International and Global Equity Strategies

October 2024

 

Global equities rose over the last quarter, recovering from the sell-off in early August, which was driven by sensitivity to economic data and central bank policy. Japanese equities were particularly volatile due to the unwinding of the carry trade following the Bank of Japan’s rate hike, and due to concerns over weaker than expected US labour market data.

Towards the end of the quarter, markets rallied on key developments, such as the 50-basis point rate cut by the US Federal Reserve and the announcement of new stimulus measures in China. However, growth stocks faced challenges after a strong outperformance at the beginning of the year.

United States and Europe

In the United States and Europe, the Federal Reserve’s interest rate cut eased recessionary fears sparked by weak July jobs data, boosting global equity returns. Fundamentals remain strong, with resilient third-quarter earnings growth expected to spread beyond mega-cap companies.

Similarly, the European Central Bank announced its second interest rate cut since June amid disinflationary trends. Falling inflation and stable wage growth are boosting domestic demand, and we expect developed markets to maintain healthy economic growth as monetary policy becomes clearer.

In the US, inflation is also normalizing and real wage growth stabilizing. However, while the US labour market is showing signs of cooling, employment indicators still point to expansion, with layoffs below pre-pandemic levels. Consumers are also shifting spending from goods to services, softening new orders in key demand centres.

Nevertheless, strong private non-residential fixed investment points to continued expansion. In addition, robust activity in the services sector underscores the strength of consumers and their willingness to spend on services.

Japan and China

In Japan, positive real wage growth is supporting the domestic economy. The Bank of Japan is gradually normalizing policy, but is likely to prioritize ending deflation. Yield differentials between Japan and other countries are expected to narrow as global central banks ease policy, which could lead to a gradual appreciation of the yen.

China announced another round of stimulus shortly after the Federal Reserve’s rate cut, introducing measures to reduce costs for homeowners. While a large-scale fiscal stimulus remains speculative and the impact of the current measures on consumer sentiment is unclear, the announcement is boosting market sentiment.

China continues to face structural challenges, including an aging population and a deteriorating property market. Recent policy announcements may help investors refocus on corporate performance, potentially improving the environment for Chinese equities. These developments may warrant a reconsideration of underweight positions in China.

Overall, falling interest rates and the likelihood of a weaker US dollar position international and emerging market equities as likely beneficiaries in the current environment.

INTERNATIONAL GROWTH STRATEGY

The Pembroke International Growth Strategy underperformed the MSCI ACWI ex-US Small Cap Index in the third quarter and year to date. The underperformance was driven by weaker stock selection in Industrials and Information Technology, which more than offset positive stock selection in Communication Services and Consumer Staples.

Positive Contribution

Since the beginning of the year, the stock selection in Communication Services has been positively driven by CTS Eventim (EVD.DE). Based in Germany, CTS Eventim is Europe’s largest live music ticketing company and the third-largest event promoter in the world. The ticketing segment produces and sells tickets for concerts, theatre, art, sports and other events. Approximately 80% of CTS’ ticket sales are made online. The Live Entertainment segment plans, prepares and executes tours and events with a focus on music concerts.

The stock rallied on the basis of solid 2023 results and the company issued encouraging guidance for 2024, calling for growth in total revenue (5% to 15% year-over-year) and earnings to remain at the level reported in 2023.

Negative Contribution

The weakness in information technology was mainly due to an overweight in the semiconductor industry. Within the semiconductors, Kokusai Electric (6525.T) and ASMedia Technology (5269.TW) were detractors. Kokusai Electric is a manufacturer of front-end semiconductor equipment, with a focus on deposition equipment. The company’s main niche is the batch atomic layer deposition process, where it has a 45–50% market share. ASMedia is the sole supplier of interface controller chips for the American CPU and GPU maker AMD. The company is a major beneficiary of AMD’s market share gains from Intel.

Both Kokusai Electric and ASMedia were top contributors in the first half of 2024, as the industry benefited from cyclical and structural tailwinds. The recent underperformance is part of a broader rotation in the semiconductor industry.

GLOBAL EQUITY STRATEGY

The Pembroke Global Equity Strategy is a diversified portfolio with exposure to Canadian, US and international developed and emerging equity markets. The strategy aims to maintain diversification by region, market cap size, manager and passive and active strategies. The strategy is benchmarked to a custom index consisting of a 64% weight in the MSCI All Country World Index (ACWI) and a 36% weight in the S&P/TSX Composite Index.

The portfolio was up on an absolute basis in the third quarter of 2024 and outperformed its benchmark. Over the period, the strategy generated positive absolute returns from all underlying funds. Year to date, the strategy rose significantly, but lags behind its benchmark, which has also risen. All of the portfolio’s geographical equity allocations and underlying funds contributed to absolute returns. On a relative basis, Canadian equities have outperformed year to date, while US and international equities have underperformed their respective benchmark components.

The strategy invests in passive exchange traded funds (ETFs) to gain exposure to certain large capitalization liquid equity markets. At period end, the fund held four equity market ETFs: the iShares Core S&P500 ETF, the iShares S&P/TSX 60 Index ETF, the iShares Core MSCI EAFE ETF and the iShares Core Emerging Markets ETF.

Overall, the strategy’s allocation to passively managed ETFs was approximately 23.6% at the end of September 2024. By region, approximately 37.3% of the portfolio was allocated to Canada, 41.1% to the US, 9.8% to Europe, 2% to Japan and 9.8% to other regions. By sector, the portfolio’s largest exposures are to Industrials, Financials, Information Technology and Consumer Discretionary.

 

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