Global Value Improvers Strategy February Commentary

Key Takeaways

• Politics and trade concerns remained centre stage in February, as discussions and negotiations around tariffs by the new U.S. administration and retaliatory tariffs by trade partners weighed on global markets, driving value to outperform growth stocks.  

• The Strategy posted positive absolute returns but underperformed its benchmark as headwinds to financials and consumer staples overcame contributors from health care and industrials.  

• We expect market volatility to remain elevated for the foreseeable future. As such, our stock selection process is highly focused on free cash flow generation and yielders that are underappreciated by the markets.

Market Overview

Global markets retreated in February, as indicators of a potential slowdown in the U.S. economy and uncertainty over President Trump’s economic and trade policies weighed on markets. The MSCI World Index returned -0.72% (in U.S. Dollars), while the MSCI World Value Index outperformed the MSCI World Growth Index, returning 1.57% and -2.83%, respectively. 

In the U.S., politics and trade concerns remained centre stage in February, as discussions and negotiations around the late-January announcement of tariffs on Mexican and Canadian goods, the possibility of an escalating trade war with China and statements from President Trump about potential tariffs on pharmaceuticals, semiconductors and other products weighed on global markets. In the minutes from their January meeting, which left rates unchanged, Fed policymakers urged a more patient stance to assess the economic and potentially inflationary impact of the president’s immigration and trade policies. Additionally, the Fed’s estimates of the first quarter’s GDP were revised downward in late February, suggesting the potential emergence of cracks in the U.S. economy. 

China’s manufacturing PMI swung into expansionary levels in February, rising from 49.1 to 50.2. However, with an additional 10% tariff by the U.S. announced in late February, economists speculate that the impact could emerge over the coming months. In positives, China’s housing crisis has shown signs of potentially stabilising after two years of turmoil; new home sales from China’s 100 biggest property developers rose 1.2% year-over-year, compared to a 3.2% decline in January. While Chinese leaders are expected to offer more details of a broad plan to bolster the green shoots of the world’s second largest economy, political posturing and a patient approach to evaluate the impact of tariffs have weighed on investors’ hopes for near-term stimulus.

Despite lacklustre economic data, including a second straight year of contraction in the German economy and French manufacturing activity reaching a 17-month low, Europe was the top performing region in the benchmark as new governments in France and Germany overcame challenges and bolstered hopes of broader stimulus and lower rates. In France, President Emmanuel Macron’s prime minister survived a no-confidence motion and cleared the way to end a stalemate over its budget crisis, but his coalition government remains precariously positioned without a solid majority. German voters elected Friedrich Merz of the CDU on campaign promises of economic and business deregulation and income-tax cuts as well as more conservative policies to immigration. However, a surge in votes for far-right and far-left parties may test the new coalition government’s ability to implement some of its more ambitious plans. Inflation across the Eurozone was largely held steady – the one exception being France, which fell to its lowest level in four years – with the ECB cutting rates at its late January meeting and paving the way for an additional cut again in March.

U.K. markets also generated positive performance, avoiding incurring any new tariffs and challenging the narrative of lacklustre economic data a victim of supply constraints as opposed to soft consumer demand. While the Labour government continues to tout economic growth as a priority, rising government bond yields, challenges in bolstering consumer spending and a worsening global trade environment reduced the Bank of England’s growth forecasts for 2025 from 1.5% to 0.75%. Additionally, while the Bank of England cut rates again, the third time in six months, several policymakers conveyed a more cautious stance moving forward giver persistent worries over rising wages and services prices.

Portfolio Highlights

Against this backdrop, the ClearBridge Global Value Improvers Strategy generated positive absolute returns, but underperformed its benchmark for the month as headwinds to holdings in financials and consumer staples overcame contributors in health care and industrials. On a regional basis, stock selection in North America and the U.K weighed on performance, but were partially offset by our overweight to the U.K. and Europe.

Despite financials detracting on a sector level, our top contributor to performance was Spanish bank Banco Bilbao Vizcaya Argentaria (BBVA, +0.43%). BBVA continued to extend its upward trajectory stemming from strong performance which outpaced market expectations, bolstered by better-than-expected net interest income margins, fee revenue and lower than expected loan losses, all of which helped overcome anxieties about the potential impact that U.S. tariffs would have on its large exposure to the Mexican market. Another strong contributor was CVS Health (CVS, +0.31%), whose shares rallied on strong fourth quarter results, exceeding analyst expectations for both revenue and earnings growth, driven by positive contributions from its Aetna insurance division and pharmacy network. We believe that the company’s recovery remains on track, with underwriting improvements in its insurance business poised to meaningfully inflect earnings power in coming years.

Our top detractor during the month was financials company PayPal (PYPL, -0.92%), as shares underperformed due to disappointment around the company's 2025 outlook for transaction margin (gross profit) growth. While PayPal growth does continue to improve as new management's strategic initiatives take hold, the magnitude of improvement was below expectations. We continue to be optimistic about the multi-year opportunity for the company to improve growth on its platform. Meanwhile Coty (COTY, -0.30%), continued to trade down alongside other health and beauty companies due to destocking trends in the U.S. and concerns over tariffs impacting manufacturing costs.

During the month, we exited UnitedHealth in the health care sector.

All returns are in local currency.

Positioning and Outlook

Coming into the year, market positioning overwhelmingly embraced the U.S. exceptionalism narrative, as reflected in decades high valuation premiums and the surging dollar. February saw a marked turn in sentiment, as the new Trump administration moved quickly on pursuing agenda items which have greatly destabilised trade, consumer confidence and global political alliances overall. Furthermore, China’s Deepseek’s latest generative AI model also shocked the market with its highly efficient resource-to-performance ratio, causing many to rethink the capital intensity needs of the AI buildout which had been a strong investment theme in the marketplace.

Simultaneously, it appears that the U.S.’s confrontational stance has pressured global counterparts, particularly in the EU and China, to come to the realisation that great fiscal stimulus and defence spending may be the only way to counteract the US’s deprioritisation of former alliances. For these regions that have suffered from low growth in recent years, large scale fiscal spending programs can be meaningful catalysts to drive economic growth, consumer confidence, and stock valuations from current low levels.

Appreciating the mercurial negotiating tactics of the Trump administration, we expect market volatility to remain elevated for the foreseeable future. As such, our stock selection process is highly focused on free cash flow generation and high FCF yielders that are underappreciated by current markets. In recent months, we have also reduced the portfolio exposure to our AI winners where valuations have appreciated meaningfully in recent years and redeployed some of the capital to healthcare and utilities where expectations remain modest. Geographically, the portfolio remains overweight Europe and U.K. and should be well positioned to benefit from the large infrastructure spending plans in Germany if the new government enact its current stimulus proposals. Given that the Eurozone has been a large donor of equity flows since the Ukraine war, a potential peace settlement in the region should also boost investor sentiment and benefit portfolio returns as well.