International equity markets recovered strongly in the first two and a half months of 2019. This followed last year’s sharp drop in global markets, particularly in December. The revival in investment sentiment has occurred despite moderation in global economic growth, which has eased from an annual pace of 3.8% in 2018 to 3.4% this year. Investors’ fears of a sharp slowdown in China, monetary policy tightening in the US and Europe, and a worsening trade conflict between the US and China have all lessened somewhat. Corporate earnings and strong profit margins continue to support equity markets.

International equity markets have gained 11.9% since the start of the year on a total return basis as measured by the iShares MSCI ex US ETF, ACWF. The advanced-economy markets excluding the US and Canada advanced by a similar amount, 12.0%, as measured by the iShares MSCI EAFE ETF, EFA. Despite the continuing uncertainties about Britain’s attempts to exit the European Union (Brexit) and export sector weakness, investor interest in Eurozone equities has strengthened. The iShares MSCI Eurozone ETF, EZU, is up 13.4% so far this year. The Japanese equity market also participated in the recovery but has continued to underperform, with the iShares MSCI Japan ETF, EWJ, advancing just 7.7%. Japan’s economy continues to advance at a less than a 1% annual rate of growth.

The recovery this quarter in the equity markets of emerging-market economies has also averaged about 11%, but the variation among individual markets has been great. Leading the pack has been China, with the iShares MSCI China ETF, MCHI, gaining 19.5%. Moves by the government and central bank to provide needed support to a slowing Chinese economy and improved prospects for a US-China trade agreement have turned around investor sentiment. The South Korean equity market, in contrast, has underperformed recently after a strong start to the year, with the iShares MSCI South Korea Capped ETF, EWY, up only 5.5%. The pattern in India has been the reverse: weakness in the first two months followed by a sharp up-tick in March, with the iShares MSCI India ETF, INDA, advancing 6.1% year-to-date. Latin American equity markets began the year with a sharp recovery, driven by gains in Brazil and Chile, followed by limited further gains in the last six weeks. The iShares Latin America 40 ETF, ILF, is up 14.7% so far this year.

Cumberland’s International ETF accounts have held a combination of widely diversified multi-market ETFs together with a number of individual national-market ETFs in which we see particular opportunities. The accounts have a moderate overweight position in emerging markets, particularly in Asia, where growth and earnings prospects are attractive. We have maintained a cash reserve that can be deployed or increased depending on market and strategy developments.