Markets & Economy

Monthly Market Review

March 2017
T. Rowe Price

BENCHMARKS MIXED, WITH GAINS NARROWLY FOCUSED

The major U.S. stock indexes were mixed in March as volatility resurfaced after a period of unusually slow and steady gains. The technology-heavy Nasdaq Composite Index recorded a solid return, while the narrowly focused Dow Jones Industrial Average and the Standard & Poor’s MidCap 400 Index posted slight losses. The large-cap S&P 500 Index was modestly higher, but most of its component sectors recorded losses. The financials segment performed worst for the month, although it remained the top performer since the November elections. Conversely, information technology shares performed best and ended March nearly 13% higher for the year to date—a notable reversal of their underperformance in the final quarter of 2016.

U.S. Indexes
Total Returns

 

March 2017

 

Year-to-Date

 

Dow Jones Industrial Average

-0.60%

 

5.19%

 

S&P 500 Index

 0.12

 

6.07

 

Nasdaq Composite Index

 1.48

 

9.82

 

S&P MidCap 400 Index

-0.39

 

3.94

 

Russell 2000 Index

 0.13

 

2.47

 

Past performance cannot guarantee future results.

Note: Returns are for the periods ended March 31, 2017. The returns include dividends based on data compiled by T. Rowe Price, except for the Nasdaq Composite Index, whose return is principal only. Russell Investment Group is the source and owner of the trademarks, service marks, and copyrights related to Russell indexes. Russell® is a registered trademark of Russell Investment Group.

INVESTORS KEEP A CLOSE EYE ON WASHINGTON

As they have since the election, investors appeared to keep an especially close eye on politics during the month. President Trump’s first speech to a joint session of Congress on February 28 sent stocks soaring after trading opened the following morning. T. Rowe Price traders noted that while the speech contained relatively few specifics on the new administration’s economic plans, investors appeared encouraged by the positive tone of Trump’s remarks. His calls for unity and expressed willingness to work with Democrats appeared in many ways similar to his election night victory speech, which was followed by a massive rally in stock futures.

Although positive reaction to the speech helped the S&P 500 establish a new intraday record on March 1, the index was unable to regain that peak as political discord and uncertainty soon resurfaced. The mood was particularly sour on March 21, when the major benchmarks suffered their biggest declines of the year as doubts grew that the Republican leadership in the House of Representatives would be able to gather enough votes to pass its proposed health care reform bill. Republican leaders had framed passage of the legislation as a key step in later cutting taxes through budget reconciliation—which would not require Democratic support in the Senate—and the official withdrawal of the bill later that week led some to question the viability of the president’s broader reform agenda. Nevertheless, most on Wall Street continued to expect some tax cuts, the firm’s traders noted, if perhaps smaller in scale and arriving later than first anticipated.

POSITIVE ECONOMIC SIGNALS HELP CUSHION POLITICAL UNCERTAINTY

The month’s generally positive economic data may have helped compensate for the political turmoil. The Labor Department reported that employers added a healthy number of new jobs in February, and hourly earnings grew at a solid pace. T. Rowe Price Chief U.S. Economist Alan Levenson observed that job gains were particularly strong in goods-producing industries, and a separate gauge of manufacturing activity reached its highest level since 2014. The housing sector also appeared to be on solid footing, although a shortage of inventory seemed to be driving up prices while keeping a lid on sales. Measures of consumer and business sentiment remained especially strong, but some began to question the growing gap between such “soft” economic data focused on perceptions and “hard” data grounded in actual consumption and investment. For example, the Conference Board’s index of consumer confidence soared to its highest level since December 2000, but the latest data from the Commerce Department showed only meager increases in consumer spending.

STOCKS SHOULD WEATHER MODEST RATE INCREASES...

The further improvement in the labor market, along with some signs that inflation pressures were firming, prompted the Federal Reserve to raise interest rates at its March 14–15 policy meeting, the second increase in three months. Stocks rallied following the rate announcement and Fed Chair Janet Yellen’s subsequent press conference, helped by indications that policymakers’ economic and interest rate outlooks remained virtually unchanged since the start of the year. Levenson continues to expect that the Fed will raise rates three times in 2017, and many T. Rowe Price equity managers believe that stocks can weather a moderate pace of rate increases.

