InvestSMART International Equities Portfolio Update - December 2018

Portfolio produced a return of -11.80% (after fees) during the December quarter and no changes were made.
By · 16 Jan 2019
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16 Jan 2019 · 5 min read
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Last quarter saw the unravelling of the gains made during the prior three quarters. International markets logged their worst quarter in over 10 years. The contrast from the beginning to the end of 2018 is quite remarkable. In January 2018, we saw the strongest open to a year for global markets in 30 years. By the end of December 2018, we were crossing off the worst December that US markets have seen in over 50 years, and over a decade in most other regions.

The declines in the quarter reflected apprehension around the deterioration in global growth and further restrictions in monetary policy. The InvestSMART International Portfolio is heavily weighted to the US market, and as such, suffered a large decline in December as the growth/policy concerns hit US markets. The iShares S&P 500 ETF (IVV) and the Vanguard MSCI Index International Shares ETF (VGS) were both heavily impacted by these concerns, detracting -4.24% and -4.75% of overall performance from the portfolio. However, both are unhedged, and the fact the Australian dollar fell to its lowest levels in over 2.5 years allowed IVV and VGS to both experience FX tailwinds. This mitigated some of the falls felt in US and European markets.

It should be pointed out that, at the start of 2018, US growth was running at around 4% in real terms. The fact the US Federal Reverse increased rates by 250 basis points (2.50%) since December 2015 means this above-trend growth should be moderating, and that is indeed the case. However, US GDP remains strong, and US employment and output remains at some of its strongest levels since 1960. This suggests the US economy is still in good shape.

The Vanguard FTSE Europe Shares ETF (VEQ) followed its US counterparts to detract -1.47% from performance. This would have been larger, but we decreased our exposure to Europe in Q3. The German Q3 GDP figures were a major drag for European performance with quarter-on-quarter growth contracting for the first time since Q1 2015. The fact Europe’s largest economy is contracting leads markets to conclude that European growth will remain sluggish into 2019 despite the European Central Bank forecasting rate hikes this year on a forecasted jump in European growth.

Finally, to Asia. The iShares Asia 50 ETF (IAA) was actually the best performing asset in the portfolio for the quarter as emerging markets (EM) saw some buying in November after large sell-offs during the first three quarters of 2018. There is deep value in Asian equities currently, and with Beijing recently undertaking large-scale stimulation measures to try and mitigate the slowdown, the markets appear to be reversing their views on the A50. We still expect short-term risk in the coming quarter for the A50, however, over the year the A50 may in fact outperform as investors look for markets with deep value and growth.

To see more information on our International Equities Portfolio, click here 



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Evan Lucas
Evan Lucas
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