And they’re off to the races again.
Foreign stock markets got off to a strong start in the first quarter of 2006, continuing the robust performance they enjoyed last year despite high energy and commodity prices, and rising rates in the U.S. and Europe. The average international equity fund returned 10.66% for the quarter, versus 4.21% for the S&P 500. The average global stock fund — which has the latitude to invest in both U.S. and foreign stocks — climbed 7.17%.
The emerging markets, especially Latin America, delivered handsome gains on the back of commodity demand from China and sustained high crude oil prices. Japan, last year’s star performer, slowed down. However, the big story among international stock markets has been the somewhat surprising resurgence of Western Europe. Equities across the old continent soared. Scandinavian nations, in particular, rocketed as much as 20%, while old stalwarts France, Germany and Italy showed respectable gains of between 10% and 15%.
M&A Craze in Europe
European markets are in the midst of a merger & acquisitions frenzy that is pushing up stock prices despite overall sluggish economic growth, high unemployment, modest consumer demand and a new phase of credit tightening by the European Central Bank (ECB). Indeed, the ECB raised its key target rate in December 2005 by 25 basis points to 2.25% — it was stable at 2% since August 2003 — and hiked again in March 2006 to 2.5%. Standard & Poor’s expects this rate to finish the year at 3.00%.
Even so, with interest rates still relatively low and corporations in Europe filled to the brim with cash after posting strong profits in recent quarters, M&A activity is likely to accelerate. According to Dealogic PLC, global M&A activity totalled about $923 billion in the first quarter, of which Europe’s portion was a whopping $416 billion. The value of European M&A deals were more than double for the comparable 2005 period. Moreover, merger transactions in Europe have occurred across an array of sectors and industries, notably in utilities, financials, materials, and media and telecom.
Emerging Markets Still A Bargain
Alexander Young, equity market strategist at Standard & Poor’s, attributes several factors to the continuing strength in emerging markets equities: robust earnings growth, relatively low valuations, low global interest rates and strong international money flows. Given that many companies in the MSCI Emerging Markets index are in the energy and materials sector, Young noted, the current commodity bull market will serve to drive growth among the developing markets. “We expect the MSCI Emerging Markets Index to show a return in the mid-teens range this year,” he said. Moreover, the emerging markets are expected, by consensus. to deliver 14% earnings growth this year – a figure higher than for the U.S. and Europe.