...AND STOCK PICKERS MAY BENEFIT

The transition to a more normal interest rate environment may also boost the importance of active stock selection. Many observers have noted that the Fed’s regime of extremely low interest rates has put a bid under stocks as an overall asset class and has evened out the cost of capital for strong and weak firms, lessening the importance of choosing winners over losers. Interviewed in The Wall Street Journal, T. Rowe Price’s co-head of global equity, Rob Sharps, pointed to the Fed’s rate increases, hopes for faster growth policies from the Trump administration, and widening performance gaps between asset classes as factors that may favor active over passive investment strategies.

INTERNATIONAL EQUITIES RISE

International stocks recorded solid gains for U.S. dollar-based investors in March as equities rose in all 10 sectors. Strengthening economic data, rising inflation, favorable currency exchange rates, and less uncertainty following key elections in Europe aided the rally. Investors increased inflows into emerging and European markets on the back of rising confidence surrounding growth prospects in the regions. A mild slump in the price of oil weighed on energy stocks. Trading volume in European equities was markedly low toward the end of the month. The European Central Bank (ECB) and the Bank of Japan left their monetary policies unchanged. The dollar weakened against most major currencies.

Within the MSCI EAFE Index, value stocks slightly outperformed growth stocks. Utilities, information technology, financials, consumer discretionary, and industrials and business services recorded higher returns than the EAFE index as a whole. Materials was the weakest sector but still managed to gain nearly 1.2%. Overall, emerging markets stocks slightly underperformed developed market stocks.

International Indexes
Total Returns

MSCI Indexes

March

Year-to-Date

EAFE (Europe, Australasia, Far East)

 2.87%

 7.39%

All Country World ex-U.S.A.

 2.63

 7.98

Europe

 4.14

 7.61

Japan

-0.23

 4.64

All Country Asia ex-Japan

 3.28

13.11

EM (Emerging Markets)

 2.55

11.49

All data computed in U.S. dollars and as of March 31, 2017. This chart is shown for illustrative purposes only and does not represent the performance of any specific security. Past performance is not a reliable indicator of future performance.

Note: MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.

EUROZONE GROWTH STRENGTHENS

In the UK, inflation also exceeded the Bank of England’s 2% target for the first time since 2013, driven largely by higher food and fuel prices and a weaker pound. Spain, Italy, Germany, and France all outperformed their developed market peers. Spanish and Italian banks were some of the early beneficiaries of rising interest rates and reflected investor interest with a seemingly positive mix of low valuations and better growth prospects. Strengthening economic data, including solid manufacturing growth in Germany and France, helped to calm some investors who were rattled by the political uncertainty swelling in parts of Europe, according to T. Rowe Price traders.

EUROPEAN ELECTION RESULTS CALM MARKET JITTERS

Fear surrounding the outcome of European elections ebbed in March. Dutch Prime Minister Mark Rutte’s People’s Party for Freedom and Democracy comfortably won the most seats in national elections, dealing a blow to right-wing populist Geert Wilder’s Party for Freedom. The victory helped to quell some nervousness and uncertainty that other European Union (EU) member states could vote to follow the UK and leave. Volatile markets calmed as polls showed that center-left and pro-euro French presidential election candidate Emmanuel Macron would likely defeat anti-euro National Front leader Marine Le Pen. UK Prime Minister Theresa May, on March 29, formally triggered Article 50 of the Lisbon Treaty that began the two-year negotiation process to exit the EU, but markets had a muted reaction. UK shares were underperformers in Europe as the uncertainty of Brexit negotiations weighed on the market.

JAPAN WEAK FOR DOLLAR INVESTORS

Despite a barely stronger yen compared with the U.S. dollar, Japanese shares were down slightly in the month. Inflation is still stubbornly low, falling one-tenth of a percentage point from the month before, as increases in food prices eased. Household spending fell by a worse-than-expected 3.8% in February. It wasn’t all negative economic news, though, as the country logged its fourth consecutive quarter of growth in the fourth quarter of 2016.

