ClearBridge Global Growth Strategy Q2 2024 Commentary

By Elisa Mazen, Michael Testorf, CFA, & Pawel Wroblewski, CFA

Increasing to Undervalued Geographies

Market Overview

World equities delivered blended ends in the second quarter, supported by U.S. mega cap management and preliminary rate of interest cuts within the European Union and Canada. The benchmark MSCI All Nation World Index superior 2.87% with a 4.28% acquire for U.S. shares as measured by the S&P 500 Index and a 5.0% rise for the MSCI Rising Markets Index offsetting a 0.42% decline for the developed market MSCI EAFE Index.

From a regional standpoint, along with rising markets, North America and Asia Ex Japan delivered beneficial properties and outperformed the index whereas Europe Ex U.Okay. and Japan suffered losses for the quarter. Japan was negatively impacted by a falling yen and shorter-term traders taking vital earnings early within the quarter. Sudden snap elections known as in France considerably impacted that market in June, dragging down one of many extra vital economies in Europe.

World development shares outperformed worth shares regardless of an increase in bond yields throughout most areas, lifted by vital energy in U.S. mega cap development firms. The MSCI ACWI Progress Index rose 6.20%, outperforming the MSCI ACWI Worth Index by 679 bps (Exhibit 1).

Exhibit 1: MSCI Progress vs. Worth Efficiency

Within the U.S., given energy in as a result of momentum of generative AI demand in key inventory outcomes like Nvidia (NVDA), development dominance was much more pronounced. The Russell 1000 Progress Index outperformed the Russell 1000 Worth Index by 1,050 foundation factors, marking the fourth time since 2020 that quarterly type dispersion exceeded 1,000 bps in favor of development. Mega caps Apple (AAPL), Alphabet (GOOG,GOOGL), Amazon.com (AMZN), Meta Platforms (META), Microsoft (MSFT) and Nvidia all outperformed the benchmark MSCI ACWI. The ClearBridge World Progress Technique was obese 5 of the names and equal weight in Apple, which helped drive outperformance for the quarter.

Along with the mega caps, the Technique benefited from renewed energy in Taiwan Semiconductor (TSM), the foundry of alternative for chipmaker Nvidia and different AI silicon builders, in addition to U.S.-based communication chip maker and software program developer Broadcom (AVGO).

Extra contributions got here from diabetes and weight problems listed holdings Eli Lilly (LLY), Novo Nordisk (NVO) and Zealand Pharma (OTCPK:ZLDPF), biopharma firms Vertex Prescribed drugs (VRTX) and Argenx (ARGX) in addition to medical system makers Olympus (OTCPK:OCPNF) and Alcon (ALC).

In evaluating our efficiency, we glance to each take part in as many sectors as we really feel have long-term development prospects and outperform in these sectors by means of our three outlined development teams – secular, structural and rising – every of which ought to carry out nicely in numerous market environments. The second quarter was risky from this development/worth perspective. Important efficiency within the portfolio in each the extra core and development shares, which usually fall in our secular and rising development teams, contributed to raised quarterly efficiency. From this standpoint, we’re inspired by latest portfolio strikes and outcomes.

Portfolio Positioning

We have now mentioned the narrowness of market breadth, and world markets have seen restricted participation, making it difficult to comply with our convictions on concepts and preserve portfolios with broad, sector allocations. However, our transactions within the quarter have been centered in areas which have been overshadowed by mega cap tech dominance.

U.S. waste administration supplier Republic Providers (RSG), within the industrials sector, was our largest addition. Republic is an efficient through-the-cycle compounder in a consolidated, well-behaved trade. Given the considerably cyclical nature of the commercial sector, this inventory addition offers good ongoing stability to the portfolio as the top market is resilient to financial cycles with sturdy money movement development. It additionally advantages from high-returning sustainability investments in polymer recycling and renewable pure gasoline, which additionally enhance Republic’s emission and circularity profile.

