International stock markets provided impressive returns for the third quarter of 2016, surpassing those of two widely recognized U.S. stock market indices (i.e. the S&P 500 Index and the Dow Jones Industrial Average). For example, in terms of international developed markets, the MSCI EAFE (net) finished the third quarter with a gain of 6.43%. This particular index is now in the black, registering a gain of 1.73% through the first three quarters of the year. Additionally, international emerging markets delivered some of the best results while largely flying under the radars of many investors. Emerging markets, as represented by the MSCI EM Emerging Markets (Net) index posted at gain of 9.03% during the 3rd quarter allowing for a YTD advance of 16.02% as of the end of the third quarter of 2016. In contrast, the domestic-oriented S&P 500 Index finished the quarter with a gain of 3.85% allowing for a year-to-date gain of 7.84% and the equally U.S.-oriented Dow Jones Industrial Average (DJIA) closed Q3 with a gain of 2.78% allowing for a year-to-date gain of 7.21% as of the end of the third quarter of 2016. Some of the emerging market countries providing the most significant returns thus far in 2016, based on their associated S&P Dow Jones indices, include Brazil and Peru in Latin America and Thailand and Indonesia in Asia.
While the U.S. will likely remain as the “shiny city upon the global economic hill” for the time being, investor interest in international equities should only grow as we close out 2016 and move into 2017 as a result of the many doses of quantitative easing and stimulation measures on the part of central banks across the globe that are expected.
Another area that investors have seemingly forgotten about is the potential impact of Brexit. This would be a mistake in our view as this vote will likely have both short and long term implications on worldwide stock markets as well as the economies of Great Britain and the Euro zone as a whole. As you may recall, markets raced downward following the surprising vote by Great Britain to leave the European Union on June 23, 2016. A lot of the trading activity that took place was attributed to traders reversing their positions following the “leave” vote came in after believing that Great Britain was going to vote to “stay” within the European Union (EU) – a position that then Prime Minister David Cameron was championing.
From an investment viewpoint, trade and economic growth are at the heart of the potential implications of the “leave” referendum vote in England. As a result of Brexit, Great Britain will have more control over the negotiation of their own trade agreements and immigration policies and will also be able to redeploy the eventual savings of their EU membership to other areas of their economy that they feel would be more beneficial to their own citizens. It remains to be seen how other European countries will treat England from a trade and diplomatic relations standpoint following this vote. According to BBC.com, approximately 28% of what is produced in Great Britain is sold abroad. Interestingly, while about half of this overseas trade in the United Kingdom (UK) is conducted with the EU, England imports more overall than it exports to the EU. Hence EU country members need Great Britain as much (and perhaps more) as Great Britain needs the EU from a trading relations standpoint.
As we move closer to the date of the actual Brexit date and the market starts to focus on potential Brexit implications again, we believe that there will be a great deal of uncertainty, and potential volatility, as the world tries to come to terms with how this very public divorce will take place and if any of the other 27 remaining EU countries will look to follow suit and leave the EU themselves. It is important to remember that although Great Britain was a member of the EU, it did not use the Euro. Nine other countries that are members of the EU also do not use the Euro as their currency (ex. Bulgaria, Croatia, Czech Republic, Denmark, Hungary, Lithuania, Poland, Romania and Sweden). A lot of the Brexit talk may not start to intensify for quite some time though as current Prime Minister Theresa May has recently said that she will trigger Article 50 of the 2007 Treaty of Lisbon (the official step to begin the two year timer for orchestrating the exit) by the end of March 2017. This would means that Britain would likely be on schedule to leave the EU by March of 2019.
While the days of international market and foreign currency volatility are not behind us, I do believe that the more clarity that is provided around how, and when, Brexit will play out coupled with continued measures of stimulus on the part of Mario Draghi and the European Central Bank (ECB) create international investment opportunities for investors in the years ahead as part of a globally diversified portfolio strategy. In this regard, many international markets have lower valuations than U.S. stocks presently and could be in a position to outperform in the years to come, similar to how they did from 2001 – 2007. During this seven year stretch, the S&P 500 Index returned 3.3% per year versus the 8.8% annualized gain developed international markets, as measured by the MSCI EAFE Index, achieved and the 24% annualized gain in emerging market stocks, as measured by the MSCI EM Index, over this same time period.
Please note: The S&P 500 Index is a market capitalization-weighted index, comprised of 500 widely held common stocks, including reinvestment of dividends that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average is a price-weighted index of the 30 largest, most widely held stocks traded on the New York Stock Exchange. Performance assumes reinvestment of any income. The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed market, excluding the U.S. and Canada. The Index consists of 24 developed market country indices. The MSCI EM Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The Index consists of 23 emerging market country indexes. Past performance is not an indication of future results. You cannot invest directly in an index. Hennion & Walsh Asset Management currently has allocations within its managed money program and Hennion & Walsh currently has allocations within certain SmartTrust®