EMERGING MARKETS ADVANCE

Emerging markets stocks gained in March—the fourth consecutive month of positive returns, helped by stronger international economic growth and less fear of a rapid rise in U.S. interest rates. Mexican stocks climbed nearly 10% as the peso gained 6%. Indian stocks surged nearly 6% after Prime Minister Narendra Modi’s ruling BJP party won state elections in mid-March, raising expectations that Modi’s reform agenda would continue. Chinese stocks advanced, but local currency A shares declined. China announced a 6.5% economic growth target for 2017 at its annual National People’s Congress, slightly lower than last year’s 6.7% expansion. Brazilian shares declined. The country reported that its economy shrank a worse-than-expected 0.9% in last year’s final quarter and had declined 3.6% for 2016.

OUTLOOK: MODEST GLOBAL GROWTH

We expect global economic growth to modestly improve over the next several quarters. While the implications of the Brexit referendum and the impact of new policies under the incoming Congress and Trump administration will play out over many months, we expect improving economic data. Markets are anticipating increased fiscal and corporate spending to be the next leg of support for growth as the effectiveness of monetary policy fades. While remaining largely supportive, global monetary policies could diverge further in the near term as the U.S. Federal Reserve’s interest rate normalization policy advances and the ECB looks for sustainable signs of stabilization to begin reducing its quantitative easing measures. While emerging markets growth is expected to improve, the emerging economies face increased risk from protectionist trade policies and rising developed market interest rates. China’s growth rate is expected to slow as government policy seeks to rein in excessive debt. Japan remains challenged by still weak consumption, tepid wage growth, and low inflation.

TREASURY YIELD CURVE FLATTENS AS FED RAISES RATES

The Federal Reserve raised its benchmark federal funds target rate by 25 basis points to a range of 0.75% to 1.00% on March 15 after statements from central bank officials earlier in the month had prepared investors to expect the rate hike. Yields on short-term U.S. Treasury securities increased significantly, while longer-term Treasury yields rose only modestly. (Bond prices and yields move in opposite directions.) The changes resulted in a flatter yield curve. The collapse of the Republican-led effort to repeal and replace the Affordable Care Act (ACA) led to some doubts that the Trump administration will be able to implement fiscal stimulus as quickly as some had hoped, helping to cap the increase in longer-term yields.

CENTRAL BANK PUTS DOVISH SPIN ON RATE HIKE

While the Fed rate hike was the second in three months, it was only the third since the 2008–2009 global financial crisis. At the central bank’s post-meeting news conference, Fed Chair Janet Yellen stressed that the 2% inflation target is, in fact, only a target and that inflation might rise above that level, just as it had been under it for the past few years. The Fed maintained its forecast for two additional interest rate hikes in 2017, putting a “dovish” spin on its rate increase as some observers had thought that the central bank would increase the number of projected tightening moves. T. Rowe Price Chief U.S. Economist Alan Levenson believes that the process of raising rates to more normal levels is likely to be very gradual due to the sluggish nature of the U.S. recovery.

BONDS FROM EMERGING MARKETS OUTPERFORM

Emerging markets debt denominated in U.S. dollars generated modestly positive returns but managed to outperform most domestic fixed income segments as U.S. yields increased. Russia surprised markets by cutting interest rates for the first time in seven months as inflation stabilized near a five-year low and growth showed signs of improvement, supporting prices of Russian sovereign bonds. Investors expected Brazil’s central bank to continue to lower rates as the country’s inflation moderates. Emerging markets bonds denominated in local currencies easily outperformed in U.S. dollar terms as several key emerging markets currencies, including the Mexican peso and the Russian ruble, rallied against the dollar.

Total Returns

Index

March

 

Year-to-Date

   

Bloomberg Barclays U.S. Aggregate Bond Index

-0.05%

 

 0.82%

 

 

J.P. Morgan Global High Yield Index

-0.13

 

 2.87

 

 

Bloomberg Barclays Municipal Bond Index

 0.22

 

 1.58

 

 

Bloomberg Barclays Global Aggregate Ex-U.S. Dollar Bond Index

 0.30

 

 2.48

 

 

J.P. Morgan Emerging Markets Bond Index Global Diversified

 0.38

    

 3.87

 

 

Bloomberg Barclays U.S. Mortgage Backed Securities Index

 0.03

 

 0.47

 

 

Sources: Bloomberg and J.P. Morgan. All data are in U.S. dollars and as of March 31, 2017. Past performance is not a reliable indicator of future performance. This chart is shown for illustrative purposes only and does not represent the performance of any specific security. Bloomberg Index Services Ltd. Copyright 2017, Bloomberg Index Services Ltd. Used with permission.

