Markets & Economy

Quarterly Market Review

Second Quarter 2017
T. Rowe Price


Stocks recorded good gains in the second quarter and added to their even better returns early in the year. The technology-heavy Nasdaq Composite Index ended the quarter on a weak note but scored the best gains for the period as a whole. Mid- and small-caps trailed larger shares somewhat, and growth stocks outperformed value shares across all capitalizations. Sector performance varied considerably within the S&P 500 Index, with health care stocks returning over 7%, while telecommunication services shares fell by a nearly identical amount. Energy stocks were also notably weak, as oil prices fell into a bear market, or a decline of over 20% off their recent highs.

U.S. Stocks

 2Q 2017




Dow Jones Industrial Average





S&P 500 Index





Nasdaq Composite Index





S&P MidCap 400 Index





Russell 2000 Index




Past performance cannot guarantee future results.

Note: All data are in U.S. dollars and as of June 30, 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 the Russell indexes. Russell® is a registered trademark of Russell Investment Group.


A definitive end to the earnings recession of the last two years appeared to be the major factor driving the market’s gains in the quarter. Stocks recorded the bulk of their gains in late April and May, as first-quarter earnings reports managed to outpace even elevated expectations. According to analytics firm FactSet, overall earnings for the S&P 500 rose by nearly 14% compared with the quarter a year before—the biggest gain since 2011. A swing to profitability in the energy sector was a major reason for the surge, but materials, financials, and information technology companies also posted strong profit increases. This marked the second straight quarter of earnings increases, following five quarters of declines that began in the middle of 2015.

Economic data released in the quarter generally suggested continued expansion, if perhaps not at a rate to allow continued double-digit earnings growth. Gauges indicated continued expansion in both manufacturing and services, and consumer spending remained healthy—although increasingly concentrated online, at the cost of traditional retailers. Job growth remained on track, if at a slower pace, as the economy moved closer to full employment, and home sales picked up in May in a welcome reversal of declines earlier in the year. Overseas economies, particularly in Europe, also appeared to be on firmer footing, providing further room for growth in U.S. exports and earnings for U.S. multinationals. U.S. stocks followed global markets sharply higher in late May, following the election of pro-European centrist Emmanuel Macron in the French presidential election.


Uncertainties elsewhere in the political arena appeared to weigh on sentiment periodically and may have restrained the quarter’s gains. Setbacks in the Republicans’ continued efforts to repeal and replace the Affordable Care Act sparked bouts of volatility, as most observers anticipated that significant efforts on tax and budget issues would have to wait until the health care legislation was settled. Investors may have also worried that the administration’s growing focus on foreign policy—highlighted by growing tensions with Syria and North Korea— would detract from its economic agenda.

The deepening controversy over Russia’s intervention in the 2016 elections also weighed on sentiment. On May 10, markets wobbled briefly on news that President Trump had fired FBI Director James Comey, but the greater market reaction came a week later, when reports surfaced that the president had earlier asked Comey to end his investigation into the Trump campaign’s ties to Russia. Stocks plunged on the news, with the Dow Jones Industrial Average and S&P 500 falling the most since September and the Nasdaq having its worst day since the Brexit vote in June. The declines proved short-lived, however, with the benchmarks regaining their losses within days. The quick appointment of the widely respected former FBI Director Robert Mueller as a special counsel in charge of the investigation seemed to calm the markets, as did a rumored roster of generally nonpartisan candidates to take over Comey’s position.


T. Rowe Price Chief Investment Officers Rob Sharps and Justin Thomson believe that global equity markets may offer modest gains in the second half of the year. They caution, however, that more substantial gains for cyclically sensitive stocks—in other words, a revival of the reflation trade—will require a fresh catalyst for economic growth. Given the controversies surrounding President Trump, they warn that it is not clear whether his administration has the political capital to achieve the sweeping reforms necessary to spur economic growth and accelerate the recovery in corporate earnings. For this reason, they continue to focus attention on areas with specific growth drivers. In health care, for example, the regulatory environment for drug pricing has brightened as research breakthroughs continue in biotechnology.

