Commentary: International Value Strategy

• International equities rose during the first quarter despite the outbreak of trade wars, as a rotation out of U.S. technology and the prospect of greater fiscal stimulus in international markets helped bolster returns.
• The Strategy meaningfully outperformed its benchmark in the first quarter, as strong stock selection within the financials and consumer staples helped to offset detractors within industrials.
• The impact of deglobalization is likely to be structurally higher inflation, lower profit margins and higher risk premiums. This provides a favorable backdrop for value sectors.

International equities rose during the first quarter despite the outbreak of trade wars, as a rotation out of U.S. technology and the prospect of greater fiscal stimulus in international markets helped bolster returns. As a result, the core MSCI EAFE Index rose 6.86% while the S&P 500 Index and the more tech-heavy NASDAQ Composite declined 4.27% and 10.42%, respectively. The financials sector continued to rally to new highs, along with traditional defensives, which were less impacted by tariff threats, helping the MSCI EAFE Value Index (11.56%) handily outperform the MSCI EAFE Growth Index (2.13%), adding to its annual outperformance since 2022 (Exhibit 1).

Exhibit 1: MSCI Growth vs. Value Performance

Tariffs were front and center in the news following the inauguration of President Trump, as the administration rapidly pushed through a series of domestic and economic policies including the imposition of tariffs on steel and aluminum, imported autos, all goods from China and many from Canada and Mexico. This sparked trade wars as targeted countries reciprocated, weighing on U.S. economic growth and raising inflation expectations. The global tariff situation remains fluid as the Trump administration wavers on enforcement and exceptions.

"A risk-off mentality spurred by economic and political uncertainty helped value stocks maintain their leadership." 

Additionally, the unveiling of Chinese AI DeepSeek in late January, with reportedly lower development costs and less need for computing power of comparable AI tools, resulted in a selloff of the U.S. IT sector and a rotation away from the AI beneficiaries that generated strong returns in 2024.

In Europe, the election of a new center-right coalition government in Germany quickly acted to formulate a new economic revitalization plan including significant infrastructure spending, debt brake reform and further defense spending as the Trump administration began to walk back its defense contribution and commitments to European and Asian allies. The prospect of further stimulus also helped removed some of investors’ bearishness on Chinese markets, as the retaliatory tit-for-tat tariff escalations between the U.S. and China has given rise to hopes that the Chinese government would ready and deploy additional fiscal stimulus to support the economy.

The ClearBridge International Value Strategy outperformed its benchmark in the first quarter, boosted by strong stock selection within the financials and consumer staples sectors, as well as regional selection within emerging markets and Japan.

Our financials holdings continued to perform strongly, with seven of our top 10 individual holdings coming from the sector, as signs of further fiscal stimulus in Europe as well as the prospect of higher rates in Japan helped increase the probability of higher terminal rates and increased loan growth. This included top individual holding Lloyds Banking, which outperformed as the company’s visibility on its net interest income continued to improve and as signs of mortgage margin pressure abated, as well as France-domiciled BNP Paribas, which also generated strong returns due to its exceptional position to benefit from further EU fiscal stimulus, its diversified business mix and its strong market share across capital markets. However, despite the strong performance of international banks — particularly in Europe — we continue to find new opportunities such as Italian banking leader Intesa Sanpaolo, which we added during the quarter, liking its strong combination of a fully integrated business model and business mix, strong capital generation and high-quality capital return program through high dividends.

We also had strong stock selection within consumer staples, as Belgian brewer Anheuser-Busch InBev and French food and beverage company Danone proved attractive and inexpensive alternatives to their U.S. counterparts, which rapidly became pricey as U.S. investors rotated into more defensive sectors amid market volatility and policy uncertainty.

Our industrials holdings, some of our strongest contributors in 2024, came under pressure during the quarter following the general unwind of the generative AI and data center buildout trades. French cable manufacturer Nexans faced increased scrutiny after investors became concerned that a proposed large undersea cable project may not progress as planned, while Japanese industrial conglomerate Hitachi was undergoing a management changeover from a highly regarded CEO and uncertainty around its next midterm plan.

