Q1 2025 International and Global Growth Fund Commentary
Market Recap
Global equity markets diverged significantly in the first quarter. Aggressive U.S. tariff policies and rising geopolitical tensions played an outsized role and heightened fears of disrupted global supply chains, increased input costs, and slower overall economic growth. This led to substantial volatility and dispersion across global markets. U.S. equities suffered their worst quarterly decline since 2022, while international markets exhibited relative resilience. Europe's performance benefited from substantial fiscal stimulus, notably Germany's €500 billion infrastructure program and the European Union’s (EU) expansive €800 billion defense spending plan, combined with accommodative monetary policy from the European Central Bank (ECB). Meanwhile, China's markets were buoyed by renewed optimism in technology sectors.
Our investment strategies focus on the long term, allowing us to navigate short-term economic fluctuations. We prioritize businesses that align with secular trends and have strong competitive advantages and market positions. Our portfolio companies are chosen for their high profit margins, strong balance sheets, and consistent cash generation. We believe these qualities will endure even in challenging macroeconomic conditions. In our opinion, our investment process is not affected by tariffs, and the well-defined characteristics of our portfolio companies mean they should be better able to withstand external economic shocks.
Our concentrated, conviction-weighted portfolios are designed to outperform market growth rates over an investment cycle. Additionally, our portfolios are diversified across a wide range of secular growth themes. For instance, within the top ten holdings of our international strategy, in addition to holdings in artificial intelligence (AI), themes include obesity, industrial automation, financial services in emerging markets, e-commerce, mobile gaming, and digitalization.
Outlook
Looking ahead, global economic conditions remain fraught with considerable uncertainty, influenced heavily by geopolitical developments and diverging policy trajectories. In the U.S., increasing protectionist measures and potential fiscal austerity pose meaningful risks to sustained economic expansion. The combination of tariffs, rising inflation expectations, and moderating growth forecasts raises the prospect of a stagflationary scenario. The Fed faces complex policy trade-offs, having to balance managing inflation pressures against supporting economic growth, thereby potentially prolonging market volatility.
Europe presents a more constructive economic outlook, benefiting from accommodative fiscal and monetary policies designed to sustain economic recovery. The progressive rollout of Germany’s significant infrastructure initiatives and the EU-wide defense spending plans, although gradual, should increasingly underpin economic growth. Nonetheless, Europe is not without challenges. Chief among these is the looming tariff threat from the U.S. If the U.S. follows through on aggressive trade measures, such as hefty tariffs on European autos or other exports as part of a universal tariff plan, it could quickly undercut Europe’s recovery. The EU has vowed to retaliate if targeted, raising the stakes of a potential trade spat. This risk has not materialized fully yet, but it hangs in the background of otherwise improving European fundamentals.
China has continued its modest approach to stimulus. While easing measures should help support its GDP growth objectives, persistent challenges in the real estate sector and external trade tensions will require careful navigation. As long as China remains modest with committing meaningful stimulus to restore the real estate sector and consumer confidence, it will remain challenging to pull its economy out of the doldrums. President Xi may be saving more stimulus for a continuing trade war with the U.S. So far, the two rounds of tariffs have provoked limited retaliation from China, rather than stimulus measures of the defensive sort. China’s ongoing strategic focus on technological self-reliance and domestic market resilience offers selective investment opportunities, even in the face of these economic challenges.
In the International Fund, roughly 18% of assets are invested in Greater China* holdings, which is overweight relative to the benchmark. In the Global Fund, roughly 13% of assets are invested in Greater China* holdings, which is overweight relative to the benchmark. 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 strategy focuses on companies that benefit from long-term secular trends and have strong competitive advantages and market positions. 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, we believe our portfolios have the capacity to surpass market growth rates in the long run. In our opinion, our investment process is not affected by tariffs, and the well-defined characteristics of our portfolio companies mean they should be better able to withstand external economic shocks.
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, AI, 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. Slowing global economic growth should not undermine the enduring strength of these investment themes, or the business models and market positions of the companies in our portfolios.
U.S. market valuations remain significantly elevated, with the cyclically adjusted price-to-earnings (CAPE) ratio recently reaching levels near historical peaks. In contrast, international markets trade at considerably lower valuations, offering a better starting point for expected future returns. Thus, we remain strategically positioned with a preference for international equities. We believe that our selective approach and emphasis on quality will effectively mitigate tariff-related risks while capitalizing on secular growth and valuation-driven opportunities.
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The above commentary does not provide a complete analysis of every material fact regarding any market, industry, security or portfolio.
*Includes China, Hong Kong, and Prosus.