But several factors roiled foreign markets in February and March, including rising concerns about inflation and interest rates around the world, growing worries about a trade war between the United States and China, and surfacing company-specific fears in the technology sector. Consequently, most international markets suffered mid- to high-single-digit losses during February and March, with the Brazil and Japanese exchanges performing somewhat better than that, and the Chinese and Indian markets faring slightly worse.
All told, the MSCI ACWI ex USA Index lost 1.2% in U.S. dollar terms in the first quarter. Markets were all over the map in both the developed and the developing worlds during the period. The U.K. and many other European exchanges posted moderate declines, whereas the French and Japanese markets eked out small gains. The South African and several other emerging markets finished in the red. But the Chinese, Mexican, and some other developing markets earned modest gains, while the Brazilian market posted double-digit returns as optimism about economic progress, valuations, and other local factors trumped pessimism about outside considerations.
A Wide Range of Results
Not surprisingly, given this volatile and varied investment climate, there was a wide range in the performance of international-stock funds in the first quarter, particularly among those with narrow geographic purviews. The average Latin America fund, which has roughly two thirds of its assets in Brazilian equities and 15% of its assets in Mexican stocks, gained 8.2%, which was the best result of any type of international-stock offering by far. The typical China-region fund returned 1.2%. But the average India equity offering fell 8.4%--the worst performance of any Morningstar Category among international-stock funds by a wide margin--as worries about government spending, slower economic growth, and corporate scandals in India added to global concerns.
The average diversified emerging-markets fund gained 2.0% in the first quarter, whereas the typical Europe stock fund lost a similar amount. The former was buoyed by its exposure to some smaller markets like Thailand and Russia as well as by its exposure to Brazil, China, and Mexico. The latter was burdened by its exposure to several of the region's larger markets, including the United Kingdom, where Brexit-related issues compounded worldwide concerns.
As was the case in the rally of 2017, smaller-cap stocks outpaced large-cap equities and growth stocks fared better than value issues overseas in the choppy first quarter of 2018. (Smaller companies tend to be less dependent on foreign trade and the global economy than large firms, while growth names tend to be less vulnerable to rising interest rates than dividend-paying and many other value issues.) Thus, the average foreign small/mid-growth fund, which gained 2.4%, performed the best among the six foreign-stock Morningstar Style Box offerings during the period, and the average foreign large-value fund, which lost 1.7%, did the worst.
Notable Outperformers and Underperformers
Several prominent international-stock funds did better than most of their rivals during the first quarter. Harding Loevner Emerging Markets
, which has a Morningstar Analyst Rating of Silver and is closed to most new investors, returned 3.6% and outpaced more than 80% of its diversified emerging-markets peers because its quality-growth discipline and several of its Brazilian, Chinese, and other picks stocks paid off. Bronze-rated T. Rowe Price Japan
benefited from its growth bias, its exposure to smaller caps, and its manager's stock selection; it gained 4.5% while the average Japan stock fund lost 0.8%. And whereas the typical foreign large-growth fund returned 0.2%, Silver-rated Vanguard International Growth
gained 3.4% because it is even more growth-oriented than its average peer, and many of its technology and consumer-cyclical holdings flourished.
Finally, a number of well-known foreign-stock funds lagged well behind the majority of their peers during the period. Silver-rated Aberdeen Emerging Markets
was slowed by its relatively hefty stake in the weak Indian market as well as its stock selection in Indonesia and a few other places; it was up just 0.1% while the typical diversified emerging-markets offering rose 2.0%. The typical Pacific/Asia ex-Japan stock offering gained 0.4%, but Silver-rated Matthews Asian Growth and Income
lost 1.8%, hurt by because it is more value-oriented than most of its rivals and it has far less exposure to the relatively buoyant Chinese market. And Bronze-rated Oakmark International Small Cap
lost 3.4% while the typical foreign small/mid-blend fund lost 0.4%, largely because it is more value-driven than most of its peers and a number of its Swiss and Canadian stocks struggled.