Global Value Improvers Strategy Commentary November 2024

Key Takeaways

• Global equities were positive for the month of November, driven by a rally in the U.S. on the back of the market’s optimism over Donald Trump’s victory in the U.S. election and the prospect of further deregulation. 

• The Strategy underperformed its benchmark for the month, as stock selection in the financials and utilities sectors overcame positive contributions from our North American holdings. 

• While the market has rallied on areas where clarity has improved, including beneficiaries of deregulation, tax policy and energy investment, other less talked about sectors such as healthcare and major European/U.K. markets are highlighting interesting high quality businesses at attractive valuations. 

Market Overview

Global markets were broadly positive in November, led by strong contributions from the U.S. as the market reacted positively to the election of Donald Trump in the U.S. election and prospects for greater deregulation. The MSCI World Index returned 4.59% (in U.S. Dollars), while the MSCI World Growth Index outperformed the MSCI World Value Index, returning 5.31% and 3.85%, respectively. 

In the U.S., Trump’s election win, along with a Republican sweep of Congress, was widely applauded by the market and seen as rekindling its animal spirits. Specifically, the prospect of lower taxes and less regulation has bolstered hopes for continued positive economic momentum, increased M&A activity and greater corporate profits. Positive investor reception to business-friendly nominees to key economic and financial positions in the new administration helped maintain the market rally through the month. Additionally, despite a substantial drop in employment numbers, partially attributed to the impact of hurricanes and lower disputes, the Fed cut rates by an additional 25 basis points with the market anticipating another 25-basis point cut at its December meeting.

The Chinese economy showed signs of mild improvement during the month as the country’s new fiscal and monetary stimulus measures began to trickle through the world’s second largest economy. Retail sales, industrial profits and manufacturing activity growth all increased in October, while exports extended their growth streak in providing crucial support for an economy still struggling to find its footing. However, China continues to struggle with deflationary pressures and a real estate crisis, leading economists to question if the announced stimulus measures on their own will be enough to restart the country’s economic growth. Additionally, the election of Donald Trump in the U.S. and his campaign positioning on increasing tariffs spurred an increase in risk-off sentiment for international investors and a subsequent selloff in Chinese equities.

After losing its majority in last month’s elections, Japan’s Prime Minister Ishiba announced a new stimulus package worth more than $140 billion (U.S. Dollars) in a new push to tackle inflation and boost growth but now faces a political battle in getting it passed through the Japanese Parliament. The ¥21.9 trillion bill is aimed at easing rising living costs through direct stimulus payments to low-income households as an inflation-relief measure, subsidising gas and electricity bills and promoting greater business innovation and investment to reinforce semiconductor chip supply chains and promote innovation in AI. However, the package directly contains measures proposed by opposition parties, broadly seen as a positive to its passage as Ishiba seeks to shore up political support for his coalition.

Political instability and economic uncertainty resulted in mixed performance in European equities. While the E.U. GDP grew 0.4% in the third quarter and manufacturers largely shrugged off the threat of tariffs from the incoming Trump administration – with manufacturer sentiment in both the U.K and France rising in November – French manufacturing and German industrial production showed greater than anticipated declines as E.U. economies continue to grapple with economic malaise. In politics, the dismissal of Germany’s finance minister by Chancellor Olaf Scholz caused a collapse in his coalition government, paving the way for a vote of no confidence that could pave the way for early elections. Likewise, political gridlock and vocal critics on both the Left and Right created headaches for French President Macron, leading to a no confidence vote in his choice of Prime Minister and a collapse in his coalition government in early December. 

The Bank of England voted to lower interest rates, the second cut in its past three meetings, despite policymakers’ citing a range of uncertainties including potential barriers to trade from Trump’s policies and threats of increases in energy prices from heightened geopolitical risks in the Middle East. However, both U.K. wages and broader inflation readings showed signs of slowing during the month, opening the way for further rate cuts over the next few meetings.

Oil prices continued to oscillate, rising on intensifying geopolitical tensions in the Middle East and Ukraine, but ultimately ending lower as a strengthening U.S. Dollar, concerning pockets of global economic slowing and the prospect of reduced production limits from OPEC+ weighed on prices. The price per barrel of WTI crude fell from $69.26 at the beginning of the month to $68.00 at the end.

Portfolio Highlights

Against this backdrop, the ClearBridge Global Value Improvers Strategy underperformed its benchmark for the month, as headwinds to our financials and utilities holdings overcame positive contributions from the information technology (IT) sector. On a regional basis, stock selection and an overweight allocation to Europe Ex U.K., an underweight to North America and an out-of-benchmark exposure to emerging markets weighed on performance, while stock selection in North America contributed.

By sector, stock selection in the financials sector was the greatest detractor from performance, as our holdings in non-U.S. banks such as French bank BNP Paribas (-0.41%) and Spanish-based Banco Bilbao Vizcaya Argentaria (BBVA, -0.29%) slid lower. BNP Paribas declined from its October highs after disappointing third quarter earnings and fears that lackluster E.U. data could result in interest rates declining below 2%. While we believe that its diversified business mix should help shield the company from the risk of a negative rate cycle, the stock could see additional volatility as the European economic outlook emerges. Likewise, BBVA felt the same regional headwinds and concerns over a lower interest rate environment, but faced additional concerns that its large Mexican footprint could face pressure from Trump tariffs and the extension of bank levies in Spain. That said, we believe that the stock continues to look attractive in light of its proposed acquisition of Banco Sabadell, either by its approval increasing their exposure in Spain and diversifying the company’s heavy Mexican exposure, or by illustrating its fiscal discipline to investors by revoking the offer to revert to a best-in-class return profile and attractive shareholder yield.

Conversely, stock selection within our U.S. holdings provided some positive offsets, with notable contribution from positions as EQT (0.52%) and Vertiv (0.44%).  As one of the cleanest natural gas producers in the U.S., EQT’s price rose after announcing a positive third quarter earnings characterised by strong operational performance and additional progress on the company’s goals of deleveraging and developing synergies from its acquisition of Equitrans Midstream earlier this year. With respect to Vertiv, the company continues to benefit from strong AI data centre capex and its unique power management capabilities. At its recent investor day, management raised midterm guidance on for both topline growth and margins, driving further upside for the share price.  

During the month, we did not initiate any new positions or exit any existing holdings.

All returns are in local currency.

Positioning and Outlook

Post-election market euphoria has been driven mostly by areas of the market where perceived clarity has improved, including beneficiaries of deregulation, tax policy, energy investment, technology superiority and U.S. “exceptionalism” in general. With valuations at multi-decade highs, we believe that confidence and certainty of these themes is well discounted in the stocks. Less talked about, in our view, are the glaring pockets of underperformance amidst the bull market, such as the multiyear underperformance of healthcare sector and major European/U.K. markets, as well as the increasingly pessimistic view toward renewables and energy transition overall. These are segments of the market where our valuation models are highlighting interesting high quality businesses at attractive valuations, and as we do more work we are discovering that stock prices that may be discounting overly pessimistic outcomes.

With respect to energy transition, priorities appear to have bifurcated between the U.S. and non-U.S. markets largely due to the generative AI investment wave. Outside the U.S., power demand growth forecasts appear mostly unchanged, as does the transition of power sources from legacy to renewables. In the U.S., however, the step function change in power demand due to data centres means legacy power sources will be needed for longer and renewables added as incremental supply. It does not necessarily derail the investment in renewables, as many would fear, because of the strong demand environment should be supportive of all incremental, cost effective power sources. As such, we believe the structural growth drivers of this market remain intact and continue to look for stocks that will see the most benefit.