WEAK DOLLAR BOOSTS RETURNS FROM NON-U.S. DEVELOPED MARKETS GOVERNMENT DEBT

Sovereign bonds from developed markets outside the U.S. also benefited from the weak dollar, which helped lift the sector to a slightly positive return in U.S. dollar terms. The euro, the British pound, and the Japanese yen all gained versus the greenback in March. The euro’s advance helped offset increasing yields on German government bonds as inflation in Germany reached its highest level in over four years. The Bank of Japan made no changes to monetary policy at its March meeting and remained committed to keeping the yield on the 10-year Japanese sovereign note near 0.0%.

MUNICIPAL BONDS BENEFIT FROM LIGHT ISSUANCE

Relatively light levels of new issuance led municipal bonds to outperform U.S. Treasuries. Longer-term municipal debt outperformed shorter-term issues, while general obligation (GO) municipals posted returns that were roughly in line with revenue bonds. (GOs are backed by the full taxing authority of the issuer, while revenue debt is supported by the cash flows from a specific municipal project.)

MBS MARKET WAITS FOR SIGNALS ABOUT THE FED’S HOLDINGS

Mortgage-backed securities (MBS) were nearly flat. MBS investors continued to look for clues about when and how the Fed will begin to wind down its holdings of MBS. The central bank currently reinvests coupon and principal payments from its MBS holdings; ending that reinvestment would remove significant support from the MBS market. Yellen suggested that MBS reinvestment will continue until the fed funds rate reaches a level that gives the central bank room to cut rates if the economy weakens. Asset-backed securities fared somewhat better than MBS, posting modestly positive returns.

Treasury Yields

Maturity

February 28, 2017

March 31, 2017

3-Month

0.53%

0.76%

6-Month

0.69

0.91

2-Year

1.22

1.27

5-Year

1.89

1.93

10-Year

2.36

2.40

30-Year

2.97

3.02

Source: Federal Reserve Board, as of March 31, 2017.

VOLATILE OIL PRICES AND HEAVY NEW ISSUANCE SINK HIGH YIELD BONDS

High yield bonds lost ground amid heavy new issuance and volatile oil prices. The price of a barrel of West Texas Intermediate crude, the U.S. oil benchmark, dropped to nearly $47 before recovering some of its losses to end March above $50. Energy- and commodities-related issuers make up a sizable portion of high yield benchmark indexes, and trading in bonds from these industries was volatile as the market absorbed sometimes-conflicting reports about the levels of oil inventories. High yield bonds from the health care industry performed well after legislators abandoned the bill to replace the ACA, although health care lagged for the month.

NEW SUPPLY WEIGHS ON INVESTMENT-GRADE CORPORATES

Above-average levels of new issuance weighed on the investment-grade corporate bond market, which also posted negative returns in March. Credit spreads on investment-grade corporates widened modestly. (Credit spreads measure the additional yield above that of a comparable-maturity Treasury security that investors demand for holding a bond with credit risk.) Within the investment-grade universe, lower-quality bonds held up better than higher-quality issues.

OPPORTUNITIES IN “RISING STARS”

Our corporate bond portfolio managers and credit analysts have been finding an increasing number of opportunities in “rising stars”—companies that are poised to move from high yield to investment-grade status. The market sometimes misprices these crossover bonds, which typically have the highest credit rating within the high yield category (BB+ according to Standard & Poor’s) or the lowest investment-grade rating (BBB-). The majority of the compelling opportunities that we are finding in crossover investment-grade corporate bonds are in the U.S., which we believe offers a more supportive economic backdrop than other developed markets.

