International Equities Rally in Q3 as Value and Cyclical Shares Lead the Way
The third quarter saw a broad-based rally in international equities, driven by value and cyclical shares as financial conditions eased across most developed markets. The MSCI EAFE Index advanced 7.26%, while the MSCI EAFE Small Cap Index jumped 10.54% and the MSCI Emerging Markets Index added 8.72%. Regionally, North America, Asia Ex Japan, and the United Kingdom outperformed the index, while Europe Ex U.K. and Japan delivered solid gains but slightly underperformed.
Chinese equities surged 23.49% following the announcement of aggressive stimulus measures from Beijing, lifting the performance of broader emerging markets. Sharp reversals were seen in the quarter, with some of the worst-performing markets, such as Hong Kong, staging a sharp turnaround after the announcement of large stimulus packages from Chinese officials.
The ClearBridge International Growth EAFE Strategy outperformed the benchmark in the quarter, driven by strength in both cyclical holdings in consumer discretionary, financials, and materials sectors, as well as information technology. Portfolio holdings that had led in a previously narrow international market environment, including GLP-1 pharmaceutical developer Novo Nordisk and semiconductor equipment makers ASML and Tokyo Electron, gave back gains in the rotation.
The strategy was active in the quarter, selling positions where growth is on the decline and upgrading into new ideas with better growth and valuation support. Four new ideas were added in Japan, reflecting confidence in the country’s move to upgrade profitability, capital allocation, and shareholder returns. These additions include Terumo, a Japanese manufacturer of medical equipment, Asics, a specialty running shoe designer, Tokio Marine, a top global property and casualty insurer, and Fujikara, an electrical equipment maker.
The strategy also exited several positions, including Hong Kong-based life insurer AIA Group, Swiss packaged foods giant Nestle, and French cosmetics maker Shiseido, in favor of higher-growth ideas in consumer staples and Japan. The proceeds were directed into better structural change stories in Japan.
The Federal Reserve’s 50 basis point rate cut at the end of the quarter rounded out the period, and markets are now nervously anticipating the upcoming U.S. election and its potential impact on international trade. The U.S. dollar was broadly weaker throughout the quarter against all major currencies.
Despite the strongly positive reaction by Chinese equities to Beijing’s monetary easing, more needs to be done to restart growth. The measures are targeted predominantly at the equity markets and local government budgets, but long-term demand drivers and consumer spending remain challenging. China is expected to make additional policy moves at the end of October, and the outcome of the U.S. elections will provide further clarity on the path of its recovery.
The improving conditions across the investable universe create a more conducive environment for the strategy’s diversified approach to growth. Recent performance has highlighted the benefits of complementing core secular growth positions with opportunistic ownership of structural growers and selective exposure to emerging growth names.
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