U.S. Exceptionalism Offsets Overseas Weakness

Global Growth Strategy Commentary Q4 2024

Key Takeaways

• The Strategy outperformed the benchmark for the quarter and full year, supported by strong results primarily from our U.S.-based stable and emerging growth holdings that offset a weak macro backdrop across Europe and a transitional period in Japan.

• We remained active in repositioning the portfolio, adding 11 new positions in the quarter and exiting 12, with a focus on communication services and consumer discretionary companies.

• We see several catalysts that could help international equities close the performance gap in the year ahead, which would offer a long-awaited complement to our majority exposure in U.S. equities expected to deliver positive but more muted performance going forward.

Market Overview

After robust performance in the first nine months of the year, global equities struggled in the fourth quarter due to a return to narrow leadership in the U.S. and market concerns about tariff wars and potentially other punitive measures that could be levied by the second Trump administration. The stronger U.S. dollar and negative sentiment over the current state of political affairs in Europe also weighed on the largest developed markets outside the U.S. The benchmark MSCI All Country World Index declined 0.99% in the quarter but finished the year up 17.49% on strength among U.S. stocks.

From a regional standpoint, the U.S. outperformed the index for the quarter and was the only major developed market to generate gains. Japan suffered the narrowest losses among other regions while the United Kingdom, emerging markets, Asia Ex Japan and Europe Ex-U.K. were the greatest laggards.

Despite inklings of a U.S. market broadening in the fourth quarter sparked by Trump’s election victory and further interest rate cuts from the Federal Reserve, the post-election rally proved short-lived and momentum-led with relatively narrow leadership. Rate cuts came amid strong economic data that began to support the case for a slower easing cycle from the Federal Reserve than had been expected. This, along with potentially reflationary policy from the Trump administration, such as tariffs, as well as slight upticks in inflation, put some upward pressure on interest rates, causing some weakness in economically sensitive and rate-sensitive sectors. In the broad market S&P 500 Index, mega cap tech leadership helped the consumer discretionary, communication services and information technology (IT) sectors continue their 2024 dominance in the fourth quarter, along with financials. Tariff and inflation concerns, meanwhile weighed on cyclical, rate-sensitive and defensive sectors, with materials, health care, real estate and utilities the bottom performers.

Unlike in the U.S., where moderating inflation has been accompanied by resilient GDP growth, Europe and the U.K. continue to face recession risks. While the European Central Bank (along with Switzerland) took the lead among global central banks in cutting rates and continued to ease policy aggressively in the fourth quarter, inflation remains above targets. Political turmoil in Europe’s two largest economies — Germany and France — as well as continued weakness in its key export market of China have been exacerbated by Trump’s threat of tariffs. Meanwhile, hopes for resolution of the Russia-Ukraine war, and the reconstruction spending that would follow, seem far off.

Lifted by the dominant weighting of U.S. stocks in the index, global growth stocks advanced 2.64% for the quarter and outperformed their value counterparts by 695 basis points. For the year, growth stocks rose 24.23% and outperformed value by 1,347 bps.

Exhibit 1: MSCI Growth vs. Value Performance

As of 31 December 2024. Source: FactSet. Currency USD. 

In this growth-dominant environment, the ClearBridge Global Growth Strategy outperformed the benchmark for the fourth quarter and the full year on a gross basis. In the fourth quarter, stock selection and sector allocation both contributed to results as our portfolio companies were able to deliver positive returns that belied the weak macro backdrop across Europe and a transitional period in Japan. The Strategy’s overweight to the more growth-oriented IT and communication services sectors also proved beneficial.

Contributions for the quarter were diversified across holdings in our emerging, stable and structural growth buckets, companies including U.S. AI-indexed chipmaker Marvell Technology, mega cap e-commerce and cloud provider Amazon.com, U.S. social media platform Reddit, Canadian e-commerce enablement provider Shopify and Singapore-based e-commerce and gaming platform Sea Limited. Those names were supported by U.S. communications chipmaker Broadcom, Taiwan Semiconductor and mega caps Apple and Alphabet.

These diversified results offset weakness in the portfolio’s pharmaceutical holdings. Diabetes and obesity drug maker Novo Nordisk, the portfolio’s second largest position, declined following a disappointing clinical trial relative to company-set expectations for a next-generation weight loss molecule. We believe investors overreacted to the slight miss of its efficacy targets and believe a close evaluation of the data shows efficacy in the molecule. Importantly, the trial was not a failure and we expect the drug combination will be the best weight loss drug on the market. Fellow GLP-1 drug maker Eli Lilly also declined on supply constraint concerns while U.S. life science tools maker Thermo Fisher Scientific was down on weaker biopharmaceutical R&D spending.

Portfolio Positioning

We added 11 new positions during the quarter while exiting 12 others. A repurchase of Luxembourg-based audio streaming and podcast service Spotify marked the largest new addition. Since we sold the stock in the second quarter of 2021, management has made two key changes to drive material profit upgrades: the company implemented two rounds of price increases across all subscription services and sharply cut costs to enhance earnings. The former led to growth in average revenue per user after years of decline, while the latter resulted in meaningful operating margin expansion. In the meantime, Spotify has maintained a strong market position, expanding wallet share while increasing the total addressable market for its services.