GLOBAL CAPITAL MARKETS ENVIRONMENT

Major U.S. stock indexes were little changed in March, as gains late in the month pared earlier losses. Volatility picked up in the latter part of the month but remained relatively low: On March 21, the S&P 500 closed down more than 1% for the first time in 109 trading days. After major indexes touched all-time highs on March 1, stocks struggled amid growing expectations for a Federal Reserve interest rate increase on March 15―which did take place and was somewhat sooner than many had previously expected, considering that the Fed had just raised rates in December. However, investors were generally relieved that Fed officials did not adopt a more hawkish stance following the meeting. Fed officials continue to expect two more rate increases this year―a view shared by T. Rowe Price’s Chief U.S. Economist Alan Levenson. Also weighing on the market was the failure of the Republican-led House of Representatives to repeal and replace the Affordable Care Act. This raised concerns that President Donald Trump would have more difficulty passing his legislative agenda than previously believed. However, the equity market was buoyed in the month’s closing days by hopes that Trump would soon turn his attention to tax reform.

Small- and large-cap shares narrowly outperformed their mid-cap peers. The Russell 2000 Index and the S&P 500 Index returned 0.13% and 0.12%, respectively, versus -0.39% for the S&P MidCap 400 Index. As measured by various Russell indexes, growth stocks surpassed value stocks across all market capitalizations―a trend that has prevailed throughout 2017.

In the large-cap universe, as measured by the S&P 500, most sectors produced negative returns. Despite a mid-month rate hike by the Fed, financials was the worst-performing sector, as the Fed signaled a “gradual” pace of rate increases, rather than a more aggressive pace of tightening that would more quickly benefit banks and other lenders. On the plus side, the information technology and consumer discretionary sectors advanced more than 2%. Materials stocks posted slight positive returns.

  S&P 500 Index S&P MidCap 400 Index Russell 2000 Index
March 0.12% -0.39% 0.13%
Year-to-Date 6.07  3.94 2.47

Past performance is not a reliable indicator of future performance.

Russell Investment Group is the source and owner of the trademarks, service marks, and copyrights related to the Russell indexes. Russell® is a trademark of Russell Investment Group.

U.S. bonds posted flat or slightly negative returns in March. The Federal Reserve raised short-term interest rates for the second time in three months, but longer-term Treasury yields were little changed, resulting in a flatter Treasury yield curve. The Bloomberg Barclays U.S. Aggregate Bond Index, which measures the performance of domestic investment-grade taxable bonds, returned -0.05%. In the taxable investment-grade universe, the performance of most sectors varied little. Municipal bonds fared slightly better than taxable bonds. High yield bonds slightly underperformed higher-quality issues for the month as credit spreads widened amid heavy new issuance and weaker energy prices.

  Bloomberg Barclays
U.S. Aggregate Bond
Index

Bloomberg Barclays
Municipal Bond Index

JPMorgan Global
High Yield Index

March -0.05% 0.22% -0.13%
Year-to-Date  0.82 1.58  2.87

Past performance is not a reliable indicator of future performance.

Bloomberg Index Services Ltd. Copyright 2017, Bloomberg Index Services Ltd. Used with permission.

Developed non-U.S. equity markets outperformed U.S. equities in dollar terms, as the greenback edged lower against several major international currencies. The MSCI EAFE Index, which measures the performance of large-cap stocks in Europe, Australasia, and the Far East, returned 2.87%. Several developed Asian markets rose for the month, but Japanese shares were essentially flat. Japan did receive some positive economic news: The economy grew 1.2% on an annualized basis in the fourth quarter of 2016; it was the fourth consecutive quarter of growth. In Europe, many markets were buoyed by improving macroeconomic trends and the results of the Dutch general election, in which voters seemed to reject the trend toward nationalism. Spain and Italy were two of the strongest markets, rising 11% and 9%, respectively. Shares in the UK underperformed, returning less than 2% in dollar terms, as Prime Minister Theresa May invoked Article 50 of the Lisbon Treaty, officially launching the two-year Brexit process.

Equities in emerging markets narrowly underperformed developed non-U.S. equity markets. The MSCI Emerging Markets Index returned 2.55%. In Latin America, Mexican shares rose almost 10% in dollar terms, helped by a 6% gain in the peso versus the dollar stemming in part from reduced fears about worsening U.S.-Mexico relations. Also, the strengthening U.S. economy helps Mexican manufacturers, and the peso’s weakness over the last year has helped Mexican exports. In Brazil, a major food exporter, shares fell more than 4%, hurt by a scandal involving allegations that some meat processors had sold spoiled meat. Most emerging Asian markets did well, especially India, Indonesia, and South Korea. In emerging Europe, most markets rose modestly in dollar terms, led by Russia, where stocks advanced 2%. Russia’s central bank surprised investors by trimming interest rates for the first time in seven months, as the rate of inflation has been declining. The ruble advanced almost 4% versus the dollar.