Market downdrafts typically current alternatives to purchase firms the place the market’s perceptions of danger will not be aligned with our personal. We see banks as an space the place we are able to reap the benefits of non permanent value weak point because of idiosyncratic elements. We diminished our financial institution underweight with the additions of Spain’s Banco Bilbao Vizcaya Argentaria (BBVA) and Italy’s Intesa Sanpaolo (OTCPK:ISNPY). BBVA is a really worthwhile financial institution with sturdy market positioning and well-developed digital capabilities in its core markets. Mexico is the financial institution’s largest revenue pool and development contributor as an underbanked market the place the corporate wins worthwhile market share. Moreover, Mexico’s new authorities is not anticipated to considerably weigh on the banking sector. We imagine BBVA’s supposed takeover of Spanish rival Sabadell (OTCPK:BNDSF) will shut within the first quarter of 2025, assuming all regulatory our bodies and shareholders agree. The takeover can be accretive and lead to BBVA consolidating its function as a robust participant within the Spanish market. We initiated, and have elevated, our place on share value weak point associated to takeover uncertainty.

Swiss electrical elements maker ABB (OTCPK:ABBNY), within the structural development bucket, was the most important addition. After its latest restructuring, ABB is a extra streamlined enterprise with higher value administration and a extra centered market place. Income development ought to choose up within the medium time period pushed by sturdy secular demand tendencies. For instance, the corporate’s low and medium voltage options profit from accelerating investments in electrification. Different options, like motor drives, are key applied sciences supporting vitality effectivity enhancements throughout most industrial processes.

Client-oriented names have been one other focus of our exercise, highlighted by the acquisition of U.Okay.-based family merchandise maker Unilever (UL) and Spain’s Puig Manufacturers (OTCPK:PUIGF). We participated within the IPO of Puig, a status perfume firm recognized for its Carolina Herrera, Nina Ricci and Jean Paul Gaultier manufacturers with sturdy income compounding from its perfume portfolio, a class which is having fun with a brand new development cycle particularly amongst youthful shoppers and Asian shoppers. Puig additionally has an advantaged margin construction and future margin growth alternatives because of greater weights to owned manufacturers and status value factors.

French contact middle software program maker NICE (NICE) was offered as the controversy round AI’s affect on its enterprise has created distinctive value volatility. Whereas we imagine NICE can be a web winner, it can take time for AI income to construct, weighing on near-term inventory efficiency. The surprising transition of its long-time CEO added one other, extra vital layer of uncertainty that prompted us to look elsewhere for alternatives in expertise. We additionally offered U.S. software program maker Salesforce (CRM), which noticed its shares derate after it missed first-quarter forecasts for present contract income and supplied smooth steerage for the present quarter.

We’re broadening out our geographic footprint with new names to reap the benefits of concepts the place we nonetheless see vital upside in expertise. We repurchased Singapore-based Sea Restricted (SE), Lenovo Group (OTCPK:LNVGY) in Hong Kong and SK hynix (OTCPK:HXSCF) in Korea. We have now additionally taken be aware of indicators of slowdowns in main finish markets, autos for instance, to scale back positions the place additional weak point might not be appreciated, eliminating a latest small place in Mobileye World (MBLY).

In whole, the interval noticed us provoke 11 new positions whereas eliminating 10 others. Our promoting this quarter centered on decreasing smaller positions impacted by higher-for-longer rates of interest and with decrease ranges of market liquidity, and exiting positions that reached goal costs or the place our confidence in a structural turnaround had eroded. As at all times, our portfolio strikes are to enhance development, scale back portfolio degree danger and enhance draw back safety.

Outlook

AI-related momentum was a key driver of efficiency within the second quarter whereas components of the market missing an AI connection underperformed regardless of no change to fundamentals. We have now managed by means of a number of comparable momentum durations over our tenure and have delivered long-term outcomes for shareholders by staying true to our valuation method to development, which emphasizes diversification throughout three buckets of development firms (rising, secular and structural). Whereas sustaining significant publicity to AI, we proceed to be opportunistic in areas of the market the place valuations stay compelling.

