International and Global Equity Strategies

January 2025

 

Global equities ended 2024 on a high note, buoyed by the continued dominance of US markets. However, the year was not without its challenges, as political events and central bank decisions created waves of market volatility.

The re-election of President Trump contributed to a surge in US equities, allowing the country to finish the year in a position of strength. Yet, risks tied to policy shifts and tariffs cast a shadow over the global economic landscape as we step into 2025.

United States

The US equity market showcased remarkable resilience in 2024, but potential obstacles loom large. Tariff expansions are expected to weigh on consumers, potentially dampening domestic demand and intensifying inflationary pressures. Immigration policy proposals, including deportations and reduced inflows, could further strain labour-intensive industries such as construction, agriculture and industrial services.

Economic projections for the US indicate a trajectory of higher inflation and lower growth, which may pressure corporate profits in the years ahead. While these risks may not fully materialize in 2025, the policy environment will play a critical role in shaping Gross Domestic Product (GDP) growth and market performance.

Europe

The outlook for European markets remains mixed as tight monetary policies from the European Central Bank continue to challenge growth. While gradual easing could provide some relief, the policies are unlikely to turn fully accommodative in 2025.

Trade relations with the US add another layer of complexity. Europe’s substantial trade surplus makes its exporters vulnerable to US tariff increases, potentially dampening demand for European goods.

However, opportunities for growth could emerge if the incoming US administration brokers a ceasefire in Ukraine. This, coupled with energy price stabilization from new liquefied natural gas exports, could provide a much-needed boost to European economies.

Emerging Markets and China

Emerging markets face a challenging environment in 2025, with rising US interest rates and a stronger dollar weighing on currencies and investor sentiment. Some regions may see growth trajectories falter, while others could capitalize on solid economic fundamentals.

China remains a focal point, with its economy projected to grow at 5% in 2024. Stimulus efforts and attractive valuations could drive short-term gains in the equity market. However, structural issues, including high debt levels, demographic pressures, and policy uncertainties, cloud China’s long-term growth outlook. Incremental measures from President Xi’s administration may stabilize key sectors, but sustained recovery remains uncertain.

As we transition into 2025, global equity markets reflect a mix of optimism and caution. The strong performance of US markets underscores the opportunities for growth, but geopolitical risks, policy shifts and regional disparities demand careful navigation.

INTERNATIONAL GROWTH STRATEGY

Pembroke’s International Growth strategy outperformed the MSCI ACWI ex-US Small Cap Index in the fourth quarter through a combination of stock selection and sector allocation effects. An overweight to Financials and an underweight to Real Estate and Materials, coupled with positive stock selection in Health Care and Information Technology, drove relative returns for the period.

Positive Contribution

The positive impact in Financials during the last quarter was partly due to Rakuten Bank (5838.T). The company is a leading online bank in Japan, leveraging the Rakuten Group’s ecosystem of around 100 million users to grow its customer base. The stock rallied with bank stocks globally following the US election, but performance was boosted by positive fundamental results, including accelerating business growth and profitability following the Bank of Japan’s July rate hike. The position was increased as we believe Rakuten’s digital offering will continue to take share from traditional banks. The network effects of the Rakuten Group can also drive returns on equity into the high teens.

Negative Contribution

Within Industrials, stock selection was slightly negative for most holdings, and Japan Elevator Service Holdings (6544.T) was the largest detractor in the sector during the fourth quarter. Japan Elevator specializes in the maintenance and repair of elevators and escalators. The company is independent of any elevator manufacturer. The stock underperformed at the beginning of the period, in line with Japanese Industrials in general, as earnings fell short of high expectations, but remained healthy. A recent meeting with management confirmed the view that end-market conditions are positive and that any part procurement difficulties have now run their course.

GLOBAL EQUITY STRATEGY

Pembroke’s Global Equity Strategy is a diversified global equity portfolio with exposure to Canadian, US and international developed and emerging equity markets. The managers seek to maintain diversification by region, market capitalization size and manager, 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 was up on an absolute basis in the fourth quarter of 2024, but underperformed its custom benchmark, which was up slightly more. Over the period, the strategy experienced positive absolute returns from all of its underlying funds. In particular, the international equity allocation made a positive relative contribution. However, this contribution was offset by the Canadian and US allocations, which underperformed their respective benchmark components over the period.

For the year, the strategy closed significantly higher, but trailed its benchmark. All of the portfolio’s geographic equity allocations and underlying funds contributed to absolute returns. On a relative basis, Canadian equities outperformed, while US and international equities underperformed their respective benchmark components.

The portfolio invests in passive exchange traded funds to gain exposure to certain large capitalization liquid equity markets. At the end of the period, the strategy held four equity market exchange-traded funds (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.

In total, the portfolio’s allocation to passively managed ETFs was approximately 23.8% at the end of December 2024. By region, approximately 37.0% of the strategy was allocated to Canada, 41.2% to the US, 9.8% to Europe, 1.9% to Japan, and 10.1% to other regions. By sector, the strategy’s top exposures include Industrials, Financials, Information Technology and Consumer Discretionary.

 

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