During the second quarter, non-U.S. equities experienced heightened volatility but managed to hold onto a small positive return. The quarter started on a positive note with central banks globally providing accommodation in spite of anticipated tightening moves by the U.S. Federal Reserve (Fed), possibly before year-end. Better economic performance in Europe and almost frenzied buying in China for most of the quarter pushed most equity markets higher, with several markets achieving highs in late April to mid-May. Stock market strength proved to be short-lived, however. Unpredictable markets like these highlight the importance of a diversified portfolio of high-quality stocks that are less dependent on broader market conditions.

The fall
Bonds were first to take the beating as investors worried about an early exit to quantitative easing in Europe and Japan. Worries that higher interest rates would jeopardize the fragile global expansion and renewed concerns that a Greek exit from the euro could damage the sustainability of Europe’s recovery started equities on a downward track. The fall accelerated with the beginning of the stock market rout in China. Regulators in China curbed margin usage (or borrowing to buy stock) for fear the equity market was overheating. Thus, the best major global equity market quickly became the worst. China dropped more than 20% from its high on June 12 to June 29. Non-U.S. equities are dominated by two regions—Western Europe and Asia Pacific—and they registered similar dollar-based returns.

Although many of Europe’s markets lost ground in local currency terms, European currency strength against the greenback, including the euro, British pound, Swedish krona, Norwegian and Danish krone and Swiss franc, helped European equities post a 0.58% USD-based return. Asia managed a slightly better 0.99% gain, with Japan, China and Hong Kong contributing most. Developed markets (0.74%), boosted by Japan (3.64%) and the U.K. (2.50%), bettered emerging markets (EMs) (0.16%) for the period. Weakening economic data in Indonesia (-13.31%) and political controversy in Malaysia (-9.51%) hurt their equities and currencies during the second quarter, dragging down the EM result. Financials (2.26%) and telecommunications (3.28%) contributed most out of the 10 sectors while information technology (-2.23%) and healthcare (-1.72%) detracted.*

Weakening global growth
The playbook for 2015 appears to be following the same script since 2010, with early-year projections for more robust, or at least better, global economic performance fading with each passing quarter. There have been different reasons for the weakening of the global economy, including the eurozone financial crisis, the Russia-Ukraine conflict, Japan’s consumption tax hike and China’s general slowdown to name a few, but subpar global growth has been the consistent result with global growth domestic product (GDP) failing to reach 3% since 2011. This year will also see global growth below 3% and probably below 2014’s growth rate.

The world’s major economies—the U.S., China, Japan and Europe—all suffer from high debt levels, older populations, and supply and demand mismatches. These dynamics suggest anemic growth for years to come. Moreover, much of the developing world is decelerating, hit by falling commodity prices and lower labor productivity. While Europe and Japan should manage modest expansion, global growth for emerging markets as a group will likely again weaken in 2015. The U.S. outlook is uncertain with most projections suggesting improvement in 2015, but early readings have been weaker than anticipated. The good news is that a global recession does not look imminent, with most central banks vigilant against contractionary forces such as deflation and unemployment. Indeed, with greater connections through trade, central banks increasingly consider, or at least are pressured to consider, the global ramifications of policy decisions. For example, the International Monetary Fund has implored the Fed to delay interest rate hikes.

Diversifying with emerging markets
There are a few things to keep in mind when operating in an environment like this one. First off, it’s important not to be too concentrated in any one market. The recent unraveling of China’s equity market serves as a good example. Because of this, I believe portfolios should be more broadly diversified, because it’s unclear where the next shock will come from. Secondly, my team and I are strong proponents of focusing on equity investments that we think can deliver earnings growth in spite of weak economic conditions. We believe investors will generally be disappointed with earnings growth from companies with higher dependency on improving economic conditions. We also focus on companies regularly delivering a portion of earnings to shareholders in the form of a cash dividend. Research shows that dividends can be a reliable signal of company growth, especially in less efficient emerging markets. This practice brings discipline to their management and helps insure the company does not overextend itself before the next inevitable downturn. Companies delivering dependable, consistent cash flow can help to achieve an attractive income stream.

*Stated performance data for regions and sectors is based on constituents of the iShares MSCI ACWI ex U.S. ETF and is for reference purposes only.


Investing involves risk, including possible loss of principal. The value of any financial instruments or markets mentioned herein can fall as well as rise. Past performance does not guarantee future results.

This material is distributed for informational purposes only and should not be considered as investment advice, a recommendation of any particular security, strategy or investment product, or as an offer or solicitation with respect to the purchase or sale of any investment. Statistics, prices, estimates, forward-looking statements, and other information contained herein have been obtained from sources believed to be reliable, but no guarantee is given as to their accuracy or completeness. All expressions of opinion are subject to change without notice.

Foreign securities, especially emerging or frontier markets, will involve additional risks including exchange rate fluctuations, social and political instability, less liquidity, greater volatility and less regulation.

Diversification does not assure profit or protect against risk.

David L. Ruff is a registered representative of ALPS Distributors, Inc.

David L. Ruff has earned the right to use the Chartered Financial Analyst designation. CFA Institute marks are trademarks owned by the CFA Institute.