Last quarter was the best for global equity markets in more than two decades. Investors stepped up bets on a quick recovery for the world economy, sending share prices to levels unseen since the early days of last year’s financial crisis. Value stocks outperformed growth stocks by a large margin, while emerging markets outshined developed markets for the second time running. The U.S. dollar traded lower against most major currencies. U.S. stocks charged out of the gates during the second quarter, rallying on stronger-than-expected earnings and hopes that the worst of the recession was over. The S&P 500 shook free from six consecutive losses, its worst run since 1970, with its steepest advance in eleven years. The benchmark closed June 30 up by more than a third from its March 9 twelve-year low. Still, unemployment rose to 9.4%, a twenty-five year high, while monthly foreclosure filings topped 300,000. A rush of optimism invigorated Asian markets during the second quarter, sending stock prices to the highest level since early October. The MSCI Pacific Index posted a gain, as 463 of 491 companies advanced. Japanese consumer confidence rose to a ten-month high, while industrial production increased, the most in fifty-six years. European bourses rallied hard last quarter, slamming the door on six consecutive quarterly losses. The benchmark MSCI Europe Index had its biggest gain in twenty-four years. Every country except Ireland increased at least 10%. The European Central Bank (ECB) dropped its benchmark lending rate to a record low 1% and announced it would begin buying assets backed by mortgages and public sector bonds. The MSCI All Country World Index, which includes both developed and developing countries, rose.

• The Allianz NACM Global Fund ended the quarter up.
• From a country perspective, the United Kingdom was the best contributor for the fund, driven by strong stock selection and a portfolio overweight. Notable names were IG Group, the U.K.’s leading spread betting business, and Wellstream Holdings, the maker of flexible pipe for oil and gas exploration. The two largest detractors were Japan and Switzerland; both of which brought negative stock selection to the table. Japanese video game maker Nintendo and Synthes, the Swiss manufacturer of medical devices, were two of the detractors.
• Looking at sectors in the second quarter, Energy and Consumer Staples were the two best-performing sectors, driven by positive stock picks. Among the winners were Tecnicas Reunidas SA, the Spanish energy engineering and construction services firm, and China Green, the Hong Kong-listed agricultural manufacturer. Offsetting positive performance were Financials and Materials shares, where the Fund posted strong performance, but lagged overall sector performance of the benchmark. Praxair Inc., the specialty gas and surface coating manufacturer, and Bank of America, the global financial services and banking company, were the two largest detractors in Materials and Financials, respectively.

Stock Stories

• IG Group added to performance with the stock up for the quarter. The U.K. company, which operates both financial and sports spread betting businesses, benefited from growth projections and a strong turnaround in the financial sector. Core markets of U.K. and Australia returned to healthy reacceleration of growth following a slowdown in previous quarters. Additionally, expectations of bad debts have been reduced, resulting in better margins. A newly acquired business in Japan is showing signs of growth and represents potential opportunities for further earnings upside. While growth is accelerating, the stock also trades at a 20% discount to the online gaming sector and 40% discount to its leading peer. Growth expectations, combined with attractive valuation, lead us to continue holding IG Group.
• Shares of Best Buy, the U.S.-based electronics and office retailer, trailed for the quarter. The company reported EPS upside, yet the stock was down by a sizeable margin. Expectations of same-store annual comps were difficult to match due to government stimulus checks in the previous year, resulting in a 6.2% reduction in sales from 2008. However, Best Buy has been diligent at controlling costs, resulting in expanding gross margins. The recent Circuit City bankruptcy continues to offer additional growth opportunities. Best Buy’s leading position in electronics retailing, with expectations of both sales growth and margin expansion, lead us to hold the stock in our portfolios.

With global stock markets and commodities up sharply since March, investors are asking whether the worst is behind us. Certainly, authorities worldwide have pulled out all the stops, using monetary and fiscal policies and government balance sheets to thaw frozen credit markets. As a result, we have seen stabilization in the rate of economic decline around the world and the large contractions witnessed in 4Q08 and 1Q09 should not be repeated. Still, we would prepare for a prolonged period of below-potential growth. The de-levering of the American consumer, growth engine for international export markets, will probably take time. Unemployment will likely continue to rise in many countries, as it is usually a lagging indicator. We also expect higher tax rates, as we have already seen in the U.K. and proposed in the U.S., and higher government involvement across the economy, from financial services to health care.