For all the talk of how America’s protectionism may sink this bull market in stocks, it’s still very much “America first” on Wall Street — at least as far as equities are concerned.
As Charlie Bilello of Pension Partners recently pointed out, the median return among the major country-specific ETFs is minus 4% in 2018, with the S&P 500 SPX, -0.76% posting a 6% gain. Only Saudi Arabia and Norway have performed better, with 17% and 9% returns, respectively.
It’s not only obvious duds like Turkey either, which has been cratering on renewed fears of a currency crisis; the iShares MSCI Turkey ETF TUR, +4.05% has been cut roughly in half compared with its January highs. Other struggling nations include developed markets like Japan and the U.K.
Bigger picture, data from Bespoke Investment Group shows that of 22 major regional ETFs, 16 are in “long-term downtrends” with three more displaying a “neutral” trend. The lone uptrend is found in the iShares Global 100 ETF IOO, -0.99% a diversified fund that conspicuously includes U.S. mega-caps like Apple Inc. AAPL, +0.23%
This strength of American equities vs. the rest of the world is not to say Trump’s trade war is certain to resolve favorably for the typical U.S. worker, mind you. Neither is it proof that it’s wise for investors to forgo geographic diversification to chase America’s hot hand in the stock market.
That said, an objective look at the situation both at home and in five key foreign markets reveals things are quite strong for the U.S. and quite weak for the rest.
U.S.• 2018 return: 6% for SPDR S&P 500 ETF SPY, -0.75%
What’s not to like? Second-quarter gross domestic product (GDP) growth hit 4.1%, the fastest rate in about four years, thanks to strong consumer metrics. And June’s consumer spending numbers released at the end of July showed continued power and included an upward revision to May’s figures.
In fact, the only headline risk seems to be a rapidly expanding economy that may be sparking moderate inflation and emboldening the Federal Reserve on its course to normalize interest rates. If the worst thing we can say about America right now is that the recovery has matured to this point, it’s no wonder investors are piling in.
Eurozone• 2018 return: minus 6% for the Vanguard FTSE Europe ETF VGK, -1.69%
When comparing nominal GDP, the European Union is collectively just a few trillion bucks behind the U.S. economy. And while there was some cheerleading on the other side of the Atlantic last year about how the eurozone economy was improving, including outpacing U.S. growth for two years running, that optimism has gone up in smoke in 2018. Trade tensions and labor woes have weighed on EU manufacturers in the first quarter, resulting in GDP growth of less than a 2% annual rate.
Headwinds only seem to be mounting, too, given the trouble in key trade partner Turkey as well as incredibly weak industrial production in its second-quarter GDP details.
China• 2018 return: minus 9% for the iShares China Large-Cap ETF FXI, -3.50%
The world’s No. 2 economy by nominal GDP, China should be a part of almost every investing portfolio regardless of your strategy. That said, Chinese equities — particularly the large-cap companies most U.S. investors are familiar with, such as telecom giant China Mobile CHL, -0.22% and Sinopec SNP, -2.22% — are suffering mightily this year.
In fact, the declines have been so severe that after its domestic stock market has lost trillions in value since Jan. 1, it is now no longer the second-largest equities venue in the world as Japan leapfrogged it to reclaim that title. Trade wars and tariffs are largely to blame, though investor uncertainty is more of a drag than any tangible impact. Second-quarter GDP growth of 6.7% was the slowest since 2016. From a sentiment perspective, threats of a trade war couldn’t have come at a worse time for Chinese stocks.
Japan• 2018 return: minus 4% for the iShares MSCI Japan ETF EWJ, -1.22%
Just because Japan is a bit more stable than China, let’s not presume this means the Land of the Rising Sun is sitting pretty. After a rosy 2017 that showed some of its best economic expansion in years, first-quarter GDP was a stunner — contracting at a 0.6% annualized rate, three times worse than forecast.
The details are even worse than the headline, with declines in both investment and consumption, along with the tell-tale decline in export growth that is a hallmark of the global economy amid trade tensions.
Economists have been quick to note that the contraction doesn’t’ mean a recession is in the works. But barring a significant change in current trends for capital expenditures and consumer spending, it’s safe to say the rest of 2018 isn’t looking particularly bright for Japan.
United Kingdom• 2018 return: minus 6% for the iShares MSCI United Kingdom Index ETF EWU, -1.81%
The U.K. is worth exploring separate from the broader eurozone because, after all, apparently this nation is on a path to independence from the EU.
But perhaps not, given the continued political mess that has most foreign policy experts highly skeptical that any functional deal is going to be easily achieved by the EU Council in October. In fact, the U.K. foreign minister has been increasingly vocal about the risk of a chaotic “no-deal” Brexit where no formal trade relationship exists and countless economic barriers and miles of red tape would suddenly apply.
If markets hate uncertainty in general, you can imagine what this means for the U.K. economy and equities domiciled there. Shares of the EWU U.K. fund were actually slightly in the green as recently as mid-June — right around the two-year mark of the initial Brexit vote, in fact. But the disarray around Brexit is taking its toll on both investors and on businesses, as evidenced by the nation’s recent “manufacturing recession.”
India• 2018 return: minus 3% for the iShares MSCI India ETF INDA, -1.93%
While the nation has a very low per-capita income, India is neck-and-neck with the U.K. in regard to nominal GDP output. And particularly as China’s economy matures, India has been one of the largest growth centers for global economic expansion.
However, despite a red hot growth rate of 7.7% in the first quarter — up from 7% at the end of 2017 — the largest and most liquid India-focused ETF is in the red this year, and down even more sharply from its January highs.
Part of that is because of U.S. policy decisions, including both trade tensions as well as tighter central bank policy that is causing a flight of capital from emerging markets. But it’s also because the red-hot growth has not come without challenges, including inflation that hit a five-month high of 4.9% in June and has subsequently resulted in the second rate hike from the Reserve Bank of India this year to a benchmark rate of 6.5%. It’s not quite a currency crisis on par with Turkey, but serious inflation challenges have caused the rupee to slump and make it Asia’s worst-performing currency so far in 2018.
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