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International Growth Fund —
Postelection optimism broadens across sectors
1st Quarter, 2017
"The first part of 2017 has seen a continuation of ascendant stock markets, notwithstanding a few bumpy moments towards the end of the quarter. "
– Baillie Gifford Overseas Limited

The initial bout of postelection optimism over the Trump growth agenda, which last year was narrowly focused on financials, commodities and industries associated with infrastructure spending, has broadened, with sectors from Information Technology through to Consumer Staples picking up the baton. In a partial reversal of a recent pronounced trend, most major international currencies were slightly stronger against the U.S. Dollar. Emerging markets were also particularly strong, with large markets such as China, South Korea and India delivering impressive double-digit returns.
For the first quarter of 2017, the Harbor International Growth Fund posted a return of 10.16%, outperforming its benchmark, the MSCI All Country World Ex. US (ND) Index, which returned 7.86%. The Fund’s relative outperformance was due mostly to stock selection in Consumer Staples and Consumer Discretionary. Although the Fund benefited from its overweight allocation to Information Technology over the period, a number of negative performances from portfolio holdings within this sector ultimately detracted from relative results.
Baillie Gifford’s comments were made in an April, 2017 report. Highlights adapted from the report appear below. All comments relate to the quarter ended March 31, 2017, unless otherwise indicated. All references to the year-to-date are for the period January 1 through March 31, 2017.

Interview Highlights

U.S. Markets Unaffected by Rising Interest Rates
This cheerful environment for equities seems in part to come against the welcome backdrop of a moderately expanding global economy. However, it has also been buoyed by a striking continued uptick in business and consumer confidence, most obviously in America, but also elsewhere. Markets appeared to brush off another modest rise in U.S. interest rates, the mere thought of which would have triggered considerable angst amongst many market participants even a year or two ago. If anything, given strong U.S. jobs data, many optimists were encouraged by the tone from the U.S. Federal Reserve. Lacking detailed policy proposals, the Fed seemed uncertain regarding how Trump’s policies might evolve and impact. However, the message for now seems clear: the Fed is in no particular hurry for rates to normalize from these very low levels.
Market Sentiment and Economic Data May Be Out of Step
Most economies are improving, though relatively moderately. In most cases, the economic data has yet to follow the cheery spirits of equity markets. For now, though, it seems clear that a change in optimism has been driving markets recently. The Trump Administration’s stumble on its first encounter with the legislative realities over health care reform has been something of a reality check for the Trump agenda die-hards. It remains to be seen what impact, if any, this will have on the other key initiatives of tax reform and infrastructure spending.
Thus Far, Brexit Not as Painful as Expected
While a great deal of focus has been on U.S. economic growth, both the eurozone and the U.K. economies have been quietly exceeding expectations. Nine months after the U.K.’s vote to leave the European Union (E.U.), the gloomy predictions of an immediate Brexit-related economic shock have not been realized. Aside from the notable drop in the British Pound last year, which largely offset the respectable returns from the local stock market, the British economy has been ticking along nicely, bolstered by surprisingly unruffled local consumers and by its competitive devaluation. More broadly within Europe, which has been tainted by perceptions of anemic economic underperformance, there have been tentative signs of improving business sentiment, a gradual uptick in growth expectations and improving employment in many areas.
Positive Confidence Indicators Despite Persistent European Uncertainty
At the end of March, the U.K. triggered the formal process to leave the E.U. In theory, this divorce proceeding is supposed to be completed within two years. Although, having never happened before, we are in uncharted waters. There are also important elections coming up very soon in France and Germany, the results of which have the potential to shape the tone and pace of those negotiations and indeed the ongoing nature of the E.U. itself. Elsewhere, the Scottish Parliament, unhappy at the U.K. wide decision to leave the E.U., requested a second independence referendum. While it is an interesting time for students of European politics, bold macro-level forecasting is fraught with folly. Despite all this considerable uncertainty, business continues, companies are investing and confidence indicators are proving to be better than resilient.

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