T. Rowe Price Investment Services, Inc., Distributor.



International stock markets posted strong returns in the second quarter. European and Asian markets were standout performers, but Japanese stocks lagged emerging markets. The key equity market drivers included strengthening economic growth, buoyant manufacturing data, and lessening concern surrounding political changes in Europe. Notably, investors showed rising confidence in emerging and European equity markets and added exposure during the period. Within the EAFE index, growth stocks outperformed value stocks. Many major European currencies strengthened against the U.S. dollar during the period, lifting returns in dollar terms.

Within the MSCI EAFE Index, which tracks developed markets in Europe, Australasia, and the Far East, information technology, consumer staples, utilities, financials, health care, and industrials and business services all outperformed the benchmark. Energy was the only sector to log a marginally negative return.

International Indexes
     Total Return

MSCI Index


2Q 2017                 Year-to-Date

EAFE (Europe, Australasia, Far East)


6.37%                   14.23%             

All Country World ex-U.S.A.


5.99                      14.45               



7.73                      15.93               



5.23                      10.11                 

All Country Asia ex-Japan


8.40                      22.93                 

EM (Emerging Markets)


6.38                      18.60              

All data are in U.S. dollars as of June 30, 2017. Past performance cannot guarantee future results.

This chart 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.

Regional Recap


European markets reacted positively to the decisive May 7 election of centrist Emmanuel Macron over anti-European Union nationalist Marine Le Pen in the French presidential election. On May 9, France’s CAC 40 Index rose to its highest level since January 2008, and the pan-European Stoxx Europe 600 Index finished at a 21-month high. UK Prime Minister Theresa May called for an early general election to be held on June 8 in order to cement her party’s mandate in Brexit negotiations, but a late surge by the UK Labour Party resulted in a "hung" parliament, in which no single political party holds a majority in the House of Commons. May’s Conservative Party, or “Tories,” lost its majority following the snap elections but still held on to the most seats and eventually formed a new minority government with the support of Northern Ireland’s Democratic Unionist Party. Dean Tenerelli, a T. Rowe Price portfolio manager based in London, said that the upset to the UK government status quo would likely result in equity and currency markets volatility.


Corporate earnings showed renewed strength, as companies in the broad pan-European index, the Stoxx Europe 600, reported earnings that were higher than the first quarter of 2016. The eurozone’s economy grew at its fastest pace since the first quarter of 2015, marking its 16th quarterly increase in economic growth and further bolstering enthusiasm for European markets. Equity inflows into Europe continued to outpace inflows into the U.S. The European Central Bank (ECB) left rates unchanged on June 8 but no longer suggested that interest rates in the single-currency area would likely go lower, a departure from previous statements. Kenneth Orchard, a T. Rowe Price fixed income manager, believes that the ECB could announce a tapering of its bond-buying program at its October meeting. In June, the Bank of England’s policymakers maintained its key policy rate at 0.25%, though a growing number of the bank’s members indicated that they were favoring a rate hike because of robust inflation in the UK.


Greece’s gross domestic product (GDP) declined for the second straight quarter, marking a return to recession. However, Greek stocks rose a strong 34% in the second quarter, buoyed in large part by a May 2 agreement between the country and international creditors to clear the way for debt-relief talks. In June, investors cheered the ECB when it launched an auction to purchase Spain’s ailing Banco Popular Espanol. Banco Santander won, purchasing the bank for the symbolic price of €1. The European Commission and the Italian government, looking to ensure investor confidence in the European banking sector, liquidated two struggling Italian regional lenders using up to €17 billion of Italian taxpayer money. T. Rowe Price traders said the bailout was a positive for the sector and a signal that there is an appetite to clean up insolvent banks.


