Geopolitics, Slowing Growth Hit Foreign Funds In Q1


Mutual fund investors with assets overseas weathered a disappointing first quarter as global markets dealt with Russia's conflict in Crimea, China's surprisingly weak economic growth and worries Japan will drift back into a recession.

But value fund managers embraced the storm, as fear-driven sell-offs often wash ashore cheap valuations.

The average world stock fund added 0.4% in Q1, while emerging markets funds slipped 0.79%. Both lagged U.S. diversified stock funds, which picked up 1.33%.

Russia lagged all global stock markets as it ignited the biggest geopolitical dispute since the Cold War after seizing Crimea from Ukraine. Russia's stock market plunged 17% in Q1. The ruble sank to a five-year low against the dollar as investors fled the country on worries that sanctions will hinder natural gas and oil sales -- Russia's biggest export.

Russia's stocks trade at the lowest price-to-forward earnings and price-to-book ratios since the country's 1998 crisis. The average Russian stock yields 4%, significantly more than emerging markets, according to Credit Suisse. But valuations are fair at current levels, given a negative earnings-growth outlook through 2015, weakening foreign trade, poor GDP prospects and lack of investment growth, Credit Suisse wrote in a report dated March 27.

Outperformance in India mutual funds, up 9.55% in Q1, was driven by investor optimism over the upcoming elections that will likely usher in a more market-friendly government. The Bombay Stock Exchange and National Stock Exchange indexes both soared to new highs as the rupee reached an eight-month high against the dollar.

India's central bank raised interest rates to 8% to slow the consumer inflation rate, currently running at 9%. It also eased foreign-exchange hedging rules to support exporters and importers. Consumer confidence also reached a new high, says Peter Kohli, CEO and chief investment officer at DMS Funds, specializing in India.

"India (is) beginning to take the steps necessary to tackle inflation and further open its markets for foreign investors," Kohli said.

China-region mutual funds lost 4.4% in Q1 on worries of a looming credit bubble, slower economic growth and China's struggle to become a consumer-driven economy.

"The problems in China are going to be with us for the next couple of quarters at least, but we anticipate the (government's) orchestration of a soft landing," said Joseph Tatusko, chief investment officer for Westport Resources. "If not, the impact will be felt globally and this could be a big negative for the equity markets in general."

Bearish On Latin America

Latin American mutual funds fell 0.96% in Q1. Andrew Ver Planck, manager of MainStay International Opportunities , is bearish on Brazil and other commodity exporters like Russia, Indonesia and South Africa because of their heavy dependence on China, whose demand for basic materials has "dropped significantly." He is more bullish on commodity importers -- China, India, Korea, Taiwan, Thailand and Turkey -- which produce end products.

Japan mutual funds dropped 4.45% as the yen appreciated almost 3% against the dollar. The increase in the sales-tax rate from 6% to 8% as of April 1 to fund rising social-welfare costs may ignite a consumer backlash. The last time the government raised the sales tax from 3% to 5% in 1997, consumer demand nose-dived.

"The consumer spending spigot may be reduced from a stream to a drip," Jason Lilly, who manages more than $2.3 billion in assets at Bright Rock Capital Management, said. "It remains to be seen if Abenomics has any staying power for the Japanese economy."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Mutual Funds

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