International Markets in 2015 Q1

April 9, 2015

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The first quarter of 2015 was a turning point for international markets versus the US market. Investors not inclined to look internationally missed out on an impressive opportunity. The main story is related to the macroeconomic policy that underpins the European market and the opening of the era of a strong US dollar versus a weakening euro and Japanese yen.

The European Central Bank’s decision to buy extraordinary amounts of European securities to backstop the market has had a measurable impact on European markets, where macroeconomic growth had already begun to quicken. The resulting downward pressure on the euro also meant the continuing appreciation of the US dollar, reducing returns to US-dollar-based investors (unless their positions were suitably currency hedged).

Another important factor has been the sharp decline in the price of oil, together with the ongoing decline in other commodity prices. The decline has had a differential impact on economies, hurting oil and other commodity exporters like Canada, Australia, Brazil and Chile, while helping commodity importers like Japan and India and stimulating consumption globally. The largest economy, the United States, has experienced a moderation in the pace of its recovery, one we expect to be temporary.

Equity markets reflected these developments. The US market, measured by the S&P 500 benchmark, had a total return of only 0.95 percent for the first quarter 2015. The international (non-US) markets gained 3.59 percent in US dollar terms as measured by the MSCI All Country World Index ex-US Index. The international markets have various components, but both of the two main breakouts, developed and emerging, beat the US market. Emerging markets gained 2.28 percent according to the MSCI Emerging Markets Index. The advanced markets did better at 5.00 percent in US dollar terms according to the MSCI EAFE Index for Europe, Australasia, and the Far East. The real important story, however, was found in the Eurozone when the weaker euro versus the dollar was accounted for in the trade. The MSCI Europe Dollar Hedged Index gained 11.27 percent in the quarter.

As we look forward to the rest of 2015, our outlook for markets continues to favor international outperformance versus the US, and accordingly we expect to make an increased allocation to these markets on a selective basis. Even though the US economy is by far the strongest of the major developed economies, relative equity market performance does not always correspond to relative economic growth rates. The stimulative polices of the European and Japanese central banks, flanked by fiscal policy and economic reforms, will likely continue to be a positive factor, driving the Eurozone and Japan equity markets further upward this year. In addition, the strong dollar vs. the weakening euro and yen suggests US investors will probably want currency-hedged exposure to these markets in order to gain sufficiently from trades.

We believe that specific emerging market countries that do not depend heavily on oil or other commodity exports, do not have large external debts denominated in US dollars, and are moving ahead with needed economic reforms will be attractive this year. On a regional basis, Asia looks to have considerably better prospects for outperformance than Latin America does. We currently favor India, China, the Philippines, Thailand and Taiwan, but we also recognize the need to remain flexible and vigilant for opportunities around the world given the fluid circumstances.

At Cumberland Advisors we have been managing our International ETF Portfolio Style (using separately managed accounts) since January of 2003. As the international markets have evolved and ETF options have increased, we have continued to learn and adjust to the changes in order to position our offering well for the upward international markets. We use both macroeconomic and technical inputs to maintain our international strategy of core ETFs (broad-based and regional), coupled with satellite positions (using country ETFs).


The ideas and opinions expressed in this blog are those of the author, and they should not be perceived as investment advice or as any other kind of advice.

The preceding is a commentary by Cumberland Advisors and has been reposted with permission. Cumberland Advisors commentaries are available at

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