In the second quarter of 2015 the outperformance of the broad international markets versus US markets has continued. As of this writing, the MSCI All Country World ex-US Index (non-US international) has continued to outperform, although with a much smaller gain than in the first quarter of 2015 (from 3/31/2015 to 6/23/2015, ACWX ETF = 4.34 percent return versus S&P 500 [using SPY ETF] = 3.13 percent, a 1.22 percent outperformance by international markets). Within the international markets, however, there has been a lot of movement and adjustment.

One of the biggest factors to consider is the movement of currencies. The strengthening dollar versus the euro and Japanese yen was a major part of the macroeconomic rationale for outperformance in the first quarter. However, recent months have seen a reversal in part of that relationship. Comparing currencies alone, we see that during the same period (from 3/31/2015 to 6/23/2015) the euro has strengthened versus the dollar (euro +3.77 percent versus US dollar -3.47 percent, a 7.25 percent outperformance). The yen, however, did not materially strengthen or weaken versus the dollar (yen -3.26 percent vs. US dollar -3.47 percent, a slight outperformance of +.22 percent). In effect, the hedged Japanese positions in the portfolio performed nicely, whereas the hedged euro positions underperformed.

In addition to the currency implications for portfolios, the emerging market concentration in Asia has been profitable but not without its angst and a need for close monitoring. China has been a dynamic trade in the last several months, whereas Taiwan has not yet demonstrated appreciable market dynamism. As we look forward to the third quarter of 2015 in international markets, we will need to closely monitor the geopolitical and geo-economic factors that impact developed markets. The Greece situation is worthy of interest, potentially as much for the theatrics as for the actual impacts. Any resolution, agreement, or even “kicking the can” will be positive for the market.

Regardless of the Greek outcome, European markets should improve in the coming months, based on risk premia being reduced. A more practical concern for Cumberland Advisors involves the currency relationships of the euro and yen versus the dollar. About half of our portfolio has exchange-traded funds (ETFs) that include currency management in a strong-dollar environment.

The Abenomics trade toward a weakening yen is long enough in the tooth to require real attention in the case of a strategic reversal. Getting the “euro versus dollar” decision right will be key for US investors in an advanced-market upturn. The macroeconomic work here at Cumberland Advisors suggests that we continue with a strong-dollar bias. We will monitor both fundamental and technical information to determine our future approach.

We continue to favor an international allocation for investors and to see opportunity for investment growth in spite of the various factors that impact non-US markets.

The ideas and opinions expressed in this blog are those of the author, and they should not be perceived as investment advice or as any other kind of advice.

The preceding is a commentary by Cumberland Advisors and has been reposted with permission. Cumberland Advisors commentaries are available at http://www.cumber.com/commentary_archive.aspx.

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