As of 09-30-2018


  • Global gross domestic product growth continues
  • Global interest rates normalize
  • Impacts on global trade environment from U.S. tariffs
  • S. dollar strength weighs on returns

Looking Back

In the third quarter of 2018, global equity markets’ performance was mostly positive with developed markets outperforming emerging markets for the second straight quarter:  1.35% versus -1.09% as measured by MSCI EAFE Index and MSCI Emerging Markets Index, respectively. As with the previous quarter, global economic data including employment, manufacturing and investment pace of growth indicated economic expansion.  However, geopolitical risks, potential trade wars and U.S. dollar strength weighed on returns.

European economic growth remained robust with second quarter GDP growth of 2.1%. PMI data released during the quarter signaled continued economic growth led by a strong service sector. The trajectory of the economic expansion has not been the same across all regions. Italy and Spain saw their expansion weaken during the quarter. Furthermore, ongoing tariff negotiations continued to cast a shadow over future growth with business optimism across the eurozone falling to a near two-year low. Political uncertainty also hurt optimism. In Germany, Chancellor Merkel struggled with a weakened coalition following disagreements over immigration policy, while in the Republic of Turkey President Erdogan struggled with a high level of U.S. dollar-denominated debt, stifling inflation, double-digit interest rates and a battered lira. In Italy, asset prices fell and yield spreads widened following the government’s release of its draft budget that proposed a deficit of 2.4%, well above the European Commission’s target of 1.6%. Finally, in the U.K., despite months of negotiations, Brexit remained unresolved. The uncertainty surrounding Brexit helped contribute to the first drop in export orders since 2016.

China’s economy showed further signs of cooling during the quarter. Chinese officials signaled their desire to support their economy leading to additional stimulus–including an easing of credit controls and increased spending on public projects. While nowhere near the level of past stimulus plans, officials from the NDRC (National Development and Reform Commission) expressed their confidence in hitting 6.5% GDP growth for the year. The ongoing trade spat with the U.S. also led Chinese officials to support the renminbi. While the impact from import tariffs was relatively subdued for Japan, the government downgraded its export outlook for the first time in three years and business sentiment remained muted. However, Japan’s domestic economy remained strong. A tight labor market led to a 3% increase in the minimum wage for the third straight year while capital spending plans rose to a 38-year high. Manufacturing activity was negatively impacted from July’s weather-related flooding but is expected to recover. At the end of the quarter, bilateral trade talks between the U.S. and Japan were expected in short order. In early 2019, the two countries will enter negotiations toward a “United States-Japan Trade Agreement” under which tariffs on imported goods will be reduced or removed.

The U.S. economy continued to expand with second quarter GDP growth accelerating to 4.2%, close to a four-year high. Underlying the current strength is increasing capex spending and domestic consumption. At its September meeting, the Federal Reserve responded to recent strength by increasing its benchmark rate by 0.25%. As discussed earlier, trade tensions linger. While deals were reached with Mexico and Canada, deals with Japan, the European Union and China have yet to be reached as of the quarter end.


Federated International Leaders Fund (A Shares at NAV) returned 0.17% for the quarter ending September 30, 2018.  That compares to its benchmark, the MSCI EAFE Index, which returned 1.35% during the period.

Performance quoted represents past performance, which is no guarantee of future results. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than what is stated. Other share classes may have experienced different returns than the share class presented. To view performance current to the most recent month-end and for after tax returns, click on the Performance tab. Performance does not reflect the maximum 5.5% sales charge for A Shares. If included, it would reduce the performance quoted.

Click the Performance tab for standard fund performance.

Performance Contributors

  • Health Care and Consumer Staples were the largest positive sector contributors
  • Among the fund’s Health Care holdings, Lonza Group, Chugai and AstraZeneca were top performers
  • Among the fund’s Consumer Staples holdings, strong stock selection and underweights to Food, Beverage and Tobacco supported performance
  • The fund’s positions in Sony, SAO and Edenred also contributed to performance

Click the Portfolio Characteristics tab for the fund’s top 10 holdings

Performance Detractors

  • The fund’s holdings in Financial and Materials
  • In Financials, ongoing economic and political turmoil put pressure on European Banks, particularly in Italy
  • In Materials, aggregate and cement companies HeidelbergCement AG and CRH PLC underperformed largely due to poor weather and an economic deceleration in certain emerging markets

How We Are Positioned

Looking forward, we are more positive than the general consensus.  Developed and emerging market’s 2019 GDP growth rates appear to be closer to those seen in the United States.  Along with stable growth rates, we believe earnings growth rates also will be more in line.  In addition, valuations continue to be more attractive overseas.  For example, the S&P 500 trades at twice the multiple of the MSCI World ex USA Index on a price-to-book multiple and at a significant premium on a price-to-earnings multiple.  So while the U.S. equity market is experiencing peak earnings and multiple compression, the rest of the world is still seeing mid-cycle earnings growth and multiple expansion.

In Europe we remain positive going forward.  The expansion remains intact, unemployment rates continue to fall and wages are growing.  We recognize that growth can be impacted if there isn’t a reasonable conclusion to the Brexit negotiations, if trade discussions with the U.S. don’t go well and if issues in Turkey and Italy spread to other countries.  In spite of those risks, the large European companies with global footprints may benefit as China closes its doors to U.S. products and services. 

In Japan, the economy remains supported by extremely loose monetary conditions and we are seeing slow but steady economic growth with some inflation.  Corporate earnings remain attractive and unemployment is at historical lows.  Japan, like the rest of the world, needs workers. 

Finally, we are cautious on emerging markets.  The strong dollar puts pressure on emerging-market debt and we see economic slowdowns in places like South Korea, Brazil and South Africa.