International equity markets are ending the year participating in the rally in global risk assets. Previous concerns about recessions over the coming quarters have eased, as has inflation, while prospects for central banks to begin reducing policy interest rates around midyear have improved. Yet there are a number of reasons for caution. The ongoing wars in Europe and the Middle East threaten to widen, with no end in sight. Global economic growth is likely to slow further in 2024, particularly in the first half, with the growth of most economies continuing to undershoot their trend rates. The full effects of past monetary tightening by central banks are still to be felt, particularly in Europe, while fiscal policy will become more restrictive. Growth in the Chinese economy, which has fallen short of earlier expectations, is still likely to be held back by its correcting housing sector. In the eurozone, its largest economy, that of Germany, is likely to register the weakest growth rate, very close to zero percent.

 

 

International stocks, as measured by the iShares MSCI ACWI ex US ETF  ACWX, are up 10.9% year-to-date December 22, recovering from a sharp fall earlier in the autumn. That increase is less than half the increase in US stocks, where the S&P 500 Index is up almost 24%. The ACWX performance masks substantial differences in the performance of individual national stock markets. Developed-economy markets appeared to outperform emerging-economy markets. The iShares MSCI EAFE ETF, EFA, which covers developed-economy markets outside of North America, gained 13.9%, whereas the iShares MSCI Emerging Markets ETF, EEM, is up only 3.9% year-to date. However, this difference was entirely due to China. The iShares MSCI Emerging Markets ex China ETF, EMXC, is up 14.7%.

European stocks have done better than might have been expected in view of the relatively poor performance of the European economy. The eurozone economy, in particular, contracted marginally in the third quarter, and there is little to suggest in the data to date that the final quarter will be any better. The good news is that eurozone inflation has been lower than forecast, encouraging investors to expect that the European Central Bank will cut interest rates soon and aggressively. The iShares MSCI Eurozone ETF, EZU, is up 19.7% year-to-date. Within the eurozone, Spain’s economy and stock market continue to outperform, boosted by strong growth in services. The iShares MSCI Spain ETF, EWP, is up 26% year to date. Outside the eurozone, the Swedish stock market ended stronger than the eurozone average, while the markets of Switzerland and UK had year-to-date returns that fell considerably short of that average. Economic growth in Europe is expected to gradually gain momentum next year, particularly in the second half.

Japan’s economy has benefited from having a less restrictive monetary policy than any other major economy and advanced about 2% this year, compared with the eurozone economy’s advance of only 0.5%. Japanese stocks, as measured by the Nikkei, gained over 27%. However, the weakness in the Japanese yen against the US dollar (the yen declined over 7% this year) subtracted from the return on US-listed Japanese ETFs. The Japanese economy is projected to slow somewhat next year due to softness in external demand.

The variations in stock market performance this year were more pronounced among emerging markets. China, which has the globe’s second largest economy, disappointed investors who expected a strong recovery after the restrictions due to the Covid pandemic were eased early in 2023. The economy was hit with widespread and persistent housing and local government debt problems, the clean-up of which continues. Inward foreign direct investment declined, and Moody’s downgraded the nation’s credit rating. The iShares MSCI China ETF, MCHI, has trended down since early in the year and its year-to-date performance is -17.3%. This is despite economic growth that looks likely to reach the government’s 5% target for the year.

Also in Asia, the Indian economy has been robust this year, advancing at a 7% pace, and its stock market is up almost 19%.  Similarly, Korea’s market is up almost 19%, and Taiwan stocks outperformed at 24%. In contrast, Indonesia, Malaysia, Philippines, and Thailand all underperformed significantly.

In Latin America, Mexico’s stock market is up about 19%, and for investors in US-listed Mexican ETFs there is also a 20% gain in the Mexican peso versus the US dollar. Peru’s market is ending the year even higher, up over 26%. The Brazilian economy has recovered well from the pandemic. Its highly volatile stock market is up about 11%, on top of which the currency has gained 12% versus the US dollar. In contrast, Chile’s stock market is ending 2023 close to where it started the year.

In sum, identifying which national stock markets were likely to outperform and which to avoid in 2023 was a difficult task. This is very likely to continue to be the case in the coming year. Diversification of risks is a strategy to address this uncertainty. Global economic growth is expected to slow somewhat in 2024, mainly in the first half, with a quickening pace in the latter half as central banks start reducing policy interest rates following progress in bringing down inflation. The rally in equity markets in the closing weeks of 2023 suggests that investors will be looking past the slower economies in the coming months. The extent to which expected gains later in 2024 have already been priced in the markets is unclear.

The one security mentioned above that is in Cumberland Advisors’ investments is ACWX.

William H. Witherell, Ph.D.
Vice Chairman & Chief Global Economist
Email | Bio

Sources: Oxford Economics, Financial Times, Wall Street Journal, oecd.org, cnbc.com

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Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.