A Challenging Second Quarter for International-Stock Funds

While U.S. equity funds, particularly growth-oriented and small-cap strategies, fared well in 2018’s second quarter, conditions weren’t as favorable for international-stock funds. Concerns about a trade war with China and the impact of tariffs loomed large for global companies, with many funds building on first-quarter losses to stay in the red in 2018’s first half. A strong U.S. dollar and rising interest rates hurt many developing markets as investors shed riskier assets. Meanwhile, compared with a sanguine outlook in the United States, projections for growth slowed abroad, setting up a quarter in which the MSCI ACWI ex USA Index lost 2.6% in U.S. dollar terms even as the S&P 500 gained 3.4%.

Geopolitical concerns hit some countries particularly hard. Brazil’s projections for economic growth dipped alongside inflation concerns, high unemployment, and a plunging currency. The Latin America Morningstar Category posted the steepest loss for the quarter at 22.4%. In Turkey, questions about monetary policy, inflation, and the country’s economic position against the backdrop of a presidential election led its currency to slide. India, which imports much of its energy resources, was hit by rising oil prices.

Beyond those country-specific issues, diversified emerging-markets funds sold off broadly, losing 8.9%--the second-worst showing of any international-stock category. China-region funds, hit by concerns about the impact of tariffs and a broader economic slowdown, were down 5.5%.

There weren’t many winning categories. World large stock and world small/mid-stock, whose constituents benefited from owning some U.S. companies, posted modest gains of 0.6% and 0.5%, respectively.

As in the U.S., growth-oriented categories fared better than their value counterparts, but only modestly so. Foreign large-growth and foreign small/mid-growth funds on average were down 0.7% and 1.7%, respectively, a tad better than the 2.7% and 3.1% respective losses posted by the foreign large-value and foreign small/mid-value categories.

Outperformers

Currency hedging produced major tailwinds for some funds.

Underperformers

Growth exposure didn’t help all funds.