International Markets in Turmoil – Part 2

Summary:

• The German equity market is in a downtrend with negative impact for Europe
• The bear market in natural resources continues to pressure Latin American and Asian markets
• In our opinion, international markets will continue to decline and should be avoided in the near term

In our June blog post we warned about the rise of geopolitical risks and their impact on international markets. In the summer, one of the main concerns was the potential exit of Greece from the Euro Zone. While the exit did not happen, the continued weakness of the Greek equity market (GREK) shows that Greece is not yet in a better shape than before, and it is likely that the question will have to be addressed again in 2016.

Our current concern is the weakness of the German market, which is the largest and strongest economy of Europe. To illustrate the concern, lets take a look at two German bellwether stocks, Volkswagen (VLKAY) and Deutsche Bank (DB).

The chart below shows that the highly publicized “Dieselgate” emissions scandal has caused a more than 50% drop for the Volkswagen stock so far. With litigations just starting up and the recall for the diesel cars still not available, we see the weakness to continue for the near term. The chart of Deutsche Bank is also very bearish with a recent technical breakdown below the support level.

The chart of the German equity market shows a similar negative pattern:

Besides the weakness of the German market, Europe has two additional problems that will have to be resolved before we can turn bullish again. The first is the concern about the effectiveness of the quantitative easing program with the ECB starting to hint again at the need for a new round of money printing. The second concern is the economic impact of the flood of immigrants and the political tensions it created in the Euro Zone.

Our second topic is the impact of the bear market in natural resources, such as oil, on emerging markets that are net exporters of raw materials. The chart of the Fidelity Natural Resources Fund (FNARX) shows that the bear market resumed in late summer and downside volatility is very high:

It is not surprising to see that equity markets in Latin America and in Asia are also in a steep decline:

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Global Equity Markets in Turmoil Due to Fears About Rising U.S. Interest Rates; Best and Worst Investments in a Highly Volatile Market

Long-term U.S. Treasury yields have been rising in the last four weeks, as traders anticipate the Fed to raise rates possibly as early as June. In addition, the dollar has continued to make impressive gains against all major currencies, as quantitative easing in Europe and Japan is under way.

The potential for rising interest rates in the U.S. and the steep rise of the dollar has led to a sell off of equities, bonds and commodities around the globe.

The S&P 500 index has retreated from its recent high and now in negative territory for the year. In spite of rising volatility, the chart of the benchmark Fidelity Spartan U.S. Equity Index Fund (FUSEX) shows that the long-term trend for U.S. equities is still bullish:

Another important development is that commodities and oil continue to deflate, reversing the short-lived rally in January:

 

In light of the rising dollar, the bear market in commodities and weak economic conditions in international markets, it is not surprising to see the Fidelity Select Energy Services Fund (FSESX), the Fidelity Select Gold Fund (FSAGX) and the Fidelity Latin America Fund (FLATX) amongst the weakest performers year-to-date:

The few sweet spots in the current market are sectors that are not sensitive to interest rates and rely on innovation to create growth. Perhaps the most notable is the health care sector, including biotechnology stocks:

The dynamic interplay of equities, bonds, currencies and commodities is shifting market conditions again. We continue to favor a conservative, risk averse investment approach in 2015.

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Long-Term Bullish Trend is Intact for U.S. Equities, in spite of Increased Volatility; Gold Forms a Bullish Double-Bottom Chart Pattern; It is Still Early to Invest in the Energy Sector or in International Equities;

It is always good to take a look at long-term trends when short-term volatility increases, in order to have a better sense of the market direction. While the widely anticipated stock market correction remains a possibility, in our view, the long-term bullish trend for U.S. equities is still intact.

The chart shows that the multi-year uptrend for the benchmark Fidelity Spartan U.S. Equity Index Fund (FUSEX) has not yet been interrupted by the recent market volatility:

In a recent article (see Best Fidelity Mutual Funds for 2015) we highlighted the most attractive investments for 2015. The selected mutual funds have continued to perform well in the last few weeks of trading. Especially, conservative sectors, such as real estate, utilities, medical equipment and consumer staples have outperformed the S&P 500 index:

Perhaps, the most interesting new development in 2015 is the renewed interest in buying gold mining stocks. The chart of the Fidelity Select Gold Fund (FSAGX) below shows a short-term bullish double bottom pattern and increased buying activity during the first two weeks of the New Year. However, gold has a long way to go before it can establish a long-term uptrend.

While gold is traditionally viewed as an inflation hedge, in the current deflationary environment precious metals are looked at as an alternate asset class that can potentially serve as a volatility hedge. We’d like to caution investors, that while gold can provide returns that have low correlation with equities, this sector is highly speculative and is more appropriate for the purposes of short-term trading than long-term investing.

As noted in earlier articles, we believe that it is still too early to diversify into the weakest sectors, such as natural resources (in particular energy), and into underperforming international markets.

The blue lines on the charts of the Fidelity Select Energy Fund (FSENX) and the Fidelity Latin America Fund (FLATX) indicate that the bearish downtrends that are still in place:

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Markets Sell Off Due to the Federal Reserve Hinting at Slowing the QE3 program; Real Estate, Gold and Latin American Funds are Hit the Hardest

The Fidelity Real Estate Investment Fund (FRESX, last change: -3.08%) was down the most today out of all Fidelity mutual funds.

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Emerging Market Investments are Loosing their Luster; Latin America Fund is the Weakest

The Fidelity Latin America Fund (FLATX, last change: -1.54%) dropped to a new 52-week low.

The Fidelity China Region Fund (FHKCX, last change: -1.40%) is still in uptrend and has outperformed other emerging market funds.

 

Buy/sell signals for Fidelity funds are available at FidelitySignal.com 

Top international fund of 2012

The Fidelity Latin America fund (FLATX, change: 1.52%) is in bullish territory now and continues to be the momentum leader of Fidelity's international funds.

 

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Bull corner: the Fidelity Latin America fund rises to the top of international funds

The Fidelity Latin America fund (FLATX, change: 0.82%) has made steady gains since October and shows the best momentum of all the Fidelity international funds. FLATX may represent a buying opportunity for aggressive investors who are looking to build back positions in international investments.

Technical analysis screens are provided by FidelitySignal.com