A Tepid Third Quarter for Non-U.S. Stock Funds

Global equity markets were tepid in 2019’s third quarter. Non-U.S. stocks once again lagged U.S. equities, and U.S.-China trade tensions exacted a toll on developed and emerging markets. Latin America and India were the worst-performing regional categories, while Japan staged a late-quarter comeback, turning the tide on its slow start to the year.

Vanguard Total International Stock Index VGTSX, which has a Morningstar Analyst Rating of Gold, lost 1.7% in the quarter through Sept. 27, 2019, but was still up 11.3% for the year. Emerging markets fell harder, as Bronze-rated Vanguard Emerging Markets Stock Index VEMAX fell 3.8% in the quarter while preserving an 7.7% 2019 gain. Gold-rated Vanguard Total Stock Market Index VTSAX, a proxy for U.S. stocks, eked out a 0.6% quarter gain and posted a 19.4% gain for the year. Global funds with large U.S. allocations have been among the world large stock Morningstar Category’s best performers for the year to date. Bronze-rated BNY Mellon Worldwide Growth PGROX had nearly 65% of assets in U.S. stocks in its most recent portfolio, and its 22.2% gain through quarter-end was top-decile relative to peers.

The year-to-date performance of the six non-U.S. Morningstar Style Box categories lined up as they did at the end of the second quarter. The foreign large-growth category lost 1.4% but kept its year-to-date lead with a 16.8% gain. The foreign small/mid-growth category had the biggest loss in the quarter. Its 2.43% drop brought its yearly gain to 14.5%. The large- and small/mid-value categories stayed at the bottom of the pack for the year to date, with 8.9% and 7.3% gains, respectively.

The global economy remained focused on the U.S.-China trade dispute and continued to grapple with below-average growth and waning investor confidence. India, which plays a key manufacturing role for the United States and China, was among the worst-performing non-U.S. categories, losing 5.7% in the third quarter and 3.4% for the year. Bronze-rated Matthews India MINDX held up better than peers but still shed 4.9% as Axis Bank and DCB Bank fell hard.

Argentina’s political turmoil was the culprit in the Latin America category’s 3.2% loss for the quarter. Populist Alberto Fernandez’s election defeat of market-friendly president Mauricio Macri stoked investor fears. Argentine equities lost 50% in August alone, a sharp correction after a roaring 32% second quarter gain. Bronze-rated T. Rowe Price Latin America treads lightly in Argentina, but its few holdings there still contributed to a 4.9% loss for the quarter. Three of its top-five detractors over the quarter were Argentine holdings, including Grupo Financiero Galica SA GGAL.

A September runup helped Japan top all regional categories in the third quarter. Optimism for a U.S.-China trade deal propelled its 2.9% gain. Silver-Rated Matthews Japan's MJFOX 1.4% gain lagged the category in the quarter, but its 15.4% year-to-date gain was still ahead of its average peer. Technology firms M3 MTHRF and Lasertec LSRCF were top contributors for the quarter. Bronze-rated T. Rowe Price Japan RJAIX posted a 1.8% gain for the quarter, boosted by healthcare firm Solasto and retailer Zozo. The fund is up 14.6% for the year to date.

Brexit politics and uncertainty continued to weigh on U.K. and European stocks. Markets seem to be pricing in the likelihood of the United Kingdom leaving the European Union without a formal deal on Oct. 31. The MSCI U.K. All-Cap Index posted a 2.2% loss for the quarter, while the MSCI Europe Index fell 1.7%.