 From a regional standpoint, our overweight to emerging markets also weighed on performance, but was largely driven by stock-specific issues within holding New Oriental Education & Technology, a provider of private educational services in China. The stock fell due to a slowing growth outlook within its overseas test prep business amid geopolitical concerns and rising tensions between the U.S. and China, as well as affordability challenges stemming from weakness in Chinese consumer spending and overseas study inflation costs.

One of our largest new positions was South Korean company SK Hynix, a leading supplier of high-bandwidth memory (HBM), a key component in AI servers. HBM has shown faster growth and stronger profitability than other broader memory segments, and as our confidence in Samsung’s ability to close the gap with its competitors has waned, we reallocated capital from it to initiate a new position in SK Hynix. Despite the recent retreat from generative AI beneficiaries, we believe that the generative AI ecosystem will continue to grow and evolve and believe that SK Hynix is exceptionally positioned to capture the upside from this long-term trend.

We exited our position in Anglo-Swiss miner Glencore, as we believe the company’s earnings will come under increased pressure as global energy prices continue to slide. The company has a significant amount of its earnings generated from its coal mining divisions and, as coal is gradually reduced and replaced as an energy source globally, we believe this could put additional pressure on its ability to generate returns for shareholders.

We also exited German chemical manufacturer Brenntag. Our original thesis centered around the possibility of a corporate restructuring, which we believe would have unlocked substantial value within the company; however, it appears that Brenntag is backtracking on the separation of its specialty chemical division from its bulk chemicals business. Combined with a continued slow demand backdrop and the decision by the CEO to retire at the end of 2025, we decided to exit the position to redeploy capital to other, more immediate opportunities while we assess and monitor what Brenntag’s new strategy will look like under its new management team.

We believe deglobalization will be the dominant theme in the coming decade. Near term, this will mean extreme choppiness in equity markets as supply chains and geopolitical alliances are redefined. Market volatility usually offers opportunities to upgrade quality in the portfolio, particularly in cyclical sectors as markets increasingly price in recession risk. Deglobalization will also drive greater fiscal spending and reprioritization of funds toward defense, domestic infrastructure and strategic industries, and we continue to add to stocks leveraged to these themes across Europe and Japan.

Longer term, the impact of deglobalization is likely to be structurally higher inflation, lower profit margins and higher risk premiums. This provides a favorable backdrop for value sectors where stock valuations are rooted in real assets and short-duration cash flows. Outside the U.S., international markets have already begun this rotation to value, which we believe will see further momentum as U.S. concentration in market-weighted global benchmarks as well as investor portfolios further unwinds.

The ClearBridge International Value Strategy outperformed its MSCI EAFE benchmark during the first quarter. On an absolute basis, the Strategy had gains across 10 of the 11 sectors in which it was invested, with the financials sector being the greatest contributor and the real estate sector being the sole detractor.

On a relative basis, overall stock selection contributed to performance. Specifically, stock selection in the financials, IT, consumer staples and consumer discretionary sectors proved beneficial. Conversely, stock selection in the industrials sector and an overweight to the IT sector weighed on performance.

On a regional basis, stock selection in emerging markets, Japan and Europe Ex U.K., an underweight to Asia Ex Japan and overweight to the U.K. benefited performance. Stock selection in North America and an overweight to emerging markets weighed on performance.

On an individual stock basis, Lloyds Banking, Rakuten Bank, Siemens Aktiengesellschaft, BNP Paribas and BAWAG were the leading contributors to absolute returns during the quarter. The largest detractors were New Oriental Education & Technology, Nexans, ICON, Burberry and Hitachi.

During the quarter, in addition to the transactions mentioned above, the Strategy initiated new positions in COVER in the communication services sector, Wienerberger in the materials sector, Alstom in the industrials sector and Burberry and Lottomatica in the consumer discretionary sector. The Strategy exited positions in Olympus and Galderma in the health care sector, Toho in the communication services sector, Noble in the energy sector, Sensata Technologies in the industrials sector, Korea Investment in the financials sector and Panasonic in the consumer discretionary sector.