Global equities experienced a mixed bag in the second quarter, with international markets digesting recent gains. The MSCI EAFE Index slipped 0.4%, while the MSCI ACWI ex-US Index rose 1.0%. Despite this, corporate earnings estimates for 2024 and 2025 saw a modest increase as companies reported better-than-expected results.
In developed markets, earnings growth is expected to accelerate from 4% in 2024 to 9% in 2025. However, the Bank of Japan’s surprise rate hike in March did little to boost the yen, which fell 6% in the quarter, bringing its year-to-date loss to over 14%. This weakness has negatively impacted USD returns, despite strong local Japanese returns driven by rising inflation and improving corporate governance.
Emerging markets outperformed developed markets for the first time in a quarter since 2016, led by Chinese equities, which surged 7.1% in the quarter. The European Central Bank’s 25-basis-point rate cut in the quarter signaled a shift away from aggressive rate hiking, which should boost investor confidence.
Our portfolio has been focused on fundamentally driven investments, but the current market environment has led investors to rely on short-term momentum rather than long-term earnings power. Stocks with high price momentum have been the largest driver of performance in international equity markets this year, leading to a significant spread in performance between the MSCI EAFE Momentum Index and the MSCI EAFE Index.
We believe this trend is unsustainable and that the average stock should close the gap with the index going forward. Our portfolio, the Lazard International Equity Select Portfolio, fell 1.7% in the quarter, underperforming the MSCI ACWI ex-US benchmark. However, we remain confident in our relative value strategy, which focuses on fundamentally driven investments.
We have identified several high-conviction companies that have been impacted by short-term concerns, including Aon and Ryanair. We believe these companies have strong long-term earnings power and will continue to grow EPS well into the double digits. We also have exposure to emerging market domiciled companies that were temporarily impacted by elections, but we believe these concerns will fade.
Stock selection in the information technology sector positively contributed to relative returns, led by ASM International and Taiwan Semiconductor Manufacturing. In the communication services sector, Tencent’s continued strong performance supported our investment thesis.
We believe the European Central Bank’s rate policy could provide a boost to quality cyclicals, and as international risks subside, investors should shift their focus to deeply discounted valuations and longer-term earnings power. Our portfolio is well-balanced for different market outcomes, and we expect stock selection to drive performance going forward.
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