Blog Posts — July 10, 2018

Trade Concerns Weigh on Stocks in June

Equity markets struggled in June, led by Europe and emerging economies, as US barriers on imports raised concerns that a trade war is unfolding.

The STOXX® Global 1800 Index fell 0.2%1 both in dollar and euro terms in the month. The index logged a 1.5% advance in dollars for the second quarter and is now up 0.2% so far this year.

The EURO STOXX 50® Index of blue chips in the Eurozone declined 0.2% in euros in the month, for a 2.9% advance in the quarter and a 1% retreat in 2018. The pan-European STOXX® Europe 600 Index dropped 0.6% in June. The gauge added 4% in the three months through June, paring the decline so far this year to 0.4%.

The US was the only major region to post a gain in June, with the STOXX® USA 900 Index rising 0.6%. The Federal Reserve increased the country’s key interest rate during the month for the seventh time since 2015, and suggested it may raise it as many as four times this year as inflation accelerates. The euro ended the month where it started against the dollar.

While the fundamentals of the global economy remain on firm footing, many country benchmarks and strategies have posted losses for the first six months amid rising interest rates and political and economic nationalism. In June, US President Trump said he might impose a 20% tariff on imports of European cars, following on new duties on steel and aluminum, and suggested – but later backtracked – plans to restrict Chinese investments in some sectors such as technology.

The European Union, Canada and China have already retaliated by either threatening or imposing levies of their own.

Emerging markets sell off

The STOXX® China A 900 Index slid 8.1% in local currency in the month, falling into a bear market, a term popularly defined by a decline of 20% or more.

But it wasn’t just trade policy behind the retreat in Chinese equities – sentiment towards emerging economies continues to sour amid concern that a rise in the US dollar and interest rates will hurt financing for less-developed nations. The STOXX® Emerging Markets 1500 Index tumbled 4.5% in June, its worst monthly performance in euros since January 2016.

Carmakers lead losses

The STOXX® Global 1800 Automobiles & Parts Index led losses among 19 supersectors in the STOXX Global 1800, shedding 4.1%. Shares of European car exporters including Daimler AG and Renault SA paced the retreat. Volkswagen AG declined 11% as the chief executive officer of the carmaker’s Audi luxury division was arrested for his alleged role in the Volkswagen diesel cheating scandal.

At the other end, the STOXX® Global 1800 Media Index rose 5.3%. The index’s two largest stocks, Walt Disney Co. and Comcast Corp., are competing to buy assets from the third-largest component, Twenty-First Century Fox Inc. (‘Fox’). On Jun. 27, the US Department of Justice gave antitrust approval to Disney to go ahead with the acquisition.

Fox shares jumped 29% over June, while Disney and Comcast each rose more than 5%.

In terms of countries, the STOXX® Australia Total Market Index was the best performing market in local currencies among the 23 developed markets tracked by STOXX. The 3.1% advance in Australian dollars, however, translated to a much smaller 0.7% return in either US dollars or euros, as the Australian currency fell.

In euros, southern Europe dominated the top spots of returns. The STOXX® Greece Total Market Index climbed 2.6% after European Union governments agreed to extend a deadline on almost 100 billion euros owed by Greece as the country readies its exit from financial bailout programs.

The STOXX® Spain Total Market Index rose 2.2% while the STOXX® Portugal Total Market Index added 1.3%. With a 6.1% decline, the STOXX® Luxembourg Total Market Index was the worst-performing developed-market national index.

Minimum variance pays off

Minimum variance strategies proved their edge in June, as investors favored low-volatility stocks that can offer relative protection in downtrends.

The STOXX® Europe 600 Minimum Variance Index rose 0.1% in June while the STOXX® USA 900 Minimum Variance Index advanced 2.2%, both in constrained versions of the indices.

The STOXX Minimum Variance Indices’ constrained versions have a similar exposure to a market-cap index but with lower risk. The unconstrained versions, on the other hand, have more freedom to fulfill their minimum variance mandate within the same universe of stocks.

Value struggles

Elsewhere, so-called value stocks, those that trade at lower prices than the market’s average, struggled for a second month. The iSTOXX® Europe Value Factor Index fell 2.6% in June, perhaps reflecting investors’ concerns about the pace of global expansion – value stocks tend to do well when the economy accelerates.

That compares, for example, with a 0.4% return for the iSTOXX® Europe Carry Factor Index, which targets stocks with high growth potential based on earnings and dividends. Carry was the only one among six strategies in the iSTOXX® Europe Factor Indices family to post a gain in June. Value has now underperformed carry by 10 percentage points in the past year.

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1 Total return after taxes.