PNC International Equity Fund (class I) returned -0.49% in the second quarter versus a return of -2.47% for the benchmark MSCI ACWI ex USA Index.
In terms of country attribution, country allocation and stock selection contributed to relative investment results. Positive country allocation effects came from an underweight to Brazil, along with overweights to Israel and Norway. Negative country allocation effects came from an overweight to Austria, along with underweights to Australia and Canada. Positive selection effects came from stock selection in Germany, Canada, and the United Kingdom. Negative selection effects came from stock selection in the Japan, France, and Russia.
In terms of sector attribution, sector allocation detracted from relative investment results and stock selection contributed. Positive sector allocation effects came from an overweight to Materials, along with underweights to Financials and Real Estate. Negative sector allocation effects came from an overweight to Consumer Discretionary, along with underweights to Consumer Staples and Energy. Positive selection effects came from stock selection in Consumer Discretionary, Financials, and Materials. Negative selection effects came from stock selection in Energy and Real Estate.
Global growth appears to be slowing slightly, due to decreasing global liquidity from monetary policy tightening, stronger energy prices, and foreign exchange volatility. Additionally, increased trade tensions are keeping global economies on edge. The U.S. dollar strengthened sharply during the quarter due to continued monetary policy tightening by the Federal Reserve, as well as a jump in short-term U.S. Treasury yields. Dollar strength, combined with higher energy prices, led to a correction in most international currencies, particularly in many emerging markets.
While the Fed raised rates in the U.S., lackluster economic performance in the Eurozone led the European Central Bank to ease up on monetary policy tightening. Several developing countries surprised markets with interest-rate increases in an attempt to stabilize their weakening currencies. Volatility in emerging markets increased during the quarter, as dollar strength also led to significant capital outflows across several countries. Second-quarter outflows from some emerging markets reached levels not seen since November 2016.
In Asia, growth in India continues to recover, with the country’s most recent GDP exceeding 7.5%. Higher-than-expected inflation and accelerating currency depreciation resulted in an interest-rate increase, the first since 2014. In China, tensions with the U.S. escalated over heightened trade tariff rhetoric. In Southeast Asia, massive foreign capital outflows struck every part of the
region, as currency depreciation accelerated. Most countries have raised interest rates to defend their currencies, which could potentially hamper growth in the short term. Tech export-heavy countries, such as South Korea and Taiwan, faced volatility caused by a slowdown in global smartphone sales and a peak cycle in semiconductors.
European economic growth slowed but remained at elevated levels. The euro weakened and Italian bond spreads widened due to concerns regarding increased deficit spending and populist rhetoric. In the UK, both consumers and companies are battling post-Brexit inflation, as rising input costs are squeezing corporate margins. Eastern Europe continues to experience solid growth.
Much of the focus in Mexico during the quarter was on the general election that took place on July 1. Uncertainties surrounding trade negotiations and tariffs threats are expected to continue affecting the Mexican economy in the short run. During the quarter, both the Argentine peso and Brazilian real sold off, causing an emergency $50 billion International Monetary Fund deal in Argentina and a reversal in monetary policy in Brazil.
Global investors remain concerned about high relative levels of developed and developing market indebtedness, geopolitical considerations and populism, shifting central bank policies, and the sustainability of global growth. As a result, the investment team is closely monitoring inflationary pressures, commodity prices, and geopolitical and policy risks.
Most fundamental indicators that the investment team tracks point to synchronized global growth. The majority of companies, regardless of geography or industry, with which the team has met have expressed optimism about the global economy. Yet, recent declines among systemically important financial institutions (SIFIs) have given us pause. We remain confident in our ability to identify and execute on value opportunities, pinpointing attractively-priced companies in an overheating global economy. This current economic boom may be intermittently tested by the ongoing threat of trade wars or challenges in emerging markets. The investment team aims to capitalize on periods of market volatility to add new investments to the portfolio.
The Fund benefits from a globally diverse analyst team, all of whom conduct on-the-ground research, meet with companies/competitors, visit manufacturing plants, and carefully analyze prospective companies using local and global accounting standards. The Fund's managers continue to believe in the merits of this bottom-up investment philosophy, and strive to improve the valuation and risk profile of the portfolio.