International Equity Markets: A Shift in Focus
After a strong six-month rally, international equity markets experienced a flat second quarter. The MSCI EAFE Index fell 0.4%, while the MSCI ACWI ex-US Index rose 1.0%. Despite this, consensus estimates for 2024 and 2025 earnings modestly increased during the second quarter earnings season, driven by companies reporting better-than-expected results.
The Bank of Japan’s decision to raise short-term interest rates for the first time in 17 years in March led to a 6% decline in the yen during the quarter, resulting in a 14% year-to-date loss for the currency. This weakness negatively impacted USD returns, but local Japanese returns remained strong due to rising inflation and improving corporate governance.
Emerging markets outperformed developed markets for the first time since 2016, with Chinese equities leading the way with a 7.1% gain. The European Central Bank’s decision to cut rates by 25 basis points in the quarter signaled a shift away from aggressive rate hikes, which should provide increased confidence for investors.
The extreme environment, led by expensive growth or low-quality stocks, is expected to transition to a more fundamentally-driven market, benefiting high-quality businesses with strong earnings power. However, the current short-term focus on elections and central bank policy decisions has led investors to rely on momentum rather than fundamental analysis.
Stock selection in the information technology sector positively contributed to relative returns, with companies like Advantest and Taiwan Semiconductor Manufacturing Company performing well. The portfolio also benefited from exposure to quality compounders, such as Accenture and Infineon, which have strong pricing power and sustainable margins.
While the market remains focused on short-term concerns, we believe high-quality international equities with deeply discounted valuations and higher earnings power can outperform. The extremely discounted valuations for international stocks should provide support for international equities going forward.
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