Structured Global Equity
Strategies
An Emerging Opportunity
Stocks enjoyed a big bounce in the second quarter of 2009, from developed countries to emerging markets, with the latter strongly outperforming established markets. In addition, REIT’s (Real Estate Investment Trusts) had a strong quarter.
Despite the financial crisis and continuing dislocation in the credit markets, the world has not ended. That underlying force drove the market stabilization and recovery. While economies continue to struggle around the world, markets were clearly oversold at the end of 2008 and beginning of 2009. We are witnessing a rebound from the most dire days of the financial crisis.
Japan did the best among the developed markets, with the Nikkei gaining 23% during the quarter. Even so, many analysts regard Japanese companies as still attractively priced, with more than 60% of the Nikkei 225 trading below book value. Coincidently, the Japanese market declined the least last year of any developed market.
France’s CAC-40 index increased 12%, and Germany’s DAX index gained 18%, breaking five consecutive losing quarters. The US also did well, as the S&P 500 managed an impressive 16% gain for the quarter. The laggard among the developed countries was the United Kingdom, with the FTSE 100 rising only 8%.
In Europe there was a notable move towards higher risk companies with weaker balance sheets which had underperformed in the previous quarters. This left stocks in defensive sectors like telecoms, utilities and consumer staples looking more attractive.
But the real action this quarter was in emerging markets. India led the charge, surging 49%. This rise reflected investors increasing optimism following the Congress Party’s better than expected victory in mid-May elections.
Eastern European markets similarly delivered outsized gains. Poland’s WIG-20 rose 23% and the Hungarian market gained 38%. These results may be difficult to sustain, however, due to a continuing banking sector crises. Credit problems are unlikely to be resolved quickly since much of the distressed debt is denominated in global currencies (Euros or Swiss Francs), and borrowers are struggling with depreciating local currencies. Ongoing credit weakness could well impact Western European to Eastern European lenders as well.
China also did well in the second quarter, with the benchmark Shanghai index increasing 25%, just slightly less than Brazil’s 26% gain.
In total, all global markets performed well, but there was a distinct split between good performance from developed markets and great performance from emerging markets. This situation leads us to a few key questions:
- What drove this bifurcated result?
- Will emerging markets continue to outperform developed markets through the rest of the year?
- Will global stocks continue their rise, or is it time to take some money off the table?
As to the beginning questions, we note that the emerging market countries appear to be recovering from the financial crisis more quickly than developed countries. Citigroup forecasts 2009 economic growth of 5.8% in emerging markets, vs. a 4.9% decline among developed countries. Consequently, we do expect emerging markets to continue their outperformance, relative to developed markets, for the next two quarters.
The last question is a bit tougher, as the bounce we’ve experienced may not prove to be sustainable. The global economy has not yet recovered; it is only declining at a less precipitous pace than in earlier quarters. Corporate earnings remain weak, and ‘green shoots’ are still sparse. Several global markets gave back gains in June, as fears of a W-shaped recovery led investors to sell.
So, the world has not ended and markets are cheering. But we remain cautious that, despite some relief, global markets are not yet completely out of the woods.
Oakwood Conservative
Global Equity
- Balance of value and growth
as well as large, medium and small capitalization stocks
- Suitable for investors
seeking income and long term capital appreciation
Oakwood Moderate
Global Equity
- Has an increased bias towards
value by using multiple asset classes and greater emphasis on smaller
capitalization stocks than the conservative strategy
- Suitable for investors seeking above average returns through long term capital appreciation
Oakwood Aggressive
Global Equity
- Has a higher component
of non-US companies, as well as a greater value tilt and emphasis on
smaller capitalization stocks than the moderate strategy
- Suitable for investors with a higher tolerance for risk seeking higher returns through long term capital appreciation
