International stock markets provided impressive returns for the third quarter of 2016, surpassing those of two widely recognized U.S. stock market indices being the the S&P 500 Index and the Dow Jones Industrial Average. The S&P 500 Index finished the quarter with a gain of 3.85% allowing for a year-to-date gain of 7.84% and the equally U.S.-oriented Dow Jones Industrial Average (DJIA) closed Q3 with a gain of 2.78% allowing for a year-to-date gain of 7.21% as of the end of the third quarter of 2016. International emerging markets also delivered some of the best results while largely flying under the radars of many investors. Emerging markets, as represented by the MSCI EM Emerging Markets (Net) index posted at gain of 9.03% during the third quarter allowing for a YTD advance of 16.02% as of the end of the third quarter of 2016. Some of the emerging market countries providing the most significant returns thus far in 2016, based on their associated S&P Dow Jones indices, include Brazil and Peru in Latin America and Thailand and Indonesia in Asia.
While the U.S. will likely remain as the market of choice for the time being, investor interest in international equities should only grow as we close out 2016 and move into 2017 as a result of the many doses of quantitative easing and stimulation measures on the part of central banks across the globe that are expected.
Another area that investors have seemingly forgotten about is the potential impact of Brexit. This would be a mistake as this vote will likely have both short- and long -term implications on worldwide stock markets as well as the economies of Great Britain and the Eurozone as a whole. As you may recall, markets raced downward following the surprising vote by Great Britain to leave the European Union on June 23, 2016. A lot of the trading activity that took place was attributed to traders reversing their positions following the "leave" vote came in after believing that Great Britain was going to vote to "stay" within the European Union.
From an investment viewpoint, trade and economic growth are at the heart of the potential implications of the "leave" referendum vote in England. As a result of Brexit, Great Britain will have more control over the negotiation of their own trade agreements and immigration policies and will also be able to redeploy the eventual savings of their EU membership to other areas of their economy that they feel would be more beneficial to their own citizens. It remains to be seen how other European countries will treat England from a trade and diplomatic relations standpoint following this vote. According to BBC.com, approximately 28% of what is produced in Great Britain is sold abroad. Interestingly, while about half of this overseas trade in the United Kingdom is conducted with the EU, England imports more overall than it exports to the EU. Hence EU country members need Great Britain as much (and perhaps more) as Great Britain needs the EU from a trading relations standpoint.
As we move closer to the date of the actual Brexit date and the market starts to focus on potential Brexit implications again, I believe that there will be a great deal of uncertainty, and potential volatility, as the world tries to come to terms with how this very public divorce will take place and if any of the other 27 remaining EU countries will look to follow suit and leave the EU themselves. It is important to remember that although Great Britain was a member of the EU, it did not use the Euro. Nine other countries that are members of the EU also do not use the Euro as their currency (ex. Bulgaria, Croatia, Czech Republic, Denmark, Hungary, Lithuania, Poland, Romania and Sweden). A lot of the Brexit talk may not start to intensify for quite some time though as current Prime Minister Theresa May has recently said that she will trigger Article 50 of the 2007 Treaty of Lisbon (the official step to begin the two year timer for orchestrating the exit) by the end of March 2017. This means that Britain would likely be on schedule to leave the EU by March of 2019.
While the days of international market and foreign currency volatility are not behind us, we do believe the more clarity that is provided around how, and when, Brexit will play out coupled with continued measures of stimulus on the part of Mario Draghi and the European Central Bank (ECB) create international investment opportunities for investors in the years ahead as part of a globally diversified portfolio strategy. In this regard, many international markets have lower valuations than U.S. stocks presently and could be in a position to outperform in the years to come, similar to how they did from 2001 - 2007.