  MSCI EAFE Index MSCI Emerging Markets Index
March 2.87%  2.55%
Year-to-Date 7.39 11.49

Past performance is not a reliable indicator of future performance.

MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.

Bonds in developed non-U.S. markets produced slight gains in U.S. dollar terms, as a weaker dollar versus most major currencies helped lift returns to U.S. investors. In Europe, the European Central Bank (ECB) held rates constant and made no changes to its stimulus program, although ECB President Mario Draghi indicated that the central bank is slowly moving to end its stimulus measures. The ECB is scheduled to begin reducing the size of its monthly asset purchases starting in April, from €80 billion to €60 billion per month. High-quality German government bonds came under pressure, as data showed that inflation in Germany reached its highest level in over four years. Similarly, UK inflation hit its highest level in three years. In Japan, long-term government bond returns were essentially flat. The Bank of Japan (BoJ) made no changes to its monetary policy during its March meeting. The BoJ still plans to anchor its 10-year government bond yield near 0%.

Emerging markets bonds fared slightly better than sovereign debt in developed countries. Local currency issues soundly outperformed dollar-denominated debt with several key currencies―especially the Mexican peso, the Russian ruble, and the Indian rupee―appreciating strongly versus the greenback. Egypt’s currency remained extremely volatile as the pound plunged over 12% during March following a 20% climb versus the dollar in February.

  Bloomberg Barclays
Global Aggregate
Ex-U.S. Dollar Bond
Index

JPMorgan Emerging
Markets Bond
Index Global
Diversified

JPMorgan GBI-EM
Global Diversified
Index

March 0.30% 0.38% 2.31%
Year-to-Date 2.48 3.87 6.50

Past performance is not a reliable indicator of future performance.

Bloomberg Index Services Ltd. Copyright 2017, Bloomberg Index Services Ltd. Used with permission.

EMERGING MARKETS ADVANCE IN MARCH AS GLOBAL GROWTH OUTLOOK BRIGHTENS

Emerging markets rose for the fourth straight month in March as indicators worldwide pointed to stronger economic growth and the U.S. Federal Reserve showed no urgency about future interest rate hikes after raising rates for the first time this year. Recent signs of stability in China, firm commodity prices, and a surge in corporate earnings estimates across the developing world also fueled demand for emerging markets assets. Capital inflows to emerging markets stocks and bonds totaled roughly $29.8 billion in March, a 26-month high, according to the Institute of International Finance. The MSCI Emerging Markets Index rose to its highest level since June 2015 but pared some of its gain by month-end. Nine out of 10 sectors in the index rose, led by information technology. Health care was the sole decliner.

Total Returns

MSCI Index

    

March              Year-to-Date

Emerging Markets (EM)

 

 2.55%                  11.49%

EM Asia

 

 3.35                    13.40 

EM Europe, Middle East, and Africa (EMEA)

 

 0.60                     2.83

EM Latin America

 

 0.57                    12.13

All data is in U.S. dollars as of March 31, 2017. Past performance is not a reliable indicator of future performance.

This table is shown for illustrative purposes only and does not represent the performance of any specific security.

Note: MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.

INDIAN STOCKS RALLY AFTER STATE ELECTIONS LIFT REFORM OUTLOOK; CHINESE STOCKS DECLINE

  • Indian stocks surged nearly 6% after Prime Minister Narendra Modi’s ruling the Bharatiya Janata Party (BJP) won state elections in mid-March, raising expectations that Modi’s reform agenda would continue. The country’s NSE Nifty 50 benchmark index rose to a record after the BJP’s landslide in Uttar Pradesh, India’s largest state, which investors viewed as a mandate supporting Modi’s policies.
  • Chinese stocks advanced, but local currency A shares declined. China announced a 6.5% economic growth target for 2017 at its annual National People’s Congress (NPC), a slightly lower pace than last year’s 6.7% expansion. The NPC kept annual targets for the budget deficit, inflation, and other metrics largely unchanged from 2016, reflecting China’s focus on containing risks and maintaining stability ahead of a leadership change this fall.
  • Southeast Asian markets rose, led by Indonesia’s advance. Central banks in Indonesia and the Philippines held their respective interest rates steady, and Indonesia’s domestic Jakarta Composite Index rose to a record after the Fed’s dovish comments regarding future rate increases spurred investors’ risk appetites. Malaysia reported that its economic growth slowed to 4.2% last year from 5% in 2015, but surging inflation makes it unlikely that its central bank will cut interest rates anytime soon.

