International and Global Equity Strategies

April 2025

 

With the exception of Japanese equities, broader international markets began the year on a strong footing. Meanwhile, China and the broader Asian region rebounded strongly from depressed valuation levels, driven by accommodative and stimulative policy measures. However, these gains were undermined by the Trump administration’s ill-conceived tariff plan, which triggered a sharp pullback.

Consequently, a significant portion of the progress achieved in the first quarter was erased in just the first two weeks of April. The future of the broader Asian and European economies is now less certain, particularly with regard to the resilience of their export-driven economic models.

Europe

As 2025 got underway, the outlook for European markets had evidently improved. Investor optimism was reflected in broad equity prices, which increased by double digits. Unfortunately, this positive outlook was impacted by the introduction of a tariff plan by the current American Administration. While The European Central Bank was most likely on hold at the start of the year, many investors are now anticipating a more accommodating stance in the future. This could help mitigate some of the pain caused by tariffs.

In a similar vein, lower commodity prices should provide a degree of protection for corporate bottom lines and consumer spending power. European markets also have quite supportive valuations on both a relative and absolute basis. This situation is encouraging for the near and long-term prospects of equity markets in the region.

Japan

Japanese equity markets enjoyed a surge at the start of 2024. In 2025, while they experienced a challenging first quarter, they remained elevated through the end of the period. In the first three months of the year, the Nikkei 225 index has fallen by almost 11%, indicating a shift in risk sentiment from a 50-year high plateau. The recent rise was driven by a favourable policy change aimed at motivating companies to distribute more of their profits to shareholders.

Pembroke believes that some of these companies remain too conservative, and we encourage more buybacks and dividends. Overall, we are very constructive on the region, as there appears to be significant potential for quality products. Japan continues to offer a substantial discount to developed market peers, with the potential for enhanced capital return plans.

INTERNATIONAL GROWTH STRATEGY

In the first quarter, Pembroke’s International Growth Strategy slightly underperformed the MSCI All Country World Index (ACWI)ex-U.S. Small Cap Index. This was due to a combination of sector allocation and stock selection effects. An underweight allocation to Materials, and stock selection in the Healthcare and IT sectors in emerging Asia, were the primary drivers of lower relative returns during the period.

Positive Contribution

Defence-related positions, such as Dassault Aviation (AM.PA), made a positive contribution to results. Dassault is a French aerospace company that designs and manufactures military aircraft and business jets. Its main products include the Rafale fighter jet, the nEUROn combat drone and Falcon business jets. It also provides services such as maintenance and training, repair, airport operations, leasing and simulation tool development.

The stock appreciated on strong growth in both civil and military segments, as order intake rose 33% year-on-year. The position was increased in the last quarter as Dassault will benefit from increased military spending in Europe.

Negative Contribution

Within the healthcare sector, Pro Medicus Limited (PME.AX) detracted from results. Pro Medicus, an Australian healthcare technology company, offers a best-of-breed software solution for enterprise medical imaging. Through its proprietary streaming architecture, it leads the market in terms of viewer speed, implementation speed and clinical efficiency.

While the company was the top contributor to strategy performance in 2024, the stock sold off in the first quarter despite strong fundamental results. Investors were concerned that the company’s recent winning streak with large hospital systems could slow down.

GLOBAL EQUITY STRATEGY

The Pembroke Global Equity Strategy is a diversified global equity portfolio with exposure to Canadian, U.S. and international developed and emerging equity markets. The managers aim to maintain diversification by region, market capitalization size, managers, as well as 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 declined in the first quarter of 2025, underperforming its benchmark, which also posted a negative return. Positive absolute contributions came from the strategy’s international equity allocation, the Pembroke Canadian All Cap Fund and the iShares S&P/TSX 60 Index Exchange Traded Fund, while all other components detracted from performance. On a relative basis, the strategy’s underperformance was primarily due to its small-cap growth holdings, which lagged the broader markets over the period. This was partially offset by the outperformance of the Pembroke Canadian All Cap Fund.

The strategy invests in passive exchange traded funds (ETFs) to gain exposure to certain large capitalization liquid equity markets. At period end, the portfolio 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 xx.x% at the end of March 2025. By region, approximately xx.x% of the portfolio was allocated to Canada, xx.x% to the U.S., x.x% to Europe, x.x% to Japan and xx.x% to other regions. Top sectors were Financials, Industrials, Information Technology and Consumer Discretionary.

 

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