Improvers Outperform Amid International Pullback

Global Value Improvers Strategy Commentary Q4 2024

Key Takeaways

• Global equities were broadly negative in December, as the post-election rally in the U.S. proved short lived, investors sold into post-rally highs and growing concerns over interest rates and geopolitics injected further uncertainty into the market.

• The Strategy outperformed its benchmark for the month, as stock selection in the industrials and communication services sectors overcame detractors in the IT sectors.

• Sentiment toward climate change and decarbonisation has turned more cautious of late but remain durable investment themes which we continue to be very optimistic on.

Market Overview

Global markets were broadly negative in December, as the U.S. post-election rally dissipated, the prospect of less monetary easing and uncertainties in the policies of the incoming Trump administration, particularly with respect to tariffs, resulted in a pullback by international investors. The MSCI World Index returned -2.61% (in U.S. Dollars), while the MSCI World Growth Index outperformed the MSCI World Value Index, returning 0.40% and -5.72%, respectively. 

In the U.S., stocks pulled back as investors captured gains from a strong 2024 in most areas of the market as November’s post-election rally began to lose steam. Market pessimism was further amplified by a more cautionary interest rate outlook from the Fed. Finally, investors appeared to be taking a more cautious approach due to a growing list of concerns for 2025, including the uncertainty of President-elect Donald Trump’s trade policies and worries that the market’s strong performance in 2024 may have overstretched valuations.  

The Chinese economy continued to show signs of mixed success as policymakers continue to struggle to reignite the world’s second largest economy through pledges to boost government borrowing, cutting key interest rates and efforts to stabilise stock and property markets. Although fourth quarter data suggests that the Chinese economy is on track to achieve its official growth target of 5%, a series of lackluster economic data suggests the country may remain vulnerable to economic slowdown, particularly if President Trump is successful in implementing higher tariffs on Chinese goods in 2025.

In Asia, the South Korean market faced volatility early in the month after President Yoon Suk Yeol voted to implement martial law, citing political division as a threat to national security. Protests and a unanimous vote by the National Assembly quickly led to a reversal of the decision, along with a vote to impeach the President, while South Korean equities faced pressure from the upheaval. However, economic news out of Asia was largely positive, with several counties in the region, including the Philippines, Indonesia and Thailand all seeing saw factory output and new orders rise sharply. In Japan, consumer inflation indicators, retails sales and wage inflation all continued to show signs of increasing during the month, highlighting a strengthening, but uneven, economy as industrial production showed signs of declines.

Political instability and economic uncertainty resulted in mixed performance in European equities. No confidence votes in both France and Germany led to political uncertainty, resulting in the first French Prime Minister ousting in over 50 years and new elections scheduled in February 2025 in Germany. Economically, Europe continues to show signs of slowing, as business activity continues to weaken across the Eurozone due to uncertainty over domestic politics and concerns over trade uncertainty. Business confidence Germany fell for its sixth month in a row, and the lowest point since May 2020, despite a slight rebound in consumer confidence over the prospect for further interest rate cuts.    

Wage growth continued to see acceleration in the U.K., underpinning the Bank of England’s reluctance for further interest rate cuts as compared to slower growth European peers. However, economic data also showed a flattening of the country’s third quarter GDP, an initial blow to the new Labour government’s hope to use economic growth to fund an expansion of fiscal spending.

Portfolio Highlights

Against this backdrop, the ClearBridge Global Value Improvers Strategy outperformed its benchmark for the month, as strong selection within the energy, communication services and industrials sectors overcame detractors in the information technology (IT). On a regional basis, stock selection and an overweight allocation to Europe Ex U.K., an underweight to North America and an overweight to the U.K. proved beneficial, while stock selection in the U.K. and North America weighed on performance.

By sector, stock selection in the industrials sector was the greatest contributor to performance largely driven by long-term contributor and Japanese conglomerate Hitachi (+0.25%). Hitachi has benefited from continued demands for investment and modernisation in areas like power grids. Additionally, the company closed the acquisition of Thales’ rail signalling business, which we believe will create synergies that should improve the profitability of its domestic systems integration business. However, not all of our industrials holdings were positive. Rideshare company Uber Technologies (-0.27%) saw its share price decline due to investor concerns over the risk posed by autonomous driving competitors as well as the blockage of Uber’s proposed acquisition of deliver company Hero’s Foodpanda by the Taiwanese government.

Within the energy sector, our top contributor was EQT (+0.23%), the cleanest natural gas producer in the U.S. EQT’s price rose alongside the price of natural gas on the back of anticipated greater demand and the prospect for colder winter weather in the United States. Stock selection in U.S.-based Oracle (-0.20%) weighed on performance. The world’s third-largest supplier of enterprise software and cloud services sold off alongside other large AI-beneficiaries following the broadening of performance post-election rally, as well as uninspiring results from its third quarter earnings and concerns over the company’s plan to double its capital expenditures in 2025.

During the month, we initiated new positions in Bureau Veritas and Fortune Brands in the industrials sector, Piraeus Financial in the financials sector, CVS Health and ICON in the health care sector and National Grid in the utilities sector. We exited positions in Brookfield Renewable, Veolia Environnement and AES in the utilities sector, Biogen in the health care sector, BNP Paribas in the financials sector and Schneider Electric in the industrials sector

All returns are in local currency.

Positioning and Outlook

Despite a muted December, 2024 remained a remarkable year on many fronts – significant market returns driven by increasingly narrow handful of megacap U.S. stocks, continuing market concentration leading to multi-decade low growth-value valuation dispersion, and a reinforced narrative around American exceptionalism post the U.S. election reflected in the surging dollar. While the outlook remains broadly positive, we believe that elevated valuations more than reflect these growth expectations and that diversifying the portfolio for less favourable outcomes such as higher inflationary headwinds or potential recession (or some combination of both) would be prudent. In this effort, we have found interesting opportunities in sectors like healthcare, where expectations have become excessively negative and provide for interesting absolute value opportunities. Similarly, pessimism toward international markets overall have led to ever widening valuation gap with the US and present attractive opportunities to buy companies with strong growth prospects trading at meaningful discounts.

2024 was also a historic election year and perhaps an even greater year with respect to the shift in voter sentiment given the overwhelming losses by incumbent parties. On this front, we expect to see shifts in policy on issues spanning fiscal spending, trade, immigration, defence and climate change to name a few, which may lead us to reprioritise the investment themes in the portfolio. Of note, sentiment toward climate change and decarbonisation has turned more cautious of late, which have pressured stocks in the renewables sector. Our belief here is that we are entering an era of resurgent power demand, which is very different from the past decade of no growth. In a backdrop where massive datacentre demand is leading to potentially undersupply of power and grid connections, both renewable and legacy power sources can see demand growth, rather than it being a zero-sum game as in the past. Regardless of power source, grid and transmission infrastructure also require significant upgrades and provide for a durable investment theme, which we continue to be very optimistic on.  These are the types of multiyear drivers that should help the portfolio to continue to generate solid returns in the face of significant market uncertainty.