Global equities experienced a correction in the second quarter, with international stocks giving back some of their recent gains. The MSCI ACWI ex-US Index rose 1.0%, while the MSCI ACWI ex-USA Growth Index increased 0.7%. Despite this, consensus earnings estimates for 2024 and 2025 saw a modest increase during the quarter as companies generally reported better-than-expected results.
In developed markets, corporate earnings are expected to grow at a rate of 4% in 2024, with this growth rate accelerating to 9% in 2025. The Bank of Japan’s decision to raise short-term interest rates for the first time in 17 years in March had an unexpected consequence, as the yen fell by over 6% during the quarter, resulting in a year-to-date loss of over 14%.
Local Japanese returns were strong due to rising inflation and improving corporate governance, but USD returns were negatively impacted by the currency’s weakness. As a result, emerging markets outperformed developed markets to the greatest extent in a quarter since 2016. Chinese equities led the way, rising 7.1% during the quarter due to continued government stimulus and lower market expectations already reflected in valuations.
In Europe, the European Central Bank cut rates by 25 basis points during the quarter, signaling an end to the aggressive rate-hiking cycle. This move is expected to increase investor confidence.
From a style perspective, value outperformed both the core and growth index during the quarter. The Lazard International Quality Growth Portfolio underperformed the MSCI ACW ex-US Index during the quarter (net of fees). Stock selection in the consumer discretionary sector contributed positively to relative returns, led by Dollarama, the dominant discount retailer chain in Canada.
Stock selection in the consumer staples sector also positively contributed to relative returns, driven by Clicks, the leading health and beauty retailer in South Africa. Lack of exposure to the underperforming materials sector positively contributed to relative returns.
On the other hand, stock selection in Japan detracted from relative returns, particularly M3, a Japan-based online healthcare platform. Additionally, two Ireland-based stocks, Accenture and AON, significantly detracted from performance.
Despite these challenges, we remain focused on our philosophy of investing in quality companies that can sustain elevated levels of financial productivity. We believe that quality companies are well-positioned to generate strong returns due to a range of characteristics, including brand recognition, network benefits, and long competitive advantage periods.
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