Positive earnings, the prospect of interest rate cuts and signs of a long-awaited market broadening helped propel international and value stocks higher, with the benchmark MSCI World Value Index outperforming Growth by over 550 basis points.
All five geographic regions and all 11 sectors of the MSCI World Value Index posted positive returns for the month, led by strong performance in Japan and sectors including health care, utilities and real estate.
Periods of heightened volatility remind us of the importance of diversification and the benefit of having longer term ESG themes, which are less tied to the economic cycle and thus lend stability during extreme market movements.
Signs of a long-awaited market broadening began to appear in July, driven by the strong prospect of further interest rate cuts in September and positive corporate earnings. Global equities rose in July, with the MSCI World Index returning 7.16% (in local currency). Leadership also began to rotate beyond mega cap AI beneficiaries, proving a tailwind to value and smaller cap stocks. As a result, the MSCI World Value Index returned 4.77% (in U.S. Dollars), outpacing the MSCI World Growth Index by more than 550 basis points, and reducing Growth’s year-to-date outperformance.
In France, a coalition of centrist and leftist parties counterbalanced the gains by far-right parties in the snap elections held during the month, allowing President Macron’s pro-business Renaissance party to retain a slim majority in the National Assembly. German consumers saw an increase in optimism according to the country’s consumer-climate index, which exceeded expectations as signs of slowing inflation and higher income expectations bolstered consumer sentiment. Continued signs of stabilising inflation and a cooling in wage increases in the U.K. helped to keep the possibility of an august interest rate cut by the Bank of England on the table. In the U.S., Fed officials voted to keep interest rate levels unchanged for the eighth consecutive meeting, marking one full year since the committee raised rates to a 23-year high. However, Fed Chair Powell strongly hinted at the possibility of a rate cut in September as policymakers felt that moderating inflation combined with a gradual increase in unemployment were creating conditions conducive to monetary easing.
China, however, continues to struggle with the persistent headwinds of weak headline demand and sluggishness in the real estate sector. The country’s PMI Index declined in July for the third straight month, signalling continued contraction in manufacturing. In response, the Chinese central bank cut key interest rates and injected additional stimulus into the banking system to help shore up the economy. Japan’s market rallied due to a rise in exports for the seventh straight month, led by semiconductor-related demand, but a slowing in export growth pointed to rising uncertainties over the strength of the global economy. Meanwhile, in the Middle East, investors’ concerns increased due to the threat of a potential escalation in regional conflicts as nations traded retaliatory strikes related to Israel’s war in Gaza.
Within the benchmark all five regions posted positive returns for the period, led by Japan and North America. Likewise, all 11 sectors of the MSCI World Value Index generated positive returns, with the largest contributors being health care, utilities and real estate.
Against this backdrop, the ClearBridge Global Value Improvers Strategy underperformed its benchmark for the month, as some of our higher quality names trailed the rally that helped boost defensive value and rate sensitive stocks.
On a regional basis, stock selection in Japan and North America weighed on performance. Conversely stock selection in the U.K. was the greatest relative contributor.
By sector, overall stock selection effects weighed on performance but was slightly offset by a positive contribution from sector allocation. Stock selection in the industrials sector was the greatest detractor from relative performance, particularly our holding in U.S.-based companies Uber Technologies (-0.47%) and Vertiv (-0.44%). Uber, the world’s leading rideshare platform which also offers food delivery services through Uber Eats, saw its share price weakened as investors continued to be concerned over the potential threats from self-driving auto technology from companies like Tesla would have on the rideshare company, as well as a decision by the U.K. Court of Appeals overturned a ruling that would have required a 20% tax on taxi profits, which would have put private taxi drivers on the same cost as Uber and potentially cannibalise demand. Meanwhile Vertiv, a global manufacturer of power, precision cooling and infrastructure management systems for mainframe computer, server racks and critical process systems, saw its share price take a breather after several strong quarters of outperformance alongside other AI beneficiaries as market performance rotated into more cyclical and defensive sectors.
Conversely, stock selection in the consumer discretionary sector was the greatest contributor to positive performance led by Compass Group (+0.32%), a U.K.-based foodservice and hospitality services company. Compass reported strong results and raise guidance based on strong execution, particularly with respect to first-time outsourcing contracts. Persistent inflationary pressure on food service costs have made Compass’s value proposition even more attractive, and the company continues to capitalise on its ability to deliver better value-for-money to clients.
Industrials company Nexans (0.44%) was our top performing holding for the month. The French-based manufacturer of cable systems for offshore wind farms, subsea interconnections, power transmission, telecom networks, fiberoptics and electrical systems. The company’s share price rallied after it announced strong second quarter revenues that exceeded market expectations. Nexans continues to execute well on delivering margin expansion in its legacy businesses, while also capitalising on the growth trends in its high voltage segment driven by continued investment in renewable energy.
During the month, we did not add any new positions or exit any existing holdings.
All returns are in local currency.
In recent months, political risk and policy uncertainty have become an increasing overhang on equity markets, and we expect this to continue. On the one hand, market valuations feel relatively full and it does not feel like we are getting paid to take outsized risk. On the other hand, volatility can present opportunities to purchase high quality businesses or unique ESG enabler candidates at significant discounts to intrinsic value. We stand ready to capitalise on these short term technical gyrations or sentiment shifts in the market. For example, in the U.S. there is much concern around the outcome of the election and potential impact on ESG areas such as renewables and energy policy. Our overall view is that concerns are overblown. Even in the most extreme case of a Republican sweep, a full repeal of the Inflation Reduction Act (IRA) would be difficult and unfavourable to many states where it has been a meaningful job creator. Even stress testing a full repeal scenario, many of the benefits to a company like U.S. renewable power producer AES, for example, already existed prior to IRA passage and would now just return to the situation before the bill with the biggest negative impact being the need to have those tax credits extended periodically since their first expiration in 2007.
Overall, periods of heightened volatility remind us of the importance of portfolio diversification and the benefit of having longer term investment themes, such as energy transition and governance reform, which are less tied to the economic cycle and thus lend stability during extreme market movements.
Infrastructure rose strongly in July, outperforming global equities. Signs of a long-awaited market broadening began to appear, driven by the strong prospect of a U.S. interest rate cut in September, cuts in other economies underway, and positive corporate earnings.
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