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Fund Spy

International-Stock Funds Bounce Back in 2019

International equity markets rebounded off 2018’s lows to deliver robust returns.

The United States-China trade conflict roiled global supply chains and equities, but a de-escalation in the latter half of the year spurred optimism. Dovish central banks drove global interest rates to low-to-negative levels, making equities look good relative to fixed income. As investors grew more sanguine about macroeconomic and geopolitical issues, the MSCI All Country World Index ex USA rose 21.5%. Developed equities outperformed their emerging counterparts, with the MSCI EAFE Index's 22.0% gain besting the MSCI Emerging Markets Index's 18.4%.

Yet such gains appear paltry relative to U.S markets. The broad Russell 3000 Index's 31.0% return easily outpaced all three international proxies. The MSCI ACWI ex USA has now lagged the Russell 3000 Index in two thirds of the past 40 quarters, contributing to an 8.5-percentage-point annualized lag over the past decade.

In both the U.S. and abroad, however, growth stocks trounced their value peers. The foreign large-growth and foreign mid/small-growth Morningstar Categories led the six non-U.S. Morningstar Style Box categories, with the former's 27.8% gain beating the latter's by 5 basis points. The foreign large-value and foreign small/mid-value categories added 17.8% and 19.2%, respectively. The large- and small/mid-blend categories landed in the middle.

The back-and-forth drama of Brexit dominated headlines in developed markets. Theresa May resigned as prime minister of the United Kingdom in July, vaulting Boris Johnson into the top job. Then a snap general election in December supported Johnson's plan to leave the European Union. Facing a flagging economy and low inflation, the European Central Bank sent interest rates further into negative territory and restarted quantitative easing in the second half of the year, boosting European equities. Japanese equities, which account for almost one fourth of the MSCI EAFE Index benchmark, trailed their European counterparts amid concerns that tensions between the U.S. and China, the country's two largest trade partners, would further dampen the economy.

Several multinational companies had big years. Investors cheered LVMH's agreement to acquire U.S.-based luxury jeweler Tiffany (TIF) in November 2019, seeing parallels with LVMH's previous successful integration of Bulgari. Meanwhile, Boeing's (BA) 737 MAX regulatory and safety trials benefited Airbus, which shrugged off production problems of its own to overtake Boeing as the world's largest planemaker for the first time since 2011. Both firms' share prices leapt more than 60% for the year. And Dutch-based semiconductor equipment manufacturer ASML Holding's (ASML) shares gained 92.4% thanks to increased global semiconductor demand.

Two seemingly opposed strategies navigated this investment backdrop. David Herro, since-inception manager of Oakmark International (OAKIX), which earns a Morningstar Analyst Rating of Gold, bounced back from a 2018 slump that bled into the first quarter of 2019 as hefty stakes in European banks like top 10 holdings BNP Paribas, Credit Suisse, and Lloyds Banking Group rebounded and contributed to the fund's 24.2% index- and category-average-beating 2019 return.

On the other end of the spectrum, Bronze-rated WCM Focused International Growth (WCMRX) posted a 35.0% gain that bested 92% of foreign large-growth category peers and topped the MSCI ACWI ex USA Growth's 27.9%, thanks in part to a sizable stake in long-term holding LVMH. Two Canadian firms active in the global commerce supply chain also helped. Amazon.com (AMZN) e-commerce challenger Shopify's (SHOP) torrid growth rates persisted in 2019, while Canadian Pacific Railway (CP) remains one of the most efficient North American railroads. WCM Focused International Growth managers Peter Hunkel and Mike Trigg also dip into emerging markets, where Taiwan Semiconductor Manufacturing (TSM) and Chinese Internet firm Tencent bolstered returns.

Tit-for-tat tariffs whipsawed Chinese equities, which encompass almost a third of the emerging-markets benchmark. Internet behemoths Alibaba (BABA) and Tencent shrugged off the headwinds and moved higher; the former's Hong Kong IPO was the second-largest of the year. Internet search firm Baidu (BIDU), however, continued its downward trend in 2019, and China Mobile (CHL) plunged after the U.S. government prohibited the telecom company from building its own network in America. Both firms finished lower for the year.

Political turmoil roiled emerging economies, too. Hong Kong protests and China's response to them stoked concerns about the region's autonomy. The Indian banking system dealt with several deposit runs and required central bank intervention, and protests erupted in December following the passing of a controversial citizenship law. Private sector banks HDFC (HDB) and Kotak Mahindra Bank, however, navigated the hostile investment climate. Middle East tensions heightened after Iran captured two oil tankers then bombed a Saudi Arabian oil refining facility. Nevertheless, Saudi Arabia's national oil and natural gas company, Saudi Aramco, raised $25.6 billion in the largest IPO of 2019, which valued the company at $1.7 trillion--the largest public company by market cap in the world. In Latin America, Brazilian equities' solid year offset upheaval in Argentina and unrest in Chile, contributing to the Latin America stock category's 28.4% gain.

Bronze-rated Artisan Developing World (ARTYX) stashes a hefty chunk of assets in developed-markets multinationals with emerging-markets revenue exposure, such as U.S.-based NVIDIA (NVDA) and Visa (V), and French luxury retailers LVMH and Hermes. Those picks drove the fund's category-leading 41.7% return, more than double the MSCI Emerging Markets Index's 18.4%. Meanwhile, JPMorgan Emerging Markets Equity's (JFAMX) emerging-markets picks--including Alibaba, Taiwan Semiconductor, and Argentinean e-commerce firm MercadoLibre (MELI)--propelled the Silver-rated fund's 31.7% 2019 gain. While those differing approaches both outpaced the category peers, Bronze-rated Harding Loevner Frontier Emerging Markets' (HLMOX) 10.4% return placed in its category's bottom decile. Its managers home in on frontier markets, such as top holding (as of September 2019) National Bank of Kuwait, but the fund still struggled against the MSCI Frontier Emerging Markets Index's 14.1% gain.

Tom Nations has a position in the following securities mentioned above: SHOP, WCMRX. Find out about Morningstar’s editorial policies.