Credit: Shutterstock photoForeign stock mutual fund performance thrived or dived at the hands of central banks and their governments in 2013. With foreign developed markets still in the early innings of their economic recoveries, investment strategists expect their stock markets to chug higher in 2014, albeit at a slower pace.
And after selling off in 2013, emerging markets are ripe for a turnaround thanks to low valuations.
Japan funds led all regions, gaining 2% in Q4 and 28% for the year, while the average foreign stock fund added 6% in Q4 and a decent 17% for 2013, according to Lipper Inc. Japan funds absorbed a record $46 billion in new money in 2013 -- nearly seven times more than a year before, according to EPFR Global.
"New Bank of Japan Governor Haruhiko Kuroda's bold plan to expand the country's monetary base in an effort to rekindle growth and inflation, which was unveiled in early Q2 2013, convinced foreign investors that Japan's leaders were serious about jump-starting the economy," stated EPFR's 2013 review.
"It also drew domestic investors back to their home market, although yen-denominated flows leveled off towards the end of the year as locals took profits," EPFR added.
Russell Investments forecasts earnings for the Japanese market to increase 20% this year. Despite last year's run-up, its economic recovery is in an earlier stage than the U.S. and valuations remain reasonable, Russell stated in its 2014 outlook. The MSCI Japan index sports a price-to-prospective earnings ratio of 15 and price-to-sales ratio of 0.75.
Europe Overcomes Recession
European funds added 8% and 27% over the same periods. Western European funds pulled in an epic $53 billion in new money after bleeding $21 billion in 2012.
"At the country level there was a significant flight from quality, with investors rotating out of Germany and Switzerland equity funds into fund groups dedicated to the so-called PIIGS (Portugal, Italy, Ireland, Greece and Spain) markets," EPFR wrote. "Flows in the latter half of the year were bolstered by the return of domestic investors, who had kept their distance while Cyprus' banking crisis was playing out in the spring."
After ailing for nearly two years, the region came out of recession in the second quarter amid a strengthening euro.CurrencyShares Euro Trust ( FXE ), tracking the 18-country currency against the dollar, appreciated 4% in 2013. The common currency now trades near a two-year high of $1.36.
"The euro, as it approaches $1.40, could be too strong vs. most other currencies to foster much export growth," Dean Junkans, chief investment officer for Wells Fargo Private Bank in Minneapolis, with $170 billion in assets under management, said in an email. "So the region faces another year where economic growth struggles to stay positive and companies based in the region struggle to grow profits."
Low inflation and weak consumer demand will hamper economic growth, Junkans added. Inflation registered at 0.8% in December. The eurozone unemployment rate of 12.1% remains too high compared with an average of 9.56% since 1995, according to Trading Economics . The jobless rate for people younger than 25 soared to a record 24.4% in November.
Junkans favors investing in Germany and Austria for their superior economic strength.
Emerging Markets Lag
The average emerging market fund climbed nearly 3% in Q4 to end the year almost flat. The weakest region, Latin America, tumbled 3% in Q4 and 13% for the year. Investors pulled $28 billion out of emerging market funds, which saw $52 billion in outflow the year before, according to EPFR. Latin America funds experienced their worst year with $12 billion in outflow compared with $2 billion in outflow the prior year.
Across all developing countries, falling commodity prices, which peaked in April 2011, dampened profits and sales. At the same time, rampant inflation, rising interest rates and weak currencies hampered economic growth. Their stock market sell-offs intensified in the second half on fears the Federal Reserve would taper QE3.
Credit Suisse analysts recommend overweighting Brazil and underweighting Mexico. Brazil's market trades at nearly 11 times forward earnings, while Mexico trades at nearly 18 times -- the highest among emerging markets. Brazil sports the lowest valuations in Latin America with a price-to-book value of 1.3. Credit Suisse forecasts Brazil's market will rally 26% in local currency and 13% in dollar terms.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
