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8 May 2019

Market Backdrop

Global equity markets rebounded strongly for the quarter after a major selloff in Q4 2018. While economic and earnings downgrades continued during Q1, equity markets appeared to be focused on a rebound in activity into the second half of the year. Weak first quarter data appeared to have been priced in the selloff of 2018 while an about face from the world’s two most important central banks provided a stimulus shot to the market. The Federal Reserve and the European Central Bank both retreated from signs of rising rates this year and both went a long way to fight over who was more dovish coming into the second quarter and second half of the year.

With the possibility of the start of green shoots with some data items in Europe and better China economic data arising, markets continue to need confirmation of improving conditions to maintain its current rally. Another set of possible good news could be in the U.S.-China trade negotiations as negotiators from both countries appear to be getting closer to a deal that would remove a major uncertainty for businesses. Commodities rose with oil prices following slower production in OPEC, Venezuela, and Iran and iron ore prices moving sharply higher on supply cuts in Brazil and Australia.

While the New York Federal Reserve’s recession indicator hit a 25% chance of a recession in the U.S., the highest level since the Global Financial Crisis, markets focused on the prospects of looser monetary conditions providing equity markets a boost. The dovish talk from central banks led to a sharp decline in bond yields with the German 10-year bond retreating below zero percent for the first time since 2016 and the U.S. 10-year bond plummeting below 2.5% for the first time since early 2018. The decline in the long bond and lack of a similar move in the front end of the yield curve led to an inverted yield curve at the 3m-10y level which spooked the market. A San Francisco Federal Reserve study from last year indicates an inversion at the 3m-10Y level is the best indicator of a recession one to two years out while other studies suggest the yield curve must remain inverted at least for one quarter for this indicator to work. The markets will be watching this development over the coming months. The lower yields pushed financial sector stocks down, in particular bank stocks, as lower yields and a flatter yield curve makes it much harder for them to earn reasonable rates of returns.

Large caps slightly underperformed small and mid-caps for the quarter while Growth outperformed Value for the quarter.  The best performing MSCI EAFE countries for the quarter were New Zealand, Belgium, and Hong Kong while the worst performing MSCI EAFE countries were Singapore, Japan, and Germany. The best performing emerging markets for the quarter were Colombia, China, and Egypt while the worst were Qatar, Turkey, and Poland.

Performance and Attribution

The Timothy Plan International Fund is off to a good start in 2019 as it outperformed the MSCI EAFE index for the quarter.  International equities bounced back after a rough finish to 2018 with the Fund increasing double digits for the quarter led by positive stock selection.  Stocks in the Industrials and Communications Services sectors performed best for the quarter while an overweight to the Technology sector helped as well.  From a country standpoint, Germany, Japan, and Hong Kong stocks performed best relative to the benchmark while any cash weight in a strong market and a void in Switzerland hurt relative performance.

Outlook

After a strong start to the year, we would not be surprised to see volatility rise in the 2nd half of the year as expectations have risen.  Investors have shunned European markets to start the year and are very underweight that region and we would expect a strong bounce in those markets if economic activity begins to stabilize and improve there as it appears to be doing so.  We have slightly reduced China exposure in the portfolio after a strong run in the 1st quarter as the rhetoric of US-China trade relations is likely to keep this topic in investor’s minds for some time to come.  The ECB and BoJ remain very supportive of their respective economies for the remainder of this year providing a tailwind for equity markets.

12 Nov 2018

Market Backdrop

Monetary policy normalization is still sending ripples through equity and bond markets globally.  As the U.S. economy remains on firm footing and the Federal Reserve continues to raise rates, emerging markets are feeling the brunt of the punch bowl being taken away.  Even though global monetary conditions remain accommodative, with the change in policy comes volatility.  Emerging market currencies continued to depreciate in the quarter led by the Turkish Lira which was pummeled following tensions with the U.S. but more so on lost confidence in the independence of its central bank.  Other emerging currencies also suffered with the volatility as trade tensions between China and the U.S. worry some that these countries will suffer the economic consequences of trade dislocations.  The U.S. maintained its pressure on China by announcing an additional 10% tariff on $200bn worth of goods from China with the Chinese government striking back with tariffs of its own.  Analysts suggest the Chinese government is waiting until after the U.S. mid-term elections to gauge their negotiating stance.  The Trump administration did have a trade win as Canada and Mexico agreed on a new NAFTA trade agreement providing a boost to the president’s negotiating tactics.

 

Market jitters surfaced again late in the quarter as trade tensions and the direction of interest rates worried investors.  Rising rates in the U.S., where the 10-year government bond rose above the 3.2% mark for the first time since 2011, concerns equity markets about the effect of rising rates on the economic recovery.  Some worry over the potential of an inverted yield curve sometime in 2019 as the Federal Reserve continues to raise rates.  While rates have risen, the Iran sanctions and Venezuela’s plummeting oil production have taken oil supplies off the market, leading to higher oil prices in the quarter.  Earnings growth overall remain well underpinned globally by stronger than trend economic growth.  International equity valuations, amid the stronger earnings growth, appear supportive for positive equity returns over the coming year.

 

Large caps outperformed small and mid-caps for the quarter while mid-caps remain slightly ahead for the year-to-date period.  Growth outperformed value in the quarter as growth extended its lead for the year.  The best performing MSCI EAFE countries for the quarter were Switzerland, Sweden, and Norway, while the worst performers were Ireland, Belgium, and Italy.  The best performing emerging markets for the quarter were Thailand, Qatar, and Poland, while the worst were Turkey, Greece, and China.

 

Performance and Attribution

The Timothy Plan International Fund slightly underperformed the MSCI EAFE index for the quarter.  Stock selection was challenging in the Technology and Consumer Discretionary sectors while positive in Consumer Staples and Industrials.  Two themes hurt performance in the quarter with anything related to China underperforming given weakness in that economy and concerns over the US-China trade battle.  The other negative was exposure to autos as both Europe and China auto sales were hurt during the quarter.  On the positive front, stock selection in Norway, Hong Kong, and Spain was additive to performance.

 

Outlook

Near term volatility is likely to remain in the equity markets as trade concerns, slowing economic conditions in some developed markets, 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.  Valuations remain supportive of international equities and any relief on the mentioned concerns could lead to a strong bounce in the markets.

30 Jun 2018

Market Backdrop

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.

Outlook

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.