The ECB took the lead in chopping charges throughout the quarter, which might present non permanent reduction for sectors which have been pressured by greater prices of capital. Whereas inflation stays sticky within the eurozone and additional cuts may very well be information dependent, EU regulators set a constructive tone with the transfer. Stabilization within the U.Okay. following the early July election of a centrist chief from the Labour Get together is also supportive of equities. Japanese equities took a breather within the second quarter from a currency- and reform-supported rally, however we count on actions taken by the federal government and exchanges to enhance company returns and encourage larger fairness possession will proceed to movement by means of to raised earnings. Buybacks are additionally on the rise in Europe and Japan, which might provide a catalyst to assist shut the lingering efficiency hole between U.S. and worldwide equities (Exhibit 2).

Chinese language equities rebounded within the second quarter from an prolonged malaise, however we’ve no quick plans to speculate instantly within the Chinese language market past our current holdings in Zai Lab (ZLAB) and Hong Kong-based AIA Group (OTCPK:AAGIY). The Chinese language financial system could not get materially worse from right here, nor will we really feel it can get materially higher till the continuing housing issues are resolved, one thing that may take extra time than the market believes. Sure industries are being focused for development on the expense of others. We have now many shares on our radar display screen and most of our portfolio holdings have a portion of their enterprise in China. The political rhetoric towards Europe, Japan and the U.S. and the businesses which are key traders in that market stay unfavorable, one thing that in our thoughts is incongruous with creating a cohesive development technique. The U.S. political election season can also be prone to spotlight rhetoric unfavorable to continued investor fund actions into China.

Exhibit 2: Buybacks on the Rise

Whereas the Federal Reserve has pared again their easing efforts till gaining extra confidence on the trail of inflation, central bankers exterior the U.S. have already begun to ease financial circumstances. Whereas frequency and timing stay unsure, we see eventual fee cuts from the Fed appearing as a stabilizer for the financial system. We imagine this transition units up nicely for our portfolio of development shares with sturdy fundamentals and particular worth creation methods.

Portfolio Highlights

Throughout the second quarter, the ClearBridge World Progress Technique outperformed its MSCI ACWI benchmark. On an absolute foundation, the Technique skilled beneficial properties throughout six of the 9 sectors by which it was invested (out of 11 whole), with the IT sector the first contributor whereas the industrials sector was the primary detractor.

On a relative foundation, total sector allocation contributed to efficiency. Particularly, overweights to the IT and communication providers sectors, an underweight to supplies and inventory choice within the well being care and client discretionary sectors drove outcomes. Conversely, inventory choice within the IT, industrials and client staples sectors and an obese to well being care detracted from efficiency.

On a regional foundation, inventory choice in rising markets and North America, primarily the U.S., supported efficiency whereas inventory choice in Europe Ex U.Okay. and an obese to Europe Ex U.Okay. proved detrimental.

On a person inventory foundation, the most important contributors to absolute returns within the quarter included Nvidia, Apple and Taiwan Semiconductor Manufacturing within the IT sector, Alphabet within the communication providers sector and Eli Lilly within the well being care sector. The best detractors from absolute returns included positions in Salesforce, Accenture and NICE in IT, Walt Disney (DIS) in communication providers and Encourage Medical Programs (INSP) in well being care.

Along with the transactions talked about above, we initiated positions in Encourage Medical Programs within the well being care sector and Bureau Veritas (brvdf) within the industrials sector. Extra gross sales included Accenture (ACN) within the IT sector, Deutsche Telekom (OTCQX:DTEGY) in communication providers, AbbVie (ABBV), UnitedHealth Group (UNH) and Stryker (SYK) in well being care, Trex (TREX) in industrials in addition to Nestle (OTCPK:NSRGY) and Grupo Bimbo (OTCQX:GRBMF) in client staples.

Elisa Mazen, Managing Director, Head of World Progress, Portfolio Supervisor

Michael Testorf, CFA, Managing Director, Portfolio Supervisor

Pawel Wroblewski, CFA, Managing Director, Portfolio Supervisor

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Editor’s Be aware: The abstract bullets for this text have been chosen by Looking for Alpha editors.

Editor’s Be aware: This text discusses a number of securities that don’t commerce on a serious U.S. alternate. Please pay attention to the dangers related to these shares.