After a robust 2017, which saw the MSCI ACWI ex-U.S. Index climb 27%, international equity markets have corrected in 2018. International markets have been hurt by weak foreign currencies in light of the divergent interest rate policies being pursued by the U.S. and most foreign central banks. Additionally, equities have fallen due to ongoing trade tensions between the world’s two largest economies, the U.S. and China. Investors are seemingly concerned that lingering trade disputes may lead to declines in business confidence and capital spending as businesses contemplate how best to position their supply chains to cope with new tariffs. A newly elected populist government in Italy and ongoing Brexit negotiations have undoubtedly added to geopolitical anxiety.

Looking Ahead

While markets could continue to trend lower, 2018’s decline has already lowered valuations significantly. The next twelve months’ price/earnings of the MSCI ACWI ex-U.S. Index has fallen from 14.4x in January to just 11.5x as of December 31, 2018, putting the index’s valuation at a 10% discount to its 10-year average, versus a 12% premium back in January 2018. Moreover, the recent decline in equity markets, coupled with ongoing economic and geopolitical uncertainty, could alter the course of U.S. interest rate policy which has weighed on foreign currencies for most of 2018.

Sustainable Growth Investing

Against this backdrop, our strategies have been successful. Our team remains committed to our sustainable growth investment approach which prioritizes investing in competitively advantaged companies that we believe are likely to experience above-average earnings growth backed by secular growth trends. We believe that our approach provides both offense and defense, as investing in faster growing companies helps us to keep pace with markets in good times, while support from secular trends allows the companies we invest in to continue growing in more challenging economic environments. Over the last seven years, this approach has helped performance while exhibiting lower volatility than our benchmark, and better preserving capital during market drawdowns.