What’s more, Japan, in which we are deliberately underweighted compared with its 41% weight in the index, was down only 3.0%, while the MSCI Pacific ex Japan Index was down 6.1%.

So if your Pacific Wealth holdings performed disappointingly, please have a bit of patience. I regard the market’s hesitancy as unjustified, resulting from Western rather than Pacific problems.

The reason for the Pacific region’s underperformance compared with world markets as a whole is quite simple: the run-up in interest rates around the world.  This started in April, with the sharp fall in the German bond market, but has intensified since Pacific Wealth began, with the 10-year U.S. Treasury yield running up from 2.22% to 2.48% in the three-week period.

Pacific Wealth countries are mostly being punished for the sins of others, in particular the epidemic of budget deficits and “funny money” interest rate policies that has bedeviled the Western world. In the Pacific, Japan has run one of the worst monetary and fiscal policies during the past decade, running large budget deficits and now making the Bank of Japan buy government bonds in larger quantities, relative to the economy’s size, than either the European Union or the United States.

This is worrying in the long run and does nothing to help the domestic economy. But because it weakens the yen, it’s great for Japanese exporters such as our holdings Nintendo (OTC: NTDOY), Trend Micro (OTC: TMICY) and Yaskawa (OTC: YASKY).

However, most other Pacific Basin countries have been notably careful, having run only modest budget deficits, or even surpluses, and have kept their short-term interest rates ahead of inflation.  Indeed, the Philippines budget, for example, is in balance and the country has modest debt and a large balance-of-payments surplus, yet the Philippine market has been one of the harder hit, with the MSCI Philippines Index down 8.2%.

This suggests that the Pacific region’s underperformance will not last long. Although interest rates are likely to continue upward for a while, and there will be some kind of a “taper tantrum” when the Fed finally bites the bullet and raises the federal funds rate from zero, there is no reason why growth in the Pacific region should slow, or why those countries that have their borrowing and balance of payments in decent shape (which is most of them) should suffer significant economic damage.

At some point, the market will realize this and re-rate the Pacific Wealth market upward.

China Shut Out

For the moment, MSCI Barra decided to defer adding Chinese domestic shares to its indices, even in a limited percentage (China itself is, of course, a huge part of the Pacific economy). I support MSCI’s decision because the Chinese domestic market remains isolated by exchange controls from world markets. But it means the Chinese bull market, which has pushed the Shanghai Composite Index up 58% in 2015, may not have all that much further to run. Our Chinese holding Guggenheim China SmallCap ETF should, however, continue benefiting from the domestic re-rating of Chinese shares that has occurred; it is certainly not expensive, with its holdings trading on an average P/E of 13 times.

Politically, the only significant election was in Mexico, where President Pena Nieto’s PRI did quite well. It is, however, disquieting that Pena Nieto appears to have watered down his education reforms in the run-up to the election, suggesting that Mexican schools will retain their poor reputation. But our one Mexican holding, Industrias Bachoco S.A., doesn’t depend on the details of government policy, so the removal of a political risk should mildly benefit it.