Global Growth Strategy February Commentary

Market Overview

Global equities finished February mixed as the Trump administration fanned the flames of a new trade war by pushing through tariffs on Chinese goods and threatening similar levies on its North America trading partners. Investors were also whipsawed by intrigue over U.S. attempts to resolve the Russia-Ukraine war that included direct negotiations with Russia and public disagreements with Ukraine. The United Kingdom and Europe delivered positive results to outperform the benchmark MSCI All Country World Index, which declined 0.30% for the month in local currency. Strength in the region was supported by P/E multiples continuing to rerate and currencies further weakening versus the U.S. dollar. Emerging markets also mustered gains and outperformed the benchmark while North America, Japan and Asia Ex Japan endured losses and underperformed.

Growth stocks underperformed their value counterparts with the MSCI ACWI Growth Index falling 2.57% in USD compared to a gain of 1.53% for the MSCI ACWI Value Index.

In the U.S., which represents the largest weight in the benchmark and the Strategy, equities retreated in February as indicators of a potential slowdown in the U.S. economy and uncertainty over President Trump’s economic and trade policies weighed on markets. The S&P 500 Index declined -1.31% in USD. Politics and trade concerns remained centre stage, as statements from Trump about potential tariffs weighed on global markets. Federal Reserve policymakers urged a more patient stance to assess the economic and potentially inflationary impact of the president’s immigration and trade policies. The U.S. added 151,000 jobs in February compared to 125,000 in January, while the unemployment rate rose to 4.1% from 4.0% the previous month. Inflation readings were mixed, with the Consumer Price Index rising for the fourth-consecutive month, from 2.9% in December to 3.0%. The ISM Manufacturing PMI declined from 50.9 to 50.3, just above contractionary territory, as manufacturers anticipated the first shocks from the new administration’s tariff policies while the University of Michigan Survey of Consumers extended its decline, dropped sharply from 71.1 in January to 64.7. Ten-year Treasury yields declined 32 bps on growing concerns about the economy and monetary policy.

Portfolio Highlights

The ClearBridge Global Growth Strategy outperformed the benchmark in February with stock selection in Asia Ex Japan and emerging markets plus an overweight to Europe Ex U.K. the primary contributors.

From a sector standpoint, stock selection in consumer discretionary, financials and communication services drove performance. Within consumer discretionary, Chinese EV maker BYD rose strongly on continued gains in EV market share both in China and outside markets. Sales beyond China have better economics for the company and BYD will continue to push to build more international factories. Canadian discount retailer Dollarama, Japan’s Sony Group and Latin America e-commerce platform MercadoLibre also delivered double-digit gains. Within financials, the Strategy saw solid contributions from U.K. and European banks Lloyds, BBVA and Intesa Sanpaolo, stocks that are inexpensive without any real fundamental issues. Other leading contributors included wireless provider T-Mobile US and Chinese laptop maker Lenovo. 

On the negative side, an overweight to communication services as well as stock selection in the health care and consumer staples sectors were the primary detractors from relative performance. Within health care, U.S. life science tools maker Thermo Fisher Scientific and Japanese medical technology and instruments provider Hoya were the primary detractors. The Strategy also saw weakness among its largest U.S.-based mega cap holdings including Alphabet, Amazon.com and Broadcom as well as Taiwan Semiconductor. U.S-based KKR was the leading individual detractor, trading down with all alternative asset managers on credit and capital market fears.   

We initiated two new positions in February while exiting seven others. The additions were U.S. beverage and warehouse retail leaders Coca Cola and Costco Wholesale. The Strategy sold out of three Japanese holdings -- Hoya, running shoe designer Asics and industrial gas supplier Nippon Sanso – as well as U.S. chipmaker Marvell Technology, U.S. mass market retailer Target, U.S. rideshare provider Uber as well as French testing services provider Bureau Veritas. Most of these sales were due to price targets being reached without visible catalysts for further upgrades.

Outlook

While Trump’s rapid fire policy moves have raised uncertainty and could threaten the current economic expansion and bull market, markets outside the U.S. started the year at a much lower bar, which we believe gives them more opportunity for improvement.

The macro outlook for Europe and the U.K. remains below trend but still positive but with inflation easing in the Eurozone, the European Central Bank should be able to continue easing policy more aggressively in 2025 than the Fed and Bank of England. Valuations in the region are close to long-term averages but continue to become cheaper relative to the U.S. with current equity valuations representing a 30% discount to their American counterparts. In addition, tariffs risks may be less impactful to U.K. and European companies than headlines suggest as many of these stocks have a low level of U.S. imports. That said, these incipient tailwinds have yet to show up in valuations, providing a range for multiple expansion. We continue to watch two key milestones in the region: the potential settlement of the war in Ukraine and whether Germany can build the necessary coalition to push through increased stimulus.

In Asia, the Japan restructuring story is ongoing, but stocks will have to endure a lot of risk from currency moves. We are slowly warming up to China, where Beijing’s approach to technology related companies is changing as they become more reliant on these previously highly regulated stocks for growth and valuations remain extremely cheap.