Pundits routinely note that Americans tend not to pay much attention to developments in foreign countries. But U.S.-based investors couldn't avoid hearing plenty of international news thus far in 2012. The continuing travails of Europe and the potential consequences of slowing growth in China have dominated the financial headlines for much of this year.
With that in mind, when we check in two weeks after midyear, it's noteworthy that the results for internationally focused stock mutual funds have been, though not spectacular, far healthier than one might guess. That doesn't mean macroeconomic concerns are unwarranted. But it does indicate how political, economic, or social developments don't necessarily translate into stock and fund returns, especially in the short term.
Beating Low Expectations
Even if many international funds held up decently well, it might seem that Europe-stock funds, at least, should have imploded. Given the endless rounds of inconclusive crisis-focused summit meetings and financial fears rapidly spreading from small countries to major ones, big losses among funds that can't shift money out of Europe might be taken for granted. However, Europe-focused funds are showing a 3.9% gain this year (through July 13). Knowledgeable readers might wonder if the handful of Russia/East Europe funds in the category is skewing the group's returns upward. But those funds aren't having much influence on the average this year.
The explanation: Although stock markets in the countries identified as being in the deepest financial trouble--Greece, Portugal, Spain, and Italy--are in fact deep in the red so far this year, Germany has risen sharply, and the non-eurozone markets of Switzerland, Sweden, and the United Kingdom are also showing gains. (The U.K. is the biggest stock market in Europe, by far.) In addition, investors have recognized that some companies in Europe, such as Nestle and Inditex (which runs the Zara clothing chain), are only partly affected by the European financial crisis and have pushed up their stock prices accordingly.
Because European stocks typically make up more than half the assets of broad international funds, these relatively healthy European stocks and markets also have helped buoy the returns of those broad funds (which have many more investors than Europe funds do). The vast majority are in the green this year despite the prevailing economic gloom.
A Mixed Picture From the East
Another pleasant surprise comes from Asia. For a lengthy spell this year, news about India was dominated by dire headlines as well, as the shine seemed to be coming off that one-time investor favorite. The Indian stock market enjoyed a powerful start in January, but then a variety of concerns--a slowing growth rate, rising inflation, increased attention to infrastructure problems, and political moves deemed harmful to investors--combined to send prices on a downward spiral. (The country's currency sank as well.) But the strength of those early-year stock gains and a revival in the past couple of months have helped the India-equity category emerge as the top performer among the 15 international-stock groups so far this year. The category's 13.7% gain is fully 7 percentage points ahead of the second-place group, foreign small/mid-growth.
Conversely, in the China-region category, concerns about an economic slowdown have had more of an impact. This group is limping along with a paltry 1.4% gain so far this year, third-worst of the 15 international-stock categories.
Meanwhile, foreign small/mid-growth has been the best of the six style-box categories on the international side. Its 6.9% gain lands in second place of the 15 international-stock categories overall. That, too, is a bit of a surprise. In times of stress, investors sometimes shy away from smaller firms. But so far this year, both the foreign small/mid-growth group and the foreign small/mid-value category are ahead of all three foreign large-cap style-box categories. The foreign large-value category, in fact, has been the second-worst performer this year, with losses from multinational oil and gas stocks bearing part of the blame.
Gregg Wolper is an Editorial Director and Senior Mutual Fund Analyst at Morningstar.
