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Fund Spy

Third Quarter in Non-U.S. Stock Funds: Tariff Tiff Tremors

Non-U.S. strategies lagged U.S.-focused managers again as both the dollar and trade fears increased.

Non-U.S. equity strategies continued to lag U.S.-focused portfolios in 2018’s third quarter. Emerging markets, such as China and India, were particularly weak, while Latin America staged a comeback and Japan continued to rally.

The  Vanguard Total International Stock Index (VGTSX) rose slightly more than 1% annualized for the quarter through Sept. 27, 2018, but was still down more than 2.5% for the year. Vanguard Emerging Markets Stock Index (VEMAX) fell 1.3% for the quarter to date, adding to an 8.4% loss for the year. In contrast, the Vanguard Total Stock Market Index (VTSAX), a proxy for the U.S. market, jumped 7% in the quarter and 10.6% for the year.

The backdrop for this performance included developments that shook some overseas markets and raised serious doubts about the endurance of the period of synchronized global growth lauded early in the year. The U.S. and China’s tariff tiff led to new levies from both. That brought some high-flying Chinese stocks back to earth. For example, Chinese Internet giant  Tencent (TCTZF), which more than doubled in 2017, fell 17.6% in the quarter through Sept. 27. Meanwhile, a strong U.S. dollar, coupled with local political and economic disruption, hammered Turkey’s lira and drew attention to weakness in other emerging markets, which explains the losses of indexes tracking those regions.

The China Syndrome
The China region Morningstar Category was among the worst groups of the third quarter, falling by an average of 6.7% annualized for the quarter to date and 10.4% for the year through Sept. 27.

 Matthews China (MCHFX), which has a Morningstar Analyst Rating of Bronze, lost more than 9.8% in both the quarter and year to date; it ranked in the bottom fourth of the peer group in the quarter and its bottom half for the year. The portfolio felt the pain of the U.S./China tariff row and worries about Chinese debt levels.  Alibaba (BABA), its top holding, dropped more than 10% after cofounder Jack Ma announced he would retire from the e-commerce titan. Tencent’s weakness also hurt. What’s more, the healthcare theme that worked well in the U.S. didn’t in China. The strategy’s one healthcare holding, Sino Biopharmaceutical (01177), fell nearly 37% and ranked among the top detractors. The strategy’s difficult third quarter followed a great 2017, showing how quickly the tide can turn in emerging markets.  

Negative-rated  Clough China shed nearly 10% for the quarter and more than 12.5% for the year and lagged most category rivals through Sept. 27. Its nearly 18% stake in Tencent did most of the damage.

India (Red) Ink
The India equity category was the next-worst group with a loss of 6.5% annualized in the quarter and 17% for the year, as the Indian rupee plunged to an all-time low versus the dollar. In local-currency terms, some Indian stock indexes, such as MSCI India, were actually up for the quarter and year. The only Morningstar Medalist in the group, Bronze-rated  Matthews India (MINDX), lost more than 8% in the quarter and nearly 13% for the year. Automaker Eicher Motors , a top-five position at the end of June, dropped by double digits in the quarter to date, while air cooler manufacturer Symphony plunged by more than 30%.

China and India’s troubles weighed on more-diversified emerging-markets offerings. Silver-rated  Harding Loevner Emerging Markets (HLEMX) retreated 4.9%. China was the largest country weighting (averaging 23% of assets during the period), but the portfolio also suffered from declines in Russian, Indian, and Brazilian stocks.  Among the top detractors were two banks: Russia’s Sberbank , which sank over 16%, and India’s HDFC Bank (HDB), which lost nearly 12%.

A heavy emerging-markets stake took the shine off Silver-rated T. Rowe Price Global Technology (PRGTX). It faded 3.5% in the quarter, though it was still up by 3% for the year. Tencent, a top holding, hurt; so did chipmaker  Applied Materials (AMAT), which fell nearly 17%.

Ranging the Globe
World large stock was the best international category, up 3.8% for the quarter to date and nearly 4% for the year. It was a U.S. story--the best performers in the group tended to have more U.S. equity exposure.

Neutral-rated  Oppenheimer Global Opportunities (OPGIX) ranked ahead of at least 90% of its peers for the quarter and year to date. It had nearly 50% in the U.S. and 29% in developed Europe. Five of its top-10 performing stocks for the year have been based in the U.S., including biotech stock Arrowhead Pharmaceuticals (ARWR) and semiconductor-maker Advanced Micro Devices (AMD). Tech and biotech played a big role in the quarter as well, as Arrowhead and AMD continue to do well.

China and Tech were among the culprits behind a couple of Bronze-rated world large-stock strategies’ bottom-quartile rankings for the quarter and year:  Thornburg Global Opportunities (THOAX) and  Davis Global (DGFAX). Davis has a remarkable 28% in China, and Thornburg 6%. Online retailer (JD) and South African Tencent investor Naspers (NPSNY) and other China-related picks took big bites out of Davis’ returns, while Macau casino operators, MGM China Holdings (MCHVF) and Galaxy Entertainment (GXYEF), pummeled Thornburg.  

Latin Beat
The Latin America category, which remains among the worst groups for the year with a more than 13.5% loss through Sept. 27, rallied in the quarter, gaining nearly 3.2%. Lone Medalist  T. Rowe Price Latin America (PRLAX) kept pace with the peer group average in the quarter to date and lost less than most of its peers for the year. The Bronze-rated T. Rowe Price Latin America’s focus on industry leaders with strong fundamentals have helped buoy it. A large position in Brazilian bank Itau Unibanco Holding (ITUB) helped. So did a top-five position in Wal-Mart de Mexico.



For all Morningstar Category returns through the previous day, visit the Fund Category Performance page

Dan Culloton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.