Monetary policy normalization in the U.S. and Trump’s trade war led to significant volatility for equity markets during the quarter. The U.S. 10-year bond yield crossed over the psychological 3% barrier during the quarter before falling back below that level as risk aversion took hold. The yield curve continued to flatten in the U.S. and some became concerned that the Federal Reserve’s continued hike cycle over the coming 12 months could lead to an inverted yield curve causing much concern. The U.S. Dollar bounced back strongly during the quarter as trade tensions and monetary policy normalization reduced investor confidence in emerging markets. The U.S. Dollar Index rose by 5% versus major currencies for the quarter. Currencies in the emerging markets declined significantly with the Brazilian Real, the South African Rand and the Turkish Lira all falling more than 13% versus the dollar during the quarter. The Argentine Peso also went into a tailspin, prompting the central bank there to raise interest rates by more than 1000 bps and ultimately asking the IMF for support.
President Trump’s trade war took hold as he initiated tariffs on aluminum and steel products from various countries. In addition, a 25% tariff was placed on $50bn worth of goods from China as the U.S. government fights back against intellectual property theft and China’s perceived unfair trade practices. This significant development led to equity price volatility around the world as the uncertainty of the trade war may lead to inflation pressures and delayed investment plans. The trade disputes are likely to continue while Trump presses ahead with announcements of additional tariffs on Chinese goods. Thus far the Chinese have announced tit-for-tat tariffs and have threatened quantitative and qualitative retributions. Oil prices continued their ascent in the quarter as the Trump administration pulled the U.S. out of the Iran nuclear pact that could lead to curtailed oil volumes from the country. Prices rose despite Russia and OPEC’s decision to increase production, mostly to balance the markets from anticipated lost Iranian volumes and as the oil markets had become more balanced since their initial cut.
Mid-caps slightly outperformed small and large caps for the quarter while growth continued to outperform value. The best performing MSCI EAFE countries for the quarter were Israel, New Zealand, and Australia while the worst performing were Austria, Singapore, and Italy. For the year-to-date period, the best in MSCI EAFE thus far are Finland, Israel, and Norway while the worst are Austria, Denmark, and Germany. The best performing emerging market countries for the quarter were Colombia, Qatar, and India while the worst performing were Brazil, Turkey, and Pakistan.
Performance and Attribution
The Timothy Plan International Fund struggled a bit during the quarter versus the MSCI EAFE index. Stock selection hurt relative performance with stocks in the Consumer Discretionary, Utilities, Financials, and IT sectors all underperforming for the quarter. The portfolio’s small exposure to emerging markets was also detrimental to performance as EM equities underperformed in the quarter. Country allocation was hurt by EM exposure while stock selection in Japan and France was negative. On the positive side, stock selection in Norway and Spain helped the portfolio.
Near term volatility is likely to remain in the equity markets as trade concerns, EM currency weakness on the back of rising US rates and stronger USD, and talk of less accommodative monetary policies in developed markets translate to added uncertainty for investors. We remain constructive longer term but cautious in the near term. US economic growth is leading the developed world while European and Japanese economic data have softened somewhat from earlier highs but remain above trend. Valuations are supportive of international equities, but near-term volatility and emerging market contagion fears is negatively affecting investor confidence.