Exports and imports rose in each month of the second quarter, in a sign of strengthening demand for Japanese-made products and increasing consumer demand. The country logged its fifth consecutive quarter of expansion in the first quarter of 2017, but GDP growth was downgraded to an annualized pace of 1% from the earlier estimate of 2.2%, partly due to lower inventory accumulation by Japanese corporations. The Bank of Japan (BoJ) voted in June to maintain its current monetary policy but highlighted that its economy is gaining momentum amid stronger consumption data. T. Rowe Price’s Japan-based equity Portfolio Manager Archibald Ciganer believes that Prime Minister Shinzo Abe’s “Abenomics” policies deserve much of the credit for Japan’s improving economic situation. However, Ciganer said that he has grown a bit more cautious about the BoJ’s ability to weaken the yen over time, as the global currency environment has grown more uncertain and volatile.


Emerging markets stocks marked their seventh consecutive month of positive returns, buoyed by ongoing global economic growth. The MSCI Emerging Markets Index hit a two-year high in May, as investor concerns over a trend toward protectionist policies abated. Chinese stocks outperformed, despite a credit rating downgrade from ratings agency Moody’s in May (the first cut since 1989) because of concerns about China’s rising debt and slowing economic growth. Brazilian stocks were down more than 6% for the quarter due to a number of political and alleged corruption scandals. Russian stocks were also among the worst performers for the quarter, due in part to lackluster economic growth and falling oil prices. However, Turkish stocks generated strong performance, surging after President Recep Tayyip Erdogan narrowly won a referendum in April on a constitutional overhaul that granted his office significant new powers.


Global growth momentum that started at the end of last year continued with improvement occurring across most developed and emerging regions. Markets appear to be 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 the implications of the Brexit referendum and the impact of new policies of the Republican-led majority Congress and Trump administration will take shape over many months, we expect improving economic data. We are also optimistic about the continued strength of emerging markets. Compared with developed markets, most emerging markets have more attractive demographics and a stronger tailwind from rising consumption. Emerging markets stocks remain attractively valued relative to developed markets stocks for long-term investors.

T. Rowe Price Investment Services, Inc., Distributor.


Expectations for continuing gradual normalization of monetary policy drove yields on shorter-term U.S. Treasury debt higher even as heightened U.S. political turmoil and geopolitical risk benefited longer-maturity Treasuries, causing a meaningful flattening in the Treasury yield curve. (Bond prices and yields move in opposite directions.) The Department of Justice appointed a special counsel to investigate possible ties between former Trump campaign officials and the Russian government, while geopolitical concerns centered on the Korean Peninsula. The yield on the 10-year Treasury note reached its postelection low in mid-June before increasing quickly near the end of the month as mounting investor worries about global central banks removing their stimulus measures triggered selling pressure on high-quality sovereign debt from global developed markets.


As was widely expected, the Federal Reserve held its target range for the benchmark federal funds rate steady at its May policy meeting and raised it by 25 basis points in June. (A basis point is 0.01 percentage point.) Fed officials maintained their prediction for one more rate hike in 2017 despite weak retail sales data and an inflation reading that came in lower than expected for the third consecutive month. The central bank’s policymakers also outlined their plans to begin unwinding the central bank's $4.5 trillion balance sheet, a legacy of its massive purchases of Treasury bonds and mortgage-backed securities (MBS) in the aftermath of the 2008 financial crisis.


Late in the quarter, European Central Bank (ECB) President Mario Draghi helped fuel a spike in yields on global developed markets government debt when he suggested in a speech that the central bank could make policy adjustments in response to improving economic conditions while still providing “considerable” monetary support. Kenneth Orchard, a T. Rowe Price fixed income portfolio manager, believes that the ECB could announce a rapid tapering of its bond-buying program at its October meeting. Signs of a potential rate hike later in the year from the Bank of England also began to emerge. While the seemingly hawkish rhetoric from European central banks drove yields higher, it also boosted the euro by over 6% and the pound sterling by nearly 4% against the U.S. dollar.

