Q4 2024 International and Global Growth Fund Commentary

Market Recap

Central bank updates signaled monetary policy remains on an easing path, but the pace of rate cuts may be slower or shallower than recently anticipated. The Federal Reserve (Fed) decision has led the way in this regard amid persistent inflation concerns, with the Fed updating its forecast to just two rate cuts in 2025. Additionally, following the Trump presidential victory, there has been a growing focus on his trade policies and election pledges, which many have viewed as inflationary and possibly leading to higher-for-longer rates. U.S. equities substantially outperformed international equities given this backdrop during the fourth quarter. Despite these headwinds, we managed to protect on the downside in the International portfolios.   

Our investment approach emphasizes a long-term perspective, allowing us to navigate short-term economic fluctuations. We focus on businesses that align with secular trends and have strong competitive advantages and market positions. The companies in our portfolios are selected for their high profit margins, strong balance sheets, and consistent cash generation. We believe these attributes will endure even in adverse macroeconomic conditions. Our concentrated, conviction-weighted portfolios aim to outperform market growth rates over an investment cycle. Furthermore, our portfolios are diversified across a broad spectrum of secular growth themes. For example, among the top ten holdings of our International strategy, in addition to holdings in AI, themes include electronic payments, industrial automation, financial services in emerging markets, e-commerce, mobile gaming, and digitalization.

Amid the current inflationary climate, we have continually adjusted portfolios to focus on assets we believe can maintain pricing power or are more attractively valued. These qualities should help shield equity investors from the negative impacts of inflation, specifically, the shrinking of profit margins and valuation multiples.

Outlook

Takeaways from the December Fed meeting were more hawkish than presumed. The Fed now forecasts two rate cuts in 2025, which is down from four rate cuts it had previously forecasted in September. Nearer term growth and inflation projections also moved higher. The new forecasts indicate the Fed anticipates more stubborn price pressures than it had previously.

In addition to a marginally more hawkish Fed and softer disinflation traction, there is considerable uncertainty and potential headwinds around some of Trump’s policy proposals. Trump has threatened to raise or impose new tariffs on trading partners and to tighten immigration rules, which could boost prices and wages in the near term, thereby stalling the progress on disinflation. Tariffs can also be a growth drag in spite of the broader enthusiasm surrounding a shift toward deregulation. Additional concerns include a growing budget deficit in the new administration and skepticism on extended U.S. stock market valuations. 

When Trump escalated the trade war in his first term, the Fed ended up lowering rates. The Fed feared the hit to business sentiment would swamp the potential effects of higher prices from tariffs. However, inflation was low back then, and consumers and businesses did not have the fresh experience of absorbing significant price hikes for multiple years. 

U.S. trade policy has steered much of the discourse in markets, and tariffs are the immediate concern. In Europe, as the economic data has been gradually worsening, the ECB is now much more focused on rate cuts to support the economy, in contrast with the more inflation-focused Fed. The potential impact of Trump tariffs also weighed on the outlook and sentiment, as a potential 10% blanket tariff is likely to stunt eurozone GDP. ECB President Lagarde advocated for a diplomatic approach, proposing a checkbook strategy of increased American product purchases to avoid trade conflicts.

Trump campaigned on applying 60% tariffs on Chinese imports, and in November he said he would add 10% to existing tariffs on such goods. As exports are among the few bright spots in the Chinese economy currently, China needs to maintain its ability to sell to its major trading partners as much as possible to prevent another big hit to overall growth. If Trump follows through with his promise to impose higher tariffs, Chinese exports would inevitably decline, and China will have to bolster domestic demand to keep the economy going. China has also drawn up plans to hit back at any tariff hikes, through retaliatory measures such as restrictions on sales of raw materials the U.S. needs to make semiconductors, auto engines, and defense products.

China's economy has struggled this year due to a severe property crisis, high local government debt, and weak consumer demand. While the risks to exports means China will need to rely on domestic sources of growth, consumers are feeling less wealthy due to falling property prices and minimal social welfare. Weak consumer confidence is a key risk.

Regarding the stimulus measure, the concern is not just whether these initiatives will be enough to stimulate the faltering real economy, but if they will be enough to drive a lasting recovery and stave off the threat of deflation. Given the government’s goals, a more substantial fiscal package may take shape in the coming months leading up to the parliamentary meeting in March. The Chinese government will need to keep some economic ammunition dry ahead of a likely escalation in trade tensions.

We believe our Chinese holdings are at valuation levels, in the context of their long-term growth outlooks and competitive positioning, that more than compensate us for the risks. Our Chinese holdings are exposed to secular growth areas of the domestic economy (private consumption and health care) that align with government priorities, have strong balance sheets and resilient cash flows, and are not reliant on restricted Western technology inputs for future growth.

Our investment strategies focus on companies that benefit from long-term secular trends and have strong competitive advantages and market positions. Some of the most promising growth opportunities over long investment horizons may not be heavily influenced by current global events or specific regional circumstances. These opportunities include our investments in and around cloud computing, software-as-a-service, digital transformation, artificial intelligence, semiconductor technology, e-commerce, payment systems, industrial automation, electric vehicles, and innovative biologic and biosimilar therapies. Additionally, there are other exciting growth prospects related to the rapid expansion of consumer markets, particularly in emerging economies and notably in Asia, which are driving the demand for various consumer products and financial services.

The ongoing trend of economic slowdown should not undermine the enduring strength of these investment themes, or the business models and market positions of the companies in our portfolios. Additionally, we have deliberately chosen companies with healthy profit margins, robust balance sheets, and consistent cash flow generation. Essentially, we have selected portfolio companies that we consider to be financially stable, even in challenging times. As a result, our portfolios have the capacity to surpass market growth rates in the long run.

We have made significant efforts to protect against the most damaging risks associated with inflation on equity investments—margin pressure and multiple compression. Our focus has been on selecting companies with pricing power due to the critical nature or value-added aspect of their products and services. These companies are capable of adjusting prices in times of inflation, safeguarding their profit margins. Additionally, we have adjusted our portfolios to include companies with more appealing valuations.

Read the Full Quarterly Results and Outlookn for Q4 2024

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The above commentary does not provide a complete analysis of every material fact regarding any market, industry, security or portfolio.