Library

Quarterly Market Review

International equities built on a robust first quarter performance with strong results during the second quarter as well. A shift in monetary policy expectations from hawkish to dovish, as well as a modest easing of trade tensions, helped propel the market rally.

Developed market gains substantially outpaced emerging market returns for the quarter, although their performance is roughly in-line on a rolling one-year basis. The continued strength of the dollar, as well as weakening commodity prices, particularly in crude oil and copper, detracted from emerging market performance. For the quarter, international growth stocks materially outperformed international value stocks, extending their post-financial crisis relative performance edge.

Foreign equity markets have enjoyed a strong first half of 2019, but we see the current investment environment as more mixed. While many international markets look more attractive than the US on a valuation basis, economic fundamentals are concerning and risks remain high.

The US economy is in a later stage of its economic cycle, and any downturn would have major spillover effects on international markets. Additionally, we expect global growth to decelerate back to more sustainable levels, and markets may become choppy as this happens. Lastly, geopolitical instability, the ongoing trade war, and other external risks have the potential to disrupt market conditions.

Considering the uncertainty that we see in our investment outlook, we prefer to maintain a more defensive positioning for international equity investors. We currently favor the following in our foreign all-equity portfolios: quality businesses that can survive in an adverse environment, growth companies that are trading at reasonable multiples, and businesses that have fewer embedded late cycle risks.

Market Insights: Opportunities from the North

When many investors think of international investing, Canada is not the first foreign country to come to mind. Our northern neighbor has much in common with the United States: democracy, basic property rights, developed financial markets, etc.

In many ways, Canada’s markets move in line with the US. From a trade perspective, 73% of Canadian exports are sent to the US, and 46% of Canada’s imports are American products. But just because the country aligns so closely with our own doesn’t mean that US-based investors should ignore looking to Canada for potentially attractive investment opportunities.

The Canadian equity market is trading at long-term averages, with some areas of the market appearing more compelling than others. Structurally, Canada is dominated by traditionally pro-cyclical sectors, which is why the market typically outperforms during risk-on periods. As we explained in the above quarterly overview, however, we aren’t looking at Canada broadly for risk-on exposure, but simply looking to understand the economic drivers as we search for opportunities from a bottom-up perspective.

Secularly, Canada’s slowing population growth has seen an acceleration over the last several years, driven by an influx in net migration. This has, in turn, helped to support economic growth prospects. Well-developed transportation, communication, and utility infrastructures have also been paired with new government programs designed to boost innovation and productivity.

From an economic cycle perspective, Canada’s economy is currently emerging from a bottoming phase as the ill effects of tighter monetary policy, restructured housing policy, and lower oil prices roll off through the rest of the year. We expect growth to accelerate going forward.

Although Canada’s economy has attractive qualities from cyclical and secular viewpoint, there are key risks demand monitoring. Domestic housing activity has slowed in recent years, and it could continue to be a headwind to consumption and investment. Dependence on cyclical sectors, particularly oil prices, as well as energy policy changes add a degree of risk as well.

Additionally, one of the most significant threats to Canada’s economy is the uncertainty surrounding trade policy with the US. A positive resolution to the trade issue is of paramount importance, and although we expect that there will be an agreement, the way forward may be characterized by significant uncertainty.

As of the end of the second quarter, our actively-managed investment processes have led us to own a significant number of Canadian-domiciled companies in our traditional, international all-equity portfolios. These opportunities are across a broad range of industries including telecom, retail, food services, nuclear energy, and metals mining. As always, each of these investments were identified on an individual bottom-up basis, using our disciplined and time-tested research processes.

The data presented is for informational purposes only. It is not to be considered a specific stock recommendation. Unless otherwise noted, figures shown are based in USD.

Morningstar, Inc. is a global investment research firm providing data, information, and analysis of stocks and mutual funds. ©2019 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied, adapted or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information, except where such damages or losses cannot be limited or excluded by law in your jurisdiction. Past financial performance is no guarantee of future results.

The MSCI Emerging Markets Index (MSCI EM) is a free float-adjusted market capitalization index designed to measure large and mid-cap representation across 26 Emerging Markets countries. The Index returns do not reflect any fees or expenses. The Index is denominated in U.S. dollars. The Index returns are net of withholding taxes. They assume daily reinvestment of net dividends thus accounting for any applicable dividend taxation.

The MSCI World Index is a free float-adjusted market capitalization index designed to measure large and mid-cap representation across 23 Developed Markets countries. The Index returns do not reflect any fees or expenses.

The Index is denominated in U.S. dollars. The Index returns are net of withholding taxes. They assume daily reinvestment of net dividends thus accounting for any applicable dividend taxation.

All investments contain risk and may lose value. This material contains the opinions of Manning & Napier, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

This newsletter may contain factual business information concerning Manning & Napier, Inc. and is not intended for the use of investors or potential investors in Manning & Napier, Inc. It is not an offer to sell securities and it is not soliciting an offer to buy any securities of Manning & Napier, Inc.

Manning & Napier is governed under the Securities and Exchange Commission as an Investment Advisor under the Investment Advisers Act of 1940.