Global Growth Strategy July Commentary

Market Overview

Global equities were impacted by a significant rotation beginning in mid-July that saw the best performing regional and investment style leaders for most of the year give way to previously underperforming parts of the market. The benchmark MSCI All Country World Index returned 3.92% in local currency, led by Japan, the United Kingdom and Europe Ex-U.K. Meanwhile, emerging markets, Asia Ex Japan and North America delivered positive absolute returns but underperformed the benchmark.

Growth stocks severely underperformed value in July with the MSCI ACWI Growth Index down 0.87% in USD compared to a gain of 4.35% for the MSCI ACWI Value Index. The main sources of growth underperformance were U.S. mega cap stocks in information technology (IT) and communication services and Eli Lilly in the health care sector.

Signs of a long-awaited U.S. market broadening began to appear in July, driven by the strong prospect of an interest rate cut in September. Leadership began to rotate beyond mega cap AI beneficiaries, with the S&P 500 Index advancing 1.22% for the month, the tech-heavy NASDAQ declining 0.75% and the small cap Russell 2000 Index returning 10.16%. The rotation also helped propel value stocks ahead of growth for the month. The Federal Reserve kept interest rates unchanged at its July meeting, but Fed Chair Powell strongly hinted at the possibility of a rate cut in September due to moderating inflation combined with a gradual increase in unemployment. Economic data was broadly weaker during the month. The U.S. economy added 114,000 jobs in July, well below market expectations, while the unemployment rate rose to 4.3%, the highest since October 2021. Ten-year Treasury yields declined on weak economic reports and growing investor optimism for rate cuts, ending 36 bps lower at 4.04%.

Portfolio Highlights

The ClearBridge Global Growth Strategy underperformed the benchmark in July with U.S. stock selection the main culprit as the mega cap growth leaders of the past several years either failed to meet heightened earnings expectations or raised concern with their continued increases in AI spending. The U.S. has a larger weight to growth-oriented stocks, which also faced headwinds from the rotation into small cap and value companies.

On a relative basis, stock selection in the health care, communication services, consumer discretionary and industrials sectors as well as an overweight to IT and underweight to financials had negative impacts on performance. In health care, GLP-1 pharmaceutical makers Eli Lilly and Novo Nordisk gave back gains while glucose monitoring device maker DexCom was down sharply after lowering 2024 earnings guidance. In communication services, social media advertiser Pinterest and mega cap search and cloud provider Alphabet were the main laggards.

On the positive side, stock selection in consumer staples and materials contributed to performance. Strength in consumer staples was led by U.K. healthcare and consumer products makers Unilever and Haleon as well as Canadian grocery chain Loblaw. The primary materials contribution came from Irish-based global building products supplier CRH. The Strategy also received solid support from Apple, U.S.-based Intercontinental Exchange and insurer Chubb in financials as well as Dutch biotech argenx and U.S. diagnostics provider Thermo Fisher Scientific in health care. 

Transactions during the month included seven purchases and three sales. New additions included the U.K.’s Lloyd’s Banking Group, U.S. medical device maker Intuitive Surgical, U.S. data centre operator Equinix, Japanese athletic footwear maker Asics, Canadian discount retailer Dollarama, Chinese electric vehicle maker BYD and Belgian biotech developer UCB. Exits included Hong Kong-based life insurer AIA Group, Japanese specialty industrial manufacturer Daifuku and U.S.-based insurance software maker Guidewire.

Outlook

AI-related momentum, a key performance driver in the second quarter, has begun to face headwinds, especially among mega cap hyperscalers and semiconductor stocks. We continue to maintain meaningful exposure to these names, which fall primarily in our stable and cyclical growth buckets, but, as always, expect contributions from other parts of portfolio in different sectors, geographies and market caps when this area underperforms. This is the benefit of our diversified approach across three types of growth companies while our valuation approach to growth allows us to be opportunistic in adding quality companies experiencing near-term headwinds. This was evidenced in our active positioning during the month while the global selloff to kick off August should also provide attractive entry points into names on our watch list.

Financial conditions continue to ease across most of our investment universe, with the Bank of England following previous actions from the European Central Bank, Switzerland and the Bank of Canada in cutting interest rates. Meanwhile, the Bank of Japan has walked back plans for further rate increases after its first hike in many years led to a surge in the yen. A raft of weak U.S. economic data has also raised the likelihood of the Fed cutting rates at its September meeting and potentially accelerating its easing cycle to offset a hiring slowdown. That move higher by the Bank of Japan, combined with hawkish rhetoric from them together with fears in the U.S. over a slowdown created a major dislocation into August. We expect markets will continue to be skittish but believe quality stocks at attractive valuations can continue to outperform.