Total Returns    


2Q 2017


Bloomberg Barclays U.S. Aggregate Bond Index



J.P. Morgan Global High Yield Index



Bloomberg Barclays Municipal Bond Index



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



J.P. Morgan Emerging Markets Bond Index Global Diversified



Bloomberg Barclays U.S. Mortgage Backed Securities Index



All data are in U.S. dollars and as of June 30, 2017. Past performance cannot guarantee future results. This chart is shown for illustrative purposes only and does not represent the performance of any specific security. Source for Bloomberg Barclays index data: Bloomberg Index Services ltd. Copyright© 2017, Bloomberg Index Services Ltd. Used with permission.


Investment-grade corporate debt was one of the best-performing segments in fixed income, modestly outperforming areas with more credit risk, including high yield and emerging markets bonds. Investment-grade corporates benefited from their tight trading links to Treasuries as well as from narrower credit spreads, which measure the additional yield above that of a comparable-maturity Treasury security that investors demand for holding a bond with credit risk. Credit spreads decreased significantly in the financials, telecom, and health care sectors.


High yield bonds overcame the drag from lower oil prices late in the quarter to post positive returns, although they lagged their investment-grade cousins. Crude oil entered a bear market—a decline of over 20% from recent highs—in June. Energy-related issuers account for a meaningfully larger percentage of the high yield market than the investment-grade corporate segment. T. Rowe Price’s energy analysts remain relatively bearish on the long-term trend in oil prices and expect a significant ramp-up in U.S. shale production in the second half of the year to add to the supply overhang in the market.


U.S. dollar-denominated government bonds from emerging markets also produced solid performance, overcoming a sudden increase in political risk in Brazil that triggered selling pressure on the country’s debt. Brazil’s prosecutor general indicted President Michel Temer on charges of “passive corruption” and accused him of taking bribes through a former adviser after a newspaper obtained recordings of Temer allegedly encouraging bribery. Emerging markets sovereign debt denominated in local currencies outperformed dollar-denominated bonds in U.S. dollar terms as key emerging markets currencies gained against the dollar. For example, the Mexican peso hit its highest level versus the dollar since the U.S. presidential election.

Treasury Yields






















Source: Federal Reserve Board.


In May, Puerto Rico’s financial oversight board filed a petition with the U.S. District Court in Puerto Rico to help the U.S. territory restructure approximately $51 billion in debt—the largest restructuring of municipal debt in U.S. history. In another setback for the municipal market, Moody’s Investors Service and S&P Global Ratings downgraded Illinois’s general obligation debt to the lowest investment-grade level after the state’s regular legislative session ended on May 31 without a budget, and the ratings agencies warned that downgrades to junk status were likely if a deal wasn’t reached by the end of June. Despite the turmoil in Puerto Rico and Illinois, municipal debt outperformed Treasuries in the quarter.


MBS lagged the broad taxable investment-grade bond market amid investor uncertainty about how the market would react to the eventual loss of a major buyer. Estimates indicate that the Fed holds approximately 20% of the outstanding supply of agency MBS. Although the Fed at its June policy meeting outlined its plans to begin slowly and systematically winding down its reinvestment of payments on its MBS holdings, removing some uncertainty, MBS still posted losses for the month and underperformed Treasuries for the quarter.


T. Rowe Price’s multi-sector bond portfolio managers are finding opportunities to benefit from positive inflation-adjusted yields in select locally denominated emerging markets debt. These attractive real rates contrast with the negative inflation-adjusted yields available in most developed markets. Inflation has broadly moderated from the traditionally high levels in developing economies, boosting real yields while allowing some emerging markets central banks to cut interest rates.


Major U.S. stock indexes rose, and many reached all-time highs, during the second quarter of 2017. While volatility was generally low, the market continued the rally, sparked by the November 2016 presidential election of Donald Trump amid hopes for tax cuts and increased infrastructure spending—although neither has yet to come to fruition. Strong first-quarter corporate earnings and Trump administration moves to reduce regulations in various industries were supportive, however. The market was largely unfazed by mediocre first-quarter economic growth, a mid-June interest rate increase from the Federal Reserve, Trump’s domestic political controversies, Republicans’ failed attempts to repeal the Affordable Care Act, and increased geopolitical tensions.

