Financial Industry Insights from Advisors Asset Management

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The "I’s" Have It Series – International

The potential and promise of global economic increases has been in holding pattern for the last few years. The MSCI World, excluding the United States, has had a total return of -6.09% over the last few years with the 2016 return looking to be slightly positive. The way things stacked up toward the end of last year we are seeing some rare territory for the global equity markets, not including the United States.

On an annualized basis, the world equity index minus the United States is on pace for a third negative price return (not including dividends). This has happened only one other time in the last 36 years (2000-2002). The correction was substantial (average annual loss of price near 15%); however, the rebound was just as profound. It averaged an annualized price return of 19.7% over the next five years.

These returns are contingent on economic expansion and political stability…two areas that have recently been scarce in supply. Over the period of 2003-2007, the world GDP averaged 3.20% which was well above the long-term average of 2.51%. The angst from the morphing political landscape may actually have a stimulus to the stagnant growth if we take two recent examples of shocks to the system: Brexit and U.S. Elections. Consider that the MSCI U.K. index is up 8.54% since the Brexit vote and the S&P 500 is up 5.80%% and the Dow Industrials is up 8.73% in just the two months after the elections. Consumer sentiment has done the exact opposite of prognosticators.

Consider some of the economic signs that are still pointing to positive growth that we referenced above. PMI (Purchasing Manager’s Index) and economic surprise indicators are on the upswing and the output gap for the global economy is narrowing.

In the Eurozone particularly, we are seeing continued strong underpinnings that are being hindered by the political uncertainty.

Consider the consumer confidence number and the impact on the Euro STOXX 600 that is now showing a long historic gap that will need to be closed.

Just as we looked at the global equity index, consider the European returns after the peak GDP for the world that hit 5.20% in 2000. The negative price return in the Stoxx 600 lasted from Sep 2000 – April 2003 when there was a significant wide spread in consumer optimism and negative price returns. Consider the current situation also started in September 2014, which would potentially correspond to a similar timeframe of April 2017 when the positive price returns could come back. A gentle reminder, markets and history are not linear, but a disparity of this magnitude for this long has shown to be a buying opportunity. The three years from April 2003 to April 2006 showed the Euro Stoxx 600 with an annualized return of 22.7% or total return for the three years of 84.63%.

Some notable events to monitor politically in Europe in 2017:

January 22 – 27, 2017


1st & 2nd Round of Socialist Primaries

February 12, 2017


Presidential Election

March 15, 2017


General Elections

April 23 – May 7, 2017


1st and 2nd Round of Presidential Elections

September 2017


Germany General Election

Source: JP Morgan

Late news in the year out of China was a mitigating of their target growth rate of 6.50%, which they had originally targeted until 2020. We have long stated that these rates were too high and rates of 5.50% to 6.00% were more reasonable for the short term. As the economy swells and population tops out, a longer term rate of 4-5% will be more likely from 2020-2030. This decline as economies become larger is natural and shouldn’t be misconstrued as economic entropy.

The second largest economy in the world, China, is showing signs of not only a healthy expansion in economic activity, but an increase in inflation. For the first time in 53 months, China’s producer price index turned positive in September and this has traditionally improved corporate earnings, government revenue growth and overall market sentiment. The newest producer price index comes out this week and is expected to jump to a year-over-year number of 0.9% from last month’s 0.1%. This has had a pretty strong correlation with moves in GDP on China as well.


Inflation continues to be ascending, yet means something different for emerging and developing markets rather than developed markets.

We believe the opportunity in the Emerging Market front is substantial and has been underinvested in for several years. The higher tide of rising sentiment and global economic activity looks to have a broad based increase in Emerging Markets. According to Goldman Sachs, the inflows of money has totaled 10% of the outflows over the past four years and are trading at an 18% discount to developed markets.

Since 1987 the average price return in the MSCI Emerging Markets index has been 10.7% but with a staggering 31.75% standard deviation, one must expect this to be a long-term buy and hold, and reinvest over those periods where negative returns present themselves. The last four years, however, have seen a significant decline in the volatility of the returns with a standard deviation of 9.37. The last time we saw decline over a four-year period in volatility of returns was 1999-2002. The five-year period following this saw an average annualized return of 33.99% from 2003-2007.

We see this year to be a positive for international markets from an equity perspective while the credit may struggle due to currency fluctuations and the potential move towards less global central bank quantitative easing.

CRN: 2017-0201-5782 R

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit



Effective, June 10, 2016, please note that Gene Peroni left Advisors Asset Management (AAM) to become President of Peroni Portfolio Advisors, Inc. Peroni Portfolio Advisors, Inc. ("PPA") is an investment advisor independent of AAM.