Emerging growth companies like Spotify and fellow new buys Reddit and Roblox are finding their way back into the portfolio as growth is normalising and financing costs easing for companies that invest heavily in growth and innovation. Reddit, in communication services, is a unique destination for community and conversation on the internet. The company’s latest quarterly results showed strong gains in daily average users while advertising and data licensing revenues also ramped aggressively. Reddit operates a very high-margin business and we believe the company is still early in its engagement, monetisation and profitability journey.

Roblox operates an online gaming and game development platform. Growth is driven by increasing user engagement, improving monetisation through premium subscriptions and in-experience ads, and effective cost management leading to higher margins. Roblox recently issued strong upward fiscal 2026 revenue revisions and a significant improvement in operating earnings.

Luxury goods has represented our primary consumer discretionary exposure over the last several years, and we swapped exposures by replacing LVMH and Puig Brands with the purchase of French accessories maker Hermes. The company limits the supply of its ultra-premium, handcrafted leather goods despite huge consumer demand. While this has led to waitlists and lower potential growth, it has also underpinned the brand’s desirability and exclusivity. We see opportunities for Hermes through increased volume, pricing power and product categories such as ready to wear, jewelry, watches and beauty still in early stages of growth.

We exited renewable energy producer NextEra as we expect the incoming Trump administration to increase uncertainty around renewables demand and subsidies, which could drive less upside over the next couple of years. The largest sales during the quarter also included aerospace parts maker Transdigm, Japanese medical device maker Olympus, cosmetics marketer Coty and communications equipment maker Amphenol.

Outlook

The idea of U.S. exceptionalism may have reached its zenith in 2024 as the U.S. economy continued to deliver solid growth with inflation coming mostly under control, leading to outsize equity returns. We believe the second Trump administration introduces a wild card into that momentum and, with U.S. equity valuations well above average, leaves little room for error should tariff or related geopolitical policies create volatility. International markets, on the other hand, are priced for little progress, which we believe creates an overlooked opportunity for active growth investors like ourselves.

Exhibit 2: Global Valuations Attractive

As of Dec. 31, 2024. Sources: FactSet, MSCI, S&P.

We see several catalysts that could help international equities close the performance gap in the year ahead, which would offer a long-awaited complement to our majority exposure in U.S. equities, which are expected to deliver positive but more muted performance going forward. The first is tariffs. In his first term, Trump ended up implementing less stringent and more limited tariffs then had been suggested on the campaign trail. Should his continued tough talk on tariffs end up being more of a negotiating tool than actual trade policy, this would be a boon to the export-driven European and Japanese economies. Second would be an end to the Russia-Ukraine conflict, which could generate significant stimulus for Europe overall as Ukraine would require a kind of Marshall Plan to revive its economy. The World Bank estimates $480 billion in terms of reconstruction costs, creating significant demand for areas like the materials sector in supplying cement and steel.

The third potential driver is that two of the largest international economies, Germany and Japan, are well behind the U.S. in terms of fiscal stimulus measures. Political upheaval in Germany could remove past impediments to greater spending. With elections scheduled for the first quarter, accommodative measures could be implemented in Germany as early as the second quarter, potentially boosting spending on infrastructure and areas like semiconductors. Japan, meanwhile, recently announced massive stimulus of ¥1.8 trillion that will be used to fund its energy transition.

Taken together, along with developed market valuations that have barely budged in the last 20 years (compared to a 40% rise in U.S. multiples), we see scope for a reversion to commence in global equity leadership. We believe the Strategy’s diversified approach to growth is well-suited to participate in this progress over the coming year.

Portfolio Highlights

During the fourth quarter, the ClearBridge Global Growth Strategy outperformed its MSCI ACWI benchmark. On an absolute basis, the Strategy delivered gains across four of the 10 sectors in which it was invested (out of 11 total), with the IT and communication services sectors the main contributors while the health care, industrials and consumer staples sectors were the primary detractors.

On a relative basis, overall stock selection and sector allocation contributed to performance. In particular, stock selection in the IT, communication services, health care and materials sectors, overweights to communication services and IT as well as an underweight to materials drove results. Conversely, stock selection in the financials, consumer discretionary, consumer staples and industrials sectors and an overweight to health care detracted from performance.

On a regional basis, stock selection in North America, Europe Ex U.K., emerging markets and Asia Ex Japan and an underweight to emerging markets supported performance while stock selection in Japan and an overweight to Europe Ex U.K. proved detrimental.

On an individual stock basis, the largest contributors to absolute returns in the quarter included Marvell Technology, Shopify and Nvidia in the IT sector, Amazon.com in the consumer discretionary sector and Reddit in the communication services sector. The greatest detractors from absolute returns included positions in Novo Nordisk, Eli Lilly and Thermo Fisher Scientific in health care, Target in consumer staples and Uber in industrials.

In addition to the transactions mentioned above, the Strategy purchased shares of Bank of America in financials, Check Point Software and DocuSign in IT, and Chewy, Airbnb and Nike in consumer discretionary and L’Oreal in consumer staples. We also exited Monolithic Power Systems and ASML in IT, Pinterest in communication services, Loblaw in consumer staples and DexCom in health care.