Past performance is no guarantee of future results. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than that shown here.
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The views expressed in this investment report represent the opinions of PNC Capital Advisors, LLC and are not intended to predict or depict performance of any investment. All information contained herein is for informational purposes and should not be construed as investment advice. It does not constitute an offer, solicitation or recommendation to purchase any security. The information herein was obtained by various sources; we do not guarantee its accuracy or completeness. Fund performance quoted above is for class I shares. Past performance does not guarantee future results. These views are as of the date of this publication and are subject to change based on subsequent developments.
PNC International Growth Fund (class I) returned 4.21% in the second quarter versus a return of 4.35% for the benchmark MSCI ACWI ex USA Growth Index.
In terms of country attribution, the Fund outperformed on a country allocation basis and underperformed on a stock selection basis. Positive country allocation effects came from overweights to Argentina and Egypt, along with an underweight to Korea. Negative country allocation effects came from overweights to Vietnam, the UAE, and Kenya. Positive selection effects came from stock selection in Germany, China, and Ireland. Negative selection effects came from stock selection in Argentina, the United Kingdom, and Sweden.
In terms of sector attribution, the Fund underperformed on a sector allocation basis and outperformed on a stock selection basis. Positive sector allocation effects came from an overweight to Financials, along with underweights to Communication Services and Energy. Negative sector allocation effects came from overweights to Healthcare and Real Estate, along with an underweight to Industrials. Positive selection effects came from stock selection in Information Technology, Industrials, and Materials. Negative selection effects came from stock selection in Financials, Consumer Discretionary, and Consumer Staples.
International equities ended the quarter in positive territory, led by developed markets, but still underperformed U.S. equities by a modest margin. U.S. equities outperformed developed and emerging market equities in a continuation from last quarter (as measured by the Russell 3000, MSCI EAFE, and MSCI Emerging Markets indexes, respectively). After moving in near lock-step with developed market equities last quarter, emerging market equities lagged during the second quarter.
While global economic growth continues to grind forward, signs of slowing have given many investors pause. The shift by major central banks towards accommodative monetary policy reignited some appetite for more risky assets during the quarter, but concern for an impending recession still looms large. Although the Federal Reserve has held rates steady, a rate cut during 2019 is increasingly possible, and the market is forecasting two cuts. Emerging market central banks are also becoming more accommodative as they keep a close eye on Fed policy.
Ongoing trade tensions between the U.S. and major trading partners, particularly China, continue to weigh on financial markets. While the two parties agreed to resume talks during the G20 meeting in Japan, there does not appear to be any substantive progress. China is preparing for a long, drawn-out process by initiating stimulus measures in the real estate and auto industries to offset the slowdown from trade.
In Europe, investors have been buffeted by disappointingly weak economic numbers, trade tensions with the U.S., the continuing Brexit saga, and European parliamentary elections, which resulted in a surprisingly strong showing by the Green parties. Germany continues to struggle, as economic growth is impacted by slowing emerging market economies (particularly China), weak automobile manufacturing, and continued trade uncertainties. The European Central Bank has indicated that it would be more accommodative than the market was generally expecting, further weakening the euro.
Turning to Asia, India was dragged into global trade disputes when the U.S. officially terminated the country’s status as a developing nation and slapped tariffs on some 2,000 products. India retaliated with a tariff of its own, and its central bank continued to cut interest rates to boost growth. Generally, exports in the region are still suffering, especially in trade-dependent countries in north Asia. Exports to China and in semiconductor products have seen the largest declines.
In Latin America, the focus remains on the new Brazilian administration and whether it can push through efforts to improve the country’s fiscal standing. Privatizations have increased, initial pension reform proposals look promising, and savings estimates thus far have been slightly higher than expected. However, political questions remain. In Mexico, investors continue to watch relations with the U.S., where tariff and immigration issues loom large.
International investors are witnessing slowing global growth due to a weaker Chinese economy, uncertainty around continued trade tensions, and weakening industrial production. We believe that we will witness a shallow, mid-cycle downturn similar to 2015-2016. Global central banks have largely become more accommodative across the globe, thus providing support for financial markets. With a stabilizing global economy and reduced near-term trade tensions, we expect some recovery in emerging equity markets. We are closely monitoring inflationary pressures, currency prices, and geopolitical and policy risks. We continue to search for companies within attractive regions that have earnings growth potential, high-quality balance sheets, strong management teams, and clearly defined growth strategies.