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    GSAM Connect 
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    July 27, 2015

    GSAM Connect | July 27, 2015

    Fed Rate Hikes and Global Equities: International Stands Out

    We’ve spent some time looking at the potential impact of rising interest rates on investor portfolios, and how markets historically have overstated the path of interest rates. Today, we’ll bring similar perspective to international equity performance.

    The takeaway: Federal Reserve (Fed) interest rate increases historically have been benign for international equities.

    Since 1976, several international equity markets have outperformed US stocks over three-, six-, and 12-month timeframes following a Fed rate hike. Specifically, as Exhibit One shows, the STOXX Europe 600, TOPIX, and MSCI Asia ex Japan have outperformed the S&P 500 on both short- and longer-term time horizons. 

    Exhibit 1: Fed Lift-Off Lifts International Equities

    Char of the Week 07-24-15

    Chart Source: Datastream, Goldman Sachs Global Investment Research, and GSAM as of July 2015. Market and Economic Summary Source: Bloomberg and GSAM. Key Economic Releases Source: Goldman Sachs Global Investment Research and Bloomberg. Please see end disclosures for definitions. Past performance does not guarantee future results, which may vary.

    We believe this perspective is worth considering, particularly in light of international equities’ strong year-to-date 2015 performance. While the S&P 500 has waffled between small gains and losses for much of the year, the MSCI EAFE Index – a broad benchmark of developed-world stocks – was ahead by 8% year-to-date as of July 23. Certain single-country European and Japanese equity benchmarks have surged by even more.

    While investors may glean more clues from the Federal Open Market Committee (FOMC) meeting July 28-29 regarding the timing of any rate action, markets are currently pricing a move as early as September. On multiple occasions recently, Fed Chairwoman Janet Yellen has stated the federal funds rate[1] is likely to rise this year. She has also touted the benefits of the Fed acting sooner, and then proceeding slowly with additional rate increases.

    As the world awaits the Fed’s first interest rate increase in nearly decade, we believe the positive outperformance of international equities during prior episodes deserves attention.

    Topics: Interest Rates, Federal Reserve

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