Commentary: International Value Strategy

• Global equity markets generated positive returns in the quarter, as progress on tariff negotiations between the U.S. and its trade partners and a Fed rate cut helped ease macro uncertainty.
• The Strategy outperformed its benchmark, led by strong stock selection in the financials, materials and IT sectors aligned with long-term structural themes.
• While central banks are signaling caution, the path to normalization is likely to be uneven and region-specific, creating fertile ground for active management.

Global equity markets generated positive returns in the third quarter, as continued progress on tariff negotiations between the U.S. and its trade partners helped to soften lingering macro uncertainty and shift attention toward the possibility of further Federal Reserve rate cuts. As a result, the benchmark MSCI EAFE Index rose 4.8%, but trailed the 8.1% return of the S&P 500 Index. Despite a late-quarter rally for information technology (IT) and more cyclical areas of the market, value stocks ultimately outperformed their growth counterparts, with the MSCI EAFE Value Index returning 7.4% while the MSCI EAFE Growth Index returned 2.2%.

Exhibit 1: MSCI Growth vs. Value Quarterly Performance

Emerging markets saw notable strength in the quarter, led by strong rallies in China, Mexico and Brazil. In China, although the manufacturing sector continued its contraction, this prompted expectations of further stimulus to meet growth goals. Additionally, resurgent growth from China’s tech giants such as Tencent and Alibaba stoked optimism that China would also be a leader an AI development, driving renewed interest in mainland stocks as well as related shares across Hong Kong, Taiwan and South Korea.

"We continue to be optimistic about the financials sector’s long-term prospects in light of outsize earnings growth and double-digit shareholder yields." 

In developed markets, returns were led by Japan, where equities were buoyed by clarity on trade policy and growing confidence that the Japanese economy could remain resilient despite trade barriers. The Bank of Japan’s steps toward policy normalization and the narrative surrounding its domestic reflation proved particularly beneficial to the country’s financials sector. In contrast, eurozone returns lagged the overall benchmark as the market continued to debate the timing and magnitude of Germany’s infrastructure spending plans. France also faced political volatility following a failed confidence vote in the prime minister, which widened sovereign spreads and increased equity market volatility.

The ClearBridge International Value Strategy outperformed its benchmark in the third quarter, supported by several of our high-conviction holdings across financials, materials and IT. Our positioning in companies aligned with long-term structural themes — such as digital infrastructure, the energy transition and capital markets normalization — proved especially beneficial.

Financials remained a key driver of outperformance, led by European banks including BBVA and Piraeus, as well as Japan’s Mitsubishi UFJ Financial Group (MUFG). Although regionally diverse, our financials holdings are broadly benefiting from homogenous trends including inflecting loan growth, cost discipline and a benign credit cycle. In particular, BBVA created optionality via a standalone strategy if its offer to acquire Sabadell is not consummated. MUFG gained from reflationary tailwinds in Japan as well as its overseas exposure through Morgan Stanley. While strong recent performance has helped the sector rebound from undervaluation extremes, we continue to be optimistic about the long-term opportunities in light of outsize earnings growth and double-digit shareholder yields.

Our IT holdings also positively contributed to outperformance, lagging most of the quarter before a sharp rebound driven by a surge of AI data center capital expenditures bolstered companies across the semiconductor supply chain. South Korean electronics conglomerate Samsung rallied ahead of the long-awaited qualification of its HBM3E memory chips by Nvidia, signaling a narrowing technology gap with peers, while SK Hynix and Murata also benefited from renewed optimism around a potential memory supercycle and increased demand for AI-enabling components.

Emerging markets exposure was another bright spot overall, benefiting from strong contributions from South Korea’s SK Hynix and Greek bank Piraeus. Chinese communication services company Tencent, which operates value-added services including online advertising, fintech, online gaming and social networking, also delivered gains supported by accelerating growth in advertising and gaming R&D, as well as continued momentum in its fintech and cloud segments.

On the downside, our consumer discretionary holdings detracted from performance. Homebuilder Bellway declined alongside consumer sentiment due to concerns around the U.K. budget, continued slow planning approval and a sluggish selling price environment. Luxury goods retailer Burberry, meanwhile, faced investor skepticism around its turnaround execution. Fellow U.K. companies CNH Industrial and Hikma Pharmaceuticals also weighed on results, as CNH continued to grapple with a weak agriculture cycle and elevated dealer inventories, while Hikma’s earnings were pressured by margin compression in its injectables division and unfavorable currency movements.

During the quarter we initiated a position in financials company JTC, a U.K.-based outsourced fund administrator and trust provider. JTC offers high and improving margins, with a strong track record of compounding earnings in the mid-teens. We believe the market has overly discounted its exposure to cyclical risk, allowing us to enter at a compelling valuation.

We exited Capgemini, in the IT sector, as concerns grew around structural disruption from AI. While we initially viewed its challenges as cyclical, we now see potential long-term cannibalization of its core IT services. We also sold SAP, which delivered solid second-quarter results but failed to meet elevated investor expectations. The stock had re-rated significantly, and concerns around software spending in an AI-driven environment prompted our exit.

From levels of extreme pessimism earlier in the year caused by the DeepSeek scare and initial tariff shock, global markets have rallied strongly as “worst case” outcomes have been removed from probability nodes and underlying economic growth remains resilient. Looking forward to 2026, there appears to be continued optimism as investors point to the Fed’s easing cycle, European infrastructure spending and potential Chinese stimulus measures as potential future catalysts.

Within this backdrop of momentum-driven markets, elevated valuations leave considerably less room for error. Importantly, we see growing dispersion in valuations across sectors and regions, with non-U.S. markets still offering a more attractive risk-reward setup. Also of interest is the extreme pessimism and underperformance of the health care sector, where stocks could see some relief if destocking headwinds abate and political pressure can be de-escalated through negotiation. Taking a contrarian view here could prove to be a defensive hedge during an eventual market selloff.

In times when markets are euphoric, remaining disciplined with respect to process and valuation are critical. We remain committed to our bottom-up approach, focusing on companies with strong balance sheets and resilient business models trading at significant discounts to intrinsic value.

The ClearBridge International Value Strategy outperformed its MSCI EAFE benchmark during the third quarter. On an absolute basis, the Strategy had gains across nine of the 11 sectors in which it was invested, with the financials and industrials sectors the greatest contributors and the consumer staples sector the largest detractor.

On a relative basis, overall stock selection effects contributed positively to outperformance. In particular, stock selection in the financials, IT, materials, health care and communication services sectors proved beneficial. Conversely, stock selection in the consumer discretionary and consumer staples sectors, as well as an overweight to the IT sector weighed on performance.

On a regional basis, stock selection in Europe Ex. U.K. and Japan, as well as an overweight to emerging markets and strategic suballocations to Greece and South Korean benefited performance. Stock selection in emerging markets and the U.K. weighed on performance.

On an individual stock basis, Samsung Electronics, Marubeni, Tencent and Anglo American, and not holding Novo Nordisk, were the greatest contributors to relative performance. The largest relative detractors were CNH Industrial, Anheuser-Busch InBev and Hitachi, as well as not owning positions in ASML and Softbank Group.

During the quarter, in addition to the transactions mentioned above, the Strategy initiated a new position in Entain in the consumer discretionary sector and acquired Sony Financial via a spin-off in the financials sector.