2Q23 International Market Insights

Markets were broadly positive in Q2 2023, with global stocks rising over 6% (as measured by the MSCI ACWI Index), bringing YTD gains to roughly 14%. US dollar-based returns were marginally lower than local returns as the USD strengthened slightly during the quarter relative to major global currencies. Developed markets handily outpaced emerging markets in Q2, rising 7% versus 1%, respectively, and bringing YTD totals to +15% versus +5%, respectively.

Latin American stocks led the way in Q2, up over 14%, tied to sharp bounces in Brazil (up nearly 21%), Peru (up over 13%) and Colombia (up more than 12%). Having started rate hikes — and therefore, largely tamed inflation — before much of the developed world, there is broad anticipation the region’s central banks are on the cusp of an easing cycle, boosting sentiment. In Europe, Poland (+25%), Hungary (+25%) and Greece (+24%) had particularly positive quarters, while the larger economies — Germany (+4%), France (+4%), the UK (+2%) — experienced more moderate gains as inflation remains a concern and the European Central Bank has signaled it is not yet done raising rates. In the Asia Pacific region, China’s market declined (-9%) as the anticipated economic bounce following its full economic reopening has yet to fully materialize. However, India (+12%), Japan (+6%), Taiwan (+5%) and Korea (+5%) were in the black in Q2.

From a sector perspective, global technology stocks in the MSCI ACWI ex USA Index notched another quarter at the top (rising nearly 7%), followed by industrials (+6%) and financials (+5%). Reversing some of its YTD gains, the communication services sector declined (-4%), as did real estate (-2%) amid an overall rising global interest rates environment. Materials declined a relatively modest -1%.

The macro picture has also been consistent in 2023, with inflation, central bank policy and ongoing geopolitical tensions dominating headlines. In June, UBS completed its acquisition of embattled Swiss-based Credit Suisse (a bank with over 170 years of history), closing the largest bank deal since the 2008 financial crisis. While we remain vigilant in assessing the fundamental health of all our portfolio holdings, we believe the worst is behind us on this front for the time being.

While the US is seemingly nearing the finale of its tightening campaign, global monetary policy is a more mixed bag. The UK faces ongoing stubborn inflation, seemingly decreasing the likelihood it is as close to the end of its hiking cycle as the US may be. Similarly, the European Central Bank likely has a way to go as inflation has proven sticky in major economies like Germany’s. In contrast, many emerging markets economies seem on the cusp of considering pausing rate hikes, if not beginning to cut. For example, Hungary trimmed rates (which remain high) during the quarter as it struggles to rein in inflation while not hampering too much economic activity. A notable exception is Turkey, which significantly raised rates (650 bps) following President Erdogan’s May reelection — presumably in a bid to convince markets the country will begin seriously addressing its economic challenges. Whether investors find the effort credible naturally remains to be seen.

With everything going on in the macro background, we believe now is a great time to invest abroad. This is not because macro uncertainty is abating; on the contrary, it's because of the uncertainty and negative headlines that selective, bottom-up investors can find opportunities. There has been disappointment over China's reopening, political turmoil in Peru and Brazil, pseudo-campaigning in Mexico and India ahead of elections, an ongoing war in Russia, and continued tensions between China and the US. But this is par for the course in international markets — uncertainty is constant. It's in environments such as these that we find some of the most attractive long-term investment ideas. It’s also why we believe owning a carefully curated portfolio of companies — rather than a benchmark — is critical to long-term success in non-US markets. What is the point of owning an international index that includes so many mediocre companies if macro concerns keep you up at night? Our approach is to be selective and own only those businesses we believe offer the greatest potential for long-term growth.

Q2 2023 Total Returns for Major Markets (USD) (%)