International Commentary

April 2024

 

While the U.S. remains strong and appears to have achieved a soft landing scenario, economic resilience was also evident in Europe. This is in part due to easing inflationary pressures from sharply lower energy prices, which supported real income and consumption growth. Earnings in Europe also exceeded expectations. With growth in Europe bottoming out at the end of 2023, an improvement is expected in the following quarters. There are also bright spots in the economic data, with manufacturing PMIs accelerating sequentially.

In Japan, earnings growth estimates have been consistently overly pessimistic and are being revised higher due to structural changes in the domestic economy. One of the biggest stories out of Japan in recent weeks has been the shunto wage negotiations, which resulted in the largest wage increase since 1991, with wage growth of around 5.3%. While real wages are still declining, they are showing signs of sequential improvement. Disinflationary trends should also help boost real wages, which in turn will drive consumption growth similar to that already seen in the U.S. and Europe.

China’s near-term outlook remains challenging despite recent monetary stimulus initiatives. Market performance in 2024 will largely depend on an economic recovery, with consumer confidence rising, the housing market stabilizing, and youth unemployment improving. Geopolitical risks are also likely to remain an overhang on equity valuations.

While tensions have eased in recent months, rhetoric is expected to intensify and policy ideas are likely to accelerate, as the 2024 U.S. election cycle turns to the general election. Against this backdrop, Chinese equity valuations remain quite attractive relative to long-term averages and emerging market valuations in general. China currently trades at a discount of around 20% to emerging markets, compared with a long-term average discount of 4.5%. More than ever, we believe in the importance of active management within Chinese equity investments.

Pembroke’s International Growth Strategy underperformed its benchmark during the first quarter of 2024, as weaker stock selection within Industrials led to underperformance, offsetting positive stock selection within Consumer Staples and Healthcare.

Partially counterbalancing some of the underperformance was positive stock selection within Consumer Staples, driven by Grupo Comercial Chedraui (CHDRAUIB.MX). Chedraui operates grocery stores in Mexico and the southwestern United States. Stores operate under a variety of formats and banners, but are generally positioned as price leaders. Food represents 80% of the sales mix. Chedraui is a well-managed food retailer with a defensive business that is likely to outperform in periods of weak consumption and high inflation. The share price has rallied on favourable guidance confirming sustainable growth in line with expectations.

Within Industrials, Japan-based Baycurrent (6532.T) was a drag on performance. Baycurrent offers comprehensive consulting services, particularly in IT consulting and IT integration. The key to its success has been hiring strong consultant talent and winning new clients. Supportive Japanese Government policies, workforce demographics (by 2030, almost a third of the population will be aged 65 and over), early software penetration and the COVID environment have been accelerating the demand for digitization and driving the need for IT consulting. The share price fell in early January after the company missed quarterly earnings expectations. The miss was mainly due to a higher volume of hiring of younger talent, which could impact the cost of sales per consultant.

 

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