Large-cap shares narrowly outperformed their smaller peers. The S&P 500 Index returned 3.09% versus 2.46% for the small-cap Russell 2000 Index and 1.97% for the S&P MidCap 400 Index. As measured by various Russell indexes, growth stocks surpassed value stocks across all market capitalizations.

In the large-cap universe, as measured by the S&P 500 Index, most sectors produced positive returns. Health care stocks fared best, with biotechnology shares spiking late in the period due to reduced concerns about new drug pricing regulations. Financial stocks did well due to brisk gains in June stemming from news that major banks passed the Federal Reserve’s stress tests and were allowed to return cash to shareholders by buying back shares or increasing dividend payouts. Information technology shares outperformed the broad market, despite some weakness in June amid concerns about valuations. On the downside, energy stocks and oil prices declined, as increased U.S. production offset the effects of an OPEC production cut that took effect at the beginning of 2017. An extension of the existing production cut until March 2018 disappointed investors looking for a larger reduction.

  S&P 500 Index S&P MidCap 400 Index Russell 2000 Index
2Q 2017 3.09% 1.97% 2.46%
Year-to-Date 9.34% 5.99% 4.99%

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 positive returns in the second quarter. The Bloomberg Barclays U.S. Aggregate Bond Index, which measures the performance of domestic investment-grade taxable bonds, returned 1.45%. Although the Fed raised short-term interest rates in June, longer-term Treasury interest rates declined—thus flattening the yield curve—as the rate of inflation remained low, economic growth remained lackluster, and new fiscal stimulus measures failed to materialize. In the taxable investment-grade bond universe, long-term Treasuries and corporate bonds did best. Mortgage- and asset-backed securities lagged with mild gains. Municipal bonds surpassed taxable bonds, helped by steady demand and limited supply. High yield issues generally outperformed higher-quality bonds, as investors continued to seek attractive yields.

  Bloomberg Barclays U.S. Aggregate Bond Index Bloomberg Barclays Municipal Bond Index JPMorgan Global High Yield Index
2Q 2017  1.45% 1.96% 2.07%
Year-to-Date 2.27% 3.57% 5.00%

Past performance is not a reliable indicator of future performance.

Note: Source for Bloomberg Barclays index data: Bloomberg Index Services ltd. Copyright© 2017, Bloomberg Index Services Ltd. Used with permission.

Stocks in developed non-U.S. markets outperformed U.S. shares, as returns to U.S. investors were boosted by a weaker dollar versus most major non-U.S. currencies. The MSCI EAFE Index, which measures the performance of large-cap stocks in Europe, Australasia, and the Far East, returned 6.37%. Most developed Asian markets produced positive returns in U.S. dollar terms. Japanese shares rose more than 5%, as the yen slipped less than 1% versus the greenback. While a weaker yen hurts the performance of Japanese stocks in dollar terms, it can help the competitiveness of Japanese exports. European equity markets were broadly positive, especially Austria, Finland, and Denmark. Markets were buoyed by signs of a pickup in economic growth and continued European Central Bank (ECB) stimulus efforts. UK shares returned almost 5% but lagged many other European markets, as Prime Minister Theresa May’s decision to call snap elections in hopes of bolstering the Conservative Party’s legislative majority backfired. The result was a “hung” parliament, in which no single party holds a majority of the seats, which forced the Tories to form a coalition government with a smaller party.

