Our International ETF strategy analyzes fiscal and interest-rate policy and complements that research with trading analytics to determine portfolio risk/reward and valuations. The strategy has the benefit of flexibility to assign allocations by market cap size and developed vs. emerging markets.
Equity demand in the international markets continued to be solid throughout the quarter, with both Asia and Europe adding to gains. Both regions are currently trading near 52-week highs. Developed markets showed strong relative strength vs. emerging markets, particularly in the back half of the quarter. The weakness in Latin America was the primary factor in this leadership change, as the political corruption charges in Brazil took that market down sharply. Current allocations and brief thoughts are provided for your review. Please don’t hesitate to contact us with any comments or questions.
Developed Markets (60%): Our biggest strategy adjustment was the sale and elimination of the currency-hedged positions in Japan and Europe. After solid USD strength in Q4 2016 and into Q1 2017, both the yen and euro found solid footing vs. the USD. We eliminated the hedge mid-quarter as the USD began to fade. We are comfortable with this move, as both the yen and euro have continued to rally. Previous comments have focused on the similarities we are observing between current Japanese and European fiscal policy and our domestic fiscal policy of the past six to seven years. We cannot ignore the response of the US equity markets to loose policy over the past five years. Currently, international equity markets are following suit. It is also important to highlight European bank strength, which has buoyed the broad markets across the region.
Emerging Markets (34%): While no longer cheap in comparison to 12 months ago, EM continues to be helped by demand driven by broad asset-allocation changes. Emerging Asia was the dominant region in Q2, as tech and banks traded well and helped performance. Brazil traded poorly, hit hard by the political corruption investigation there, and weighed on the Latin America story. We are also mindful of the commodity scenario: Further weakening in oil and broad commodities could become an obstacle to those countries dependent on production.
Cash (6%): Although a drag on performance in strong markets, the diverse international markets normally offer multiple trading opportunities throughout the year. We will use our cash to add to current securities on pullbacks and to seize new opportunities when the risk/reward analysis demands it.
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