Finally, Global Markets Are Going Their Own Ways
In a Positive Sign, Stocks No Longer Fall in Tandem; Emerging Markets Like Brazil Are the Stars So Far in 2009
Global stock markets are striking out on separate paths, in contrast to last year’s universal collapse.
There was a wide divergence in markets’ performance in first three months of 2009, with results ranging from poor to middling to stellar. Shares in developing countries like China and Brazil well outpaced those from developed regions like the U.S. and Europe.
That is a marked change from late last year, when global stocks crumpled in unison and the only disparity was between different intensities of awful.
While one quarter doesn’t make a trend, the divergence could be a sign that some of the fear gripping investors around the world is abating. No longer selling shares indiscriminately, investors are trying to identify which stocks world-wide will profit if a tentative economic recovery takes hold, even if the economic picture for this year remains grim.
“Maybe it’s indicative that we’re out of the acute phase of the crisis and into more of a chronic phase,” says William Sterling, chief investment officer of Trilogy Global Advisors, which manages $8.5 billion of global shares.
The Dow Jones World index, excluding U.S. shares, fell 12% in dollar terms in the quarter, compared with the 13% drop in the Dow Jones Industrial Average. A Morgan Stanley index tracking emerging-market stocks rose 0.5% in dollar terms and 4% in local-currency terms.
After taking a drubbing last year, emerging markets fared particularly well. The benchmark indexes of Brazil and Russia both jumped 9% in local-currency terms, while India’s edged into positive territory. China’s domestic stocks — largely off limits to foreign investors — led the pack, with the Shanghai Composite surging 30% (it fell 65% last year).
Michael Hartnett, co-head of international investment strategy at Banc of America Securities-Merrill Lynch, says three elements combined to support emerging markets: signs the Chinese economy was stabilizing; the relative strength of financial shares in these markets; and the rapid return by some investors to riskier investments in March.
In the middling category were markets such as Japan and Canada, where declines were more modest compared to the U.S. Japan’s Nikkei Stock Average of 225 companies fell 8% while Canada’s S&P/TSX Composite fell 3%.
In Europe, the quarterly declines were in tune with, or worse than, in the U.S., with benchmark indexes in Germany, France and the U.K. falling 11% to 15%.
Not surprisingly, the sector that fared the worst worldwide during the quarter was financials, which fell 21% in dollar terms based on a Morgan Stanley index that covers a wide swath of global stocks. No sector really shone, however: the best-performing sectors were information technology, which eked out a gain of 2%, followed by materials, down 2%.
For U.S. investors, the dollar was a thorn in the side. The buck notched a solid advance, despite flagging at the end of the quarter. That strength cut into any profit from overseas shares and magnified any losses, since most foreign currencies bought fewer dollars at the end of the quarter.
The differing performance among global markets presents a challenge for investors. If some of the widespread selling and extreme volatility that characterized financial markets late last year returns, then markets once again could move in lockstep. If the divergence continues, then getting relative winners and losers right will become increasingly important.
“You will see a disconnection between markets” if shares manage to stabilize for a sustained period, says Uri Landesman, a senior portfolio manager at ING Investment Management in New York. “The rising tide may lift most boats, but not equally.”
Mr. Landesman likes such markets as Canada and Brazil, which he says are well-positioned to benefit from a rebound in the prices of commodities like oil on the back of stabilizing global demand.
Other fund managers say they see reasons to favor shares in the U.S. and Asia over Europe. The logic is that the massive U.S. government response to the crisis will gain traction, leading to a bounce in some of the Asian exports that fell off a cliff last year.
What is more, “Asian companies and economies have the balance sheet to survive this thing,” says Stephen Auth, chief investment officer for global equities at Federated Investors, who oversees $28 billion.
Mr. Auth says that over the course of this quarter his firm has been moving money in its international portfolios to Asia from Europe. He adds that the firm favors U.S. shares over international shares more broadly, largely because it is bearish on European stocks, and they account for a significant proportion of the non-U.S. benchmark index.
“We think “Chimerica” is moving more quickly, and in general is in better shape, than Europe,” he says, “Partly because Europe doesn’t know what bad shape it’s in.”
One factor in Europe’s favor: shares are trading at cheap prices. A recent report from Citigroup analysts recommended that investors own more European and British shares than suggested by a benchmark index for precisely that reason. As of mid-March, such stocks were trading at nine times estimated 2009 per-share earnings, according to Citigroup, compared with 12 times for North American shares and Asian shares outside Japan.