MW:China, oil, pressure global stock-fund investors
Strong quarterly gains could fall to recession, other ‘known unknowns’
SYDNEY (MarketWatch) — Economic trouble isn’t over, over there, but buyers of international stocks are clearly over the shock that plagued both developed and emerging markets in 2011.
Stock investors venturing outside of the U.S. waded into calmer waters in the first quarter, with every international mutual-fund category posting double-digit gains in the period. Exchange-traded funds dedicated to non-U.S. stocks also performed strongly.
Yet while the rebound is healthy and welcome, the fear pendulum is swinging towards China, where the economy is slowing. Moreover, surging oil prices pose a new hurdle for global growth and could worsen any recession that may hit Europe. How to position portfolios against such uncertainty will dominate investors’ attention in coming months.
For now, investors can look back a rally that brought substantial relief. Confidence and risk-taking grew as Europe came off the critical list. Europe-stock mutual funds were up 14.1% on average in the quarter, according to preliminary data as of March 28 from investment researcher Morningstar Inc. Henderson European Focus Fund HFEAX -1.13% was among the standouts, gaining 23% An exchange-traded proxy for the region, Vanguard MSCI Europe ETF VGK -0.76% , added about 11%.
“We are witnessing a rehabilitation of European growth prospects, boosted by a sharp fall in European Union sovereign concerns,” said Gary Baker, head of European equities strategy at BofA Merrill Lynch Global Research.
Diversified international stock funds gained 12.2% on average for the quarter, while similar emerging markets funds rose 13.5%, Morningstar reports.
Latin America funds led the pack with a 15.2% rise; Diversified Pacific Asia rose 13.2%. Among single-country funds, Japan added 12.3% and China rose 10.3%
Top Latin America funds, led by surges in Brazilian and Colombian markets, included MFS Latin American Equity Fund MLEAX -0.40% , up 16.4% and exchange-traded Market Vectors Latin America Small Cap Index LATM -0.79% , which gained 15.8%
Europe fights back
Measures to inject stability into Europe’s banking system — namely the European Central Bank’s long-term refinancing operation (LTRO) and approval of Greece’s latest bailout package — pulled the region back from the brink.
A survey of fund managers by BofA Merrill Lynch in March found global investors hold far fewer fears about the euro zone, with those listing European Union sovereign debt as their number one “tail risk” dropping sharply to 38% from 59% in February.
Yet Europe’s wounds are far from healed. Upcoming elections in France and Greece add an additional layer of political risk in the coming quarter.
“The Europeans have managed to kick the can down the road, but there’s still a high risk of something pretty ugly happening,” said Stephen Halmarick, head of investment markets research at Colonial First State Global Asset Management in Sydney.
“Bottom line: 25% of the world economy is in recession and that has implications for everybody else,” said Halmarick, whose funds have around $141 billion Australia dollars ($147.2 billion) invested globally.
Barclays Capital analysts, meanwhile, remain underweight in Europe, with Germany the exception. The strategists’ recommend picking up European insurance and utilities, while steering clear of banking stocks.
China rattles nerves
As China’s biggest customer, waning demand from Europe hurts the world’s fastest-growing economy. The downgrade of China’s 2012 growth forecast from 8% to 7.5% by Premier Wen Jiabao in March sent shudders through global equity markets.
“A harder landing in China, with its potential consequences for the rest of the world, remains a risk factor for the second quarter of the year,” strategists at Barclays Capital said.
China’s economy has slowed by design due to policy tightening as well as weaker export demand and housing market pressures.
Colonial First State’s Halmarick said anxiety over China is exaggerated.
“Market expectations that China is going to collapse into a hole are wrong. If it does slow down, there’s a lot of stimulus they can bring into the economy,” he said.
Anticipated policy easing from China would likely boost equity markets. Further supporting the outlook is a history of under-promising and over-delivering.
