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Brexit Compounds Poor Relative Performance of Global Markets

July 15, 2016
Globes galore: A look at the MSCI EAFE Index and developed nations' stock markets performance versus the U.S.

U.S. stock market returns are sluggish, but they’re currently outperforming countries in the MSCI EAFE Index, which are developed markets outside of the U.S. The acronym EAFE stands for Europe, Australia, and the Far East.

As of late June, the overall EAFE Index was down by about 7%, hurt by the U.K. vote to leave the European Union (also known as Brexit). Of the top five countries—Japan, the U.K., France, Switzerland, and Germany—the one market that held up well through the first half of the year was France. But even France succumbed to selling after the Brexit vote.

The underperformance of developed markets compared to the U.S. is shown in figure 1. The U.S. is represented by the S&P 500 (SPX) as the black line, and other global developed markets are represented by the candlestick chart.

FTSE Developed ex North America Index


Developed markets around the world have lagged the U.S. so far in 2016. Through late June, developed markets excluding the U.S. were down by about 7%. Data source: S&P. Image source: the TD Ameritrade thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

In a research note, Invesco analysts echoed the concerns about Japan and Europe as outlined by the International Monetary Fund and the World Bank. These institutions are likely worried about financial stability and growth concerns for Europe, especially after Brexit, and the chance that Japan may slide back into deflation.

These worries are reducing international equity flows in developed markets, along with lower risk appetite, say Deutsche Bank analysts.


France accounts for about 10% of the EAFE Index and benefited this spring from a recovery in the energy sector because of the country’s higher weighting to energy. The mega-cap Total represents nearly 9% of the French index, and the stock helped lift performance relative to the broader EAFE index during the recovery in crude prices, said Clayton Fresk, portfolio manager at Stadion Money Management.


The U.K. makes up 20% of the index and was down by about 8% in late June. One day before the Brexit vote, the U.K. market was up by about 4%. The U.K. stock market wasn’t the only market that saw extreme volatility in the wake of the Brexit vote. What remains to be seen is Brexit’s longer-term impact.

Switzerland and Germany

Both Switzerland and Germany represent 9% of the EAFE index, and their year-to-date performance was on par with the EAFE Index.

Unlike other countries that have seen currency moves help offset weaker equity performance, the Swiss franc has been rather benign so far this year, Fresk said. This safe haven and poster child for negative interest rates has held up thanks to its top-heavy exposure. Nestle, Roche, and Novartis make up about 45% of the Swiss index. However, this could lead to a bit more idiosyncratic risk relative to other developed nations going forward, Fresk said.

Germany saw a bit of drag from some of its larger exposures this year, with names such as Bayer down over 20%, Daimler nearly 15%, and Deutsche Bank over 25%, he said. The ECB intervention pushed rates in Germany to some of the lowest in the world, next to Japan and Switzerland. “As such, risk assets [stocks] could be the beneficiary, as there does not seem an end in sight for negative interest rate policy,” Fresk said.


Japan has the largest share of the index, at 23%, and also holds the distinction of the worst showing so far this year, down by about 16.5% through late June.

Japan saw a sharp break at the beginning of 2016, and has been slow to recover, Fresk said. Local equity markets remained down. “Banks are leading the decline, as central bank policy and resulting negative interest rates are a continued headwind for the industry,” he said.

The relatively poor performance of Japan is shown in figure 2, with the Nikkei 225 (N225:JP) probing lows for the year following Brexit.

Nikkei 225 Index


The Japan market, defined by the Nikkei 225, was among the worst-performing stock markets across the developed world in the first half of 2016. Data source: S&P. Image source: the TD Ameritrade thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

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