Having any allocation to international equities over the past several years has generally not been productive, but investors’ patience finally began paying off in 2017. Looking ahead, a few key themes may support continued international equity outperformance.

U.S. Dollar Weakens

The Trump administration has clearly backed down from its 2016 campaign posture that a stronger dollar means a stronger America.

First, the U.S. dollar has been weakening since reaching a 14-year high in late 2016. The U.S. Dollar Index has fallen from 103 to 89 over the past 13 months. The euro has strengthened, and we are seeing economic growth in Europe outpace that in the United States.

A growth recovery in France, formerly among Europe’s main laggards, has propelled the eurozone to its strongest expansion in a decade. In Germany, activity is accelerating in a balanced fashion across both the industrial and consumption sides of the economy.

This favorable growth backdrop has translated into a strong recovery for the euro—from $1.03 in December 2016 to approximately $1.25 in early 2018.

At the same time, the Donald Trump administration has clearly backed down from its 2016 campaign posture that a stronger dollar means a stronger America. Shortly after he was elected, Trump hosted CEOs of multinational companies at the White House, and he clearly got the message that a weaker dollar is better for their companies.

In fact, Treasury Secretary Steven Mnuchin recently commented at the World Economic Forum that a weak dollar benefits American trade, which sent the currency to a three-year low and left the impression that he could be reversing 25 years of strong dollar policy at the Treasury Department.

Fed Embarks on Tightening Cycle

Second, the U.S. Federal Reserve (Fed) has finally embarked on its much-anticipated tightening cycle, while the rest of the world has remained more accommodative.

The European Central Bank (ECB), for example, recently clarified that it is not in a rush to unwind its stimulative monetary policy, because inflation remains well below the official 2% target.

At the conclusion of its recent meeting, ECB board member Benoit Coeure said that he expects the ECB’s key policy rates to remain at present levels for an extended period, supporting the outlook for relative stock-market performance.

Economic Activity Strengthens in Japan and Emerging Markets

Lastly, strengthening economic activity in Japan and emerging markets also supports our positive outlook for international equities.

In Japan, the Purchasing Managers’ Index—an indicator of the economic health of the manufacturing sector—recently experienced its fastest growth in almost four years, and the tighter labor market bodes well for prospective wage growth and consumer spending.

Meanwhile, emerging markets are benefiting from economic recoveries in countries such as Brazil and South Africa. The growth outlook for China also remains compelling and the composition of growth is becoming more durable, shifting away from government-backed fixed asset investment toward increased consumption as the Chinese middle class expands.

In another post, I’ll discuss some key opportunities I see in international equities, as well as some potential risks to monitor.

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Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Investments are subject to market risk. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Statements concerning financial market trends are based on current market conditions, which will fluctuate.

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Copyright © 2019 William Blair & Company, L.L.C. "William Blair” is a registered trademark of William Blair & Company, L.L.C. No part of this material may be reproduced in any form, or referred to in any other publication, without express written consent.

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Please carefully consider the Funds’ investment objective, risks, charges, and expenses before investing. This and other information is contained in the Funds’ prospectus and summary prospectus, which you may obtain by calling +1 800 742 7272. Read the prospectus and summary prospectus carefully before investing. Investing includes the risk of loss.

Any statements or opinions expressed are those of the author as of the date of publication, are subject to change without notice as economic and markets conditions dictate, and may not reflect the opinions of other investment teams within William Blair Investment Management, LLC or the Investment Management Division of William Blair & Company, L.L.C.

This content is for informational and educational purposes only and not intended as investment advice or a recommendation to buy or sell any security. Investment advice and recommendations can be provided only after careful consideration of an investor’s objectives, guidelines, and restrictions.

Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Investments are subject to market risk. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Statements concerning financial market trends are based on current market conditions, which will fluctuate.

William Blair does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax questions and concerns.

Distributed by William Blair & Company, L.L.C., member FINRA/SIPC.

Copyright © 2019 William Blair & Company, L.L.C. "William Blair” is a registered trademark of William Blair & Company, L.L.C. No part of this material may be reproduced in any form, or referred to in any other publication, without express written consent.

Statement of Financial Condition | NMS Rule 605 & 606 | Business Continuity Plan | UK Stewardship Code
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