Equity Markets Review Third Quarter 2014

Equity markets were extremely volatile during the quarter with daily moves of over 1% not at all uncommon.

The first week of the first quarter (as of this writing October 7) has shown a sharp selloff in global stock markets, sparked by continued disappointing European markets now influencing US and Asian markets as well.

Although the US economic news has been positive valuations remain high. The movements in the bond market continue to waver in their sentiment as to when the Federal Reserve will raise interest rates. And the future direction of interest rates adds another factor of uncertainty to the markets. Thus although the US market reached record highs during the third quarter there has been little follow through.  World Bank economic forecast for 2014 has been revised down a bit to 2.1%

European markets face two negatives: continued weak economic data and the political tensions related to the Ukraine. The European Central Bank has indicated that it will continue policies of low interest rates and a weaker Euro to try to stimulate economies. The overall Euro zone ETF fell 8.8%. Germany reflecting concerns over both political and economic concerns fell even more -11.9% World Bank economic growth forecast in Europe is 1.1%

The impact of the weaker Euro can be seen in the comparison between FEZ and HEDJ which invests in Eurozone stocks but hedges the currency risk fell only 1.6%. Despite the weak economic data from Europe investors should be aware that investing in European stock indices have significant weightings in multinational corporations. Therefore the beaten down European indices have potentially attractive valuations compared to US stocks, particularly if one makes use of currency hedging to protect against a weakening Euro. The valuation discount of German stocks vs. the US is over15% but for the near term pessimism on economic conditions will put a drag on markets.

Emerging markets showed a large divergence which raises the question as to whether investing in emerging markets as an asset class makes sense. The overall emerging markets index was -4%, the index includes Russia. Eastern Europe. Latin America and Emerging Asia. The emerging Asia index by contrast was up .3% and has actually outperformed the US market year to date

Within the emerging markets the outlook for Russia continues to be clouded by political conditions. Latin American growth has slowed considerably and is expected to show economic growth based on the World Bank of only 1.2% from 2.2%. This would be the slowest growth rate since 2009 as a point of comparison the average growth rate from 2003 -2010 was 4.8%.

Asia remains the region with highest forecasted growth despite the fact that the same World Bank report moved down its growth forecast for China down to 7.2% (last year’s growth rate was 7.7% the forecast for East Asia is 6.9%

From the perspective of short and long term economic growth and stock valuation Asia seems the most attractive of international markets. Market prices have yet to fully recover from several years of underperformance vs. US stocks with valuations currently at close to a 30% discount to US markets.

As of Sept. 30,2014
Total Return (Price+Dividend)
	ticker	3q 2014	YTD	1 year	3 Year
US total stock k market	VTI	-0.8%	7.9%	16.6%	92.5%
Emerging Markets	IEMG	-4.0%	5.0%	2.8%	44.0%
Emerging Asia	GMF	0.3%	11.8%	11.1%	62.5%
Eurozone	FEZ	-8.8%	-0.6%	5.2%	44.0%
Germany	ewg	-11.9%	-8.1%	5.0%	69.8%