Emerging markets equities performed in line with developed markets, helped by a generally improving growth backdrop. The MSCI Emerging Markets Index returned 6.38%. In dollar terms, markets in Asia strongly outperformed other regions. Chinese stocks rose more than 10%, while Chinese A shares rose almost 5%. In late June, MSCI announced that it would begin to add Chinese A shares to its emerging markets index, starting in June 2018. Major Latin American markets were mixed. Mexican shares climbed more than 7%, helped by a stronger peso and by the central bank’s upgrade of the country’s 2017 economic outlook and downgraded outlook for inflation. Stocks in Brazil fell more than 6%, hurt by bribery allegations involving President Michel Temer. Near the end of June, he was formally charged with “passive corruption;” his political future depends on whether or not the lower house of the legislature accepts the charges. Several emerging European markets rose sharply, but Russian shares skidded almost 10% as the economic recovery remained anemic and oil prices and the ruble declined.

  MSCI EAFE Index MSCI Emerging Markets Index
2Q 2017   6.37%   6.38%
Year-to-Date 14.23% 18.60%

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 good returns in dollar terms in the last three months, helped by stronger European currencies. Near the end of the quarter, UK bond yields spiked as Bank of England Governor Mark Carney indicated that “some removal of monetary stimulus” may be needed in the months ahead. The pound rose about 4% versus the greenback. In the eurozone, the ECB continued its monthly bond purchases, but starting in April, it reduced the amount it spends on monthly purchases from €80 billion to €60 billion. Bond prices were supported in part by the French presidential election’s results, which reduced worries about other nations seeking to leave the European Union. However, yields rose sharply at the end of June as ECB President Mario Draghi spoke of the need for being “prudent” when adjusting monetary policy in response to economic improvement. The euro rose more than 6% versus the dollar. Japanese bond returns were flat, as the Bank of Japan’s bond purchases kept the 10-year Japanese government bond yield near 0%.

Emerging markets bonds also produced good returns in dollar terms, with local currency bonds faring better than dollar-denominated issues. Major emerging markets currencies were mixed: Brazil’s real and the Russian ruble declined more than 4% against the dollar as their economies slowly recovered from deep recessions, but the Turkish lira strengthened more than 3%. The South African rand also strengthened versus the dollar, even though S&P Global Ratings and Fitch downgraded the country’s sovereign debt to below investment-grade status in early April. South Africa recently slipped into its first recession since 2009.

  Bloomberg Barclays Global Aggregate Ex-U.S. Dollar Bond Index JPMorgan Emerging Markets Bond Index Global Diversified  JPMorgan GBI-EM Global Diversified Index
2Q 2017 3.55% 2.24% 3.62%
Year-to-Date 6.12% 6.19% 10.36%

Past performance is not a reliable indicator of future performance.
Note: Source for Bloomberg Barclays index data: Bloomberg Index Services ltd. Copyright© 2017, Bloomberg Index Services Ltd. Used with permission.

T. Rowe Price Investment Services, Inc., Distributor.


Emerging markets stocks rallied in the second quarter of 2017, as solid economic data worldwide and steady demand for riskier assets offset the Federal Reserve’s latest interest rate increase on June 14. The MSCI Emerging Markets (EM) Index rose for the seventh straight month in June even after the Fed raised rates for the second time this year, a testament to an improving global growth outlook and investors’ search for yield amid low interest rates in most developed markets. China lifted sentiment as the country’s economic indicators signaled broadly stable growth, while most other emerging markets reported first-quarter gross domestic product (GDP) growth that matched or surpassed forecasts. The World Bank forecast that developing economies as a group would grow 4.1% in 2017 versus last year’s 3.5% pace, lifted by strong global trade and a rise in commodity prices from recent lows. However, the World Bank warned that weak investment in developing economies posed a risk to their long-term productivity growth. Seven sectors in the MSCI EM Index rose and three declined. Information technology was the best-performing sector, while energy stocks fell the most.

International Indexes
    Total Returns

MSCI Index


2Q 2017          YTD       

Emerging Markets (EM)


 6.38%           18.60%       

EM Asia


 8.74              23.31

EM Europe, Middle East, and Africa (EMEA)


 2.30               5.19

EM Latin America


-1.61             10.32

All data are in U.S. dollars as of June 30, 2017. Past performance cannot guarantee future results.

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.