BRAZILIAN STOCKS EASE AS DATA CONFIRM RECESSION’S DEPTHS; MEXICAN STOCKS RALLY AS PESO REBOUNDS

  • Brazilian stocks declined. Brazil reported that its economy shrank a worse-than-expected 0.9% in last year’s final quarter and contracted 3.6% for 2016. Last year’s decline followed a 3.8% contraction in 2015, making the combined two-year period Brazil’s deepest recession on record. Brazil’s central bank chief said that the country would emerge from recession and reach a growth rate of up to 3% by year-end, though most private economists predict weaker growth in 2017.
  • Mexican stocks climbed nearly 10% as the peso recovered. The Mexican IPC benchmark stock index erased its post-U.S. election losses and reached a record high in late March, lifted by conciliatory remarks about trade from U.S. officials, firmer oil prices, and dovish comments from the Fed about the pace of U.S. interest rate increases. Mexico’s central bank raised its key interest rate by 25 basis points, continuing a tightening cycle that began in September.
  • In Andean markets, stocks in Chile and Colombia advanced while Peruvian stocks fell. Central banks in Chile and Colombia cut their respective benchmark interest rates by a quarter percentage point, and Chile’s central bank suggested more easing could be forthcoming. Peru’s central bank left its rate unchanged and cut its growth forecasts for this year and next following devastating floods in parts of the country.

RUSSIAN STOCKS RISE AS GROWTH PICKS UP; SOUTH AFRICAN STOCKS DECLINE ON POLITICAL CRISIS

  • Russian stocks advanced. Russia’s central bank cut its benchmark interest rate for the first time since September and signaled an easing bias in the coming months after inflation fell faster than expected. Russia’s gross domestic product (GDP) grew 0.3% in last year’s final quarter from a year earlier and shrank 0.2% for all of 2016, the government reported. The growth pickup at the end of 2016 ended two years of recession spurred by slumping oil prices.
  • Turkish stocks edged higher. Turkey’s GDP expanded a better-than-forecast 3.5% in the final quarter of 2016 and 2.9% for the entire year, lifted by household and state spending after the government implemented expansionary policies to counter a slowdown following last July’s failed coup. However, Moody’s cut its credit rating outlook for Turkey to negative from stable, citing diminished strength in Turkish institutions, a weaker growth outlook, and rising pressures on the country’s economic imbalances.
  • South African stocks declined on political turmoil after South Africa’s president, Jacob Zuma, fired a slew of ministers, including the country’s respected finance chief, in an attempt to purge his critics. The cabinet reshuffle caused the rand to weaken, raised fears that South Africa would lose its investment-grade credit rating, and threatened to split the ruling African National Congress party.

SOLID FUNDAMENTALS IN EMERGING MARKETS OFFSET NEAR-TERM RISKS

We are optimistic about the outlook for emerging markets. Most developing countries have smaller current account deficits, larger foreign exchange reserves, and more flexible currencies than they did in previous decades, reducing the risk of a financial crisis. Compared with developed markets, most emerging markets have more attractive demographics and a stronger tailwind from rising consumption as the middle class expands. For long-term investors, emerging markets stocks remain attractively valued relative to developed markets stocks.

Near-term risks include a stronger dollar and a faster-than-expected pace of U.S. interest rate hikes. Given the stronger financial positions of most emerging markets, however, we believe they will be able to manage a gradual move away from the Fed’s accommodative policies of the past several years. Economic growth in emerging markets has stabilized, and corporate earnings are starting to turn higher after years of disappointing performance. Nevertheless, we believe that careful stock selection will remain crucial for producing good long-term returns as emerging markets continue to show wide dispersion in the performance of individual countries and companies.

Important Information

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The views contained herein are as of April 2017 and may have changed since that time.

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