International Surprises

If we asked you what the first thing that comes to mind when we say “Sweden” what would it be?  We don’t think you would answer that it is number 5 on the ETFG Quant Ranking or just one in a litany of international ETF’s that turned in strong performances on Thursday and Friday following the global rout.

So far, 2014 won’t be remembered for how kindly it treated international equity markets.  The MSCI All-Cap World Index ex US (ACWX) is down over 5% compared to -.91% for it’s more inclusive brother, ACWI, while you could almost hear the cheers of “USA, USA!” when both the S&P 500 and PowerShares DB US Dollar Index Bullish Fund (UUP) enjoyed a strong August while the iShares MSCI EAFE ETF (EFA) treaded water.  The cause?  A clear lack of coordination in response to their mutual affliction of deflation and weak economic output has kept the members of the Eurozone from enjoying the sort of economic recovery that we’ve had in the land of the free and any nation within the Eurozone or with a currency pegged to the Euro has lagged.

You can get proof of this theory by going to the ETFG Behavioral 25 and reviewing the long list of emerging market ETF’s that make up seven of the names on the list.  A strongly appreciating U.S. dollar will clearly help these nations manage their balance-of-payments issues and spark some sort of economic growth, but the bigger boost comes from controlling their own monetary policy.  Instead of trying to coordinate policy among 28 different finance ministers; Turkey, Brazil and South Africa (all well represented on this list) get to make their respective policy decisions.  No wonder the iShares MSCI Sweden ETF (EWD) is number 5 on the ETFG Quant Screener and the iShares MSCI Switzerland Capped ETF (EWL) is at number 8.  We’ll leave it up to you to see how far down the list you have to go before you find a country that uses the Euro.

 

And what helped make EWD one of the behavioral darlings with its ETFG Behavioral Quant score rising nearly 50% in one week?  While its performance relative to a broader European oriented ETF such as the Vanguard European Vipers ETF (VGK) has been better since the dollar began its strong move on July 1st, (EWD is down 11.99% while VGK is off over 13% through Friday), lack of exposure to the Euro can’t be the whole of the story.  While deflation and the potential for monetary easing are a clear and present danger to Sweden, the real story has to be EWD pulling back to long-term support at the $31 mark established in early 2013, or becoming oversold on a weekly basis while running into the 150 week moving average.  In other words, there might be more to the Swedish success story than lack of Euro exposure.

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