  • Chinese stocks rose, lifted by MSCI’s landmark decision in June to include local currency Chinese A shares in its flagship emerging markets index. Though MSCI’s move will boost China’s weighting by just 0.7%, T. Rowe Price analysts believe it could mark the start of China gaining substantial weightings in MSCI’s benchmarks over time. On the other hand, Moody’s cut its credit rating on China in May for the first time since 1989 over concerns about rising debt and slowing economic growth. The downgrade dealt a blow to China at a time when the country is trying to woo more foreign investors into its onshore debt market.
  • Indian stocks advanced and the country’s domestic benchmarks rose to record levels on solid corporate earnings and expectations of strong growth, though its economy expanded at a weaker-than-expected 6.1% annual pace in the first quarter. The growth slowdown was attributed to the impact of a shock demonetization measure implemented last November.
  • Southeast Asian stocks strengthened, led by Indonesia’s nearly 9% gain. The Philippines reported that its first-quarter GDP grew a slower-than-expected 6.4% from a year ago as government spending weakened, while Indonesia’s roughly 5% GDP growth met forecasts. Malaysia reported that its economy grew a surprisingly strong 5.6% in the first quarter, its fastest pace in two years, aided by an export recovery driven by higher oil prices.


  • Brazilian stocks fell as President Michel Temer was charged with corruption, an event that jeopardizes his reform agenda seen as crucial for Brazil’s recovery. Brazil reported that it emerged from recession in the first quarter of 2017 as its GDP grew 1% from the previous quarter, though it contracted from a year earlier. However, some analysts feared that the latest political scandal would push Brazil into a double-dip recession.
  • Mexican stocks advanced roughly 7% aided by a resurgent peso, this year’s best-performing global currency, as investors turned more bullish on the country’s assets and growth outlook. The Bank of Mexico raised its benchmark rate for the seventh straight time in June to its highest level since 2009 and signaled that its tightening cycle was over.
  • Andean markets were mixed: Chilean stocks declined, but stocks rose in Colombia and Peru. Chile’s central bank cut its benchmark interest rate in April and May and the country reported its weakest quarterly growth since the 2009 financial crisis. Colombia’s central bank cut its key rate each month during the quarter to bolster its economy, which has been hit by the recent slump in oil prices. Peru reduced its benchmark rate just once over the quarter, though officials said that damaging floods since last December and a huge corruption scandal involving Brazilian construction firm Odebrecht would weigh on its economy this year.


  • Russian stocks sank almost 10% as prices for crude oil, the country’s top export, fell into a bear market in June amid signs of persistent global oversupply. Weak oil prices bode ill for Russia’s economy, which expanded 0.5% in the first quarter from a year ago, barely above the previous quarter’s 0.3% pickup. The weak GDP raised doubts about the health of Russia’s economy, which exited recession at the end of 2016.
  • Turkish stocks rallied nearly 20% as investors viewed the outcome of the country’s April 16 referendum as a continuation of the political status quo, removing a source of uncertainty that had weighed on sentiment. Turkey reported that its first-quarter GDP grew at a faster-than-expected annual 5% pace, lifted by stimulus spending and domestic demand. The Borsa Istanbul 100 Index repeatedly hit record levels during the quarter.
  • South African stocks advanced as growing public opposition to President Jacob Zuma raised hopes that the corruption-tainted leader would be forced out of office before his term ends in 2019. In June, South Africa reported that its GDP contracted for the second straight quarter, pushing the country into recession for the first time in eight years. The disappointing data led Moody’s to lower its sovereign credit rating to the lowest investment-grade level with a negative outlook.


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. Emerging markets stocks remain attractively valued relative to developed markets stocks for long-term investors.

Near-term risks include a rise in U.S. protectionism and a faster-than-expected pace of rate hikes by the Federal Reserve. Given the stronger financial positions of most emerging markets, however, we believe they will be able to withstand a gradual tightening of monetary policy. 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 be crucial for producing good long-term returns as emerging markets continue to show wide dispersion in the performance of individual countries and companies.

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

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