Global Value Improvers Strategy January Commentary

Key Takeaways

• Trade uncertainty, pockets of economic malaise and a tech shock from the unveiling of DeepSeek helped drive demand for global value stocks, which generated positive returns and outperformed their core and growth counterparts.  

• The Strategy outperformed its benchmark with strong contributors in the financials sector overcoming mixed performance in industrials and detractors in utilities.  

• Our focus on ESG improvement, valuation and diversification is designed to withstand volatility in political swings over sustainability.

Market Overview

Global markets were broadly positive in January, overcoming escalating U.S. trade-related uncertainty, a more hawkish path for interest rates and a shock from the unveiling of DeepSeek, a Chinese generative AI model. The MSCI World Index returned 3.53% (in U.S. Dollars), while the MSCI World Value Index outperformed the MSCI World Growth Index, returning 4.50% and 2.65%, respectively. 

In the U.S., the inauguration of President Trump spurred waves of market uncertainty following a flurry of executive orders, which included new tariffs against Canada and Mexico late in the month. The tariffs levied on the country’s largest trading partners sparked fears that they could lead to an increase in inflation and potentially derail future interest rate cuts. Accordingly, the Federal Reserve left rates unchanged at its January meeting, its first pause following three straight cuts since September.  

The Chinese economy continued to show signs of struggling, with the Yuan declining to a 16-month low amid concerns over a potential escalation in U.S. tariffs under the new Trump administration. While the Chinese government celebrated the country achieving its nominal 5% growth target in 2024, anemic consumer inflation, tax revenue and online spending, combined with further signs of a real-estate slump and the decline of Chinese manufacturing into contractionary territory has raised questions about the health of the world’s second largest economy. However, the Chinese government is expected to provide further stimulus to potentially offset any economic impact from Trump-imposed tariffs. Additionally, the unveiling of Chinese AI competitor DeepSeek, with reportedly lower development costs and less need for computing power of comparable AI tools, drove a selloff in U.S. tech and AI hyperscalers, bolstering confidence in AI-driven growth in China.

Despite being the strongest-performing region of the benchmark, the economic situation in Europe continues to show signs of concern. Germany, Europe’s largest economy, recorded its first two-year economic contraction since 2003, Eurozone business sentiment continued to decline and French unemployment climbed amid a chilly economic environment and political uncertainty across the region. However, with inflation remaining below their target, the ECB cut rates by an additional 23 basis points, with economists suggesting that an additional cut in March remain likely.

Meanwhile, in the U.K, yields on government bonds rose to their highest levels in over 25 years while the British Pound came under pressure, as investors grew more concerned about the Labour government’s increasing levels of borrowing. Meanwhile, an uptick in inflation, weaker than expected GDP growth in late 2024 and signs of growing slack in the labour market all helped set the stage of the Bank of England to cut rates at its early February meeting.     

Portfolio Highlights

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

Our financials holdings proved the greatest contributors to performance, with notable outperformers including Banco Bilbao Vizcaya Argentaria (BBVA, +0.43%) and relatively new holding Piraeus Financial (0.31%). BBVA reported strong performance which outpaced market expectations, bolstered by better-than-expected net interest income margins, fee revenue and lower than expected loan losses, all of which helped overcome anxieties about the potential impact that U.S. tariffs would have on its large exposure to the Mexican market. Meanwhile, Greek bank Piraeus continues to show attractive loan and economic growth and is a direct beneficiary from the country receiving investment funds from the EU. With a solid management team and strong capitalisation structure, we believe that returns to shareholders will continue to increase over the next few years.

Our top detractor during the month was French high-voltage cable supplier Nexans (-0.44%), as a poor reception to its analyst day led to a pullback in earnings expectations, adding to concerns that a potential halt to new offshore wind projects by the Trump administration could lead to a decline in demand. Although the unveiling of DeepSeek also spurred volatility within across sectors over stocks that benefit from the massive AI capital investment including tech, communication, utilities and industrials, our AI plays positively contributed to performance, thanks to strong stock performance from holdings like Meta Platforms (+0.41%), which outperformed other hyperscalers. 

During the month, we made no changes to the portfolio.

All returns are in local currency.

Positioning and Outlook

The start of 2025 was anything but dull, with headlines on President Trump’s tariff decisions, Elon Musk’s disruptive actions through the Department of Government Efficiency (DOGE), geopolitical developments around the U.S. and China AI race and a possibility of a Trump-facilitated Ukraine Russia truce, all exerting fundamental impacts on the economy and the markets. We expect the market to broaden out from the record return concentration driven by U.S. mega caps and AI plays to include winners from international markets and themes beyond AI, where we are well positioned. The policy position of the Trump administration is temporarily impeding the move toward sustainability goals. However, our focus on ESG improvement, valuation discount, and portfolio diversification means that we have designed our strategy to withstand volatility in both political swings over sustainability and the economic and market environment. This has borne fruit in recent quarters, and we continue to add portfolio resilience to pass future tests.