Review
Global markets were mixed in the quarter as strong company-specific catalysts were offset by more macro natured headwinds.
Global equities posted mixed returns in the second quarter. After initially moving higher in response to a strong corporate earnings season, equities weakened in the second half of the quarter. Although most developed markets posted low single-digit gains for the quarter in local currency, these returns were mitigated by a strengthening U.S. dollar, resulting in modest negative returns on a translation basis. The UK was a notable outperformer in the quarter – an encouraging rebound after trailing its EU counterparts for the past year. Emerging Market (EM) stocks lagged, with the MSCI Emerging Market Index declining by 8% in the quarter. Within EM, Chinese stocks were particularly hard hit, with the Shanghai Composite in bear market territory after declining more than 20% from its January highs.
With company-specific fundamentals generally attractive during the quarter, the pullback in stocks was more macro in nature. Events included new government coalitions in Italy and Spain, as well as a heated immigration debate in the EU. Yet market skittishness was primarily a function of escalating protectionist measures from the U.S., which were immediately countered by China, Canada and members of the European Union. The market had previously played down the prospect of tariffs as a negotiating tactic by the White House – which may still be the case. Yet hopes for a compromise, we feel, are becoming less likely, with the resulting uncertainty leading many investors to move to the sidelines. The more obvious consideration is the broader risk to the synchronized global growth story should a trade war materialize. Defenders of tariffs attempt to talk down the financial impact on consumers (e.g., an extra $.10-$.12 on a six-pack of beer); however, the potentially more damaging impact on the economy could be a decline in business confidence – which can delay capital expenditures and related expansion plans. Reduced business investment results in a push-out in hiring plans and related second-order effects, as well as weighing on investor sentiment.
Given the fluid/tweet-by-tweet nature of these discussions, it would be premature to draw any firm investment conclusions. While the total “cost” of trade disputes still seem pretty low – current estimates are a hit to U.S. GDP in the 0.3-0.4% range – it will be important for the market to see a softening of stances. Cambiar continues to monitor the situation and gauge the potential impact to our companies. A company’s trade situation in and of itself is unlikely to lead to a portfolio decision, but theoretically could tip the balance, all else being equal.
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