Global Value Improvers Strategy Commentary October 2024

Key Takeaways

• Global equities were broadly positive for much of October before a late month pullback erased gains and drove indexes into negative territory. 

• The Strategy underperformed its benchmark for the month, as strong stock selection in financials was offset by detractors in the utilities and consumer staples sectors. 

• While overall market valuations remain elevated, sector level volatility driven by the outcome of the U.S. election may create interesting buying opportunities for ESG related names.

Market Overview

Global markets were broadly positive for much of October, as the prospect of additional rate cuts from global central banks helped propel stocks higher, before a late month pullback erased gains and drove indexes into negative territory. The MSCI World Index returned -1.98% (in U.S. Dollars), while the MSCI World Growth Index outperformed the MSCI World Value Index, returning -1.81% and -2.16%, respectively. 

In the U.S., an elevated jobs report for September along with signs of continued stabilisation in inflation and broadly positive third quarter earnings helped bolster U.S. markets despite growing investor anxiety over the looming presidential election in November. The minutes from the Fed’s September meeting, where it voted to lower interest rate for the first time since 2020, showed the policymakers were united in their vote to cut rates but divided over how much, with some members citing elevated growth and low unemployment as the basis for a smaller rate cut. However, markets snapped back after a substantially lower October employment report, largely attributed to the disruptions from hurricanes Helene and Milton, and concerns that it could delay further rate cuts.

China continued to be a major focal point for international investors, as a whipsaw of investor sentiment between optimism over stimulus measures, and pessimism that those measures may not be enough, resulted in a turbulent market. While October presented investors with a mixed bouquet of economic reports, including a rebound in manufacturing activity and a slow, but steady, growth in exports, continued concerns over the real estate crisis and indicators slowing in the broader Chinese economy weighed on investor sentiment. However, analysts will be closely watching China’s National People’s Congress in early November in hopes of additional stimulus measures aimed at reigniting the world’s second largest economy.

In Japan, snap elections in early October resulted in Prime Minister Shigeru Ishiba’s Liberal Democratic Party losing seats in the national assembly, with the party falling short of a majority for the first time since 2009. Although the LDP, the largest party in parliament, will likely stay in power, the prospect of needing to compromise with smaller parties raised concerns over the stability of its economic policy and a possible delay in additional rate increases from the Bank of Japan, pushing the Yen to its lowest level in three months.

In Europe, a rebound in industrial production, signs of mild economic growth in its largest members and inflation below its target range in September helped pave the way for another 25-basis point interest rate cut from the European Central Bank in October - its third cut in 2024 and its first back-to-back rate cut in 13 years. Despite growing hopes that the Eurozone could achieve a soft landing, ECB President Christine Lagarde urged caution citing elevated services inflation and potential impacts from energy prices that could reignite inflationary pressures. However, markets continue to estimate an additional rate cut at the ECB’s December meeting.

Running contrary to many European governments, where austerity and spending cuts are being used to shore up state finances, the new U.K. Labour government presented its new economic plan centred around raising taxes and government borrowing to kick-start business investment and invest in the company’s public services and infrastructure. While opponents argue that higher taxes could end up deterring hiring and private investment, Labour leaders asserted that greater taxes, and borrowing would help fund longer-term industrial policies aimed at breaking a cycle of slow growth leaving the government short of the funds needed to maintain public services. Despite a rise in U.K. borrowing costs, projections for higher growth and inflation and uncertainty over what the plan would mean for long-term monetary policy, recent inflation close to its current target, signs of slowing wage increases, and flat employment growth nevertheless helped bolster market expectations for an additional quarter-point rate cut by the BoE at its November meeting.

Oil prices oscillated during the month, rising in the first half as escalating tensions in the Middle East spurred fears of a broadening of the conflict and subsequent disruption of oil exports, before declining as no major disruption occurred and reports showed relatively modest production losses due to hurricanes along the U.S. Gulf Coast.

Portfolio Highlights

Against this backdrop, the ClearBridge Global Value Improvers Strategy underperformed its benchmark for the month, as strong stock selection in the financials sector was offset by declined in our utilities and consumer staples holdings. On a regional basis, stock selection in North America and Europe Ex U.K. benefited performance, while our overweight to Europe Ex U.K. and underweight to North America weighed on returns.

By sector, stock selection in the financials sector was the greatest contributor to relative performance, with notable strength in US financials driven by increasing optimism toward a Trump victory in the upcoming presidential election, which markets assumed would benefit the sector in the form of greater deregulation and capital return. Three of our top five best performers came from financials, including U.S. bank Wells Fargo (0.49%) and financials payments company Fiserv (0.35%). Wells Fargo saw its share price increase because it reported strong third quarter earnings and also because the bank submitted its third party review to the Fed for lifting the asset cap that has been in place since 2018 for its fake account scandal. Wells is now on track to have the asset cap lifted in 2025, which was the most important ESG improvement KPIs which we have been tracking for the stock. We believe that removing the asset cap will enable the bank to take major steps toward cost efficiencies and normalisation of returns, which in turn should drive re-rating of the stock. Likewise, Fiserv reported strong results and increased guidance, and the share price rallied as the market continues to reward management’s ability to deliver consistent and sustainable top-line growth and margin improvement.

Positioning and Outlook

In the month preceding the U.S. election, global markets moved swiftly to price in the increasing odds of a Trump victory with very literal interpretation of his rhetoric on tariffs, deregulation and spending cuts. Accordingly, the U.S. dollar and bitcoin have rallied, financial and energy stocks are up, and renewables and imported goods are suffering. While it is tempting to apply a 2016 playbook to the coming four years, we also note there are important differences this time around for President-elect Trump. For example, he no longer has to worry about re-election and may focus more on his legacy; his cast of confidants is much different than before with different motivations; he will start his term with two ongoing wars with the potential to escalate. While overall market valuations remain elevated, election volatility has created pockets of opportunities in sectors such as renewables, utilities, commodities, industrials and consumer goods that we will be taking a hard look at in the coming weeks in search of undervalued companies with strong ESG improvement profiles.