Sector rotation was one reason credited for MSCI’s standard aggregate international equity index eking out a small gain in February and narrowly outperforming its U.S. counterpart, which has a high exposure to tech. There was, however, a wide variance in performance between and within regions. For instance, the developed European index was up 3.69% – with Ireland up over 12% and the Netherlands, which has a 36% weight in ASML, in negative territory. The developed Pacific index was down over 1% for the month with HK and Singapore in positive territory and Japan down slightly and New Zealand, significantly. In aggregate, the emerging markets were up half a percent, but ex-China, the representative index was down almost 4% with the Asean region, including Malaysia, Thailand, Indonesia and the Philippines, and India being significant detractors.
Listening to presentations and speaking with senior managements, I gathered that European companies didn’t seem surprised at their region’s continued outperformance – despite the threat of tariffs. They have hope that the war with Ukraine will reach some sort of settlement, which could lead to an abatement of energy prices. They noted their exposure to regions outside of North America, such as the Middle East, are boosting earnings that are also helped by restructuring efforts and fiscal stimulation.
If aversion to risk continues, investing in less concentrated and less expensive international markets could increase. At the end of February, the aforementioned international index dividend yield was twice that of the U.S. index; the price to book was less than half and the forward p/e was at a 35% discount. Stock and industry selection will be important.
To gain some insights into the infrastructure and industrial sectors, check out John Rotonti’s notes and for the energy sector, Cale Smith’s notes – both of which can be found at the Bastion Boards.
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